Here’s another excerpt from the Economics 2.0 book.
“Scientists Sara Solnick and David Hemenway…questioned students in what kind of world they would rather live–one where they earned $50,000 and everyone else half as much, or alternatively, $100,000 while everybody else would make twice as much. The majority chose the first option, even though they would have cleared improved their lot by picking the second.”
- Norbert Häring and Olaf Storebeck (2009). Economics 2.0: What the best minds in economics can teach you about business and life. Palgrave MacMillan, New York, NY.
- Solnick, Sara and David Hemenway (1998). “Is More Always Better?: A Survey on Positional Concerns,” Journal of Economic Behavior and Organization, vol. 37, pp. 373-383.
I disagree with the author’s contention that “though they would have cleared improved their lot by picking the second.” The absolute number isn’t important, it’s how that compares to the rest of society. Wouldn’t this give me double the buying power of my peers? In the other scenario, I have half the buying power that my peers. Wouldn’t the supply and demand curve calibrate to the cost of what the rest of society is willing to pay for everything? If they have twice as much money as I do, is it safe to say that’s more than I am willing to pay. Thus, I’m getting the short end of the stick in scenario #2.
This reminds me of my very young children who don’t know anything about math. They think that having more coins is more money. If I give one child 3 quarters and another child 10 pennies, they both think that child #2 has more money. They don’t realize that when we go to the store, 3 quarters will buy one child a cookie, 10 pennies will barely get the other a piece of gum.
You’re taking a very ‘general equilibrium’ view that having more money (in nominal terms) simple means higher prices and may not mean more buying power. The experiment was meant to ask the following question: would you rather be lower middle class in 2009 or upper middle class in 1809? You’d be “richer” in real income terms under the lower-middle class 2009 scenario. However, you would have a lower status relative to your peers compared to the 1809 scenario. That is the tradeoff.