For his analysis in Social Limits to Growth, Fred Hirsch divided goods into two primary types. The first type was material goods: These are, in a sense, goods as commonly defined in economics. Their consumption generates utility because of the intrinsic characteristics of the good in question. These will generally be called FMCG (Fast Moving Consumer Goods like soaps, shoes, refrigerators etc.). The supply of material goods could be, and was, increased in response to the public’s rising demand for them.
The second category was called positional goods. There were certain amenities whose supply cannot be increased. Economic growth increases their utilization which increases their relative scarcity. The ozone layer, clean air, drinkable water, natural beauty, land for infrastructure (e.g. roads, sewers) and growing food, antiques etc. are examples. (‘Buy land. They are not making it anymore.’ – Mark Twain). Positional goods have no equivalent in standard economic theory. The focus of Hirch’s analysis was on the interplay between these two divisions of the economy.
Within the realm of material goods, all the accomplishments economists attribute to the invisible hand of the competitive market economy holds true. Economic growth understood as a continuous increase in affluence means that ever more people have their needs in the material sector satisfied – and turn ever more attention to the positional sector. What happens when the material pie grows while the positional economy remains confined to a fixed size?
Classical economists focused their attention narrowly on mankind’s bodily needs and thereby managed drastically to simplify the economic problem. That made demand and increases in demand always into a good thing, it showed competition to be a beneficent force that diminished monopoly profits and caused market prices to reflect costs and preferences; and it made quantification possible by rendering GDP estimates a simple measure of the economy’s contribution to welfare.
But when positional goods enter the picture, the situation is muddied. So long as material privation is widespread, conquest of material scarcity is the dominant concern. As demand for material goods are increasingly satisfied, demand for goods and facilities with a public (social) character become increasingly active. The limited demand for things with augmentable supply (material goods) and the unlimited demand for those whose supply is limited (positional goods), have created a great number of peculiarities and problems in our society.
The consumption of positional goods is valued at least partly by comparison with the consumption of these goods by others – e.g., having a manager’s job makes me better off not only because of its intrinsic characteristic (salary, power, freedom etc.), but also because others are not managers. In a further sense, positional goods define our position within the society and are thus socially scarce.
Social scarcity can have differing visible effects. One is physical congestion: the more people acquire the material good “car”, the more frequent are traffic jams. The other is social congestion: this is the case in the area of jobs, where there is limited scope for “leaders”, “bosses” and the like. Furthermore, some positional goods are socially scarce because they generate utility by being physically scarce – for instance, there is limited amount of “picturesque” natural landscapes. Another area where such “direct” social scarcity prevails is in arts: a Picasso is seen as valuable mainly because there is only one of its kind.
The scarcity of a positional good renders different people’s enjoyment of it interdependent, so that one person’s increased consumption or use of it reduces its availability for other people’s enjoyment. This causes numerous problems. Smog, traffic jams, the deterioration of cities, the spoiling of much natural beauty by overcrowding and too many tourists, the poisoning of the soil and ground water by the burying of toxic waste products are a few examples.
While the economy as a whole keeps growing, the positional sector gets ever smaller (i.e more scarce) in relation to the rest. This makes positional goods relatively more expensive and/or their quality deteriorates (e.g., due to congestion effects). Also, while any individual has the possibility to attain positional goods, it is impossible for everyone to attain them making an increasing fraction of the population frustrated. Therefore, economic growth is continuously aggravating the problems arising from social scarcity.
Demands for positional goods tend to grow as general standards rise, a demand that can be satisfied for some only by frustrating demand by others. For most people, they become objects of desire that the most intensive effort cannot reach. This creates situations in which individually rational behaviour leads to socially irrational outcomes. Positional competition that is promoted by growth leads to ever more frustration within the allegedly ever better off society.