The neglect of comparison income: An historical perspective

Abstract

Theories of social comparison have a long presence in the social sciences and have provided many useful insights. In economics, the idea of comparison, aspiration or relative income belongs to this theoretical framework. The first systematic usages of this notion can be found in the works of Keynes and Duesenberry. After these works the concept was relatively ignored by orthodox theorists until its recent re-appearance, mainly in the fields of labour and macroeconomics. To the contrary, however, income comparisons continued to play a role in much of Keynesian inspired and non-mainstream economics literature. In the past few years it has made a strong comeback in the literature of job satisfaction and of the economics of happiness. This paper attempts to trace the development of the concept in the modern history of economic thought. It also discusses the main theoretical implications of adopting income comparisons and possible reasons for its relative disregard by orthodox economics.

Keywords:

• Relative income
• history of economic thought
• wages

Acknowledgements

An earlier version of the paper was presented to the Annual Conference of the European Society for the History of Economic Thought, Prague, May 2008. Special thanks for comments and suggestions are due to J.L. Cardoso, Sheila Dow and to three anonymous referees of this Journal. The usual disclaimer applies. The University of Athens research committee provided partial financial support for this paper.

Notes

1 Recently, using the idea of comparison income, economists have attempted to provide a choice-theoretic justification for the kinds of behavioural rules predicted by social psychologists (such as in Adams' equity theory and Homans' social exchange theory). See, for instance, Clark and Oswald (1998).

2 Many authors use the above terms interchangeably. However, in some formal specifications y is income, y* is the reference group or comparison income, while the ratio y/y* is called relative income. The same apply to the more specific term of wage (see also Clark et al. 2008).

3 There are many common points concerning income and consumption comparisons, and also the demonstration effect between Veblen and Duesenberry. For an analytical discussion, see McCormick (1983).

4 This can also be seen as part of the relatively recent shifting balance between pure and applied economics. I am grateful for this point to an anonymous referee. For an historical treatment, see also Backhouse and Biddle (2000).