Wednesday, May 17, 2006

I Sill Don't Get It -- $1000 Khakis Edition

Tyler Cowen points out a stunning fact from the WSJ:

Some khaki pants are now selling for as much as $1055; $400 and $500 khaki pants are becoming common.

Last fall, I was wandering through SoHo with friends and we stumbled into Dolce & Gabbana. Did you know they have a children's section where you can spend $800 on a coat for your 4 year old?

It is pretty obvious that most of the benefits that are being enjoyed by these consumers is not related to their use of the actual good. That is, as long as it came with the right brand and marketing campaign, I could put just about any pair of khakis on the rack and people would still pay me the $1000.

I think this is weird. Essentially, in our system, we pay others (in the form of high prices) to create arbitrary differences in the social signals and emotions that are associated with certain products (or certain types of the same product). (Yet, as the ad post below points out, we have to be paid to watch the ads which are integral to creating many of these differences.)

And while I have argued that I think this is all pretty silly, the only reason we (as a society) should care is if this system somehow reduces social welfare. Ultimately, that is a tough debate. One the one hand, status goods serve as a carrot to motivate people to work. On the other hand, they also encourage people to steal and are associated with a variety of negative emotions (like envy). Further, the money spent on these goods is not lost. It is just transferred to other people. Jobs and wages are good. However, it is possible that this money could be spent in alternative ways (e.g., investing in capital or protecting African kids from malaria) which produce better jobs and wages or raise social welfare in some other significant way. Last, it is possible that most people would prefer this convention to go away, that we are in a bad equilibrium, and we'd be happy for someone to intervene and make it go away. One possible scenario is that, for whatever reason, there are a few people who care about this stuff and make their opinions known with vigor (a friend who is a professor at HBS related a story from one of her colleagues of a student criticizing a professor on a course evaluation for not wearing his pants "right"). Fear of offending these few leads many to follow along. Now, even though the vast majority of people don't care, it seems as though everyone cares. In this way, we get stuck in a bad equilibrium until enough people (or enough of those in "leadership" positions) coordinate to shift the norm (for a real example see the growth in the acceptance of business casual in the 90s).

Ultimately, I think there must be better ways to signal your identity and/or status to others. E.g., why not walk around with our net worth displayed on our cell phones, or, if we think that might over-encourage savings, why not display your total lifetime earnings up to that point? I like the total earnings thing -- it works as a signal because we could make it hard to fake, it encourages work, but consumption or saving are now totally up to you. And for those think this over emphasizes money, we could make the display color coded to match your emotional state (which we would measure daily using some hormone metric or a brain scan or something).

I like it. Let's go one step better, and figure out a way to calcuate the PDV of all your past and expected future incomes. That way, when a Harvard student switches from an econ major to art history, we'll all see the dramatic drop in their lifetime earnings. It will provide immediate feedback into the decisions we make about career choice. (Though it could cause some serious problems along and across the Charles River.)
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