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An economy based on social status will always be prone to crisis

An economy based on social status will always be prone to crisis

By Expert Panel 24.02.2014


By Vincent F Hendricks, University of Copenhagen

Here is a question: how can it be that everyone has free and independent choice and yet we largely converge on exactly the same things? That’s neither original nor independent.

Despite economic growth giving people increased opportunities for “self-realisation” in whichever direction they choose, desires have still converged towards the same trends: extravagant sports cars, expensive watches, high-end apparel, brand labels, designer kitchens and other accessories.

The explanation is to be found in what happens when we as citizens, consumers or voters don’t have perfect information available. The basic idea is that when you don’t know how to solve a given problem, it can be rational to imitate others by way of “social proof”.

Take, for instance, holiday crime novels. For those of us who are unable to examine the entire market, imitating others’ choices solves the problem. We consult the bestseller list and the newspaper reviews as well as family and friends. This can be rational, because through imitation you benefit from information which others have gained through experience.

But it’s not a blind imitation process. Imitation is motivated by the problem that needs solving – which book to buy, or how to lead your life – and one seeks to imitate those who have had success. But which problem, except for vanity, does fashion solve, and whom should you imitate?

Here conspicuous consumption has assumed the role that titles and honours had in days of old. It signals acclaim, status and power. These types of signals are naturally social; their meaning is only credible when everyone knows that everyone else likewise understands the signal. It’s the same with money. We only accept the currency we expect others want to receive.

But when a status symbol is no longer embedded in a real value – when it exists in a bubble – status economics becomes a self-feeding process where an individual no longer commands any quality assurance other than the status itself. Unlike money, status isn’t spent but is simply strengthened when used.

Those with a reputation therefore end up having a reputation simply because they have a reputation, and celebrities become famous for being famous. Just think of the alarmingly high number of reality show stars produced lately whose only qualification is that they are like everyone else. And if they can become famous for specifically being themselves (or a media boosted version thereof), then the rest of us can as well, which is why in principle anyone can become famous for being famous. Status economics may create status bubbles.

Cars, clothing fashions and the rest of the “superficial” lifestyle products are perfect examples of status economics, with their value largely derived from how we think others will perceive them. This also explains why the consumer bonanza celebration of the individual paradoxically arrives in a standard package.

Imitation is by its very nature limited to the observable. In a status economy, where there are no other guarantees than the social status itself, successful imitation is thereby the kind of imitation everyone can see and everyone can understand – thus the standard packaging.

Meanwhile, honours and titles only have value if an audience recognises them. This is exactly why it’s so important for us to read in the tabloids about VIP-parties which the audience are, by definition, barred from participating in. For just as the nobility had to acknowledge back in the day, if everyone gains access to the symbols of power, inflation and then worthlessness follow.

While everyone converges toward these symbols of power, what these symbols actually are is constantly changing. This very feature entails a cat-and-mouse chase in the hope of being first to the latest sign of high status. Imitation therefore causes inflation in the symbols of power. Remember when having a TV was considered a status symbol?

The status economy just brings along further spending and sinks us ever deeper into a consumer society. And voila, that’s how it all resulted in an economic crisis.

Vincent F Hendricks does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published on The Conversation

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