by Chandan Kulkarni
Conspicuous consumption, a term in economics that describes and explains the practice by consumers of using goods of a higher quality or in greater quantity than might be considered necessary in practical terms. The American economist and sociologist Thorstein Veblen coined the term in his book The Theory of the Leisure Class (1899).
The concept of conspicuous consumption can be illustrated by considering the motivation to drive a luxury car rather than an economy car. Any make of car provides transport to a destination, but the use of a luxury car additionally draws attention to the apparent affluence of the driver. The benefit of conspicuous consumption can be situated within the idea, postulated by economists, that consumers derive “utility” from the consumption of goods.
Veblen identified two distinct characteristics of goods as providing utility. The first is what he called the “serviceability” of the good—in other words, that the good gets the job done (e.g., luxury and economy cars are equally able to get to a given destination). The other characteristic of a good is what Veblen called its “honorific” aspect. Driving a luxury car shows that the consumer can afford to drive an automobile that others may admire; that admiration comes not primarily from the car’s ability to get the job done but from the visible evidence of wealth it provides. The vehicle is thus an outward display of one’s status in society.
A corollary of the dual characteristics of goods is that such conspicuous consumption is “waste.” In using this term to describe what might usually be termed “excess,” Veblen was not making a judgment that the good is unneeded by society but rather was using waste as a technical term indicating that the production of a luxury good requires more resources than the production of a non-luxury good. The difference Veblen would label waste, but this does not mean that luxury goods should not be produced. The core of Veblen’s analysis of modern society was the fact that on the one hand there is enormous technological potential to produce goods, and on the other hand business enterprise constrains the amount produced to that which can be profitably sold. Advertising plays a major role in placing the product as a luxury item in the mind of consumers. The product has to be elegant, exclusive (branded bag, jewellery etc.), or tailor made for the consumer.
In Veblen’s view the function of advertising is to create a desire among consumers for goods whose usage displays status and prestige. The gulf between the wants of consumers and the productive potential of technology is reduced through advertising. It is for this reason that Veblen viewed advertising as waste but waste that is intrinsic to a modern economy based on the principles of profit-making business enterprises.
Rich people buy luxury goods for many reasons, but even those seeking to display their wealth can almost always find efficient ways of doing so. Why buy a gratuitously expensive good when you can signal your riches just as effectively with an equally expensive good that you actually like? To be sure, billionaires are often willing to spend enormous sums for beautiful things that can’t be duplicated at low cost. But almost none of them would want to buy more of something simply because its price had risen.
If they were merely chasing Veblen goods, the rich would be easily exploited by the purveyors of luxury items. Yet the markets for these goods are among the most bitterly contested, and not just because the stakes are so high. Thousands of wine producers spend small fortunes trying to achieve 96-point Robert Parker ratings, but very few get them.
The disruptions that have occurred in the luxury car market also cast doubt on the Veblen-goods concept. Throughout the 1980s in the American market, BMW and Mercedes-Benz were leaders in the market for sedans costing up to about $70,000. But wealthy motorists eventually found more choices when respected reviewers assured them that the Toyota brand Lexus offered a better car in many respects.
If BMW and Mercedes sedans had been Veblen goods, their producers could have responded to the Lexus challenge by simply raising their prices. In fact, they have managed to prosper by getting costs under control and making their cars much more appealing.
The rich, of course, are willing to spend more, often a lot more, for products that deliver quality improvements they value. But few of them want to throw money away. In that respect, they’re like middle-income Americans, many of whom don’t feel especially prosperous these days. Yet relative both to current world standards and to living standards of the past, middle-income Americans are incredibly wealthy. And when viewed from the perspective of those standards, much of their current consumption is strikingly similar to that of today’s rich.
Each day, for instance, many of us consume coffee brews priced at what would be almost a week’s wages in other parts of the world. We’d be offended if someone described these purchases as attempts to display our wealth. And we’d be puzzled if someone said we’d buy even more lattes if our favourite cafe were to raise its prices. The coffee just tastes better, we’d say, and we’re willing to pay a premium for that.
Luxury markets are already important, and with inequality poised to grow further, these markets will become ever more so. Those who fail to understand them cannot hope to understand what drives the world economy.
That goal will remain elusive until we recognize that the wealthy are essentially similar to the rest of us. They just have a lot more money.
The wealthy engage in conspicuous consumption from Peacock to Porsche, in order to advertise their wealth.