The Social Significance of Consumption: James Duesenberry's Contribution to Consumer Theory

The Social Significance of Consumption: James Duesenberry's Contribution to ConsumerTheoryAuthor(s): Roger MasonSource: Journal of Economic Issues, Vol. 34, No. 3 (Sep., 2000), pp. 553-572Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4227586 .

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J JOURNAL OF ECONOMIC ISSUES Vol. XXaV No. 3 September 2000

The Social Significance of Consumption: James Duesenberry's Contribution to Consumer Theory

Roger Mason

Late nineteenth century economists gave little consideration to claims that consumer demand could often be determined by the social needs and aspirations of individuals, and this reluctance to discuss the social dimensions of consumption became a cause for concern for some. Simon Patten [1889] and Thorstein Veblen [1899] were early critics of a theory of consumption that did not seem able to accommodate social and psychological dimensions of consumer preference formation, and this dis- sent continued into the early years of the twentieth century [Veblen 1909; Downey 1910; Mitchell 1910; Clark 1918; Knight 1925a, 1925b]. For the most part, however, neoclassical interpretations of consumption and consumer demand continued to drive economic analysis.

After 1920, the persistent attempts by economists to secure recognition of the discipline as an exact science, capable of providing precise economic systems, models, and measurements, moved mainstream economics further away from issues relating to socially motivated consumption. In the 1930s and 1940s, attempts were made not to accommodate social aspects of consumption within theories of consumer demand, but to remove all traces of what was pejoratively referred to as "psychologizing" from consumer theory [Hicks and Allen 1934; Samuelson 1938]. By 1947, with the publication of Paul Samuelson's Foundations of Economic Analy- sis, the process was almost complete.

The arguments of those who continued to believe that the social significance of consumption was being systematically understated were still intuitively convincing. However, their case was usually rejected on the grounds that they had not been able to present an alternative theory of consumer behavior expressed in purely economic terms-a theory that could, where necessary, be supported by persuasive empirical

The author is Professor of Consumer Theory, University of Salford, England.

553



554 Roger Mason

evidence that social factors could and did play a considerable part in determining patterns of consumer demand. This long-standing criticism was effectively removed, however, with the publication in 1949 of James Duesenberry's Income, Saving and the Theory of Consumer Behavior.

This paper describes in detail Duesenberry's contribution to the subsequent development of consumer theory and, in particular, his attempts to secure proper recognition for the social significance of consumption within economics. It especially establishes his influence on economic thought in the 1950s, when the debate over the respective merits of (Duesenberry's) relative income and (Milton Friedman's) permanent income theories of consumption was at its height. It also looks at the re- newal of interest in Duesenberry's work that took place in the 1970s as an increasing number of economists began to revisit and revaluate his economic theories of consumer demand. It should be noted that I do not attempt a review of the Institu- tionalist treatment of consumption [for this, see Hamilton 1987].

Duesenberry's influence on economic thought over the past 50 years is often ap- parent even where no direct attribution is made to his work. This paper makes no claim to be a comprehensive review of all developments in economics since 1950 that bear, directly or indirectly, on the issues raised by Duesenberry. It does, however, serve to emphasize the often unacknowledged significance of his contribution to consumer theory over the latter half of the twentieth century.

A New Theory of Consumption

It is now some 50 years since the publication of Duesenberry's Income, Saving and the Theory of Consumer Behavior, a book not widely reviewed at the time of its appearance in 1949 but that, significantly, attracted the attention of some eminent economists of the day. Kenneth Arrow believed that it offered "one of the most significant contributions of the postwar period to our understanding of economic behavior" and that it was to be commended for attempting to link economic theory more directly with psychological motivations and with consumer learning processes [Arrow 1950]. Ralph Turvey [1950] was more guarded but nevertheless conceded that Duesenberry had made a provocative and significant contribution to demand theory. G. L. S. Shackle welcomed the attack on "conventional postulates of Olym- pian knowledge and aloofness" and saw Duesenberry's work as at the least attempting to broaden the theoretical economist's horizon [Shackle 1951]. A. C. Pigou [1951], while expressing serious methodological reservations, nevertheless recognized the potential significance of the work.

Duesenberry had intended the book to be a critique of the Keynesian consumption function and was, above all, interested in a reformulation of the theory of saving. Existing assumptions about consumption choices were badly flawed and simplistic, he argued, because they failed, inter alia, to recognize the central impor-



The Social Significance of Consumption 555

tance of habit formation and took no account of how levels of expenditures could be increased not by changes in income or prices, but by contact with "superior" goods generated by the consumption expenditures of others with whom the individual or family came into frequent contact. Duesenberry called this largely social influence on consumption the "demonstration effect," and he saw it as a mechanism that tended to force up consumption expenditures independently of price and income considerations. He argued also that this effect was significantly reinforced by an interdependence of preference systems, that promoted a general desire for distinction and encouraged individuals to emulate the consumption behavior of others in order to protect or increase their social status and prestige. These so-called "Veblen effects" on consumer demand were generally recognized by 1949, although they had not been incorporated into mainstream consumption theory and were seen by most economists as interesting but relatively trivial sociological observations on the nature of consumer demand.

