• A
  • A
  • A
  • ABC
  • ABC
  • ABC
  • А
  • А
  • А
  • А
  • А
Regular version of the site

Keeping Up with the Neighbours: Envy as a Driver of Economic Growth

Keeping Up with the Neighbours: Envy as a Driver of Economic Growth

© iStock

Classical economic theory assumes that economic agents are entirely self-interested and rational in their pursuit of material well-being, and that they are not affected by external factors. As a result, externalities are not considered in any way when constructing economic models. Nevertheless, some sociologists argue for a revision of modern economic theory to incorporate the ethical dimensions of economic agents' behaviour. Kirill Borissov, Professor of the Faculty of Economics at the European University in St Petersburg, spoke at the XXIV Yasin (April) International Academic Conference and shared his observations from creating his own economic model incorporating the factor of envy.  

'It's natural to assume that an individual's level of patience may depend on their level of envy. For example, if an individual's neighbours display a high level of consumption and are buying new phones or cars, the individual may feel compelled to increase their own consumption and buy new things, regardless of the expense, in order to keep up with their neighbours,' explains Borissov. His paper, entitled 'Growth and Distribution in Models with Envy', discusses an approach to rationalising the relative income hypothesis by incorporating envy into consumers' utility functions.

Kirill Borissov

The permanent income hypothesis in macroeconomics proposed by American economist Milton Friedman suggests that as income increases, people should save more. Although the hypothesis holds true at the individual level, it can create a misleading picture when applied to a larger scale, such as when making comparisons between countries. According to Friedman's hypothesis, if a country becomes wealthier, it should save more. However, in reality, this is often not the case.

Also relevant is the Solow model of exogenous economic growth based on the neoclassical production function and the exogenous savings rate. This model assumes that the savings rate remains constant. However, this assumption contradicts the permanent income hypothesis and the Keynesian approach, which suggests that savings determine the size of investments, rather than the other way around. 'If individuals save more as their income and wealth increase, then economic growth should result in a higher average savings rate,' Borissov observes. 'In reality, however, the average savings rate tends to remain relatively constant despite the growth of income in society.' James Duesenberry, an American Keynesian economist, proposed an explanation for this paradox in his relative income hypothesis.

According to Borissov, Duesenberry argued that poverty is relative, and that people make decisions about savings based not on their absolute level of income, but on their relative position in society and on the property ladder.

Economist Robert Frank, professor at Cornell University's Graduate School of Management, believes that a successful theory should account for three key facts:

  • as national income grows over time, the average savings rate should remain relatively constant
  • consumption should be more stable than income
  • people with higher incomes should save more

'However, Duesenberry's theory has been criticised for its lack of microfoundations, sociological and psychological underpinnings,' notes Borissov, who has proposed a model in which an individual's degree of patience may be influenced by the level of envy, and individuals differ only in their initial level of savings. 

It turns out that the level of envy can be calculated. In Borissov’s model, which employs the standard Cobb-Douglas production function with competitive markets, total production is dependent on the inputs of labour and capital. A distinctive aspect of the model is its consumption function, in which an individual's consumption is calculated as the difference between their theoretical consumption and the average consumption within their generation, multiplied by the envy coefficient. The model assumes, according to Borissov, that an individual's enjoyment from consumption is not based on the absolute level of their consumption, but rather on how this level relates to the average consumption within their generation. This, indeed, is a mathematical expression of envy. 

In an economy with envy, there are two equilibrium types: an egalitarian equilibrium with a fair distribution of wealth, and multiple two-class stationary equilibria, similar to the Schlicht-Bourguignon model (an endogenous growth model where the consumption function plays a significant role in wealth redistribution in a society having two groups of equilibria. The model predicts the existence of multiple stationary equilibria, including one with a Pareto-dominant single group—Ed).

'If the parameter responsible for envy is not very high, then the incomes of consumers tend to be levelled over time,' says Borissov. 'However, if the envy parameter exceeds a certain threshold value, the society will become polarised.' The economy will then converge to a stationary equilibrium in which the population is divided into two classes: the poor and the rich, and the division between them will depend on the initial distribution of wealth. The consumers who had the highest initial savings will be the only ones who become rich. Borissov's model demonstrates how envy can contribute to an increase in inequality.

One interesting modification considered in the model is the robotisation of society. Borissov has observed that regardless of the level of envy in society, robotisation will result in a continuously growing economy, while wages will remain stagnant. 'Even if robotisation starts in an egalitarian mode, it will eventually lead to a regime of growing inequality, where all benefits of growth will go to the wealthy,' Borissov concludes.

