Envy

There have been heavy discussions on inequality and envy. It started with DeLong's comments on Krugman's NY piece on the inequality of income distribution, and Greg picked up from there, and Cowen and Tabarrok piled on. While I admire(not envy :-) ) economists' sharpness in making excellent points, I become more aware of the very nature of economics -- a social science with a bunch of tools and frameworks.

Here are some highlights:

Greg:

......people derive utility from comparisons with others. In this case, making the rich poorer raises others' welfare, even if their material standard of living is unchanged.

I must confess that I do not have a good retort to the argument. This is all the more problematic because there is some evidence that having rich neighbors reduces a person's self-reported happiness. (See Luttmer and Weinzierl.) But I am uncomfortable making envy a basis for public policy.

Cowen:

Envy tends to be local. Few Americans resent Bill Gates or Warren Buffett. The real definition of a wealthy man is one who earns more than his wife's sister's husband.

I guess it all comes down to a couple of fundamental questions:

1. What's economic price we have to pay to maintain the relative social harmony by the progressive taxing? In other words, what's the right progressivity that will keep the poor from rioting and keep the rich investing?

2.Specifically in this case, who is to blame for this externality? The rich or the envious? I tend to tell myself that it's not a zero-sum game, but at the same time I strongly believe things in their relative terms. Go figure.