Thursday, August 4, 2011

Positional Competition

I was talking earlier (link to come) about important differences between economies where marginal costs are rising in the key sectors, and those where marginal costs are falling. It is one of the most important influences on what kind of growth you get, and what kind of daily life you live.

But there's another major factor as well. A lot of what people want is often dependent on where you are in the pecking order, and not how much absolute wealth you have. Some things are inherently limited to small groups at the top - beachfront property in Malibu, say, or the proportion of students who can go to Harvard.

This kind of relative competition can limit the gains from growth in important ways. If 50% of the population have degrees, for example, a degree is not as valuable as a mark of extra skill as when only 10% had one. But there may be a lot more student debt which weighs people down. Of course, in this case it may still be worth it foe the education itself. But it won't give the same vocational leg-up. That may now need a master's degree. It is a "red queen" type of problem. You have to run faster to stay in the same place.

One of the first decisive books to make this point was Fred Hirsh's Social Limits to Growth (Twentieth Century Fund Study). I haven't read it a while, but I should take another look.

Anyway, the real upshot is - how do we stop ourselves wasting much of society's effort running faster to stay in the same place? How do we avoid diverting wealh into zero-sum comeptition over pecking order, status and rank? People very much care about status.

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