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June 19, 2005

The Knotty Questions of Real and Relative Incomes

Fontana Labs of Unfogged calls for help!

Unfogged: In which I use the blog for (almost) scholarly purposes.

I'm teaching a class on well-being soon, and I'd like to cover some of the literature on the relationship between economic status and subjective happiness. In particular, I'm interested in a question that sometimes appears in 'Paul Krugman vs. The Corner' form: does, say, the increasing availability of cheap consumer goods make up for a decline in adjusted income? (Yes, real wages have fallen, but TVs are so much cheaper, etc.) If you know good (accessible) literature on this-- or on related issues-- and you give me references, I'll be grateful.

Hmmmm... Well, first of all, the "adjustments" to nominal wages and incomes in order to turn them into real wages and incomes are supposed to already take this into account: real wages are your nominal wages divided by the Consumer Price Index, and the CPI is supposed to be the price of purchasing a representative constant basket of commodities (a basket that they do change over time: "constant" is in conflict with "representative").

Whether the CPI actually does this or not is a disputed issue. And then there are all the other issues revolving around relative incomes...

If I were going to cover this, I would make people read:

  1. Something of the Boskin Commission on the CPI's report: http://www.ssa.gov/history/reports/boskinrpt.html
  2. A section of The Road to Wigan Pier where George Orwell talks about the "cheap luxuries" created by modern technologies and their effects on perceptions of well being.... My copy of Wigan Pier is at the office (if I haven't loaned it out, that is)... Ah, here we are: chapter 5: http://etext.library.adelaide.edu.au/o/orwell/george/o79r/chapter5.html
  3. Something by Amartya Sen on commodities vs. capabilities... perhaps from Development as Freedom? http://www.amazon.com/exec/obidos/asin/0385720270/
  4. Tibor Scitovsky's old The Joyless Economy: http://www.amazon.com/exec/obidos/asin/0195073479/.

Here are some of Orwell's paragraphs:

Life is still fairly normal, more normal than one really has the right to expect. Families are impoverished, but the family-system has not broken up. The people are in effect living a reduced version of their former lives. Instead of raging against their destiny they have made things tolerable by lowering their standards.

But they don’t necessarily lower their standards by cutting I out luxuries and concentrating on necessities... in a decade of unparalleled depression, the consumption of all cheap luxuries has in-creased. The two things that have probably made the greatest difference of all are the movies and the mass-production of cheap smart clothes since the war. The youth who leaves school at fourteen and gets a blind-alley job is out of work at twenty, probably for life; but for two pounds ten on the hire-purchase he can buy himself a suit which, for a little while and at a little distance, looks as though it had been tailored in Savile Row. The girl can look like a fashion plate at an even lower price. You may have three halfpence in your pocket and not a prospect in the world, and only the corner of a leaky bedroom to go home to; but in your new clothes you can stand on the street corner, indulging in a private daydream of yourself as dark Gable or Greta Garbo, which compensates you for a great deal. And even at home there is generally a cup of tea going....

[A] luxury is nowadays almost always cheaper than a necessity. One pair of plain solid shoes costs as much as two ultra-smart pairs. For the price of one square meal you can get two pounds of cheap sweets. You can’t get much meat for threepence, but you can get a lot of fish-and-chips. Milk costs threepence a pint and even ‘mild’ beer costs fourpence, but aspirins are seven a penny and you can wring forty cups of tea out of a quarter-pound packet.... And then there is the queer spectacle of modern electrical science showering miracles upon people with empty bellies. You may shiver all night for lack of bedclothes, but in the morning you can go to the public library and read the news that has been telegraphed for your benefit from San Francisco and Singapore. Twenty million people are underfed but literally everyone in England has access to a radio. What we have lost in food we have gained in electricity. Whole sections of the working class who have been plundered of all they really need are being compensated, in part, by cheap luxuries which mitigate the surface of life.

Do you consider all this desirable? No, I don’t. But it may be that the psychological adjustment which the working class are visibly making is the best they could make in the circumstances.... The alternative would be... agonies of despair... insurrections which... could only lead to futile massacres and a regime of savage repression.

Of course the post-war development of cheap luxuries has been a very fortunate thing for our rulers. It is quite likely that fish-and-chips, art-silk stockings, tinned salmon, cut-price chocolate (five two-ounce bars for sixpence), the movies, the radio, strong tea, and the Football Pools have between them averted revolution. Therefore we are some-times told that the whole thing is an astute manoeuvre by the governing class—a sort of ‘bread and circuses’ business—to hold the unemployed down. What I have seen of our governing class does not convince me that they have that much intelligence. The thing has happened, but by an un-conscious process—the quite natural interaction between the manufacturer’s need for a market and the need of half-starved people for cheap palliatives...

Posted by DeLong at June 19, 2005 10:48 PM