I get quoted in the New York Times. Sigh

It’s lovely to be noted of course. Rather less lovely to be misunderstood:

One common claim is that the wealthy routinely violate the economist’s law of demand. A bedrock principle of economic rationality, this law holds that as the price of a good rises, consumers buy less of it. Many analysts, however, portray the rich as people who lust after what are known as “Veblen goods” — commodities whose sales actually increase when their prices rise.

Er, no. A Veblen Good is something that is more desirable because it is expensive. A $1,00 raincoat insists that you are the sort of person who can afford a $1,000 raincoat. It is conspicuous consumption, showing that one is alpha.

However, this doesn’t mean that sales actually increase as price does. A good whose sales increase as price does is a Giffen Good. Long thought to be a mythical creature they’ve now been identified. Rice in South China, wheat noodles in North China (and perhaps potatoes in 18th century Ireland etc). A seriously basic foodstuff, the staff of life (and possibly bread in 18th cent England as well, etc). When you’re only getting 3,000 calories a day and spending 70% of your income to get it, that staff of life rises in price. So, you drop other expenditure (say, that 10% you’ve been spending on the occasional piece of bacon) in order to buy more of the staff of life to continue getting your 3,000 calories a day.

Veblen and Giffen goods are different things. It is, of course, theoretically possible for the former to be one of the latter but it’s most, most, unlikely.

12 thoughts on “I get quoted in the New York Times. Sigh”

  1. Bloke no Longer in Austria

    Sorry for being dense, but I don’t really get that definition.

    Surely essentials ( like food and fuel) depend on supply and demand for their prices, unless Govt sets the price or, as in Rome, gives it away free.

    I’d have thought that an iPhone was more of a Giffen good. They are expensive, wildly overpriced, but affordable and people actually use their functions and so not necessarily a “luxury” good.

  2. Bloke in Germany in Hong Kong

    The Giffen thing in basic foodstuffs, surely that’s just because people are worried about the price going up even more?

    So thinking out loud, would shares in tulip growers, or shares in a company for the carrying-on of an undertaking of great advantage, but nobody to know what it is, be both Veblen and Giffen?

  3. Giffen goods: I can afford to get 2,500 calories a day from rice and 500 from meat and vegetables, spending 70% of my income to do so (the other 30% goes on rent). If rice increases in price, then I switch to getting 3,000 calories in rice and stop buying meat and veg.

    Positional goods are goods where demand depends on their exclusivity, that is depends on other people not buying them.

    Veblen goods are absolutely goods where reducing the price reduces demand. They’re often so because they’re positional – ie reducing the price means that proles can afford them, which reduces demand from the snobs. If proles don’t actually start buying them, then they’re Veblen goods.

  4. I mostly agree with Tim and Richard Gadsden.

    It’s worth pointing out a few problems though from an Austrian point-of-view.

    Firstly, “Veblen Good” is all about knowledge. Physical goods are not necessarily the same good in the economists sense, because of social climbing. Let’s take two identical watches. In one world these models of watch sell for £1000, and in another for £5000. These are different products, not different prices for the same product.

    Suppose you were a friend of the chairman of Rolex and you were invited to a party on his Yacht. At the end he offers a limited collection of watches for sale to his friends at knock-down prices. In such a circumstance the supply and demand curves would slope in their normal directions. If the public price of the watches were to change then they would not. This isn’t because the laws of supply and demand change, they don’t it’s because the good has changed because it’s price has changed.

    Secondly, “Giffen good” is about overall income. We have the situation where a basic foodstuff increases in price to a large degree. The poorest section of the population then consume more of it because *their real income has fallen*. In this case a supply change is large enough to change total income significantly. Again, the supply & demand curves are in their normal directions. The problem here is that any set of supply & demand schedules are only valid for one set of real-incomes. Mainstream economists often recognize this when discussing “oil shocks” but not when discussing “rice shocks”.

  5. I think the most general way to put this is that every good has a sweet spot where the profits are maximised- that is where (price-costs)*sales is at a maximum. “Veblen goods” are just goods where that point is achieved at a high unit price.

    Every good has a point where reducing costs reduces profits, because it does not sufficiently increase demand to compensate, to the left of the sweet spot. Like, say, table salt. You can reduce that to 1p per tonne if you like, and I won’t buy any more. And if you do, I’ll probably think it’s cheap-ass poor quality salt with bits in and go buy something a bit more reassuringly expensive.

  6. People don’t buy these goods overtly to show their status. They would argue reasonably that they are high quality goods; hand made, fine materials, and so on.

  7. Bloke in Germany in Hong Kong

    So what are the actual definitions? Can someone dig up Giffen and Veblen themselves to explain?

  8. I don’t know about Giffen but this phenomenon is what my economics teacher simply called an inverse demand curve. The way he explained and I understood it was that in a time of famine, say, when the price of all food rises, then demand for the staple food will increase.

    So I agree with Richard Gadsden with the slight modification that it’s not just the price of rice (in his example) that’s going up but probably the price of all parts of the diet.

  9. Bloke in Germany in Hong Kong

    Well, rice is cheaper calories than pork since both prices will go up in tandem. So I still don’t think this is real Giffen stuff. I think (but not sure) I am agreeing with The Meissen Bison here.

    Any more than, say, LPG consumption going up with rising LPG prices, because the oil it substitutes for (and is generally more expensive per calorie) is also going up in price, so more people choose to switch and take the price advantage. So the increase in the price of the less economically purchasable stuff (pork, oil) is actually driving the increased sales of the cheaper substitute.

  10. Meissen Bison & Bloke in two places,

    The problem you have is the confusion the Giffen good idea generates. It confuses two things, general price level changes – which change real income – and specific price level changes. In the situations usually discussed (under various names like “inverse demand curve”) the price of a specific good is so important in a basket of goods that it causes a real income to change.

    Whether the price of other goods (pork, oil, etc) changes isn’t really that important. But the fact that it can change the outcome indicates that a “basket problem” is involved.

    It’s explained well in Anthony J.Evan’s book “Markets for Managers”.

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