Positional good

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Positional goods are a subset of economic goods whose consumption (and subsequent utility), also conditioned by Giffen-like pricing, depends negatively on consumption of those same goods by others.[1] In particular, for these goods the value is at least in part (if not exclusively) a function of its ranking in desirability by others, in comparison to substitutes. The extent to which a good's value depends on such a ranking is referred to as its positionality.

The concept[edit]

Although Thorstein Veblen emphasized the importance of one’s relative position in society with reference to the concept of conspicuous leisure and consumption,[2] it was Fred Hirsch who coined the concept of the “positional good,” in Social Limits to Growth.[3] He explained that the positional economy is composed of "all aspects of goods, services, work positions and other social relationships that are either (1) scarce in some absolute or socially imposed sense or (2) subject to congestion and crowding through more extensive use" (Hirsch, 1977: 27).

Hence, Hirsch distinguished categories of positional goods.[4] Some depend, essentially, on their relative positions (pride of superiority, status and power); others, such as land for leisure activities or land for suburban housing, are positional merely because their total amount is fixed. However, land is valued at least in part for its absolute contribution to productivity, which does not derive from its relative ranking. Thus, some economists (such as Robert H. Frank and Ugo Pagano) only include goods (like status and power) which are valued specifically because of their relative quality.

Hirsch’s main contribution is his assertion that positional goods are inextricably linked to social scarcity [5] - social scarcity relates to the relative standings of different individuals and arises not from physical or natural limitations, but from social factors; for instance, the land in Inter-Provincial Montioni Park is physically scarce, while political leadership positions are socially scarce.

The broad theme of Hirsch's book was, he told The New York Times, that material growth can "no longer deliver what has long been promised for it—to make everyone middle-class".[6] The concept of positional good explains why, as economic growth improves overall quality of life at any particular level, doing "better" than how your grandparents lived does not translate automatically into doing "well", if there are as many or more people ahead of you in the economic hierarchy. For example, if you are the first in your family to get a college degree, you are doing better. But if you were at the bottom of your class at a weak school, you may find yourself less eligible for a job than your grandfather, who was only a high school graduate. That is, competition for positional goods is a zero-sum game: Attempts to acquire them can only benefit one player at the expense of others.

It is worthy to underline that in the case of positional goods, agents benefiting from a positional good do not take into account the externalities of their respective sufferers. That is, in the case of "public […] goods, the consequences of this failure implies that an agent consuming the public good does not get paid for other people’s consumption; in the case of a positional […] good, the equivalent failure implies that an agent consuming positive amounts is not charged for the negative consumption of other agent’s consumption" (Pagano 1999:71). That is, while, in the case of public goods, we have the standard underinvestment problem in their supply, because excluding individuals from externalities that have the “same sign” may turn out to be impossible, by contrast, in the case of positional goods, we have a problem of over-provision, because all agents may try to consume positive amounts of these goods, neglecting to consider the externality on others. For public goods, an under-supply, for positional goods, it signifies an over-supply. In other words, in positional competitions, people work harder and consume more than they would under optimal conditions.

Some economists, such as Robert Frank, argue that positional goods create externalities and that "positional arms races" can result for goods that might boost one's social status relative to others. This phenomenon, Frank argues, is clearly bad for society, and thus government can improve social welfare by imposing a high luxury tax on certain luxury goods to correct for the externality and mitigate the posited social waste.[7]

However, in some cases it may be less clear that such government intervention is warranted in response to these externalities.[8] For example, in certain cases, such government actions can potentially impede improvements in living standards and innovation. Technological advance itself is possible in part because wealthy individuals are willing to purchase new and untested goods. There is a certain experimentation and risk that accompany luxury goods, and if they are found to be useful they may eventually be mass-produced and made affordable to the common person: one era's luxuries are another's commonplace goods. In short, the negative positional externality can be compensated by the public goods of infant industry effects and research and development.[9]

Definitions[edit]

One early instance of positional economy comes from San Gimignano – a Tuscan medieval town. San Gimignano is considered the Manhattan of the Middle-Ages for its towers – in the past there were about eighty towers. Towers were not built by aristocratic families to live within them, but to “demonstrate” to community, the power, the affluence and the status of each family. In this case, the owner of tower consumed a positive level of positional good, like power, instead the family which did not own tower or owned a lower building consumed a negative level of positional good, that is, it consumed the exposure stemming from the power of the owner. For this reason, there is a zero-sum game in the family consumptions. There is a party consuming a positive amount of positional good and at the same time there is a counterparty consuming a negative amount of such a good. However, the aristocratic family – owner of tower – enjoyed the positive consumption of positional good, namely it had a positive utility deriving from positional good. On the contrary, the family – non-owner of tower – suffered from the negative consumption of positional good (the consumption of exposure to power of others), namely it had a negative utility. For this reason, there is a zero-sum game in the family utilities. Lastly, towers were not built stuck to each other; it would have reduced the construction costs because a part of walls would be shared. Instead, among towers there is a gap, but this gap is not large enough for a person to pass through; it is the size of a brick. The reason of this gap and its size is to keep costs of construction high, and to deny the positive consumption of a positional good to families, which were not rich enough to build the entire edifice. For this reason, positional good is related to a higher pricing. The case of San Gimignano’s towers explains three meanings of positional good, each one resting on the idea of social scarcity: 1) the first one based on a zero-sum game in the consumptions, 2) the second one based on a zero-sum game in the payoffs (utilities), and 3) the third one related to higher pricing mechanism to deny the consumption of others.[10]

