Tag: diminishing marginal utility of income

The happiness literature has established that, in the developed countries, increasing affluence has not increased well-being in recent decades. We seek an explanation for this in terms of conspicuous consumption, a phenomenon originally identified by Veblen.

This is from the abstract of an article in the Economic Journal, ‘Well-being and Affluence in the Presence of a Veblen Good’ by B. Curtis Eaton and Mukesh Eswaran. The authors argue that while increased affluence of the rich may bring a small amount of extra benefit to them, it actually reduces the well-being of others who crave after things that they cannot afford. As the first article below states:

[The authors] believe their work shows that as a nation becomes wealthier, consumption shifts increasingly to buying status symbols with no intrinsic value – such as lavish jewellery, designer clothes and luxury cars. But they warn: “These goods represent a ‘zero-sum game’ for society: they satisfy the owners, making them appear wealthy, but everyone else is left feeling worse off.”

… There is another downside. As people yearn for more status symbols they have less time or inclination for helping others. This, the authors argue, damages “community and trust”, which are vital to an economy because they ensure the smooth running of society.

But do the super wealthy generate more jobs and more prosperity? Do we need to pay vast salaries and bonuses as incentives for executives to take risks: to invest in new products and processes, and drive technological advance and productivity increases? According to the second article, ‘Too few of the world’s billionaires can claim to be honest-to-God productive entrepreneurs who have enlarged the economic pie by dint of hard work, imagination, risk taking and innovation – although thankfully a useful proportion do populate the list.’

So is the ever widening gap between rich and poor necessary if the economy is to grow? Or is it something of very little value to society, except, perhaps, for the super rich themselves?

Articles
More money makes society miserable, warns report The Observer, Jamie Doward (14/3/10)
Don’t celebrate these billionaires, be horrified by their existence The Observer, Will Hutton (14/3/10)

Data
For the latest Guardian survey of executive pay, see: Executive pay survey, 2009
For data on UK incomes and income distribution, see: Annual Survey of Hours and Earnings (ASHE) Office for National Statistics
For data on the distribution of wealth in the UK, see Distribution of Personal Wealth HM Revenue and Customs

Questions

  1. Explain what is meant by a ‘Veblen good’.
  2. What is meant by the diminishing marginal utility of income? What implications does this have for the effects of income distribution and redistribution on social well-being?
  3. Why may a rise in GDP make society worse off if it is accompanied by growing inequality?
  4. To what extent can marginal productivity theory explain the salaries and other rewards of the wealthy?
  5. Using the data below, examine the extent to which the gap between rich and poor is growing.
  6. Explain why increasing conspicuous consumption by the wealthy might be a zero-sum game for society or even a negative-sum game.
  7. What factors cause a rise in productivity?
  8. How might greater entrepreneurship be encouraged in the UK?