1. Adam Ball Economics Essay
@00446202
Tutor-Kevin Marshall
1.(a) Explain Veblen’s theory of conspicuous consumption in relation to the
consumer choice theory and compare it with Galbraith’s ideas on producer
sovereignty
(b) To what extent do these theories undermine the usefulness of the rational
consumer choice theory?
The rational consumer choice theory explains the actions and decisions that
consumers make in a marketplace when they are purchasing goods and/or services.
It assumes that when entering the marketplace consumers already have pre-thought
out preferences in their minds; they know which products they desire the most when
presented with a choice and will allocate their incomes proportionately to these
products. In order to understand this theory two elements need to be considered
throughout. Firstly, the possibilities in terms of consumption that the individuals
income and the product price can make and also what preferences the consumers
will have amongst feasible bundles of goods. A simple way of explaining how
limitations affect decisions is by creating a budget constraint in relation to different
products. In this scenario, you can chose to consume all of one good, all of the other
good or a combination of both and your choice is constrained by the amount of
money you have to spend in this situation. The formula for a budget constraint is
M=Px X + Py Y which translates to the price of X times the quantity of X + the price
of Y times the quantity of X. If the resultant amount of money spent on both products
is less than the overall budget you have e.g. £200 then that is a possible
combination of goods, however if the resultant amount of money spent on both
products is more than the overall budget then this is not a possible combination of
goods. To create a budget constraint on a graph you first of all look at how many
units of good A you would consume if you purchased if you spent £0 on good B, then
do the same step but the other way around and then connect those two points to get
your budget constraint. This shows the two most extreme points and all of the
possibilities in between.
To find the combination of goods that suits a specific consumer the best, which is
also known as the best feasible bundle you take the budget constraint created by the
money you have available for consumption and add your personal preferences,
which come in the form of an indifference curve. Indifference curves have 4 keys
axioms which exist in the mind of every consumer. The first is completeness where
all consumers can choose between all bundles. The second is non-satiation which
simply means that more is better. Next is transitivity which is the property of
consistency which translates that if A>B and B>C then A>C. Finally, indifference
curves have the property of convexity which is that a mixture of good A and good B
is more preferable to an extreme of 1 good. Every single point on an indifference
curve is of equal preference to the consumer and to decide the best feasible bundle
on a graph containing both the budget constraint and the consumer’s indifference

2. curve, you would pick the point on the indifference curve which is tangent to the
budget constraint (point X).
(Diagram from lecture notes)
The consumer choice theory outlines the basic behaviour of consumers and in its
most simple form shows how they come to the economic decisions that they make.
Veblen’s theory takes this subject into a lot more detail and really aims to define the
reasons behind the actions of the wealthiest members of society and not just say
how consumers buy goods because they want to. This theory looks into the why and
not the what and is known as conspicuous consumption.
For Veblen, the ownership of property is not enough to give an individual status. If an
individual acquires a great amount of assets over time but spends their time living in

3. a small house, that individual will have no status in society. To build up and gain
status individuals must show off and display their wealth to others which will give
them personal utility. This can be done through leisure activities e.g. attending a club
or doing sports such as polo or fencing or large expenditure on consumption goods
e.g. cars and homes. In earlier societies, no class system existed. It was only once
societies started to produce a surplus that allows for private property to be owned
that a hierarchy developed in which some people own property and others do not. To
own property was to have status and a position of worth and esteem in this
hierarchical system. He also goes on to say that different types of wealth amount to
difficult levels of wealth concluding that inherited wealth gives more status than
wealth that is self-made and a result of hard work and efficiency. An example of this
is a very rich businessperson and member of a royal family. (Himmelweit, Simonetti,
Trigg, 2001)
Gaining property and increasing your assets (wealth) which increases your social
status gives individuals utility. The more expensive a good of high quality is the more
utility consumers will get from its conspicuous consumption and if the price is
reduced then the amount of utility gained from its consumption will also decrease.
This can lead us to conclude that preferences are dependent on the price of a good.
Veblen’s theory is led by the principal of consumer sovereignty where the products
that the consumers want most will be produced. Harvard professor John Galbraith
provides a contrasting view to this with the power and influence lying with the
consumers. He believes that capitalism’s greatest flaw lies with the fact that we
judge the performance of an economy based upon the amount it produces which
leads us to think that if firms produce less goods than they did the year before then
they are unsuccessful. (Himmelweit, Simonetti, Trigg, 2001) If a firm is successful
and produces more goods than the year before then where are these goods going to
be sold in the marketplace? The price of a good can change to bring in more
revenue but the amount of new buyers in a market and new demand is nowhere
near as big as the this extra stock so what happens to these goods?
Both Veblen and Galbraith’s theories are hugely contrasting in what they say and
where they put the power in consumer buying with Veblen putting the power in the
hands of society and Galbraith believing that the producers influence the buying
decisions of the consumers. Both of them do provide clear criticisms and do
undermine the rational consumer choice theory and its implication of consumer
sovereignty.
Veblen’s theory of conspicuous consumption argues that the more expensive a good
is (due to increased scarcity and therefore exclusivity) the more utility a consumer
will gain from the conspicuous consumption of this product and that if the price is
reduced then the reverse will happen. This means goods less suitable for
conspicuous consumption if they have a decreased price and this can lead us to
believe that preferences are dependent on price which suggests that if this were to

