Inequality seems to have captured the national consciousness, and it might even be an issue in the next presidential election. Some of this interest has been generated by scholars like us. For example, The Spirit Level, co-authored by Richard Wilkinson and Kate Pickett, make a compelling case that more equal societies are happier and healthier than their less equal counterparts. If this is so, then nations could improve the well-being of their citizens by promoting equality.

Not to be a behavioral science geek, but doesn’t The Spirit Level raise an interesting question? When we say something to the effect of “inequality has negative consequences” we are essentially claiming that the differences among some people’s wealth creates social dysfunction. This is a bold claim. It would be conceptually simpler to maintain that social problems are caused by (a) too much poverty or (b) too much wealth, rather than to argue that difficulties are created by the difference between the two. But Wilkinson and Pickett are firm on this point – Poverty is a concern, but inequality makes it worse.

Think of the policy implications! Society needs to reduce wealth differences. Reducing poverty overall will not solve our problems, for persons who become objectively well-off would continue to suffer if they had less than their neighbors. Even more intriguing – becoming a richer nation will not necessarily reduce social dysfunction. Quite the contrary, when economic growth increases inequality – and in the past few years this has been the case in the US and the UK – then more wealth will make us worse off, at least in some important respects.

I enjoyed The Spirit Level, but the more I thought about Wilkinson and Pickett’s premise, the harder it was to believe. And I say this, even conceding that they presented a lot of data to back up their claims. My concern was theoretical. Why would the difference in wealth cause harm beyond the absolute levels of wealth? I could immediately grasp why poverty hurts (e.g., due to diminished access to health care, education, housing, etc.), but it was harder to see why having less than others, per se, would be problematic, so long as one had enough to live on. I needed a mechanism, and preferably a reasonably comprehensive one.

Fortunately, I believe that I have found one. Well, the truth is that I am borrowing an idea from the economist Robert Frank. He took up this issue in two books, The Darwin Economy: Liberty, Competition, and the Common Good and Falling Behind: How Rising Inequality Harms the Middle Class. (Falling Behind is the shorter of the two, so this might be the best place to start.)

According to Frank, there are two types of goods that can be purchased in a market economy. Normal goods are the ones you already know. Purchasing a normal good does not have major implications for other buyers. Positional goods concern us here. A positional good derives its worth, at least in larger part, in comparison to what others have. That is, the value of a positional good is not fixed. It can be worth more or less, depending on how it “stacks up” within a social hierarchy.

The idea of a positional good may not be intuitive, but a few of Frank’s examples should clear up any confusion. Consider a fashionable business suit. You might dress modestly in order to save money. However, if someone else purchases a chic and sophisticated (and expensive) ensemble, then you are at a disadvantage in a job interview. If others have nicer clothes, then it might be reasonable for you to shell out the extra cash. After all, your once adequate off-the-rake garment has become shabby, when it is compared to how others are garbed. Notice the hamster wheel effect of positional goods. Both you and your hypothetical competitor were equal in the initially modest clothing. Once the two of you have spent a lot of money on posh suits you are — what? — still equal! Equal that is, but poorer as well.

Likewise, you might prefer to buy a small and expensive automobile. Perhaps it is perfectly safe for your driving needs. However, if others acquire sizable sports utility vehicles, then your little car has become unsafe by comparison. In order to stay competitive in the vehicular arms race, you may need to spend money on that Yukon you never wanted. Here is another example. You may not want to live in one of those expensive tract mansions. But homes in the best school districts have gotten larger in recent years. If you want your children to get a good education, then you might find yourself investing in a cathedral ceiling and a three-car garage.

The value of positional goods changes based upon how they are distributed. The more other people acquire, the less your possessions are worth. Here is the heart of the matter – Inequality makes many people poorer. Not objectively poorer; the blue book value of your Honda Fit doesn’t drop when your neighbor drives home in an SUV. Practically speaking, though, you have less. The affordable business suit that was once acceptable is now a rag, the vehicle that was once safe is now dangerous, and the modest home you wanted is located in a sub-standard school district. As inequality increases, the functional value of positional goods is driven down. Some people are becoming poorer. For all intents and purposes they are losing ground.