Richard Serlin:
Richard H. Serlin: To: John Cochrane, Re: Positional Externalites: Years ago, when your excellent book, Asset Pricing, first came out, I was a finance PhD student. I found some errors and sent you an email with them, and some feedback and suggestions I had. You replied, and were very gracious. So I'm hoping you might reply to this.
In your current blog post, you write:
Frank's article is hilarious in another way. Higher taxes are fine, he says, because more money won't make you feel better when everyone around you is wealthier too. Too much low-hanging fruit there, just go read it and have a laugh. Or shake your head in amazement. No, he's not joking.
With regard to Frank's contention that position/rank/prestige/context is a substantial part of how much utility the average person gets from goods, please give us the evidence why this is wrong. Please don't just say, ha ha, it's hilarious, it's too obvious. Because Frank's contention was published in one of economics' top journals, the American Economic Review, "Positional Externalities Cause Large and Preventable Welfare Losses." (2005). And other authors have based top journal papers on the same contention…. Now, surely the wrongness of this idea can't be so laughably obvious if the editors of some of economics' top journals repeatedly published articles based on it. And, not to beat a dead horse, Nobel Prize winning economist Gary Becker wrote a paper based on this idea:
"Evolutionary Efficiency and Happiness", Journal of Political Economy, April, 2007 (with Louis Rayo). Quoting Becker and Rayo:
For a long time, utility was assumed to depend only on the absolute level of an individual’s economic conditions. However, a large body of research now shows that the relative level of these conditions also plays a central role: an individual’s utility, whether defined in terms of decision making or hedonic experience, tends to be sharply influenced by his personal history and social environment. Examples include Markowitz (1952), Stigler and Becker (1977), Frank (1985), Constantinides (1990), Easterlin (1995), Clark and Oswald (1996), and Frederick and Loewenstein (1999).
So please John, don't treat Frank's general idea as laughably, obviously wrong. Becker's not an idiot. None of the very successful economists noted above are idiots….
For me personally, I'd be stunned if position/rank/context/prestige were insignificant or insubstantial factors in how much utility people get from clothes, cars, homes, etc…. But I'm very open to your evidence, and very curious to hear it.
Sincerely,
Richard Serlin
