Grey Swan

Daily news reports stress that the price of luxury good tends to increase faster than the rate of inflation. Increasingly, middle and upper middle class families are being priced out of the luxury good market altogether. Why? I believe that a combination of age old factors and new trends are the root cause. This includes the relative and zero-sum nature of status, societal stratification, rising wages, and the increasingly rapid and free flow of information. The combination of these factors leads to an unmitigated arms race for high status.

In a previous blog I explained that status is achieved relatively*. The result is that wealthy people demonstrate their greater buying power by purchasing more luxurious goods than their neighbors. This may be in the form of large items like a brand named car, or small ones like a new and exotic bottled water. The underlying problem is that these goods do not necessarily get significantly better as their price increases, they just get more exclusive.

When we couple this with the rapidly expanding wealth of our nations elites, we begin to see why luxury prices are spiraling out of control. A decade ago bottled water was considered a luxury good. This was not because it was so expensive, but because it was so ridiculous. Bottled water? Its free out of the tap! A person needed to have money to ‘throw away’ to buy such an item. Today, many people consider bottled water a necessity. What do the rich drink? They drink Voss. Voss costs about three times as much as Poland spring, but it is certainly not three times as good. Its just preferred because it’s exclusive. I currently think that a five dollar bottle of water is ridiculous, but maybe I won’t in a few years. Water illustrates my point so clearly because it so clearly remains the same. Its just water! The main contribution that higher wages have made to the rising cost of luxury goods is creating more demand (more money) for the same ‘number of items’ – status. Consequently, the cost of these goods increases. In the proceeding paragraph I explain how factors compounding the rising wage rate lead to an arms race over status.

Stratification plays an important role in placing similar people in competition with each other. If a poor person lives next to a billionaire, not only can they not compete status-wise (at least not materially), they also won’t. There is no point. In our current society however, people with similar incomes are more and more likely to live near each other. Placing direct social competitors in close proximity with one another increases the importance of status items. People have much greater need to prove themselves because they are surrounded by peers.

The last part of my theory is that the spread of news and information compounds the aforementioned issues. The media continuously displays the styles of the wealthy and the famous. This constant bombardment of information essentially increases the pool of competition for status items. Instead of simply competing in our local community, we now have to compete on a much larger scale. We don’t just want to have a nicer phone than our neighbor, we want a nicer phone than Steve Jobs (the iPhone). Since status is zero sum** but competition for items that grant status continues we have a positive feedback loop. What was good enough today to impress ones friends may be the laughing stock of tomorrow.

**Most people would rather make 100,000 dollars in a community where everyone else made 80,000, than 120,000 dollars in a society where everyone else made the same. The idea is (and this must have evolutionary roots) that being fitter than ones peers may be better than being fitter in general, at least as long as ones survival is not threatened.