THE POWER OF THE PURSE
Some individuals will always have more power than others, but how much power is too much?
Once upon a time, power was linked to physical strength or military prowess, whereas now its perquisites usually stem from what Simon Johnson and I call “persuasion power,” which, as we explain in our book Power And Progress, is rooted in status or prestige. The greater your status, the more easily you can persuade others.
The sources of status vary greatly across societies, as does the extent to which it is unequally distributed. In the United States, status became firmly linked to money and wealth during the Industrial Revolution, and income and wealth inequality skyrocketed as a result. While there have been periods in which government intervention sought to reverse the trend, American society has always been structured around a steep status hierarchy.
This structure is problematic for several reasons. For starters, the constant competition for status – and the persuasion power it confers – is largely a zero-sum affair, because status is a “positional good.” More status for you means less status for your neighbour, and a steeper status hierarchy implies that some people will be happy while many others are unhappy and dissatisfied.
Moreover, investments in zero-sum activities tend to be inefficient and excessive compared to investments in non-zero-sum activities. Is it better to spend a million dollars on gold Rolex watches or on learning new skills?
Both may have intrinsic value – the beauty of the watch versus the pride of acquiring new knowledge – but the first investment merely signals that you are richer and more capable of conspicuous consumption than others. The second, by contrast, increases your human capital and may also contribute to society. The first is largely zero-sum, and the second is largely non-zero-sum. Worse, the first can easily get out of hand as everyone spends even more on conspicuous consumption to stay ahead of others.
