Status is not, in fact, a zero sum game. This point was originally made clear to me when I was an undergraduate at Harvard and realized that Harvard had, in at least one interesting way, the perfect social system: Everyone at the top of his own ladder. The small minority of students passionately interested in drama knew perfectly well that they were the most important people at the university; everyone else was there to provide them with an audience. The small minority passionately interested in politics knew that they were the most important ones...
Okay, but this might be more persuasive if Friedman didn't seem compelled to mention "Harvard" twice in one sentence. He could just as well have written "when I was an undergraduate and realized that my college had ..." But, no, he wrote "when I was an undergraduate at Harvard and realized that Harvard had ..."
The academics at Crooked Timber are trying to explain what's wrong with this theory:
Wilkinson’s claim implies, unless I misunderstand him badly, that it doesn’t matter very much to me if I’m a despised cubicle rat who can’t afford a nice car and gets sneered at by pretty girls, because when I go home and turn on my PC, I suddenly become a level 75 Night Elf Rogue who Kicks Serious Ass!
But they don't get very far in their criticism because reductionism is a dirty word to them.
So, while this theory's glass is half full, it's half empty, too, and here's my reductionist explanation why:
Men can invent all the status hierarchies they want, like World of Warcraft (as noted by Half Sigma), but women don't have to be impressed by them. Ultimately, some status hierarchies (e.g., the Forbes 400) are higher status than others (e.g., nerd competitions like World of Warcraft) because the highest status male hierarchies in America are whichever ones attractive women are most impressed by.
The problem from an economics policy point of view is that there isn't all that much that can be done about the pain that accompanies competing for women. In Ayn Rand's utopia or in Pol Pot's, there will still be winners and losers. (From a social point of view, a society can help by resisting both formal polygamy and the serial polygamy of accumulating trophy wives. America used to do a fairly good job of the latter -- e.g., Nelson Rockefeller lost the decisive 1964 GOP primary in California because he'd just traded in his old wife for a new one -- but that has broken down since then.)
Similarly, the reason it stinks to be poor in America in 2006 is not because you don't own enough stuff, but because you have to hang around with other poor people, with their socially dysfunctional tendencies.
Once again, economic policy is not terribly useful, although it would be helpful if the supply of unskilled labor was kept tight enough to keep the wages for honest work high enough to attract more of the underclass into the disciplining bonds of paying work. A rational immigration policy would have another benefit by only letting in people with enough human capital so that they, their children, and their grandchildren are unlikely to sink to the underclass.