This is a crosspost for People Barely Care About Relative Income by Bryan Caplan, which was originally published on Bet on It on 5 March 2025. Relatedly, see People Barely Care About Equality by Bryan Caplan, and People Barely Care About Relative Income: Some Empirics by Douglas Coate.
[Subtitle.] A simple proof.
Do people want to be rich? Or just richer than their neighbors?
Self-styled “realists” have long defended the latter position: What human beings really savor is not material wealth, but feeling superior to others.
The idea that human beings care primarily about relative income is the standard resolution of the famed “Easterlin paradox.” If richer people are happier at any point in time, why doesn’t economic growth raise overall happiness? Because what really brings joy is not being a “have,” but being a “have-more.”
One response to the Easterlin paradox has been to carefully re-examine the data to see if economic growth raises overall happiness after all. (Spoiler: It does). A fine approach, but there’s a much less laborious way to resolve the claim that “People just want to be richer than their neighbors.”
The resolution begins with the observation that each of us possesses a nearly fool-proof short-cut to relative riches. Namely: Move to a poorer area.
If you want to feel superior to your immediate neighbors, move to a poor neighborhood.
If you want to feel superior to people in your state, move to a poor state.
If you want to feel superior to people in your country, move to a poor country.
When we look at human migration, all three of these choices are rare. And when people do voluntarily move to poorer neighborhoods, states, and countries, there’s almost always an obvious motive that has nothing to do with boosting the mover’s relative income. People relocate to get a better job, to be closer to family, for a lower cost of a living, or for love. Almost no one relocates to feel relatively rich. (In fact, isn’t this essay the first time you’ve heard anyone point out that this is even an option?!)
Moving to poorer neighborhoods, states, and countries? It is far more common for people to deliberately move to richer neighborhoods, states, and countries. Part of the motivation for such moves is to raise the migrant’s absolute income. But especially at the neighborhood level, “being around a better class of person” is a common goal. Holding housing price constant, the richer your neighborhood, the better. I’ve heard plenty of griping against homeowner associations, yet I’ve never heard anyone lament, “HOAs are trying to make our neighborhood look poor.”
A world where people commonly moved to raise their relative income would have surreal dynamics. Developers would voluntarily intersperse “affordable housing” next to mansions, knowing they could charge rich customers a premium for the privilege of living next to destitute neighbors. “Gentrification” would be a never-ending cycle: Rich people would move to poor neighborhoods to feel superior; the poor would flee to avoid feeling inferior; once the gentrification process was complete, the rich would sigh in extreme aggravation and move on to poorer pastures.
I’ve said it before, and I’ll say it again: Actions speak louder than words. Since you can easily get a sky-high relative income by moving, yet almost no one uses this easy strategy, we can safely conclude that people barely care about relative income. “Realists” who think otherwise have an unrealistically negative view of human motivation.
I don't think that Caplan's test is a good one, for a couple of reasons that commenters on his original post pointed out:
Thanks for the good points, David!
I think Bryan convincingly argued people do not care much about how their wealth compares with that of their neighbours. However, they could still care about how their wealth compares with their peers, which will remain the same to a significant extent even if people move to lower income areas.
In any case, I still think the absolute level of wealth significantly matters for welfare. Otherwise, I would not expect self-reported happiness to increase with real gross domestic product (real GDP) per capita within the vast majority of countries.
Caplan says that Schooling is Mostly Signaling - Econlib
If I told him "since education in US is just about signaling, an American should move to a place where their degree + alma mater would be regarded as more valuable - e.g., a developing country, or a poorly educated area, etc.", d'you think he'd agree?
Hi Ramiro,
I do not think Bryan would agree with that. Studying in the United States (US) means a higher chance of being employed relative to studying in a random country, but the US has higher salaries, which plays against leaving.
Don't you think a similar objection would apply to Caplan's "proof" that people don't move to poorer neighborhoods because something something externalities?
(Moreover, I just realized thata "realists say that people only care about relative wealth" is a remarkable strawman, and it's refutation does not entail that people barely care about relative income - and this is the first time I see an Economics professor mixing claims about wealth and income in the same argument)
Yes, I think a similar objection applies. However, I would still expect more people to move to neighbourhoods with a lower mean income if people cared a lot about their income relative to their neighbours. I believe people's behaviour is better explained by people caring much more about their income than their income relative to their neighbours.
Or: people care about relative income because: a) it entails more wealth (as capital gains accumulate faster than returns on work) which entails more power, like the possibility of funding intellectuals to say that inequality doesn't matter; and b) it signals status, or it is used to buy status-goods, such as buying a nice house in a rich neighborhood without fearing your neighbors wanting to sack it (since they might care about relative income, even if you don't)
Btw I just realized I can totally bite this bullet: I have lived in 4 cities in the last decade, and I prefer to live in the cheap one not only because of the low cost of living (like many online workers have been doing), but also because I never feel poor in relation to others...Which results in mixed feelings, though, as I don't want to feel much wealthier than the surroundings - it makes me wonder of I should be paying more for services and taxes etc.
Also in his original formulation "high status" environments are often simply nicer (especially to people who disproportionately care about material wealth and status). The people that do move to the developing world tend to be people that don't mind inconveniences associated with [global] relative poverty like having to drink bottled water or everything else around then looking a tad scruffy.
Above all, Filipinos benchmark their wealth relative to other Filipinos (even if their dream involves a Green Card). Americans don't start benchmarking themselves against Filipinos and start thinking that cars are exotic wealth just because they move to Manila
Agreed. I think this is another important confound.
People's concern for relative status may seems clearer when we consider cases of 'moving up' into an area of people who are relatively wealthier, i.e. even if the environment were materially much nicer, I think most people will find it very salient if they are the only non-wealthy person there.