Duesenberry himself was convinced of the social significance of consumption and felt that it posed a direct challenge to value and utility theory in that the pursuit of self-esteem and social prestige often generated a demand for goods and services that had no tangible utility in conventional terms. "It is well known," he argued, "that there are societies in which prestige is gained by the acquisition of some sort of good that is completely useless in fulfilling any need whatsoever. In spite of the complete uselessness of things in general, their acquisition may be vital to the acquisition of prestige or maintenance of self-esteem. A great deal of effort may be ex- pended in acquiring these useless items" [Duesenberry 1949, 29].

In modem societies, increased opportunities for social mobility had raised the propensity to conspicuously consume, particularly in those communities, increasing in number, where systems of ascribed social status and social stratification were breaking down or had effectively disappeared. Status was increasingly being con- ferred on the basis of socially visible consumption, and individuals were making comparisons between their own living standards and those in higher or lower status groups when deciding on their own present and future levels of expenditure. Above all, Duesenberry claimed, it was now no longer possible to defend an aggregate demand theory that assumed that any individual's consumption behavior was independent of the consumption choices of others

In truth, economists had long recognized that preferences were interdependent to a greater or lesser extent, but they had chosen either to ignore it or to marginalize its consequences for theory construction, particularly as it posed a direct challenge to the concept of demand "additivity," that assumed independent preferences and that formed a keystone of neo-classical demand theory. Alfred Marshall had been attacked on the issue [Cunynghame 1892; Pigou 1903, 1913] and had conceded that there was a social dimension to demand that had to be acknowledged [Pigou 1925, 4331. His defense, however, was to argue that this was a largely trivial aspect of



556 Roger Mason

consumer behavior that was confined, for the most part, to a relatively insignificant group of status seekers who had no real influence on the nature, direction and level of aggregate demand. Later, John Maynard Keynes acknowledged the importance of social influences on consumer preference formation, recognizing such factors as "ostentation" and "extravagance" as determinants of demand. However, he chose to ignore them in developing his general theory, arguing that such motives changed only slowly over time and could safely be ignored in the shorter term [Keynes 1936]. Although some reservations were later expressed as to whether these subjective factors could safely be assumed to be stable even in the short period [Gilboy 1938], the Keynesian view prevailed within mainstream economic thought.

By 1949, Duesenberry had become convinced that aggregate demand theory would be increasingly discredited if it could not accommodate the fact that a large part of consumer demand was socially inspired and that consumer preferences for socially visible goods were interdependent. Given the importance of social considerations in determining expenditures, Duesenberry argued that it was relative, rather than absolute, levels of income that determined the nature and direction of much individual consumption and saving. Consumption was social as well as economic, and the social dimension could only be accommodated by recognizing the importance of relative income effects. In this way, emulation and propensities to conspicuously consume could be contained within a more plausible economic theory of consumer demand.

Duesenberry was not alone in the 1940s in questioning conventional economic theory relating to saving and consumption and in suggesting that relative, rather than absolute, levels of income often determined patterns of consumer demand. A relative income effect on consumption had first been noted by Dorothy Brady and Rose Friedman [1947] when their research indicated that consumption patterns appeared to depend on an individual's position in the distribution of income in any given community. Two years later, Franco Modigliani [1949] also reported that analysis of aggregate data on consumption tended to support arguments in favor of relative income effects. Duesenberry, however, took the argument further, moving the debate beyond statistical analyses of saving and consumption and attempting to explain these relative income effects in terms of the social significance of consumption.

The strength of Duesenberry's analysis lay in the fact that, having proposed a new theory of consumption that incorporated social influences on consumer demand, he was then able to draw together empirical evidence of income, saving and consumption patterns gathered in the 1930s and 1940s by several eminent economists of the day to provide support for his hypotheses. While data analysis was not capable of proving his hypothesis, Duesenberry was able to claim that, in no case, were his theories inconsistent with observed patterns of saving and consumption.




The hypothesis was, in short, both plausible and able to withstand empirical scrutiny.

Developments in Consumer Theory after 1950

At the time of its publication, Income, Saving and the Theory of Consumer Be- havior generated no widespread academic interest for, throughout the 1940s, mainstream economics was becoming increasingly mathematical in its approach and had, implicitly and often explicitly, rejected arguments that there was a significant social dimension to theories of utility and value [Hicks 1946; Samuelson 1947]. At the same time, market realities were beginning to support Duesenberry's demonstration effect and the relative income hypothesis, for the years immediately following World War II saw a marked rise in socially inspired conspicuous consumption in the United States. As discretionary incomes grew, consumers displayed an obsessive interest in "keeping up with the Joneses," a preoccupation that persisted into the 1950s and beyond.

The changing nature of consumer demand did generate some limited interest and concern within mainstream economics. Oskar Morgenstern, in a comprehensive review of consumption economics, argued that the neglect of interdependent preferences had, given the emerging evidence of the postwar marketplace, badly compromised demand theory [Morgenstern 1948]. In 1950, Harvey Leibenstein published a paper that looked at the growing importance of bandwagon, snob, and "Veblen effects" in the theory of consumer's demand, arguing, like Morgenstern, that the existence and significance of interpersonal preference formation had been conveniently overlooked by economic theorists in their attempts to protect the concept of additivity [Leibenstein 1950].