The definition centred on a zero-sum game in the consumptions is originated from contributions of Ugo Pagano: When one party’s level of consumption is positive, then at least one other party’s level of consumption must be negative. However while the dimension of positional good is binary, the net (utility) impact of a positional good may be positive, zero or negative. The individual utility derives from the individual preferences on the level of consumption. If reasonable conditions - positive (negative) consumptions imply positive (negative) utilities - hold, then a second kind of definition of positional goods may be formulated: Zero-sum game in the payoffs. Positional goods are goods whose utility of their consumptions is relative (negatively) to the consumption of the others. A last definition of positional good derives from the so-called “Veblen effect”, which is witnessed whenever individuals are willing to pay higher prices for functionally equivalent goods (a very significant example is the luxury goods market). The Veblen effect also implies that a sufficient decrease in price leads not to an increase in demand, but to a decrease, because the social status derived from acquiring the goods in question may fall (remember the role of gap among San Gimignano’s towers!). In this respect, positional goods are goods for which the satisfaction derives (at least in part) from higher pricing. This brings us to an intriguing parallel between positional goods, such as “luxury goods”, and what are known as “Giffen goods”. Rae observed that in the case of “mere luxuries”, while a halving of the price would require a doubling in the number of units purchased, in order to satisfy vanity to the same extent, a reduction of the price to a small fraction of its previous level would reduce demand to zero. Cournot also admitted that some goods “of whim and luxury [...] are only desirable on account of their rarity and of the high price which is the consequence thereof […] [i]n this case a great fall in price would almost annihilate the demand.” (cf. Schneider [11]).

The triad of economic goods[edit]

People constantly compare themselves to their environments and care greatly about their relative positions, which influence their choices. Therefore, the paradigm of homo economicus should be extended, so that positional goods are included in theories of individual consumption and social concerns are considered among the basic motivations for individual economic behaviour. We can define the triad of economic goods – private, public and positional goods – in terms of individual and total consumption. Private goods are characterized by the fact that they are consumed only by single individuals. The exclusion of others from positive amounts of consumption is impossible in the case of public goods. Instead, when some individuals consume positional goods, other individuals must be included in the consumption of related negative quantities. A pure positional good can be defined as a good of which a certain amount of positive consumption by one agent is matched by an equally negative amount of consumption by another agent. That is, in the case of positional goods, individuals’ consumption levels have opposite signs.

The distinction among private, public and positional goods brings different rules for deriving total demand. In a diagrammatic view,[12] total demand of a private good is the horizontal sum of individual demands. For a public good, instead, total demand is the Samuelsonian vertical summation of individual demands. Finally, for positional goods, the optimal level of consumption does not coincide, as it does in the case of private goods, with the intersection of any individual marginal rate of substitution curve with the marginal cost curve since an externality emerges for the consumption of other. Thus, we should first calculate the total marginal rate of substitution and, consequently, find the intersection with the marginal cost curve. As in the case of public goods, the total marginal rate of substitution is calculated by the summation of individual marginal rates of substitution. But in the case of positional goods, one marginal rate of substitution is subtracted since there is negative consumption. Therefore, the total marginal rate of substitution is the difference between the two individual marginal rates of substitution.

See also[edit]

References[edit]

  1. ^ Vatiero, Massimiliano (2011). "The Institutional Microeconomics of Positional Goods". Mimeo (presented to ISNIE 2011, Stanford University)link. 
  2. ^ Veblen, Thorstein (1899). The theory of leisure class. New York: MacMillan. 
  3. ^ Hirsch, Fred (1977). The Social Limits to Growth. London: Routledge & Kegan Paul. ISBN 0-674-81365-0. 
  4. ^ Schneider, M. (2007). "The Nature, History and Significance of the Concept of Positional Goods". History of Economics Review, 45: 60-81. 
  5. ^ Pagano, Ugo (1999). "Is Power an Economic Good? Notes on Social Scarcity and the Economics of Positional Goods". In Bowles S., Franzini M. and U. Pagano (Eds.), The Politics and the Economics of Power, London: Routledge, pp. 116-45. 
  6. ^ "Fred Hirsch, 46, British Economist; Professor at Warwick". New York Times. 12 January 1978. 
  7. ^ Robert H. Frank (2008). "consumption externalities," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
       • _____ (1997). "The Frame of Reference as a Public Good," Economic Journal, 107(445), pp. 1832–1847.
       • _____ (2005). "Positional Externalities Cause Large and Preventable Welfare Losses," American Economic Review, 95(2), pp. 137-141 (close Bookmarks tab & press +).
  8. ^ Vatiero, Massimiliano (2011). "The Institutional Microeconomics of Positional Goods". Mimeo (presented to ISNIE 2011, Stanford University)link. 
  9. ^ Andrew Kashdan and Daniel B. Klein (2006). "Assume the Positional: Comment on Robert Frank," Econ Journal Watch, 3(3), pp. 412-34. Abstract.
  10. ^ Vatiero, Massimiliano (2011). "The Institutional Microeconomics of Positional Goods". Mimeo, presented to ISNIE 2011, Stanford University, link. 
  11. ^ Schneider, M. (2007). "The Nature, History and Significance of the Concept of Positional Goods". History of Economics Review, 45: 60-81. 
  12. ^ Massimiliano Vatiero (2009). "Positional Goods: A Diagrammatic Exposition." Abstract and link.