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

AuthorMcCaffery, Edward J.

LUXURY FEVER: WHY MONEY FAILS TO SATISFY IN AN ERA OF EXCESS. By Robert H. Frank. New York: The Free Press. 1999. Pp. ix, 326. $25.

With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eye is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves.

--Adam Smith, The Wealth of Nations, 1776

Great wealth cannot still hunger, but rather occasions more dearth; for where rich people are, there things are always dear. Moreover, money makes no man merry, but much rather pensive and full of sorrow.

--Martin Luther, Table Talk, LXXXII, 1569

Probably the greatest harm done by vast wealth is the harm that we of moderate means do ourselves when we let the vices of envy and hatred enter deep into our own natures.

--Theodore Roosevelt, Speech in Providence, Rhode Island, August 23, 1902


    The more things change, the more they stay the same.

    A human activity almost as venerable as the accumulation and opulent display of vast riches is the condemnation of the accumulation and opulent display of vast riches. People have been busily engaged at each for several millennia now. Both continue in full flower as America races into the twenty-first century with its liberal capitalist democracy ascendant around the world, its rich richer than ever, its less-rich curiously lagging behind.(1) Yet figuring out what, exactly, is wrong with the excessive accumulation and opulent display of wealth, on the one hand, and then deciding what if anything to do about it, on the other, have been among the most troubling issues of social theory and political economy -- far harder to pin down than the intuitive sense that something is, indeed, wrong.

    In his interesting, important, thoughtful, if sometimes wandering, repetitive, and maddening recent book, Luxury Fever, the psychologically-minded economist Robert Frank of Cornell University -- coauthor, with Philip J. Cook, of the related Winner Take All Society,(2) another widely accessible and important book -- ventures into this familiar domain. Part economics, part social psychology, part autobiography, part cognitive psychology or behavioral economics, part game theory, part evolutionary biology, part tax policy, and part a journalistic foray into the lifestyles of the rich and famous in fin-de-siecle America, Luxury Fever offers up both a view of the social problems presented by luxurious living and a specific type of solution to them. In short, Frank argues that much of our spending results from a desire for relative status, leading us to want "positional goods"; since everyone else does likewise, we end up treading water with no improvement in our subjective well-being or utility. We would all be better off if we hopped off the treadmill and directed our limited resources to nonpositional goods, including more savings, leisure, and education, whose benefits endure. Frank argues that a progressive consumption tax can help us all to escape in a "win-win" way from the collective action problem of luxury fever. His description and prescription each deserve to be.' thought through and taken seriously. Luxury Fever is a good, important book.

    I happen to agree with much of what Frank has to say about both the nature of the disease and its remedy, curiously enough involving tax policy.(3) Where I am skeptical is at the level of the whys -- the precise connection between sickness and cure. It strikes me that Frank plays too fast and loose here, and that it somehow matters, a point on which Frank himself would agree ("ideas matter," he writes) (p. 267). It strikes me, in fact, that what is omitted from Frank's style of analysis is, in the end, more important than what is included.

    But let us back up and begin where Frank himself does -- with a portrait of the nation as an ailing patient.


    Look around, and something indeed seems wrong in contemporary America.

    The beginning parts of Luxury Fever set out the problem in sometimes gory detail -- our rich are richer than ever, and boy are they flaunting it. As is perhaps to be expected, we learn about the author himself indirectly -- and sometimes quite directly -- through his choice of examples. Watches, household appliances (especially gas grills), wines, fancy cars (more on these anon), and houses mansions, really -- are the recurring motifs. In each case, the thing is bigger, better, or faster -- and always more expensive -- than ever before.

    My personal favorite example -- the one I have been telling friends and students about -- is the Patek Phillipe watch that sold out its limited run of four for a minimum of 2.7 million dollars per watch (p. 16). This, I suppose, is the item on the book's jacket cover. Since you might as well learn about me through reading this Review, I can honestly say that I had never heard of Patek Phillipe until I read Frank's book, although I live in the shadows of Beverly Hills. I also take a perhaps perverse pride -- more on this anon, too -- in never having spent more than $20 on a watch. Truth be told, when my $19.95 Casio runs out, I often don't bother to replace its battery, which costs $5.00, because it's easier just to get a new watch. Perhaps this decadent impatience means I have a luxury head cold.