Leibenstein made a convincing case for greater recognition of interpersonal effects. His work, in fact, paralleled that of Duesenberry, but he acknowledged the latter's contemporaneous contribution to the debate: in a footnote to his paper, he records that Duesenberry "considers problems of a somewhat similar nature but handles them in a quite different manner . . . [His] treatment of the problem helps considerably to fill an important gap in the current theory. Unfortunately, Mr Due- senberry's work came to the attention of the writer too late to be given the detailed consideration it deserves" [Leibenstein 1950, 186n].

Leibenstein's work differed from Duesenberry's in that it viewed social consumption as a microeconomic activity, rather than as a macroeconomic phenomenon with implications for general economic policy. While Leibenstein believed that the problem could be successfully addressed by modification and adjustments within conventional demand theory, Duesenberry was convinced that a more radical reas- sessment of consumer economics needed to be made if the social significance of consumption was to be properly accommodated within economic theory.



558 Roger Mason

In the early 1950s, reaction to Duesenberry's work was limited. Harry Johnson saw the book as "pioneering and highly suggestive" but agreed with Ralph Turvey [1950] that the analysis was open to serious objections [Johnson 1951]. Neverthe- less, one year later, he published a paper on the effects of income redistribution on aggregate consumption with interdependence of consumers' preferences, that im- plied that relative income effects were significant in determining consumption behavior and that recognized Duesenberry as the economist who had opened up the issue for discussion [Johnson 1952].

Elsewhere, Duesenberry's concept of the demonstration effect generated interest among economic development specialists and was used in the context of developing economies to address the issue of whether so-called pecuniary emulation produced positive or negative effects on economic well-being [Hoyt 1951; Nurkse 1953; Sci- tovsky 1954]. However, the possibility that the demonstration effect may have had wider and equally important implications for consumption behavior in more affluent developed societies was not seriously considered.

At the purely theoretical level, Duesenberry's interdependent preference analysis was also reviewed by Robert Clower, who concluded that the practical validity of the general interdependence postulate "can not seriously be questioned" [1951, 176]. However, he was not convinced that the consequences that flowed from such recognition were anything other than trivial:

Interdependent preference analysis differs but little from ordinary consumption theory; hence, while one sometimes gets different and slightly more general results in "interdependent" as compared with "independent" preference analysis, it is only in this very limited and practically unimportant sense that the two kinds of theory may be said to be at variance with one another. One gets the impression, therefore, that the interdependence postulate is compara- tively innocuous as concerns established doctrines [Clower 1951, 178].

Clower's central argument was that the real effects of interdependent preferences were seriously overstated because what individuals chose to buy and consume was inherently influenced by the choices of others and was therefore reflected in classical indices of utility. He saw Duesenberry's work, therefore, as posing no real threat to traditional doctrine and saw no reason "why the basic Duesenberry ideas should not be accepted as an integral part of the pure theory of consumer behaviour" [Clower 1951, 178].

While Clower was concerned with downplaying the significance of interdependent preferences, interest in Duesenberry's theoretical work was also being shown by Modigliani, whose own research into relative income effects had been published contemporaneously [Modigliani 1949]. Duesenberry's work, in fact, had been acknowledged by Modigliani in his 1949 paper, but he himself had taken a different and less sociological approach to the importance of relative income effects on consumption, arguing that such effects could be seen, more simply, as a homogeneous




function of current and highest previous income. T. M. Brown then proposed a further modification of Duesenberry's formulation by suggesting that "highest previous income" should be replaced by "highest previous consumption" [Brown 1952] and, in time, a Duesenberry-Modigliani-Brown hypothesis emerged [Modigliani 1975, 4]. However, the "modifications" introduced by Modigliani and by Brown had largely removed the stronger sociological foundations of Duesenberry's original work in order to reposition the relative income hypothesis within the economic mainstream.

While Duesenberry's contribution to the Duesenberry-Modigliani-Brown hypothesis had been effectively sanitized, the new hypothesis was still less than ideal, for it offered no explanation of the basic long-term level around which the savings ratio appeared to fluctuate cyclically, nor could it explain how relatively poor people could go on dissaving indefinitely. Modigliani, in particular, was worried by these inadequacies but was, in any event, soon to abandon the hypothesis. His change of heart came after he had had sight of the draft of an unpublished paper by Margaret Reid, which explored the relation of within-group permanent income com- ponents of income to income elasticities of expenditures. Reid's research and findings had an immediate impact on Modigliani, who saw it as "pointing to a totally different explanation for the association between the saving ratio and relative income, based on the notion that consumption was controlled by normal or 'permanent' income rather than by current income" [Modigliani 1975, 4].

