This Matt Yglesias post (about a Houston-area day spa for babies [sic]) makes me wonder if the following has been formalized appropriately. Imagine some microeconomic decision like how large a house to buy. Some part of that decision will come from your actual desire to own a larger or smaller home. Some part will come from zoning (maybe you *can’t* buy a 1000-square-foot ranch-style home in the gated community). And some part will come from a pointless arms race between neighbors: I need to have a larger house than you, and you need to have a larger one than me, and so we proceed, more and more garishly.
That last motive is a collective-action problem: I don’t actually care *where* I end up, so long as I end up ahead of you; you, of course, think the same way. This is an arms race, in other words. During the Cold War, neither the Soviet Union nor the U.S. *wanted* to build up a nuclear arsenal; they were both forced to, because neither side could credibly commit to the other that it would disarm. So it is, I think, with housing. If there were some way to forcibly disarm both of us — if there were a single superpower, to continue the analogy, with a monopoly on violence that could bring both the Soviet Union *and* the United States to heel, well then the problem would be solved.
As it happens, we have such a superpower in the United States. It’s called the U.S. government, and it has a magical power called “taxation”. Imagine if we taxed the wealthy to such an extent that they no longer had the choice to participate in housing arms races and could only buy ordinary-sized homes. In some sense they might not mind this: if the point is to get ahead of your neighbor, and your neighbor is getting taxed at the same high level as you are, you’re both reasonably happy with the situation. Of course, you’d be happier if you both had more money, but by stipulation you were already forced to throw money into a zero-sum pursuit of larger homes; now you’re just forced to throw money to the federal government.
I don’t claim that wealthy people would raise no tantrums at all if they were forced to pay higher taxes, but I *do* wonder whether much consumption among the wealthy is fundamentally about this sort of wasteful arms race.
There’s probability ε, for some very small ε, that economists haven’t already run through this idea. … Indeed, a moment’s Googling suggests that I’m talking about a positional good; Veblen’s (“conspicuous consumption”) name comes up, as I should have expected. Time to read some Veblen.
What I’m looking for, though, is a formal estimate of how much economic waste goes into the pursuit of positional goods, and maybe a theory of optimal taxation based around it. I wonder if any of you lovely people have seen such a thing.