The dictum "context is everything" is certainly true when it comes to assessing the value of material goods.
In Falling Behind, economist Robert H. Frank shows that what we consider "average" or "good enough" in a home or car is determined by context: what are others around us driving? where are they living? Is a `79 Chevy Nova is adequate (or even luxuriant)? The answer to this depends on the cars driven by others around us. This context varies between Cuba and the snazzier parts of L.A. Context matters in assessing the value of many things: cars, real estate, appliances, clothing. Not all goods are evaluated in this way: Frank categorizes those that are as positional goods.
Frank lays to rest the notion that wanting what others have is greed or envy, or that we are duped by snazzy advertising. Rather, it is natural to judge one's own assets in terms of local context. Having less than the "norm" has tangible consequences for professionals: Doctors or lawyers who fail to keep up appearances will be judged as incompetent. People who choose to buy smaller homes will end up in poorer neighborhoods, and suffer their attendant problems.
The inflation of positional goods is driven by income inequality. Since the 1970's, the incomes of those at the very top has risen dramatically, while those at the bottom are now earning about the same or less. (If you want clear graphics and elucidated statistics on rising income inequality, look no further than chapter 2.) However, changing standards for what constitutes a luxury home or car have "trickled down" so that middle-income Americans now need to spend more to achieve average.
Frank likens the arms-race style inflation of positional goods to the metaphor of the stadium. If one spectator stands up, he/she will get a better view. But if everyone stands, they will all have the same view as before, except they will have given up their comfy seats. The author calls this behavior "smart for one, dumb for all."
Frank outlines what working and middle class families have had to sacrifice to achieve the new average: time, equity, and investment in public works. Workers must live farther from work to afford average, and have longer commutes. They work longer hours, and sleep less. Families don't save as much, and they go into debt. People who feel strapped for cash are less willing to pay the taxes necessary to maintain roads and schools, so these services get cut.
For all that I enjoyed this book, I cannot rate it a 5. While the tone through most of the book was jargon-free and accessible to the non-economist, Frank lapses into dense econo-speak in places (notably chapters 6 and 7). Frank also delves into "Darwinian" hypotheses in chapter 6, which only detracted from his larger point. After all, he had already made the case for the positional judgement of goods. The evo-psych explanation lacks any evidential support, and merely stating that it is the "biological," or, worse yet, "Darwinian" point of view is not sufficient for it to be taken seriously.
The final chapters redeemed this book for me, as the author proposes a novel, progressive tax solution: taxing consumption while exempting savings. A progressive marginal tax rate on consumption would reward those who save rather than spend, limiting the inflation of positional goods as people opt for smaller mansions and more utilitarian vehicles. The tax is not regressive: People earning modest salaries can apply their deduction to their taxable consumption, so that they are not penalized for being unable to save.
If you want to know why the rich get richer, the poor and middle class can't get ahead, and houses and cars seem to have doped up on steroids since 1970, give this book a read.