Reid's work, extending earlier, related research into the effect of the income concept on expenditure curves [Reid 1952]; it persuaded Modigliani that his belief in relative income effects (and, by extension, any belief in Duesenberry's hypothesis) was misplaced, and he began a collaboration with Richard Blumberg of Johns Hopkins University to explore other possible theoretical explanations of consumer behavior. This collaboration led eventually to publication, in 1954, of their "life cycle" hypothesis of saving [Modigliani and Blumberg 1954], a new theory for which Reid's work, in their view, provided crucial and persuasive evidence. Modigliani and Blumberg also argued that Brady and Friedman's [1947] findings, when properly interpreted, lent support to their new life cycle theory of saving and consumption. However, Duesenberry's earlier work, seen now as offering a largely misplaced social-psychological explanation of events, was effectively rejected; the new interpretation, Modigliani and Blumberg argued, was sounder and much sim- pler-although they added confusingly that "we do not wish to deny that the earlier explanation may have some validity" [Modigliani and Blumberg 1954, 424].

Between 1949 and 1954, therefore, Modigliani at first embraced, then rejected, the relative income hypothesis. Over the period, however, he had never seriously examined, nor felt it necessary to examine, the social and psychological issues raised by Duesenberry-issues that set Duesenberry's work apart from others who had become involved with the debate over consumption, savings, and relative in-



560 Roger Mason

come in the later 1940s, but who had, unlike Duesenberry, taken pains to construct purely economic rationales. Economists generally, in fact, were reluctant to take up Duesenberry's ideas and to submit them to critical scrutiny, perhaps because they could then be accused of implicitly recognizing, however indirectly, the strong sociological and psychological influences on demand that were evident in his ap proach. However, Duesenberry's ideas came under further scrutiny in 1957 with the publication of Milton Friedman's A Theory of the Consumption Function, a work that built on Modigliani and Blumberg's lifecycle hypothesis in proposing a "permanent income hypothesis" and that addressed, in part, some of the issues that Duesen- berry had raised nearly a decade earlier [Friedman 1957].

Friedman laid claim to no special expertise or long-standing interest in consumption. Although he had had some limited connection with consumer purchasing studies in the mid-1930s [Friedman 1935], he had shown no interest in empirical work on consumption until 1951, when he drafted a tentative version of the hypothesis he was to develop over the next six years. His renewed interest in the subject came, as he himself acknowledged [Friedman 1957, ix], as a direct result of his wife's collaboration with Brady [Brady and Friedman 1947]-a collaboration that had appeared to offer some empirical support for relative income as a prime determinant of demand and consumer behavior. Later, however, Brady and the Fried- mans worked closely with Reid, whose unpublished paper on permanent income effects had impressed Friedman as much as it was to impress Modigliani. Reid her- self was aware that her empirical research had produced important results, but, being no theorist, she subsequently asked Friedman to write up the underlying theory to her work so that she could then refer to it in a paper presenting her conclusions. Friedman then developed the permanent income hypothesis, using the research of Brady, Rose Friedman, and Reid extensively in developing his arguments, He acknowledged that "though my hand held the pen, and though I am fully responsible for all its defects, it is in essential respects a joint product of the group, each mem- ber of which not only participated in its development but read and criticized the manuscript in its various stages" [Friedman 1957, ix]. In truth, as he conceded, Friedman could take credit only for the theoretical development of the hypothesis: it is to Reid that credit was given for the empirical work that pointed to the importance of permanent income in shaping and directing consumer demand.

Friedman was particularly able to appreciate the importance of Reid's work on income effects for, in an entirely different context, he had collaborated with Simon Kuznets on an earlier study of the effect of changes in relative income status among independent professionals in the United States [Friedman and Kuznets 1945]. This study had, in fact, proposed a new way of interpreting observed income data that Friedman was now able to apply to studies of consumption and which prompted the development of his permanent income hypothesis. At the same time, he had to an-




swer Duesenberry's claim that relative income, rather than permanent income, ex- plained consumer behavior.

Friedman acknowledged that Duesenberry had indeed offered a persuasive argument in support of relative income effects and that his exposition was the most widely accepted theoretical justification for the relative income hypothesis. To Due- senberry, relative income was important within a community because of emulation and the demonstration of the availability and usefulness of superior goods. Fried- man, however, in defending his permanent income hypothesis, rejected this claim, arguing instead that relative measured income was, in reality, only a biased index of relative permanent income status.

Duesenberry's construction of a consumption function characterized by preference interdependence was also rejected by Friedman, who offered, in contrast, a purely economic explanation for so-called relative income effects-an explanation that owed nothing to sociology or to psychology. In essence, Friedman had not been prepared to entertain the proposition that there was a significant subjective element to demand-unlike Keynes, whose earlier views on consumer preference formation were far closer to Duesenberry's formulation. Friedman's agenda, however, was to challenge Keynesian orthodoxies with respect to consumer theory and the consumption function, and it has since been speculated [Drakopoulos 1992] that his attack on Duesenberry was, in reality, motivated more by a desire to discredit Keynes than Duesenberry himself. Whatever his motivation, Friedman's 1957 work, and the subsequent support for his permanent income hypothesis, effectively marginalized Duesenberry's attempt to introduce social and psychological elements into current economic debates on consumer demand formation.

