Wednesday, September 18, 2013

Ways of Measuring Wealth

A recent exchange between Matthew Yglesias and Andrew Gelman got me thinking. Here's Yglesias' original comment:

I think rich businessmen would be happier if we could go back to 1950s-style, more egalitarian distribution of pre-tax income. The richest people around would still be the richest people around, and as the richest people around they would live in the nicest houses and drive the nicest cars and send their kids to the best schools and in other respects capture the vast majority of the concrete gains of being rich. But they’d also have a much better chance of gaining the kind of respect as civic and national leaders that they crave. They want to be seen as the “job creators” and the heroes of the economy, not the greedy exploiters of the masses. But in order to have heroes of the economy, you need a broadly happy story about the economy—one where living standards are rising across the board and prosperity is broadly shared.
And here's Gelman's response:
This is an appealing argument but I’m skeptical. My impression is that, back in the 1950s, the culture heroes included sports starts, authors, broadcast and movie stars, etc. Some politicians and union leaders too, and various others. But nowadays, lots of rich people are heroes of one sort or another: Steve Jobs, those guys at Google, various gossip about tech billionaires, Donald Trump. Even the supervillians at Goldman Sachs get some respect—it’s kinda cool to be a supervillian. There’s the Forbes list of billionaires. Not to mention Michael Bloomberg and Mitt Romney. And it’s not just cos these rich guys have done cool things like Google maps. Warren Buffett is a hero too, mostly from doing a very good job at accumulating money.

If you’re superrich and your goal is to be viewed as a hero, I’d say that the current era from the mid-90s through now has been a good time to do it. They call this the New Gilded Age for a reason. In contrast, I have the sense that the 1950s was a great time to get respect for local rich guys: the owner of the local factory, the proprietor of the local newspaper, etc. Back then, if you were running a moderate-sized business, you could be a real big shot.

I’m not quite sure how this could be studied more systematically but maybe it’s worth looking in to.
This is very much a first draft, but just to get things started, let's think about money in the following ways: traditional; relative; impact (Really need to come up with an adjective for this); ordinal; 'disposable'; perceived and perceived value (not crazy about these terms, but we can always come up with something better later).

I have to be careful with the word relative here (most of these are, in some sense, relative). In this case, I mean relative to some cost of living measure for that person for household. For example, this might entail normalizing or otherwise adjusting for region and might also take into account factors such as what your stage of life is, what your health and healthcare needs are, and what your family situation is.

In a distinction that is sure to piss certain people off, I think of impact as a libertarian metric. It measures the increase in choices that additional money creates. This is, as I believe we have discussed before, a function of both where you start and where you end up. The impact of going from 5,000 to 10,000 a year is unimaginable to anyone who has never been destitute; going from 10,000 to 20,000 while huge is not as big; going from 20,000 to 40,000 while big is still less than the former jump, and so on.

Ordinal is also a somewhat relative measure since where you rank depends on the group to which you're being compared. As Gelman alluded to earlier, being the richest person in town can have special significance even if it doesn't require that much absolute wealth.

Perceived wealth could be perceived by the holder or we could be talking about the perception of some group which the holder is either a member of or which affects him or her.

Perceived value would basically be the thing Gelman is talking about, how much we value a given level of wealth. There's an obvious compared-to-what problem here that, I think, would be best suited to a multivariate approach. We would look at the relationship between perceived wealth and things like how attractive/likeable/respected a person is, how much people would like to meet that person, how much they'd like to trade places, etc. Given the desire not to appear shallow, it might be a good idea to supplement traditional methods like surveys with something like implicit association tests.

Obviously all of these metrics are correlated and in some situations one can undoubtedly be substituted for another, but that does not mean that they are interchangeable. That leaves us with two big questions: one which metric or metrics are most appropriate for a given problem; and what are the best way of measuring these different concepts of wealth, but there are some data gathering steps we can start while we're grappling with those questions.

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