Poor-Rich Gap and Declining Marginal Utility

I have been thinking about the declining marginal utility of money and the shrinking difference between being rich and being poor. There is much consternation over the ever widening income gap between the richest and the poorest Americans. However, there is a shrinking difference between the subjective value of what that money buys. Most understand that new technologies and products are expensive luxury items at first and then get cheaper. As a matter of fact they continue to get cheaper and cheaper until practically everybody can afford some version of the new item. This process actually takes place very quickly in the U.S. and the more competition allowed within an industry, the faster that adjustment will take place.

Take a look at this chart from Steve Horowitz comparing ’03 and ’05 in ownership of certain commodities.

% Households with: Poor 2003 Rich 2003 2003
gap
Poor 2005 Rich 2005 2005
gap
Gap
change
Washing machine 67.0 94.8 27.8 68.7 95.2 26.5 -1.3
Clothes dryer 58.5 93.6 35.1 61.2 94.3 33.1 -2.0
Dishwasher 33.9 86.1 52.2 36.7 88.4 51.7 -0.5
Refrigerator 98.2 99.6 1.4 98.5 99.8 1.3 -0.1
Freezer 25.4 44 18.6 25.1 43.7 18.6  0.0
Stove 97.1 99.6 2.5 97.0 99.7 2.7  0.2
Microwave 88.7 98.6 9.9 91.2 98.8 7.6 -2.3
Color TV 96.8 99.5 2.7 97.4 99.5 2.1 -0.6
VCR 75.4 97.7 22.3 83.6 98.5 14.9 -7.4
Personal computer 36.0 87.9 51.9 42.4 92.7 50.3 -1.6
Telephone 87.3 98.6 11.3 79.8 97.1 17.3  6.0
Air conditioner 77.7 90.3 12.6 78.8 89.1 10.3 -2.3
Cellular Telephone 34.7 88.6 53.9 48.3 92.4 44.1 -9.8

In almost every category gains to the poor have outpaced gains made by the rich. As Steve points out in his post it is easy to complain that because the rich are already at practically 100% ownership in most of these categories they have nowhere to go but down, but that’s the point of declining marginal utility. It does no good for a rich fridge owner to own 2 fridges all they can do is own higher quality fridges. The move from having no fridge to any fridge is huge. The move from the worst fridge to the state of the art fridge isn’t as big.

In the past being poor meant not having access to certain experiences and commodities that the rich had: televisions, washing machines, cell phones, European vacations. Every year there are fewer and fewer things that the rich can have but the poor can’t. As long as you define your commodities as this graph does, i.e. TV not plasma TV, 40″+ TV, etc. then there are not that many items that are what might be called rich-only. Yes, the rich have Iphones but everybody has a cell phone. The difference between rich and poor becomes more and more qualitative rather than quantitative.

And all this is in the face of a very real increase in income inequality. The poor are actually poorer than ever, in monetary terms, relative to the rich. But it’s not clear that this is as big a deal as it seems. To quote Steve:

“[The rich] end up being first adopters of new technologies, such as color TVs years ago or cellphones today… The more that the distance between the poor and the rich becomes about who gets the latest technology first and less about who has basic comforts and enough to eat, I’d say inequality is shrinking.”

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One Response to “Poor-Rich Gap and Declining Marginal Utility”

  1. What Can the Rich Do that the Poor Can’t? « Curious Task Says:

    […] began investigating this claim in an earlier post by claiming that a majority of the lowest quintile own a whole host of staple consumer products […]

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