Saturday, January 19, 2008

Relative vs. Absolute Wealth

(click map for larger view)

David Friedman:

Economists prefer to measure preference by actions rather than words. It occurred to me that we have such evidence for this question. Lots of people choose to migrate from one society to another. If you go from a rich society to a poor society you are likely to substantially increase your relative position, since you will bring with you both wealth and human capital that are high compared to the average in your new home. If you go from a poor society to a rich society, the opposite can be expected.

I don't have data, but my impression is that migration from a poorer to a richer society is much more common than migration the other way. If so, that provides evidence, at least for the alternatives that migrants face, that absolute wealth is more important than relative wealth.

Could it be they are immigrating to richer countries for reasons beyond just wealth? Many other factors correlate with average GPD per person, such as longevity, happiness, rule of law, lack of corruption, overall security, etc. Maybe people are more concerned about the beneifts of living in a wealthy society more than they are being wealthy themselves.

Here is Daniel Kahneman on happiness and wealth. (HT Tyler Cowen) It looks like happiness is far more correlated with the wealth of your country than it is with your individual wealth.

We had thought income effects are small because we were looking within countries. The GDP differences between countries are enormous, and highly predictive of differences in life satisfaction. In a sample of over 130,000 people from 126 countries, the correlation between the life satisfaction of individuals and the GDP of the country in which they live was over .40 – an exceptionally high value in social science.

Humans everywhere, from Norway to Sierra Leone, apparently evaluate their life by a common standard of material prosperity, which changes as GDP increases. The implied conclusion, that citizens of different countries do not adapt to their level of prosperity, flies against everything we thought we knew ten years ago. We have been wrong and now we know it. I suppose this means that there is a science of well-being, even if we are not doing it very well.

Seems like this implies a very strong correlation between happiness and good institutions (good courts, well developed markets, low corruption, etc.). That makes a lot of sense to me.

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