Positional goods are goods and services whose value to the owner depends largely on how they compare with what other people have, rather than on their absolute qualities. Examples include a home in the most sought-after neighborhood, a place at an elite university, a top job title, a seat at the front of a queue and luxury items that signal status. The concept is used in welfare economics, the economics of happiness and debates on taxation and growth.
The term was popularized by the British economist Fred Hirsch in Social Limits to Growth (1976). Hirsch argued that as societies grow richer, more spending flows into goods that are scarce by nature or by social ranking, so that not everyone can have more of them however much the economy grows. Positional goods overlap with Veblen goods, which are valued partly for their high price, but the idea is broader: many positional goods, such as relative rank in a job market, have no price tag at all.
Positional goods in plain terms
At a concert, one person stands up to see better. The people behind them then stand up too, and soon everyone is on their feet. Nobody can see any better than before, and everyone is more tired. The view from the front is a positional good: it depends on where you are compared with others, not on how high you stand.
Many things in life work this way. A house in "the best" school district or a degree from "a top" university is valuable because only a few can have it. If everyone had one, the advantage would vanish.
Positional and non-positional goods
Economists distinguish goods whose benefits depend mostly on absolute amounts, such as safety, health, clean air and leisure, from goods whose benefits depend mostly on relative standing. The American economist Robert H. Frank, in Choosing the Right Pond (1985) and later work, argued that people systematically overinvest in positional goods because the rewards of relative position are visible and immediate, while the costs of an arms race are shared by all. Survey research has supported the presence of relative concerns: in a 1998 study, Sara Solnick and David Hemenway found that many respondents would prefer a lower absolute income if it ranked higher than others' incomes, while concerns about relative position were weaker for goods such as vacation time.
The phenomenon also bears on the Easterlin paradox, named after Richard Easterlin, who reported in 1974 that rising national income did not appear to raise average reported happiness over time, even though richer people within a country were happier than poorer ones. One explanation is that much of the gain from higher income comes from rank, which cannot rise for everyone. Later studies with more countries and longer data have challenged the paradox, and the debate continues.
Arms races and externalities
When one person improves their position, others slip in relative terms, which is a negative externality. Competition for positional goods can therefore resemble a zero-sum game: the rankings are fixed in number, and spending more simply bids up the cost of each place. In the language of game theory, each person's best response is to keep spending, producing a Nash equilibrium in which everyone would be better off if all agreed to spend less.
Examples include bidding wars for homes near top schools, which push up land prices and capture value as economic rent; ever-higher educational credentials, where part of the return to human capital may reflect signalling rank rather than skills; and winner-takes-all markets in sport, entertainment and some professions, where small differences in rank bring very large differences in reward.
Policy responses and criticism
Several remedies have been proposed to reduce wasteful positional spending:
- Consumption taxes. Frank has advocated a progressive tax on consumption, exempting saving, to damp spending races at the top while encouraging investment.
- Luxury and corrective taxes. Taxes on high-end goods can be seen as a Pigouvian tax on the positional externality.
- Collective rules. Limits on working hours, mandatory holidays, safety standards and caps on sports teams' payrolls act as agreements to stop an arms race.
Critics raise several objections. Measuring which goods are positional is difficult, and status concerns vary across people and cultures. Some economists argue that positional competition spurs effort and innovation, and that using it to justify taxes or rules gives governments too much say over private choices. Others note that GDP growth still delivers large absolute gains, such as better health and technology, that are not positional at all. The concept nonetheless remains influential in debates on economic inequality, housing and education policy, and in studies of marginal utility that look beyond individual consumption.