Positional good

In economics, a positional good is a product or service whose 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.

Concept

The term was coined by Fred Hirsch in 1976.^[1] The broad theme of Hirsch's book, The Social Limits to Growth, in which he developed his theory of positional goods, 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".^[2] This important^[3] concept 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. "The value to me of my education - the satisfaction I derive from it - depends upon how much education the man ahead of me in the job line has."^[4]

Details

Positional goods often earn economic rents or quasi-rents. Examples of positional goods include high social status, exclusive real estate, a spot in the freshman class of a prestigious university, a reservation at the "hottest" new restaurant, and fame. The measure of satisfaction derived from a positional good depends on how much one has in relation to everyone else.

Competitions for positional goods are zero-sum games because such goods are inherently scarce, at least in the short run. Attempts to acquire them can only benefit one player at the expense of others. By definition, every person cannot be the most educated, the most skilled, or elite, in the same way that every person cannot be a star athlete: all of those terms imply a separation or superiority over other people.

Land (in the economic sense) is similar to positional goods in that it cannot be created, and land rent arises largely because of a parcel's ranking in desirability against other plots.^[5] 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 Hirsch) include 'land' in positional goods, while others (such as Robert H. Frank) only include goods which are valued specifically because of their relative quality.^[6]

In general, positional goods cannot be created, only redistributed, while material goods can be created with time and effort. However, most goods have both a positional and a material component. Fast cars may be considered to be inherently scarce because one's perception of a car's speed depends on its relation to other vehicles, but there is still an absolute value attached to satisfaction gained from the speed at which a car can travel; it can be considered as having a positional aspect in that only some cars can be the fastest. Because a car is a complex product made of many other materials, some of which (such as steel) are limited in supply and some which (such as leather) are renewable, they may instead be considered Veblen goods.

Positional externalities

Some economists, such as Robert Frank, argue that positional goods create externalities, or a so-called "arms race" for goods that might boost one's social status relative to others. This phenomenon, Frank alleges, is clearly bad for society; thus, it is argued, government can improve social welfare by imposing high luxury tax on certain luxury goods to correct for this perceived 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, government spending may be administered by players who are equally motivated by positional goals. Furthermore, 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 is often compensated by the public goods of infant industry effects and research and development.^[9] Ultimately, any such positive effects of these goods would need to weighed against the negative positional effects to determine the magnitude of any consumption taxes placed on them.

Cultural references

The idea is mentioned in an episode of The Big Bang Theory.^[10]

See also

• Conspicuous consumption
• Expenditure cascades
• Narcissistic personality disorder
• Status symbol

References