Thursday, October 16, 2008

Conspicuous Consumption, Economics and Personal Finance

"Keeping up with the Joneses." It's a phrase most of us have run across at one time or another. Generally, we know what it means: if the neighbors get x, we need to get x (or if possible x-plus). We'd like to convince ourselves that "we were thinking about getting one anyway," or "once I saw the actual item, that was the last bit of information I needed." But the concept actually goes a bit deeper and has roots in economics and sociology.

In economics, the idea is called conspicuous consumption. And it is usually attributed to a 19th century economist named Thorsten Veblen. Veblen wrote about the upper classes of his time, and their desire for displays of wealth. He attributed this activity to the desire for status-seeking. Purchasing larger homes, "better" food and clothes, etc. was a way of displaying a real or imagined socio-economic pecking order. It was status-seeking.

This concept started moving around in my mind recently when one of my students asked a question about "name brands." We were discussing the idea of utility and I had mentioned that consumers seek utility in the goods and services they purchase. I mentioned the three types of utility: form, place, and time - and the student asked what form of utility was present in "branded" clothing. My response was that the brand differentiated a product - say a pair of jeans or shoes - from other like products, even if only by label. In my opinion, that was an example of form utility.

But the aspect of status-seeking and conspicuous consumption was also brought into the discussion. I asked whether status was actually improved by such things. It may be a matter of perception (ours) as opposed to reality (other people may not actually care). Conversely, do we receive psychic income if we feel better and if so, what is that worth? That was a couple weeks ago, but then the topic surfaced again as I read Greg Easterbrook's book, The Progress Paradox: How Life Gets Better While People Feel Worse.

First, let me say I enjoyed the book. His examples of broad economic progress were convincing. And the idea that wealth is not synonymous with happiness is not new. To that point, I think many of us need to examine the big picture before bemoaning our station in life. To make things seem worse than they are may be, as Easterbrook supposes, partially genetic. But it is also played up for self-serving reasons by individuals and groups that have a stake in our feeling bad.

That being said, Easterbrook uses a term in his book that, in my mind, clarifies what Veblen was writing about. Easterbrook uses a different term to describe the "having and exhibiting of that which is not needed." That description would easily explain conspicuous consumption. And while Easterbrook points out that the idea has always existed among the rich, he maintains that it has trickled down toward the middle class. He gives a few examples of items that fit his definition. You or I may disagree with some of them. But one of the beauties of the market is my wants/needs don't have to coincide with yours. However, I think the question which determines whether something falls into Easterbrook’s and Veblen’s concepts may be "what is it used for?" If the purpose is to impress or signal status, perhaps their terms aren't that far off.

As a classroom application, Veblen’s (or Easterbrook's) idea has value. It provides another way of examining the concepts of value, consumption, and utility. And in the personal finance setting, these topics can come into play when we ask students to prioritize their wants in setting goals or making budgets. Everyone needs to continually ask, "Am I buying this because it meets basic utility, or am I buying to signal?" Either way, we need to be aware of what we expect our purchase to do for us in order to make smart choices. After all, if you're willing to accept the opportunity cost...

What are your thoughts?

1 comment:

debt negotiation said...

I say forget the Jones, it is