In the later 1950s, consumer theorists within economics focused their attention on further examining Modigliani and Blumberg's life cycle hypothesis and Fried- man's permanent income thesis. These two initiatives had effectively removed any social dimensions to consumption, and Duesenberry's work was largely neglected. In a review of "new" theories of consumption published in the Economic Journal at the end of the decade, M. J. Farrell made no mention of Duesenberry or of his contribution to consumer theory [Farrell 1959], and Robert Pollak later noted that Due- senberry's work was to lie "dormant" for some 20 years after the mid-1950s [Pollak 1978].

It is not difficult to appreciate why economists were happy to adopt Friedman's theory of the consumption function and to marginalize Duesenberry, for any significant concessions to a relative income hypothesis or to the importance of "demonstration effects" would have made demand measurement and economic model-building relative to consumption far more complex. By 1960, the increasing mathematization of economics was well established [Debreu 1991], and Duesenberry's sociological interpretations of preference formation posed a recognizable threat to purely



562 Roger Mason

econometric treatments of consumer demand. Friedman, in contrast, was offering a diagnosis that lent itself easily to mathematical analysis.

While Modigliani-Blumberg and Friedman dominated discussion, there were a few eminent authorities who continued to voice doubts. In his 1961 review of developments in consumption theory, H. S. Houthakker took issue with many of Fried- man's assertions and explicitly refused to consider his 1957 treatise as a real contribution to the ongoing debate concerning consumer economics:

I do not discuss Friedman's book in the present survey because the problems with which it deals belong primarily to statistics rather than to economic theory. The "permanent income hypothesis," that has done much to clarify recent empirical research, is essentially a theory about errors of measurement: it is logically independent of the proportionality of consumption to permanent income [Houthakker 1961, 728n].

Later in the same paper, Houthakker conceded that assumptions concerning ran- dom variations in preferences (a commonplace in the economics literature) were contradicted by many intuitive ideas concerning the social nature of human behavior. Acknowledging that the formation of preferences was, to some extent at least, a social process, he recognized also that some of the consequences had to be of interest to economists and needed to be addressed. Duesenberry's 1949 work was cred- ited with opening the discussion, but Houthakker was more guarded about whether it was yet possible to draw any firm conclusions:

While the "demonstration effect" agrees with casual observation, it has not been subjected to much theoretical analysis. Preliminary investigation (Prais and Houthakker, 1955) has suggested that when the budget constraint is properly taken into account, the consequences of social interaction are not so straightforward as they seem at first sight. Perhaps the most that can be said at the present is that social interaction may produce patterns of correlation in the variation of preferences among individuals [Houthakker 1961, 733-34].

Houthakker, therefore, while rejecting what he saw as Friedman's excessively statistical approach to consumer behavior, also had substantial reservations about the real importance of Duesenberry's thesis. At the same time, and unlike many mainstream economists before him, he was not prepared to dismiss what was often pejoratively referred to as "psychologizing" out of hand and was worried that economists too easily rejected or ignored many social and psychological influences on consumer preference formation:

There is much to be said for regarding the explanation of the content of preferences (that is, of the question why an individual prefers one bundle of goods to another) as outside the economist's competence. Nevertheless, there is also a danger with such delimitations of responsibility, namely, that the




problems thus excluded may not be studied at all. It is easy to say they belong to psychology, but this does not mean that psychologists will find them sufficiently interesting to look into them. Indeed, the whole concept of preference as used by economists may be hard to fit into the psychologist's framework [Houthakker 1961, 734].

More empirical research was needed concerning social interactions and the content of preferences, conceded Houthakker. At the same time, he had doubts whether any detailed study would be worthwhile, and he was not certain that the error involved in applying macroeconomic conclusions to aggregates was large enough to warrant a more concentrated study of the analysis of aggregation. In effect, he acknowledged the reality of social interactions based on casual observation, but he stopped far short of encouraging a more detailed study of the phenomenon.

Houthakker's comments were unremarkable in that they were, for the most part, in line with general economic thought, for economists since the time of Adam Smith had never sought to deny that "casual observation" seemed to confirm that consumer demand, especially for socially visible goods and services, often appeared to be influenced by social considerations that lay well outside conventional utility theory. At the same time, like Houthakker, they had always been reluctant to address the issue, arguing either that such behavior was trivial in aggregate terms or that the exploration of why individuals developed certain tastes and preferences was the proper business of sociologists, anthropologists, and psychologists. Economists, as Mar- shall had observed, were interested only in outcomes and not in any social or psychological aspects of demand formation: any speculation as to how and why social interaction decided patterns of consumption would, it was argued, only serve to di- lute the rigor of economic analysis.

Duesenberry's work was, by now, being almost entirely neglected, and it was certainly not used to inform theory construction. The next significant development in mainstream consumer theory came in 1966, when Kelvin Lancaster published his New Approach to Consumer Theory-a work that attempted to redefine goods and services as competing bundles of "characteristics" from which individuals made their consumption choices [Lancaster 1966]. While Lancaster's analysis offered a radical break with conventional economic theories of consumption, challenging, in particular, many of the assumptions of Samuelson's "revealed preference" arguments [Samuelson 19481 and introducing issues of subjective choice into demand theory, there was no reference to, or acknowledgement of, Duesenberry's earlier work on the significance of social influences on product perception and consumer demand. Indeed, Lancaster was at pains to follow what was, by now, a well-established tradition of removing any social theorizing from economics, arguing that any sociology of consumption (even with respect to demand for [status-laden] automo- biles in the United States) could be safely ignored [Lancaster 1971, 167-74].



