Many years ago, I attended a lecture by a philosopher who began his talk with a thought experiment. For me as a listener, that approach worked so well that in the years since I have tried to employ it myself at every opportunity. A recent conversation with a neuroscientist friend shed some light on why this device is often so effective. Different parts of the brain, it seems, specialize in thinking about different things. When we are confronted with a question in a specific domain, blood flows to the relevant part of the brain, priming it to think more effectively...

Presidential aspirants since Ronald Reagan have urged us to ask whether we’re better off now than we were four years ago. At any time from 1945 to the early 1970s, the answer for most Americans would have been a resounding yes. Throughout that period, incomes grew at about 3 percent a year for families up and down the income ladder.

Today, however, this question is more difficult to answer. During the past several decades, the distributions of income and wealth in the United States have changed in such a way that the economic environment for most upper-middle-class people has become...

With evidence on recent trends in income and wealth inequality in hand, we are now in a position to attempt to answer the question before us: Does rising inequality harm the middle class? One way to approach it is to try to answer a closely related question: Does growing inequality make the middle class less happy? Although few economists would pose such a question, I am persuaded that much can be learned from an attempt to answer it. As a first step, we require a workable measure of happiness. So I will briefly survey some highlights from the large literature...

Cartoons are data. If a cartoonist produces a drawing and we laugh, that tells us something. ANew Yorkercartoon by Robert Weber depicts a man driving by as he looks out at a man talking on an outdoor public phone during a heavy rainstorm. The motorist thinks to himself: “I was sad because I had no on-board fax until I saw a man who had no mobile phone.” That what we feel we need depends on what other people have is an old idea. It is not a radical conjecture.

Yet it is an idea that does not sit...

Increased spending at the top of the income distribution has imposed not only psychological costs on families in the middle, but also more tangible costs. In particular, it has raised the cost of achieving goals that most middle-class families regard as basic.

Consider, for example, the price a middle-class family must pay in order to secure housing that is adequate by community standards. Increased expenditures on housing by top earners appear to have launched an “expenditure cascade” that has resulted in increased housing expenditures even among those whose incomes have not risen. The process starts when sharply higher incomes prompt...

Being concerned with how your house compares with other people’s houses makes sense for purely practical reasons, because the relative price of your house influences, among other things, how safe your neighborhood will be and the kind of schools your children will attend. It is possible that many people care about relative house size only for these practical reasons, not because of any inherent concern about relative size per se. In that case, people would generally try to keep up with community consumption standards whenever doing so promised to influence real outcomes they cared about, but would otherwise tend to...

The Darwinian perspective on human motivation suggests that concerns about rank should vary in accordance with the extent to which relative consumption in different categories contributes to reproductive success. In this chapter I will consider examples of the kinds of hypotheses suggested by the Darwinian perspective and discuss how available evidence bears on each of them.

Consider the trade-off faced by each individual between increased consumption of leisure, on the one hand, and increased acquisition of material resources, on the other. When threats to survival are acute, as during famines, those who stand high in the distribution of material resources...

With real incomes little higher than they were three decades ago, how are middle-class families able to spend so much more than they used to on houses, cars, watches, interview suits, and gifts? The answer, it turns out, is that they are working every possible angle.

Women now work an average of approximately two hundred hours more each year than they did in the mid-1970s, and men work an average of roughly one hundred hours more each year.¹ In transnational comparisons, people in countries with high earnings inequality work longer hours than their counterparts in countries with low earnings inequality.²...

Context seems to matter in virtually every domain. As noted, however, we are far more sensitive to context in some domains than in others. And that simple fact gives rise to profound distortions in the ways we spend our incomes.

To illustrate, consider the following hypothetical question: Who is happier—a resident of Society A, where everyone lives in a 4,000-square-foot house and drives an hour each way through heavy traffic in order to get to work, or a resident of Society B, where everyone has a 3,000-square-foot house and takes a ten-minute train ride to get to work? (This...

Evidence suggests that, relative to the mix of goods that would maximize our health and happiness, we spend too much on context-sensitive goods and too little on goods that are relatively insensitive to context. Looking ahead, there is little reason to think the spending imbalance will cure itself and considerable reason to expect it to grow worse.

The imbalance has been growing because of the tendency for income and wealth to become more concentrated among top earners. This tendency, in turn, owes much to the spread and intensification of what Philip Cook and I have called “winner-take-all markets.”¹ These are...

Can we draw from this discussion any useful lessons for public policy? Evidence from the human happiness literature strongly suggests that our current expenditures fail to take full advantage of the opportunities available to us. Roughly speaking, the problem is that we work too many hours, save too little, and spend too much of our incomes on goods that confer little additional satisfaction when all have more of them.

Historically, some societies responded to essentially the same mix of problems by adopting sumptuary laws. These laws were complete failures.¹ The moment gold buttons were outlawed, people immediately switched to fancy...

Incomes have been largely static during recent decades except for those of earners in the top quintile. The real incomes of the top 1 percent have tripled since 1979, while those higher up the income ladder have enjoyed far more spectacular gains. CEOs of America’s largest companies, who earned 42 times as much as the average worker as recently as 1980, now earn more than 500 times as much.

As a general rule, a family’s total lifetime spending tracks its total lifetime income closely. Because top earners in the United States now earn so much more than they used to,...