4. be mapped out on a diagram then the demand curve would in fact be upward sloping
and not downward sloping.
(Diagram from lecture notes)
As shown in the diagram we start with the consumer choosing the bundle of goods at
point A (X1,Y1). The price of the good X then falls and the indifference map of the
consumer shifts from good X to good Y which results in them choosing the bundle of
goods at point C and not point B. This has created new indifference curves based on
price and gives bundle C which has less good X and more of good Y in it. This leads
us to the conclusion that as price falls so does demand which would lead us to an
upwardly sloping demand curve based on consumers looking at what product will
give them the most social status regardless of price and not their own personal
preferences. This has serious implications in relation to the consumer choice theory
and undermines several of its core principles. Instead of consumers tastes
controlling the price of a product we have the reverse situation where the price of a
product is actually determining how much a consumer wishes to have it. The
upward-sloping demand curve that has resulted because of this completely
contradicts what is laid out by the rational consumer choice theory. Finally, two of the
axioms of the rational consumer choice theory that were laid out earlier are
challenged by this result. The first is non-satiation which doesn’t fit in in this scenario
because more is not better for a conspicuous consumer because that good may not
give the utility they wish for. With curves crossing in for example an S-curve, multiple
equilibria points would exist which would challenge the axiom of transitivity. Veblen’s

5. theory does not entirely undermine the theory of rational consumer choice however
as first not all consumers want to emulate the rich. This means that expensive goods
will keep their exclusivity more as they are not trying to be bought in the levels that
Veblen may be suggesting. Their social influences may come from something
completely opposite like wanting to look understated and normal and not stand out at
all. As well as this Veblen’s theory of conspicuous consumption only applies to
certain goods in society certainly not all of them and only explains the economic
behaviour of a select group in society.
Galbraith shares a similar view to Veblen in the sense that he does not believe that
consumers preference are the driving force. However where Veblen speaks of how
society and the desire to own goods of high status and utility, Galbraith believes that
modern societies are in essence blank canvases of demand and that the producers
of goods create demand for them themselves. How does they do this? They promote
and push goods upon the customers. This comes in the form of advertising and
marketing which is paramount to the firm. They must make the customers believe
that their product is necessary for them and that they must buy it. This provides us
with a contrasting situation to the one presented in Veblen’s theory where the firms
are influencing the behaviour of the consumers by introducing and advertising their
products to them. Consumption therefore is not determined on the need and utility
that a product gives to the consumers it is dependent on the activities of the firm.
Consumption is separated from need as consumers are purchasing goods with little
utility. Producer sovereignty is definitely in place in this scenario as the producers
are in control of the needs of the consumer as they are controlling what goods they
purchase. In his book “The Affluent Society” Galbraith says that “the institutions of
modern advertising and salesmanship cannot be reconciled with the notion of
independently determined desires, for their central function is to create desires – to
bring into being wants that previously did not exist. Wants can be synthesized by
advertising and catalysed by salesmanship.” (Galbraith,1969) This clearly
undermines the theory of rational consumer choice as it is the producers who are in
control and not the consumers. The consumer does not demand something and get
it from the producer, they demand what is most advertised and made to look the best
by the producer. Galbraith’s theory doesn’t come without its flaws though. Galbraith’s
theory puts across the idea that humans are influenced by producers and have no
real power against the power of advertising but does not consider that human
desires can be divided into physiological desires and psychological desires and that
neither production, nor advertising, can create either of these two types of desires;
both are original with the individual. Furthermore Galbraith’s only apparent reason for
deciding that wants are urgent is that the want is physically experienced e.g. hunger.
This standard makes of little urgency psychological wants, such as a desire for
education, for security, for justice, or a desire to create. (Drake 1970)
In conclusion, the theories of Veblen and Galbraith do provide clear alternatives to
the mind set that the rational consumer theory makes us think and this can be seen
in modern society. Huge numbers of people are influenced and will want to buy a
good if it is in fashion and desired by many which really makes us believe that
exclusivity (which is usually a result of higher prices) creates utility which can lead us

6. to an upward sloping demand curve which does not exist in the realms of the rational
consumer choice theory. As well as this it is the case more often than not that the
products that are advertised the most and have the strongest marketing campaign
are the ones that get the highest demand which does not suggest that consumers
preferences are driving production. Both of these theories are not completely
concrete though and either do not cover all parts of society or do not take fully take
into account the natural tendencies of human behaviour. It cannot therefore be said
that these theories completely undermine the rational consumer choice theory but
they do definitely give you reasons not to fully believe what it says.
References
S.Himmelweit, R.Simonetti, A.Trigg (2001)
Microeconomics-Neoclassical and Institutionalist Perspectives on Economic
Behaviour London, UK
G.Hodgson (2002)
The Hidden Persuaders: Institutions and Individuals in Economic Theory
Retrieved from
http://uhra.herts.ac.uk/bitstream/handle/2299/673/900721.pdf?sequence=1Milner
H.Drake (1970)
J. K. GALBRAITH’S THE AFFLUENT SOCIETY: A CRITIQUE
Retrieved from http://www.libertarian.co.uk/lapubs/econn/econn022.pdf