564 Roger Mason

Away from economics, Duesenberry's more sociological explanations of consumer demand formation should have made a greater impact and been more sympa- thetically received. This was particularly true in certain areas of business and management research, where there had always been a greater acceptance of social influences on demand formation and subsequently on product sales. Certainly, consumer decision processes were receiving greater attention through the 1960s, but here again Duesenberry's influence was most noticeable by its absence. Francesco Nicosia [1966] made passing reference to the ratchet effect on demand but expressed reservations about any theories that to him were only a posteriori interpretations of already collected economic data. And in the development of two other highly re- garded models of consumer behavior [Engel, Kollat, and Blackwell 1968; Howard and Sheth 1969], no reference was made to Duesenberry, to demonstration or ratchet effects, or to the relative income hypothesis. Duesenberry's belief in the social significance of consumption, in short, had failed to find a sympathetic audience even in those areas of research that held no brief to protect the orthodoxies of traditional economic thought and that took a more catholic, interdisciplinary view of consumer preference formation and consumer demand.

Changes after 1970: Duesenberiy Revisited

Throughout the 1960s, Duesenberry's work had been relegated to the margins of economic and business research. By the early 1970s, however, some orthodox economists were beginning to show a greater concern with those issues relating to consumption that had preoccupied Duesenberry in the later 1940s. Pollak looked at the influence of habit formation on dynamic demand functions, in particular at how past consumption patterns could be important determinants of present consumption [Pollak 1970]. His work mirrored much of Duesenberry's earlier research relating to ratchet effects on consumption, although he made no reference to Duesenberry in his paper. It was research into interdependent preferences, however, that subsequently brought about a renewed interest in Duesenberry's work.

Issues relating to interdependent preferences in economic theory had been ignored for many years, but the "problem" had refused to go away. In 1972, W. Krelle proposed a theory of social interdependence of consumer evaluations, arguing that mutual utility interdependence had to be recognized in any analysis of consumer demand [Krelle 1972]. He then outlined a new treatment of consumer preference formation, which attempted to link conventional utility theory to the social psychology that had been systematically removed from economic theory for more than 50 years. One year later, Wulf Gaertner [1973], building on Krelle's work, constructed a more detailed model of consumer and consumption interdependence. The consequences of interdependent preferences were once again receiving attention within the economic mainstream.




Pollak further extended Gaertner's model in a paper he published that proposed two new and complementary models of interdependent preferences and examined their implications for demand behavior [Pollak 1976]. "It is a commonplace that preferences are influenced by other people's consumption," he argued, "but this in- sight has never been incorporated into demand analysis in a satisfactory way." Pol- lak saw Duesenberry's contribution to the debate as being the first to have appeared since Veblen's early treatise on conspicuous consumption and pecuniary emulation [Veblen 1899], and he regretted that "the lead provided by James Duesenberry was never systematically explored" [Pollak 1976, 310].

Pollak's work on habit formation and on interdependent preferences, coupled with the work of Krelle and Gaertner, did stimulate some further research. In 1977, Hiroaki Hayakawa and Yiannis Venieris reviewed the literature on consumer interdependence and proposed a "life-style" model of consumer behavior in which consumers were explicitly recognized as identifying with, and emulating, a social group as a reference group [Hayakawa and Venieris 1977]. Duesenberry's claim that consumer preferences were interdependent because of the incorporation of social and cultural propensities into the consumer choice calculus was acknowledged but criticized on the grounds that such arguments assumed that the individual "possesses un- limited psychological stamina and computational capacity and . . . operates in a frictionless environment." In reality, argued Hayakawa and Venieris, consumers recognize that information is limited and that the environment is volatile: conse- quently, a model of "adaptive behavior" best described consumer preference formation in the real world.

While attempts were now being made to incorporate interdependent preferences into models of consumer behavior, interest in Duesenberry's relative income hypothesis increased in the 1970s, as attempts were made to explore the relationship between income and consumer "happiness" or satisfaction with life. Richard Easter- lin, in a review of empirical evidence, had found a strong correlation between socio- economic status and happiness: 29 surveys carried out in the United States and in several other countries between 1946 and 1966 showed that, without exception, people in the highest income groups declared themselves happier, on average, than those in the lowest groups [Easterlin 1972]. Easterlin's findings were quickly con- firmed by a subsequent survey carried out in Europe which seemed to provide significant empirical support for Duesenberry's claim that relative income was a prime determinant of consumer perceptions of deprivation and well-being. Economists generally, however, appeared reluctant to take research further, and the subject received little attention in the later 1970s.

