However, some other portion of human welfare (of unknown magnitude) is directly dependent on the welfare of others. This "comparative welfare" may come in two forms:
- Empathetic welfare: that portion of human welfare that has a positive or direct correlation with the welfare of others. (Example: I feel bad when I see a homeless person who looks unhappy; I feel happy when I see a puppy wag its tail.)
- Status welfare: that portion of human welfare that has a negative or inverse relationship with the welfare of others. (Example: I feel happy when I win a contest; I feel sad when I have to wear less expensive clothes than my peers.)
The nice thing about non-comparative welfare (welfare independent of the welfare of others) and empathetic welfare is that they may be positive-sum. Consensual transactions may be possible to make all parties better off in terms of non-comparative and empathetic welfare.
The problem with status welfare is that it is zero-sum. No transaction involving status welfare can possibly make all parties better off.
A great deal of evidence exists to support the unfortunate proposition that status welfare accounts for a large proportion of human welfare. Further, the effects of status on welfare are likely themselves a function of status - marginal status changes may have more of an effect on welfare for those of low status than for those of high status.
Status Welfare is Large
Several bodies of research support the proposition that status welfare is a large part of human welfare. (Many of these are cited in the paper "The Economics of Happiness" by Paul Graham at the Brookings Institution. In addition, Richard Wilkinson's 2006 book The Impact of Inequality: How to Make Sick Societies Healthier is a book-length treatment of the problem; I have not yet read it.)
- "Easterlin paradox" - happiness and income have a much stronger relationship within-country than between countries, at least beyond the level of abject poverty. Status welfare would be expected to come more from within-country differences (directly perceptible) than between-country differences (less immediately perceptible).
- Homicide rates are highly correlated with income inequality. As income inequality and absolute poverty tend to go together, it has been difficult to establish whether income inequality or mere poverty is the driving force behind such negative competitive outcomes as homicide. However, a 2001 study found that income inequality is a better predictor of homicide rates than mere poverty.
- Studies directly measuring the effect of income and/or wealth inequality find that inequality has a negative effect on well-being. The effect is larger for Europe than for the United States, and higher for Latin America than for either of these. These studies capture only within-country status, not status within smaller groups, and therefore must be seen as only part of the picture in terms of status welfare.
- Welfare is affected more by unemployment than by inflation, dollar for dollar. Unemployment tracks inequality, whereas inflation applies to all equally.
- Many animals change reproductive strategies depending on relative status. Status, therefore, must have strong effects on fitness.
- In male humans, winning or losing a competition - even vicariously - is associated with hormonal changes, specifically an increase or decrease in testosterone levels, respectively.
- Blacks and Hispanics spend a much larger share of income on visible consumption (clothing, jewelry, cars) than do comparable Whites.
- Health effects of inequality are large, and less than a third of the difference is explained by risky behaviors of the poor.
The key point here is that there is a large component of human suffering that free markets and free choice have no hope of mediating. Merely being in a socially stratified market economy imposes a cost on those of lowest status.
The happy trample on the backs of the unhappy. This is not merely an observed fact of our world that can be changed, but an underlying truth of any human system. The unhappy cannot all be made happy. Human existence necessarily implies a high degree of misery for some part of the population. How does the happiness of the lucky justify the suffering of the unlucky?
Comparative Welfare and the Rational Decision Maker
A further problem is that lumping both types of comparative welfare, as well as non-comparative welfare, together as "utility" complicates the classical economic model of individuals as rational actors maximizing their utility.
In a classical economic transaction, two parties consent to an exchange, and are both made better off. All individuals must do in order to achieve higher and higher society-wide happiness is to pursue their own ends rationally. The simplicity and optimism of this model are challenged by the sad fact that an individual's welfare correlates (in a complicated manner) with the welfare of various others.
Contract law recognizes this problem, especially with regard to transactions that do NOT take place "at arm's length"—that is, transactions where the participants explicitly care about the welfare of the other participants. This can be traced back to its origins in Gemora, with its different rules for transactions with different groups (e.g., loyalty/no interest on loans for in-group, charging interest okay for out-group).
Most humans (sociopaths and saints excluded) have some component of welfare that is empathetic welfare, and some component that is status welfare. These components are likely large—and vary within populations. These complicate in a rather extreme manner the computational tasks of economic man; transactional partners must be modeled not just as self-interest-maximizers, but as (a) self-interest maximizers, (b) maximizers of the interests of certain others, and (c) maximizers of the difference between one's own well-being and the well-being of certain others. That is, humans are—to some unknown degree—inquality maximizers.
Update: An interesting response on Why I Am Not.