Comparison and Growth

Magisterial is not a word to be thrown around lightly, but I suspect it applies to Benjamin Friedman's The Moral Consequences of Economic Growth. (I've only been through the first 100 pages, but I don't imagine it's going to get any less impressive.) Friedman includes an important discussion of the relation between the comparative character of the effect of income on well-being and economic growth. It was, for me, the source of a satisfying “Aha!” moment.

Friedman notes that the effect of income on well-being depends mainly on two different kinds of comparisons. First, we compare our present circumstances to our past circumstances. If we're better off economically than we used to be, we feel better off. Second, we compare our circumstances to those of other people. If we're doing better than our imagined peer group, we feel better; if worse, then worse.

Friedman's insight is that these two forms of comparison in some ways substitute for one another. If almost everyone is continuously doing better than they were before, due to a steady rate of growth, the satisfaction from intra-personal comparison mitigates the tendency to compare ourselves to others. However, if economy stagnates, and most are no better off economically than they used to be, the tendency to compare ourselves to others is heightened. And this, Friedman argues, has deleterious political and social consequences.

Here is what he says:

By continually giving people a sense of living better than they or their families have in the not very distant past, sustained economic growth reduces the intensity of their desire to live better than one another. Economic growth satisfies the form of people's aspirations for “more” that is possible for everyone to fulfill. . .

When an economy stagnates, however, the importance people attach to living better than others against whom they naturally compare themselves is more intense. The fact they cannot do so, or at least on average cannot, then takes on heightened importance in their eyes. The resulting frustration generates intolerance, ungenerosity, and resistance to greater openness to individual opportunity. . .

Mobility, either economic or social, is inherently threatening because it means the possibility of movement either up, or, more to the point, down, compared to the prevailing norms of the society as a whole. But when the average income for an economy is stagnant, people who allow others to get ahead of them are not only falling behind in relative terms but also losing ground compared to their own past living standard. They lose out from the perspective of both benchmarks. When an economy is growing, however, and per capita income is rising, those who fall behind compared to others can still be moving ahead–and if growth is sufficient, moving ahead solidly–by the standard of their own experience.

If Friedman is right about this, and I suspect he is, then this is an exceedingly important argument. A number of happiness-centric economists argue that because increasing wealth has little positive effect on happiness, due to adaptation and comparison, we shouldn't worry about implementing policies that would reduce, or even stall, economic growth just as long those policies are increasing happiness. But if slowing or stalling growth itself heightens the negative effects of social comparison, we have a powerful argument against such policies on the very grounds that they are supposed to be justified.

I highly recommend this book.

[Cross-posted to Happiness and Public Policy. Please leave comments there.]