Finally, recognition of Duesenberry's work increased in the 1970s as a direct result of the growing interest of cross-disciplinary researchers in issues relating to consumption and consumer demand. Mary Douglas and Baron Isherwood [19781 attempted a marriage of economics with anthropology in seeking a better explanation



566 Roger Mason

of consumer preference formation and, in particular, of why people want goods. In their analysis, they recognized the publication of Duesenberry's Income, Saving and the Theory of Consumer Behavior in 1949 as being the first formal attack on economists who, up to that time, "still found that a demand theory based on the isolated individual was adequate to explain consumption decisions as functions of prices and incomes alone" While Douglas and Isherwood, in turn, were critical of certain aspects of Duesenberry's model and, indeed, of Friedman's later permanent income hypothesis, they nevertheless acknowledged the importance of Duesenberry's attempt as an economist to propose an econmic theory of consumption grounded in sociology, and they recognized him as "an economist with sophisticated views about the social nature of human needs" [Douglas and Isherwood 1978, 44].

Taken together, the work on consumption and on consumer choice that appeared in the 1970s, though limited in range and volume, provided a platform for the more systematic exploration of Duesenberry's work, which had been advocated by Pollak. Economists for the most part, however, continued to be uncomfortable with what they saw as an essentially sociological theory of the consumption function, prefer- ring instead to stay with theories [Modigliani and Blumberg 1954; Friedman 1957] that did not rely on constructs borrowed from other branches of the social sciences. As Robert Frank later pointed out, these preferred theories "provided clear a priori reasons, carefully grounded in utility-maximizing behavior, for the observed pattern of savings [and consumption] rates in time-series and in cross-section data"; as a consequence, "Duesenberry's relative income hypothesis has been relegated to a historical footnote in most modern textbooks" [Frank 1985a, 1571.

Frank's concern for Duesenberry and his work came from his interest in the concepts of positional and nonpositional goods, which had first been suggested by Fred Hirsch some years earlier. Hirsch had argued that there were social limits to rates of economic growth-limits that, in part, related to distinctions between the material economy, capable of continuous technologically driven expansion, and a status-driven and socially determined positional economy, that saw people competing for finite resources in order to signify their social status and prestige [Hirsch 1976]. He saw this positional economy and the way it operated as supporting Due- senberry's relative income hypothesis, and this theme was taken up by Frank some years later [Frank 1985a, 1985b].

Frank, like Pollak, took the view that economics had prematurely abandoned Duesenberry and his 1949 analysis of consumer behavior, pointing out that recent evidence [Diamond and Hausman 19821, far from confirming the life cycle and permanent income theories of consumption, had only served to demonstrate that savings rates did indeed rise substantially, and in a non-linear fashion, with income. This finding appeared also to confirm those of Thomas Mayer who, in reviewing empirical research into the relationship between savings rates and income, observed that of all the tests carried out into the proportional savings rate hypothesis, not one




had produced evidence to support it. He concluded that the hypothesis was, in all probability, invalid [Mayer 1972].

This was, for many, too ambitious a claim, and Frank was more circumspect, arguing that it was naive to believe that long-term considerations were not of any importance to consumers. He was more concerned that Duesenberry's relative income hypothesis, which, similarly, lacked conclusive empirical validation, could have been so easily dismissed:

In view of the empirical evidence, the extent to which these theories have supplanted Duesenberry's relative income hypothesis in modern textbooks seems yet another testament to the power of the a priori beliefs held by most economists. This outcome is not without irony, since we have seen [a reference to Clower 1952] that concerns about relative standing may well be fully compatible with the rational pursuit of self-interest, and therefore presum- ably not at all in conflict with economists' important prior beliefs. If this view wins acceptance, it suggests that greater attention be accorded to Due- senberry's explanation of the savings rate paradox, at least until some new empirical evidence is uncovered that proves it faulty [Frank 1985b, 111].

In any event, little attention was paid to Duesenberry's work in the following years, even by those economists who could have been expected to acknowledge his contribution to the continuing debate over consumption and consumer behavior. Jef- frey James, researching positional goods, conspicuous consumption, and the international demonstration effect, made no mention of Duesenberry [James 1987]; Richard Blundell, reviewing consumer behavior theories and their empirical evidence within economics, similarly included no discussion or analysis of Duesen- berry's work [Blundell 1988]. Duesenberry had, in short, become unfashionable, and he has remained so throughout the 1990s.

A few economists continued to believe that his work had been undervalued. George Kosicki, whose studies of relative income effects in the later 1980s [Kosicki 1987a, 1987b] had persuaded him of the merit and relevance of the hypothesis, argued that Duesenberry's work could sensibly be integrated with Frank's model of demand for unobservable and non-positional goods [Kosicki 1990], but this idea was not subsequently taken up by others. More recently, Frank, still sympathetic to Duesenberry, pointed out that the traditional economic models of consumer behavior proposed by Modigliani and Blumberg and by Friedman were still unable to explain why the rich save significantly higher proportions of their permanent income than do the poor-behavior that is only accurately predicted by models in which utility, as Duesenberry had suggested, depended not on absolute, but on relative consumption [Frank 1997, 1835-6]. Past experience, however, suggests that these observations and implicit criticisms will go largely unheeded in the mainstream economic literature.



