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Luxury Fever: Why Money Fails to Satisfy in an Era of Excess.

by Robert Frank, New York: The Free Press, 328 pages, $25

Robert Frank believes that what our economy needs is a vast increase of taxation and government expenditure. Why? Because private persons left alone buy the wrong things.

But hey, before you tune out in disgust, listen to what the man has to say. He has a case. Frank's previous works prove him to be an outstanding creative economist. They include two important books representing novel approaches to the explanation for wage and income inequality: Choosing the Right Pond (1985) and, with Philip J. Cook, The Winner-Take-All Society (1995). His Passions Within Reason (1988) helped introduce economists to an issue long overlooked, the biological and cultural underpinnings of human preferences. These earlier works have been well-received on professional grounds and, what is more remarkable for economic writings, they are readily comprehensible by an intelligent general audience. In Luxury Fever, Frank draws out some rather disturbing implications of these earlier studies.

Frank is well aware of the disincentive effects of taxes, of the ways government regulation distorts decision making. So where and why does he veer from the straight and narrow? The answer: Frank might have been a libertarian, had he not been mugged by Thorstein Veblen.

Free markets respond very well to human preferences, Frank believes, but there is a flaw in those preferences themselves. We often desire goods not for the substantive benefits they confer but only for purposes of display and assertions of status - for what Veblen termed "conspicuous consumption." You can buy a serviceable wristwatch for $20, an excellent one for $200. But if you want to impress your friends, there's a Patek Philippe for $17,500. That is, if you're willing to settle for a regular production-run model. Should you really care to make a statement, a Patek Philippe Calibre '89, of which only four were manufactured, might dent your wallet for over $3 million.

Or take houses. Bill Gates' new 45,000-square-foot lodgings may set him back $100 million - over $2,000 per square foot. But Microsoft co-founder Paul Allen has topped him with a 74,000-square-foot palace. And then there are the yachts. Aristotle Onassis' Christina appears to have been surpassed by rival Stavros Niarchos' Atlantis, which is 50 feet longer. On the other hand, Atlantis has nothing comparable to the barstools aboard Christina, covered as they are with a most exceptional fabric: "the buttery soft - and jarringly expensive - foreskin of the sperm whale penis."

Well, is there anything so very wrong with all that? Does conspicuous or "positional" spending provide any stronger ground for government regulation than ordinary material consumption, which can certainly be piggish enough to revolt sophisticated sensibilities? In either case, if you don't like what Mr. X spends his money on, what business is it of yours? For Frank, the objection is that positional consumption is a zero-sum game. Atlantis and Christina measure in at 375 and 325 feet, but perhaps Niarchos could have dished Onassis equally well had both vessels been half the size. More generally, the satisfaction one person gains from an increment of positional consumption is matched by a corresponding psychic loss imposed upon everyone else.

Furthermore, as income and wealth grow over time, Frank argues, not only the super-rich but even the merely affluent may be approaching saturation when it comes to simple material consumption. Our stomachs are only so big, our bodily frames can carry only so much clothing - even our psychic capacities to enjoy physical pleasures are limited. In contrast, status will always be in fixed supply. So the problem of positional consumption, if it is a problem, will grow worse and worse as more people can afford to play the game. As the economy progresses, we will all be devoting more and more effort to a mutually self-defeating activity - conspicuous consumption intended to spite our friends, neighbors, and business associates.

For Frank, this motivation has important unpleasant consequences apart from waste and ugliness. First of all, he claims, it makes us work too hard. Struggling to earn the income needed to mortify our neighbors keeps us from enjoying many really worthwhile activities. We could tend our gardens, read books to the kids, listen to fine music, go to the art museum. Second, he complains, the display motive inclines us to prefer spending over saving. Consumption is more conspicuous than dough quietly accumulating in bank or brokerage accounts.

Third - grit your teeth now, readers, 'cause you're not going to like this - the need to pay for conspicuous consumption makes us less enthusiastic than we ought to be about taxes. "Luxury fever" makes us unwilling to vote for government levies that could provide for sanitation and disease control and rapid transit and other needed public goods, or for socially and morally desirable aid to the poor and homeless.