    Returning to the more general malady, what exactly the root cause of luxury fever is, or what exactly the best description of it might be, varies a bit in Frank's text. But the symptoms are clear enough. We are spending too much, on too frivolous things, and accordingly -- by the zero sum logic that pervades most of the book -- we are spending too little on good things, such as providing public goods and capital for our personal and collective present and futures. We are wasting our time and money on positional goods rather than on gains that endure.

    Now as at least in part an economist (I have a master's degree in the dismal science), I am obliged to point out that even wasteful, conspicuous consumption need not be a zero sum game. Perhaps the ability to engage in luxurious spending is an important inducement to greater productive activity in the first place. If the wealthy preeners noticed by Adam Smith in the opening epigraph worked harder than they otherwise would in order to be able to strut their stuff in public, then the celebrated social pie would be larger on account of their perhaps perverse motivation and the socially granted opportunity to sate it. But much of Frank's analysis is static or partial equilibrium in the economist's sense.(4) In particular, Frank gives short shrift to the idea that productivity might decrease under his ideal solution -- a steeply progressive consumption tax.

    On this as on other points, I am certain that many, probably most, professional economists will find Frank a better journalist or psychologist than an economist, although he is indeed the latter. Much of Luxury Fever reads like an amplification of various possible market failures: externalities and public goods, primarily, but also signaling in the presence of asymmetric information, and so on. Frank, as he does in all of his work,(5) enriches this; standard homo economicus analysis with some sense of "homo realisticus" (p. 248), namely that imperfectly rational creature who suffers from various cognitive heuristics and biases, as chronicled by behavioral economists and decision theorists such as Daniel Kahneman, Amos Tversky, and Richard Thaler. But when it comes to pure economics analysis, Frank is often defensive (worrying about or dismissing what the "free marketeers," "libertarians," or the "perfectly rational" crowd might think) on the one hand, and imprecise on the other. It's all well and good to go beyond the narrow, rational actor model, of course, but cognitive decision theory -- for all of its powerful insights -- is notoriously unsystematic and underdeterminative. Granted that we mere mortals overreact to some things and underreact to others, but how can we tell which is what.(6) I doubt that Frank will assuage critics looking for any precise and predictive model behind his polished popular prose.

    To illustrate, Frank somewhat curiously calls the specific idea that individuals will respond to incentives in the form of high tax rates on consumption by working less "trickle down economics" (p. 226, passim). But the idea that people respond to incentives is quite general in all rational choice social theory, as Frank elsewhere acknowledges (p. 228). The economist James Mirrlees, for example, received a Nobel Prize in large part for his work on optimal taxation. Mirrlees's analysis falls far short of the pejorative lay idea of "trickle down" economics, and ends up pointing towards declining tax rates on upper-income earners, even and maybe especially in the name of progressivity or redistribution.(7)

    Frank's arguments against "trickle down" theorists, moreover, are inconsistent. He argues that we will not respond to an economic incentive against luxurious living by working any less (Chapter Fifteen), and thus that we will save more (pp. 233-35), but if we do work less, this will be good, too, because it is good for us to work less and spend more time relaxing and with our families (pp. 241-42, passim) -- leisure being a classic nonpositional good. Frank does not close the loop by explaining how, if we all respond to a "steeply progressive" consumption tax by spending more time with our families, we would still get the "trillions of dollars" in benefits from more savings (p. 250, passim), except possibly for stating in passing that we should count the value of leisure time in the national income accounts (p. 242), as if this, alone, would help buy brick and mortar for public goods.

    It is also unclear what the exact psychological mechanism behind luxury fever is. Frank generally writes as if we are all the same, governed by inexorable laws of nature or the...

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