Friday, January 28, 2005

The demonstration effect

Lately I've been puzzling over consumer-behavior theory, and James Duesenberry's notion of the "demonstration effect" in particular. I'm just trying to consolidate some of what I've learned here. Duesenberry was a vociferous critic of the utilitarian/"man is an insatiably acquisitive hyperrational hedonist"/"we take wants as given" school of neo-classical economic thought. Assuming man to be an unerring calculator of how to maximize his consumption (and thus maximize his happiness) is a useful theoretical construct, as it makes a convenient parallel to corporations and their attitudes toward profit -- this in turn lets marginal-utility theory function -- one will allegedly consume where the additional increment yields the most marginal, that is additional, satisfaction. It allows one to assume that supply creates its own demand -- Say's law. It presumes people, like prices, strive for an optimal equilibrium point, a kind of stasis in which ends are met most efficiently. And it allows one to remove from economics the ethical question of what should be produced, and how much is enough. (Theories of social/relative scarcity (Cf. Fred Hirsch's The LImits to Growth) show that more economic growth, more goods, cannot lead to more individual satisfaction. So why the vehement commitment to growth? It produces jobs, yes, but unfulfilling ones for a larger and larger cohort of the working population.) It also makes man inherently greedy and ruthless and only begrudgingly social, all would be Robinson Crusoes who'd prefer to be alone on an island with their lucre. It also perpetuates misguided notions of what the good life consists of (Galbraith is eloquent on this) -- consuming more material goods instead of undertaking meaningful work and enhancing social connections. We enter the dream life of commodities instead, consigning ourselves to the "hedonic treadmill," chasing satisfactions that always ultimately elude us, since we quickly adapt to whatever level of material comfort we achieve and since the true human connection and validation we seek in consumption isn't really present, or is diluted over the course of the commodity's circulation. And as Galbraith notes, "One cannot defend production as satisfying wants if that production creates the wants." Wants are not really externalities; they are generated by the economic system, they don't preexist it.

The main problem with the utilitarian approach is that it doesn't at all correspond with actual human behavior, which is rarely rational and is often dictated by social considerations hard to quantify as utility. People don't maximize their utility, they often choose poorly or by other standards than personal satisfaction. Veblen, of course, highlighted social emulation as a spur to consume. Rather than seeking static equilibrium, one's wants are always dynamic, responsive to shifts in social position. Independent of their specific usefulness (their instrumentality) goods have a display function, a symbolic function that establishes an individual's social identity and mandates certain levels and types of consumption beyond what one needs for sustanence. Related to this is the "demonstration effect," whereby exposure to new goods destroys one's complacency with what one has. Why does this matter? Because it allows consumption to increase while income levels stay the same. This in turn afffects levels of saving. Greater income inequality leads to less saving, which leads to the lower classes never achieving sufficient capital to change their status -- they can't really work hard and succeed, on the aggregate. What Duesenberry claims is that this theory proves that the satisfaction of every consumer is negatively affected by the consumption of those with higher incomes but unaffected by those with lower incomes, which in turn means that a progressive income tax should make everyone more satisfied. Of course, we are moving in the opposite direction. Robert Frank suggests that the demonstration effect tells us that things like forced-savings requirements (i.e. Social Security), luxury taxes on positional goods, and working-hour limits would also help aggregate satisfaction. The point is that a higher standard of living for a few leads to a exponential ripple of dissatisfaction for many -- mass media only multiples this effect, allowing the demonstration effect to function through people we don't know, allowing it to be distorted by advertising and lifestyle magazines that purport to be a reflection of how others live. On a personal level, can we evade the demonstration effect by tuning out media saturation? Can we create consumer biospeheres that function independently of mainstream norms without surrendering the symbolic function of goods that we need as much as their instrumentality?


  1. I've been puzzling over consumer-behavior theory myself, and here's the conclusion I've reached, in my own words:

    It is not from the benevolence of the butcher, the Brooklyn brewer, or the baker, that we expect our dinner, which is sometimes beef with mixed Chinese vegetables, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

  2. But rational self-interest can only take us so far as a predictive paradigm. Ultimately we appeal to someone's sense of advantage only to discover what they find in their interest is utterly unfathomable.

  3. I have not seen one article on the mathematical treatment of the demonstration there any that you are perhaps aware of?