The Economics Book

136

See also: Economic man 52–53 ■ Spending paradoxes 116–17 ■ Economics and

tradition 166–67 ■ Behavioral economics 266–69

T

he US economist Thorstein

Veblen was the first to note

that economic behavior is

driven by psychological factors,

such as fear and status-seeking,

as much as by rational self-interest.

Having grown up in a Norwegian

farming community in Minnesota,

Veblen was an outsider who

observed the extremely rich and

self-satisfied Americans of the

1890s. In 1899, he published his

devastating critique, The Theory of

the Leisure Classes, which argued

that the defining qualities of New

York high-society were like those of

primitive tribal chieftains—a surfeit

of leisure and money. The rich did

not buy things because they

needed them but to display their

wealth and status. Veblen was

the first to describe this as

“conspicuous consumption.”

Consumption trap

Today, “Veblen goods” (p.117) are

luxury items such as Porsche cars

and Rolex watches. A person’s

satisfaction increases the more

of them they have and the less of

them that other people have. Veblen

believed that rich societies can

suffer from a “relative consumption

trap” in which production is

squandered on these types of

goods. As more people consume

them, there may be no gains in

overall well-being. Some

economists have argued that

wasteful consumption, fueled by

credit card usage, contributed to

the global financial crisis of 2008. ■

PEOPLE

CONSUME TO

BE NOTICED

CONSPICUOUS CONSUMPTION

US oil tycoon John D. Rockefeller

(left), pictured here with his son, was

the first person to be worth more than

$1 billion. Rockefeller was part of the

New York society Veblen criticized.

IN CONTEXT

FOCUS

Society and the economy

KEY THINKER

Thorstein Veblen

(1857–1929)

BEFORE

1848 British philosopher

John Stuart Mill’s theory of

political economy assumes

that utility (satisfaction) lies

at the heart of economics.

1890 British economist

Alfred Marshall moves the

focus of economics away from

markets and towards the

study of behavior.

AFTER

1940 Hungarian economist

Karl Polanyi argues that

economic behavior is rooted

in society and culture.

2010 US economist Nathan

Pettit says that “conspicuous

consumption” and the

resulting debt played a key

role in crippling global

financial markets in 2008.