Conspicuous Consumption

Need it happen? Need it be bad?

I read a rather elegant paper recently, which I thought I would pass on to you. It’s Arrow and Dasgupta, (2009), with “Conspicuous Consumption, Inconspicuous Leisure”. Then, I consider whether consumption externalities are always a bad thing.

i. Keeping up with the Joneses

Humans are not entirely concerned with what they consume. They are concerned with status too, their placement relative to others. This can take the form of honor and respect, which have no particular relationship to consumer goods, but can also take the form of consuming more than other people. “Conspicuous consumption” is consumption which isn’t actually about the thing being consumed, it’s just about showing off. I’m sure we can easily think of examples — fancy jewelry, cars, a gold chain, box seats, instagram vacations, and on and on and on. “Conspicuous leisure” is a related idea, but it is far harder to see in our world. What Thorstein Veblen had in mind was people almost performatively not working. Think of the plantation owner’s wife, or the maniacal aversion of the Spartiates to work. 

If people’s level of consumption is dependent upon what other people are doing, then we are in a prisoner’s dilemma. Everyone would prefer if we consumed fewer goods, and worked less instead, but it is individually optimal for no one to do this. Thus, you have a reasonable argument for consumption taxes actually being welfare-enhancing, because it encourages us to consume more of what we want for its own sake, not simply because other people are consuming it.

The point of the Arrow-Dasgupta paper is that this intuition is not always reliable. The mere presence of externalities from consumption does not mean that it will distort consumption. Suppose that labor is supplied inelastically – in other words, the amount that people work doesn’t vary much as prices change. People can consume more now, but only at the expense of savings now. Thus, they will consume considerably less relative to their peers than if they remained in the optimal steady state level of savings. This was a rather beautiful insight.

The only way to generate inefficiency from consumption externalities is if labor supplied is endogenous to what you can buy, and leisure is inconspicuous. Then, people will work too much and consume too much, relative to what everyone would prefer. But if leisure is conspicuous too, then it is once again unclear if we are at an optimal level of consumption, nor is it clear which direction we need to go to find it. 

That it is not certain that consumption externalities will lead to excess consumption explains the difficulty in finding the effect. They open the paper discussing the literature on consumption externalities – things such as, “do the neighbors of people who win the lottery buy more”? I am willing to believe that some level of consumption tax is efficient, and may be a costless way to raise some amount of revenue. I would be very cautious about this, however, because of section ii.

ii. But will things really stay the same?

There are reasonable arguments that, especially in pre-modern economies, conspicuous consumption leads to highly positive outcomes. We have been taking institutions for granted. Suppose that we are living in a slave society, like that of Sparta or Rome or feudal Europe. Social status is tied not to the goods which you consume, but to the people you control, or your performance in combat. Aristocrats have little use for institutions which gain them wealth, and if it should involve them having to give up control, they will be quite hostile to them. 

Now imagine that consumer goods become more varied and more interesting. Whereas before, economic growth might look like producing more bread at less cost – something for which aristocrats have little marginal value, one can only eat so much bread – economic growth now contains novelties and luxury goods. Adam Smith, in book 3 chapter 4 of the Wealth of Nations, argued that feudalism declined because, for a “diamond buckle … or something as frivolous and useless”, aristocrats negotiated away their power. In order to get the consumer goods they wanted, the landowners of England allowed the merchants freedom to trade, and from this, eventually, came the Industrial Revolution.

On firmer footing, it seems that people began to work longer as goods got more interesting. Access to the New World led to the so-called “Industrious Revolution”. Despite small improvements in living standards, as measured through consumption baskets which focus on the necessities of life, people increased their working hours. Hans-Joachim Voth’s 2001 book “Time and Work in England, 1750-1830” (linked is a book review outlining the main points) had an extraordinarily clever way of measuring working hours. Whenever a witness gave a statement with regard to a crime, they would state what they were doing at the time of the crime. Therefore, any change in the percentage of people saying that they were working at the time indicates a change in working hours. He finds that working hours, for urban workers, increased some 50% between 1750 and 1830. Allen and Weisdorf, (2010) find that the increase was indeed only among urban workers, not agricultural workers – but this does accord with the story of product access leading to greater working hours.

The point being – consumption might be something of a zero-sum game, when others can see how much consumption others are doing. But status is very much always a zero sum game. Shifting from comparing status to comparing consumption should lead to far better institutions.