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Penguin).

      12. For a widely cited early proposal along these lines, see Yew-Kwang Ng’s 1987 paper “Diamonds Are a Government’s Best Friend: Burden-Free Taxes on Goods Valued for Their Values,” American Economic Review 77: 186–191.

      PREFACE TO THE 2007 EDITION

      The psychiatrist George Ainslie, author of the brilliant book Picoeconomics, is one of the most interesting and creative people I have ever had the pleasure to know. He remarked to me one afternoon over coffee that the ultimate scarce resource in life is the willingness of other people to pay attention to us. New technologies are constantly creating opportunities to engage with things rather than people, or to watch others perform on television or on film rather than to interact with them directly.

      Ainslie argues that it is a basic human need for other people to engage with you, to pay attention to you, to take you seriously. He forecasts that failure to meet this need will prove the most serious and enduring mental health problem of the future. That’s not a happy prospect, of course, but his concerns seem hardly farfetched.

      I therefore count myself incredibly fortunate to have had the opportunity to deliver the Aaron Wildavsky Lecture at the Goldman School of Public Policy at the University of California at Berkeley. The Wildavsky Forum takes place over two days, with a reception and dinner preceding the main lecture on the first day, and then a lengthy panel discussion about the lecture on the following day. I am mindful of what a luxury it was to have had so many smart and experienced people pay such close attention to what I had to say and respond to it in such focused and energetic ways.

      I am grateful, too, to have enjoyed the luxury of being able to write this book after having benefited from their commentary. The insightful remarks of Gene Smolensky, Hal Wilensky, and Gene Bardach led to countless improvements. Most important, they persuaded me of the wisdom of launching the book with a discussion of what, exactly, the concept of relative deprivation entails.

      As my distinguished commentators pointed out, variants of this concept have been discussed for hundreds, even thousands, of years. So we must ask why the concept has never become a serious player in our intellectual debate. It is repeatedly introduced, and each time, after generating a flurry of discussion, it disappears from sight. Why is that?

      The answer, I believe, is that many understand the concept far too narrowly. Most people, my commentators included, understand it to entail envy provoked by comparisons with others in more favorable circumstances. Although that may be true in specific cases, I have become increasingly convinced that relative deprivation actually has little to do with envy. Rather, it is fundamentally about the link between context and evaluation. This is a critical point, because, as I will explain, the contrary belief is what has consigned the concept to marginal status.

      No one denies that a car experienced in 1950 as having brisk acceleration would seem sluggish to most drivers today. Similarly, a house of given size is more likely to be viewed as spacious the larger it is relative to other houses in the same local environment. And an effective interview suit is one that compares favorably with those worn by other applicants for the same job. In short, evaluation depends always and everywhere on context.

      This observation is completely uncontroversial among behavioral scientists. If I am correct that the link between context and evaluation is what relative deprivation is mostly about, then explanations that ignore relative deprivation must also ignore this important link. This is true of the reigning economic models of consumer behavior, for example, which ignore context completely. These models assume that each person’s consumption spending is completely independent of the spending of others.

      Future intellectual historians will find this more puzzling than the fact that physicians once prescribed leeches to treat fever. Eighteenth-century doctors, after all, had no way of knowing about the germ theory of disease. But ignorance cannot explain the absence of context from economic models. Even those economists who have not studied the relevant social science literature surely know from their own experience how much context matters.

      Evaluation guides choice. So if context shapes evaluation, it must also guide choice. In this book I will argue that many economic choices simply cannot be understood without reference to context. But as the animated discussion that followed my Wildavsky Lecture persuaded me, this argument becomes a lot easier to digest if we first attempt to answer this obvious question: If context is so important, why have economists largely ignored it?

      In recent years, I have posed this question to a number of friends and colleagues, both in and out of the profession. One suggested that economists will fully embrace context models once it can be shown conclusively that they track the data better than traditional models. Experience, however, suggests otherwise. A case in point is the history of modern consumption theory, which I will discuss in chapter 7.

      Another economist speculated that many of our colleagues fear that taking contextual, or positional, concerns seriously might signal a certain lack of rigor. But as recent work has amply demonstrated, there is no barrier to formalizing models that incorporate such concerns.

      Still another economist suggested that the aversion to positional concerns might be rooted in the fact that such concerns undermine economists’ celebrated invisible hand theorems, which hold that unregulated markets produce the most efficient possible allocation of resources. I suspect there is something to this. Yet the profession has incorporated numerous other forms of market failure into its arsenal of policy recommendations. Even the most ardent proponents of free markets, for example, are quick to concede a productive role for government intervention to curb pollution when transaction costs are high.

      Yet another reason I discovered for the aversion to taking explicit account of the influence of context is that many economists feel that to do so would be to give weight to negative emotions such as envy and jealousy, which they feel merit no consideration in normative analysis. They reject models that incorporate context for the same reason they would reject models that give policy weight to the preferences of sadists.

      Society does indeed have a legitimate interest in discouraging envy. We should continue to teach our children not to envy the good fortune of others. But the influence of context stems less from envy than from the fact that many important rewards depend on relative position. As I will explain in chapter 5, for example, the median household must keep pace with community spending on housing or else send its children to below-average schools.

      Perhaps even more important, context is the very wellspring of the everyday quality judgments that drive consumer demand. That this point is not widely appreciated first became clear to me during a dinner conversation that took place before a lecture I gave at the University of Chicago several years ago. Three of us were waiting outside a restaurant when the fourth member of our dinner party pulled up behind the wheel of a brand new Lexus sedan. Once we were seated at our table, the Lexus owner’s first words to me were that he didn’t know or care what kinds of cars his neighbors and colleagues drove. As it happened, I had had numerous conversations with this gentleman over the years and found his statement completely credible.

      I asked him why he had chosen the Lexus over the much cheaper, but equally reliable, Toyota sedan from the same manufacturer. He responded that it was the car’s quality that had attracted him—things like the look and feel of its interior materials, the sound its doors made on closing, and so on. He mentioned with special pride that the car’s engine was so quiet and vibration-free that the owner’s manual posted warnings in red letters against attempting to start the car while its engine was already running.

      I then asked him what car he had been driving before trading up. I forget what he said, but for the sake of discussion suppose that it was a five-year-old Saab. I asked him how he thought people would have reacted to his Saab if it had been possible to transport it back to the year 1935 in a time capsule. He answered without hesitation that anyone from that era would have been extremely impressed. They would have found the car’s acceleration and handling spectacular; its interior materials would have amazed them; and its engine would have seemed unbelievably quiet and vibration-free. His own evaluations of his former car were of course strikingly different on each dimension.

      We then discussed what a formal mathematical model

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