Author: Kamila Rafibekova, Research Assistant, HSE Laboratory for Economic Journalism

See also:

25th Yasin (April) International Academic Conference Now Accepting Proposals

Reports on new research results will be presented and discussed as part of the conference’s sections. These reports will be selected based on reviews of proposals. As always, the conference programme features expert discussions of the most pressing economic, social, internal and external issues in the format of roundtables and associated events.

Academic Council: HSE University’s Contribution to Achieving National Goals and Development Priorities to Increase

HSE University’s Development Programme until 2030 will be improved in order to increase the university’s contribution to achieving national goals and implementing the priorities of the country’s scientific and technological development. This decision was made by the university’s Academic Council on April 26. The meeting also addressed the principles for the development of HSE University’s external communications, one of which is the creation of a high-quality information field around the university.

Structural Transformation and Drivers of Sustainable Growth in Russian Economy Discussed at HSE University

The Russian economy has demonstrated high resilience to unprecedented external pressure and has managed to largely adapt to new conditions. As early as this year, it can go from recession to growth. The issue of where to find drivers and resources for this was discussed at a plenary session titled ‘Russian Economy under Sanctions: From Adaptation to Sustainable Growth’ at the XXIV Yasin (April) International Academic Conference held at HSE University as part of the Decade of Science and Technology. Minister of Economic Development of the Russian Federation Maksim Reshetnikov took part in the discussion.

‘People Want to Receive Only Useful Content’

Experts say that interest in news has sharply increased among the Russian audience. At the same time, part of the audience deliberately avoids it. What kind of content is in demand and will people continue to watch TV? These and other issues were discussed at the plenary session ‘ Info-hygiene and Information Elitism: How to Consume Media Properly’ at the XXIV Yasin (April) International Academic Conference.

'The Emerging Trends in Africa Will Shape the World Order, and We Need to Be Prepared for That'

Africa has the potential to become a new economic giant. Today, African countries are interested in comprehensive cooperation and strengthening their positions in the global arena, and they look forward to receiving assistance from Russia and China in developing their technology, economy, and social sphere. Effective engagement with Africa requires training a greater number of professional African studies specialists. The XXIV Yasin (April) International Academic Conference at HSE University featured a plenary session on 'Africa in a Changing World'.

Learning a Foreign Language Can Delay the Onset of Dementia

Dementia, a debilitating form of cognitive impairment, can be preventable. According to Professor Jubin Abutalebi of the University Vita Salute San Raffaele, Italy, and the Arctic University of Tromsoe, Norway, the easiest way to prevent cognitive decline after the age of 60 is to learn and practice foreign languages – the more languages, the better, suggests Professor Abutalebi in his presentation 'Preventing dementia through bilingualism' at the XXIV Yasin (April) International Academic Conference.

‘The BRICS Strategic Partnership Offers the World Creative, Unifying, Forward-Looking Initiatives’

Today, BRICS has become an influential factor in modern international relations and is perceived as one of the pillars of a more just world order. This association is not based on one party’s dominance, but instead, is built on a sound balance of interests. The role of the association was discussed by the participants of the plenary session ‘BRICS Development Strategy: Equal Opportunities in an Unequal World’at the XXIV Yasin (April) International Academic Conference.

Sanctions Create New Opportunities for Russian Companies

Like any crisis, the sanctions of 2022, besides problems, have created new opportunities for Russian companies. This is the conclusion that HSE University’s experts have come to. Their study results are presented in the report ‘Adaptation of Russian Industrial Companies to Sanctions: First Steps and Expectations’, prepared by HSE University for the XXIV Yasin (April) International Academic Conference.

Search Query: How to Study Migration with Google Trends

Experts have calculated that the number of international students in Russia has grown six times over the last decade, and researchers say that many of those who are studying today would like to stay in the country. This, alongside issues such as why Google Trends are worth looking into, were covered at the HSE XXIV Yasin International Academic Conference on Economic and Social Development section on demography and labour markets.

XXIV Yasin (April) Academic Conference Kicks Off at HSE University

HSE University is hosting the XXIV Yasin (April) International Academic Conference on Economic and Social Development in Moscow from April 4–14. The conference has attracted over 3,000 leading researchers, experts, business representatives and government officials from over 30 countries. The leaders of HSE University—Rector Nikita Anisimov, Academic Supervisor Yaroslav Kuzminov, and President Alexander Shokhin—addressed the conference participants.