568 Roger Mason

Perspective

It would be wrong to argue that James Duesenberry's Income, Saving and the Theory of Consumer Behavior has not, directly or indirectly, influenced important areas of economic and social thought. Today, welfare economics accepts "relativi- ties" as a major factor in determining perceptions of absolute and relative hardship and poverty. Sociologists also implicitly accepted the relative income hypothesis in developing their own theories of relative deprivation. At the same time, it is clear that, within economics generally, Duesenberry's work has never been overtly recognized as a substantial contribution to the formulation of general economic theory and policy. What explains this neglect of ideas that, at the least, offered a constructive alternative approach to consumer theory?

First, orthodox economists were always uneasy with the strong sociological themes running through Duesenberry's work. In one sense, Duesenberry himself must be held partly accountable for this, for he often did little to root his ideas in an economic literature and tradition. As an example, his treatment of the social significance of consumption [Duesenberry 1949, 28-32] was underpinned by references to an entirely anthropological, sociological, and psychological literature extending from Karen Horney's The Neurotic Personality of Our Time [1937] to Abram Kardi- ner's The Psychological Frontiers of Society [1945]. Nowhere in this part of his analysis does Duesenberry attempt to forge links with the work of other economists, admittedly few in number, who had also seen the significance of social influences on consumption [Pigou 1903, 1913; Schumpeter 1909; Mitchell 1910, 1914; Knight 1925a, 1925b; Keynes 1936; and others]. This omission subsequently lent credibil- ity to claims that Duesenberry's work was grounded in, and concerned with, sociology and psychology, rather than with economics

Such claims were strengthened because of Duesenberry's close identification with Veblen, another economist who had explored many social dimensions of consumption and who had similarly been branded a "sociologist" by economists, many with a vested interest in marginalizing his work and ideas. Samuelson [1964] wrote of Duesenberry's introduction of a "Veblen-like hypothesis" into economics, and the perceived similarities between Duesenberry and Veblen were later made explicit by Ken McCormick [19831. Like Veblen before him, Duesenberry was to learn that any attacks on economic orthodoxies needed to be seen to come from within, and not apparently from outside, the discipline.

The charge that Duesenberry was motivated more by sociology than by economics was convenient for some but was unfounded, for his model of consumer behavior was always presented as economic theory. In the 1940s, Modigliani had first become aware of Duesenberry's work at a meeting of the U.S.Econometric Society held in Atlantic City, New Jersey, where Duesenberry had presented a detailed econometric analysis of income effects, arguing that savings rose relatively faster than consumption as income increased. Early reviews of Income, Saving and the




Theory of Consumer Behavior by Arrow, Pigou, and others recognized the work as economic analysis, while Robert Clower [1951] had seen no reason why Duesen- berry's ideas and formulations should not be fully integrated into orthodox theories of demand and consumption. In any event, no such integration was forthcoming.

What explains this reluctance to give greater weight to Duesenberry's economic theories? Without question, economists were quick to see threats, as well as opportunities, arising from any more rigorous exploration of Duesenberry's work. In 1949, two new concepts had been introduced into the economic literature: "demonstration effects," which, it was claimed, were a major influence on patterns of consumer demand; and the "relative income hypothesis," which offered a persuasive explanation, seemingly supported by empirical evidence, of the complex relationship between income, saving, and consumption. Both terms quickly entered the economic vocabulary, and for a brief period, as Kosicki [1990] has pointed out, Duesenberry's analysis was considered by some to have reconciled various empirical findings concerning the relationship between consumption and income. By 1960, however, his work had been prematurely abandoned by mainstream economists, and, apart from some renewed interest in the 1970s, it never again achieved any real status or authority within the discipline.

Economists were able to distance themselves from Duesenberry after publication of Friedman's Theory of the Consumption Function in 1957. Friedman proposed a purely economic interpretation of consumption, and the "permanent income hypothesis" was well received by the economic community. The suspicion remains, however, that Duesenberry was abandoned by mainstream economists not because his theories had been tested and found wanting, but because an alternative hypothesis was now available that, in essence, recognized no sociology of consumption. Duesenberry's emphasis on interdependent preferences had, in fact, always posed a threat to conventional consumer theory-a theory that held that preferences were independent and that aggregate demand could therefore be derived from the simple summation of individual demand schedules. Friedman's 1957 thesis provided a timely opportunity for economists to reassert the assumptions of conventional demand theory and to move away from any wider and more radical interpretation. By 1960, as we have seen, Duesenberry had been effectively marginalized and was subsequently to become "a historical footnote in most modem textbooks" [Frank 1985a, 1571.

It is difficult to assess the extent to which the premature rejection of Duesen- berry's ideas has hindered developments in consumer theory. One thing is certain modern-day consumer societies, which are increasingly obsessed with status, identity, and style, serve to strengthen, rather than weaken, claims that consumer preferences are interdependent and that utility is a function of relative, rather than absolute, consumption expenditure. In truth, Duesenberry's analysis seems more



570 Roger Mason

relevant today than it did in 1949-testimony, perhaps, to his neglect as an economist over the last 50 years.

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The Social Significance of Consumption: James Duesenberry's Contribution to Consumer Theory