People Barely Care About Relative Income

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:

• Facts about human psychology mean that for most people (unless they have a great capacity for self-delusion), consciously moving from a higher status group to a lower status group in order to feel relatively better about your status is not feasible. If one feels intellectually out-matched on the EA Forum so one decides to go and debate some primary schoolers instead, most people would experience this as humiliating, and increase the salience of their low status, more than it would be enjoyable.
  • A better test would be whether people would feel better when they spontaneously move up a status hierarchy because their peers lose ground. There are some measurement difficulties and confounds here too, both because it's socially taboo to rejoice in your peers suffering (though obvious schadenfreude is a thing), and because events which reduce the status of all your peers (e.g. everyone else's crops get destroyed) often threaten you too.
• In most cases, improving your local status by moving from a higher status group to a lower status one, also lowers your global status. If one moves from an elite university (where one is below average in local rank) to a low tier university (where you are high in local rank), your overall status has nevertheless declines.
  • This makes sense, because a large part of one's status often comes from one's community/local peers. So moving to a lower status group is often undesirable. 

Vasco Grilo🔸 @ 2025-05-14T20:15 (+6)

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.

Ramiro @ 2025-05-21T17:43 (+2)

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?

Vasco Grilo🔸 @ 2025-05-21T18:04 (+2)

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.

Ramiro @ 2025-05-22T20:55 (+6)

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)

Vasco Grilo🔸 @ 2025-05-23T05:51 (+2)

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.

Ramiro @ 2025-05-23T17:15 (+2)

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.

David T @ 2025-05-15T08:06 (+5)

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

David_Moss @ 2025-05-15T10:17 (+2)

Also in his original formulation "high status" environments are often simply nicer 

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.

I'm not convinced by this way of looking at the Easterlin paradox.

The thing I see is not necessarily that people want to feel superior to their neighbour - it's rather that they have a 'quality of life' threshold they consider 'normal' (mostly defined by what they see around them when they grow up - in their neighbours, télévision, cinéma, social media) and feel less good if they feel left out. 

For instance, I'm used to having a smartphone, video games, microwavable food, Uber eats and my own room because of where I live. I'm frankly not convinced that societies where these elements don't exist would be unhappier. But me not having them when everyone else does is not something that feels good.

Moving to another country doesn't solve that. For most people, they want to get above the 'normal' threshold. That's why changing neighborhood doesn't appear like an option for most people. If I have a PS3 and everyone around me has a PS5, moving to a country where people can't afford more than a PS1 doesn't do the trick.

I agree that there is a correlation with income and happiness, because some elements that money buys do improve happiness (food, medicine, leisure time with your family). But increasing income is less and less effective at increasing happiness over time. Most charts indicating that countries with higher GDP have higher happiness use log scales - the result is much less impressive after some threshold using a linear scale.

It reminded me this: Saturday Morning Breakfast Cereal - Wishes
 

Tbh, I barely care about what economists in Koch's pockets claim (something Caplan apparently doesn't consider worth denying)

Yea, this seems like a remarkably basic defense for the title "People Barely Care About Relative Income". I want to expect more from economists like this.   

I tried asking Claude to come up with a list of arguments on both sides of this. Then I asked it to come up with its final take. I thought that this kind of analysis was far more reasonable than what Caplan did. 

(Obviously, this was a very basic job. A more thorough one would probably look like asking an LLM to do some amount of background research and a large amount of brainstorming and then summarize that.)

https://claude.ai/share/5e2f1332-095e-4858-b960-55fc566b61ee