Absolute versus relative well-being

Let's consider a key dimension that people differ on: wealth.

At any given level of wealth, people can compare themselves to richer people and feel dissatisfaction, or to poorer people and feel thankful.

People compare themselves to those who live nearby in the present much more than those who live far away or who lived long ago. Do American middle class people today appreciate that they are better off than the ordinary folks in the Third World? I doubt it's salient to them. The classic line for children of my generation encouraging them to clean their plates was, "Think of the starving children in India." But I do not believe it was notably successful at getting children to clean their plates or to feel fortunate, and it has been mentioned since then mainly as a joke. Americans mostly compare themselves to other Americans. I speculate that the relatively well off of the Third World are more thankful comparing themselves to those around them than dissatisfied that they are not so well off as those in the American middle class.

I suspect most people attend more to those richer than them rather than poorer. The advertising industry feeds off this and also reinforces it. Advertising is trying to get us to buy things, people who are richer buy more things, so buying more things will give us the appearance of being richer. Earning more money to buy those things would be making us in fact richer.

Evaluation relative to others living nearby is in line with what evolution might predict. We are geared to aspire to plausibly attainable improvement and to avoid dangers that have hurt people like us. If the band next door is catching more game than you are, it's well worth your while to study how they do it and try to duplicate it. They have less interest in studying you, unless you did something different that did not turn out well. Sacrifices to the gods that are too lavish might in fact leave your people hungry. In the environment we evolved in, there would have been limited awareness of those living long ago or far away, and limited relevance if they lived in a very different natural or social environment.

But if we step back and think things through, is relative comparison really a good idea? Is it perhaps more important to focus on what you have in absolute terms rather than how you compare to others?

One way of looking at our relative perspective is as the result of <cognitive biases>. The "framing effect" and "anchoring effect" come to mind. The basic idea is that people will evaluate a situation relative to the frame they perceive it in. A retailer sets a high list price for something, and then announces it is on sale. If the buyer accepts the retailer's list price as the frame, he will think he's getting a good deal compared to a retailer who simply sets the first one's sale price as their list price and doesn't have a sale. A discount for paying a bill in cash is acceptable, while a surcharge for paying by credit card is unpopular. Psychologists can confirm this in experiments by setting different frames for different people and comparing the results. People will feel better about paying a higher price if framed appropriately. Applying this to wealth, if due to some change in policies you get 10% richer but your neighbor gets 30% richer and you feel worse, we could call that the result of an irrational cognitive bias.

One simple way to get happier is to adopt as your frame of reference people who lived 200 years ago. You live longer, infant mortality is more like 1% than 40%, you have much better health, you have hot water and flush toilets, plenty of food and a wide variety year-round, clean streets and air, and a world of information and entertainment at your fingertips. By those absolute measures, today's working poor have it better than the nobility of two hundred years ago. But from a comparative viewpoint, the nobility of times gone by were content and today's working poor are not.

The absolute perspective can be used appropriately as a defense of capitalism -- even if the system creates vast wealth inequality, it is justified as the poor are so much better off too in absolute terms. Taken over the sweep of 200 years, I think this is accurate. Even Karl Marx recognized that capitalism created wealth and was an improvement on what came before. Still today, the prospect of getting very rich motivates people to create wealth. Without such incentives those creative people would not bother to work extremely hard and take the risks and create the wealth. However, it is also entirely compatible with 70% marginal income tax rates, 50% inheritance taxes, and 1% wealth taxes. Motivation of entrepreneurs doesn't require the prospect of keeping everything they earn, just a large portion of it. That (combined with consistent regulation to control externalities) is the best economic system we know of.

An absolute perspective suggests that there is no inherent benefit to making the rich poorer. Instead, it should emphasize what benefits we can get for ordinary people. Such benefits may require money. The only people with the money are the rich. But we should sympathize with them, as none of us likes to pay taxes -- the only justification is that we need the money to help out ordinary people.

Studies suggest that people's happiness depends on how they compare to others around them. It is unlikely we are going to change that in any major way. But I suggest it is due to cognitive biases, and a sensible and even preferable alternative when considering two futures is to prefer the one with better well-being in absolute rather than relative terms.

People might disagree. Even with cognitive biases controlled for, they might feel that relative wealth is what's important. You could ask them whether they would prefer the status quo to a future in which ordinary folks are 5% richer and the rich are 100% richer. Or one in which they are 5% poorer and the rich are 50% poorer. The answer would probably depend on exactly how the question is framed, requiring refinement over multiple experiments.

I am not at all suggesting that those choices (+5/+100 or -5/-50) are the actual alternatives available. I believe we can and should reduce wealth inequality and income inequality substantially, and the obvious mechanism is redistributive taxation and spending. Redistribution does not require a relative perspective. If you ask ordinary folks if they favor being 2% richer and the (far less numerous) rich being 20% poorer, they might well agree with that. The large majority of people are getting richer in absolute terms.

We might find that relative well-being is simply what we inherently value more than absolute well-being, not just the result of cognitive biases. Or we might find that different people have different values. Some people might find they prefer to adopt the absolute perspective.