The solution? Frank proposes a progressive consumption tax (rather than a higher income tax). A consumption tax is called for, since he doesn't want to discourage saving. The progressive feature is needed, because a merely proportional tax would impinge in a more or less parallel way upon both the innocent and the guilty, that is, upon both material and positional consumption. A progressive tax, in contrast, would especially hit the rich - who, in the nature of the case, are the ones who can and do spend more on positional goods.

So what's wrong with this story, if anything? Classical liberals can point out several flaws in the argument, but I will mention only one problem: implementation. It is always possible for a reformer to come up with ways in which the world might be improved. But even the best of reforms has to be carried out by imperfect, often downright corrupt, humans. Although early reforms like public sanitation and aid to the poor were and are defensible, the social processes at work have led to our current overgoverned society in which the minute details of private and social life are subjected to bureaucratic manipulation.

We live today with a vastly oversized "public sector," a euphemism for the huge parasitic class of politicians and bureaucrats and their allies: teachers' unions, class-action attorneys, journalist flacks of the welfare state, and other unindicted co-conspirators. Surely any reasonable person must shudder at the prospect of putting a huge new source of tax revenue in the hands of that crew.

In fact, one could well argue - Adam Smith certainly did - that those charged with public spending are likely to be even more interested in conspicuous spending than private persons. Think of the tax-financed white-elephant ballparks, the ornate federal office buildings that have sprung up not only in Washington, D.C., but just about everywhere, the hypertrophied public transit systems lacking nothing but riders, the Agriculture Department's wildly wasteful irrigation schemes. Simple corruption is very likely the major explanation, true, but politicians' desires for "monuments" (Hoover Dam, J.F. Kennedy Airport, the Sam Rayburn Office Building) are a big part of the story behind such travesties.

One technical objection: Frank errs in believing that saving is intrinsically less of a positional expenditure than consumption. Saving represents a transfer of consumption from the present to the future. Although saving today does reduce present consumption, both material and positional, it serves to augment future consumption, in turn also both material and positional. So the logic underlying his proposal for a progressive consumption tax falls to the ground. To the extent that Frank's main contentions are valid, they imply the desirability of a straightforward increase in both the magnitude and progressivity of the ordinary income tax.

That brings us to the problem of incentives, on which Frank swings both ways. Like most proponents of high taxes and big public spending, he is skeptical that tax penalties will have much of an adverse effect upon incentives. But earlier on he had claimed we were all working too hard. If that were so, the discouraging effect of high taxes should require no apology on his part - it might be just the corrective medicine needed to keep us at home playing with the kids.

Getting back to fundamental issues, the deep-seated biological and cultural forces underlying our desire to achieve and demonstrate high status will not be stamped out by a mere tax scheme. What will individuals with strong status drives do if punitive taxation deters them from conspicuous consumption? They will seek status by other means. Dr. Johnson said, "There are few ways in which a man can be more innocently employed than in getting money." And, he might well have added, in spending his own money.

If we discourage spending on consumption displays, some of the alternatives could be quite praiseworthy - for example, competition in philanthropy. Some high achievers may shift from big-salary jobs to careers of greater social value, perhaps in space exploration or scientific achievement. On the other hand, we can imagine competition for notoriety in evil, along the lines staked out by the Marquis de Sade or Larry Flynt.

Overall, however, the biggest status game in town is not big spending but acquiring power over other people. In short, politics. So a likely consequence of sumptuary legislation would be more and more intense contests over the perennial question, "Who shall be king?" As usual, Adam Smith said it best, in The Wealth of Nations. "It is of the highest impertinence and presumption...in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will."

Still, I am inclined to defend Frank in one important respect: as a moralist and a Jeremiah. If our society is to remain at its barely civilized level, from time to time we do need to be reproved for the vulgarity of wasteful consumption, not to mention the in-your-face boorishness currently recommended by ideologies of self-assertiveness and self-esteem. Although all of us are at fault, it is up to those who cash in most of the benefits of civil society, the rich and powerful, to take the lead in restraint. Frank avoids smarmy preaching, but Andrew Carnegie had it right in saying that great wealth is a sacred trust.

Jack Hirshleifer (jhirshle@ucla.edu) is professor of economics emeritus at UCLA.
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Title Annotation:Review
Author:Hirshleifer, Jack
Publication:Reason
Article Type:Book Review
Date:Jun 1, 1999
Words:1756
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