Veblen Good or Veblen Bad? Trivia Quiz

Answer: Harvard University Degree

Before we go too far, let's get some economic background material out of the way. Normally, it is logical to assume that as the price of a good increases the demand for the good will decrease. If the price of a McDonalds hamburger went from one dollar to ten dollars overnight, would people still buy as many McDonalds hamburgers or walk across the street to Wendy's and eat there instead? Of course, McDonald's sales would decrease. However, a Veblen Good acts in the opposite way. These goods increase in desirability when their price increases. Exclusive college degrees are an example of a Veblen Good. If the Harvard degree were to decrease suddenly in cost relative to other "hoity-toity" colleges, there would be concern that the Harvard cachet would be tarnished. Higher tuition costs increase the perception of the degree's value thus increasing the demand for the degree.

The phenomenon of Veblen Goods was first discussed (and thus named) for American economist and sociologist Thorstein Veblen. In his 1899 book, "The Theory of the Leisure Class", Veblen applied Darwinian evolutionary theory to the development of markets for overpriced goods. According to Veblen, the display of wealth, either in the ability to purchase over priced goods or expensive leisure activities, explains why some goods will increase in demand as their price rises. As such, basic commodities like oil and corn will act in accord with the normal rules of supply and demand.

Answer: Conspicuous Consumption

Thorstein Veblen used the phrase "Conspicuous Consumption" to describe the acquisition of expensive objects as a means to convey the relative wealth of the owner. Veblen's 1899 treatise "The Theory of the Leisure Class" postulated that the newly rich owners of industrial era businesses displayed their relative power and prestige by buying products that were expensive rather than of utility. Indeed, it is the very excesses of conspicuous consumption that defined the so-called "Gilded Age" of late 19th Century America. Showy and over the top consumption was likened to the displays of bright plumage by animals to signify attractiveness to females and to take the place of battles to establish the dominance of an alpha male.

The concept of consumption for status continued well into the 20th and 21st Centuries and extended beyond the upper classes to the middle classes as well. The concept of "keeping up with the Joneses" or securing increased status from the ownership and display of possessions are examples of conspicuous consumption. Veblen also coined the less well-known corollary phrase of "Conspicuous Leisure" to describe the increasing amount of time and effort the 19th Century wealthy spent "playing". Veblen concluded that like the ostentatious possession, the engagement in long and intricate leisure activities served as a wealth status marker.

Answer: The demand rises

Welcome to the wonderful world of economic theory, where in order to describe a theory of market behavior you need to create examples that can't possibly happen in the real world. "Giffen Goods" are so named after the 19th Century Scottish economist and statistician Robert Giffen. To understand the Giffen Good I need to throw a few econ terms your way. Don't be scared they don't bite. Normally, if the price of a good goes up then, people will buy other goods. This concept is called the "substitution effect". For example, if vanilla ice cream increases in cost, by virtue of the substitution effect more people will buy cheaper chocolate. "Income Effect" is the term to describe the impact wealth has on the buying of goods. If you have a small income, you tend to have to buy cheaper products. For example, I would like to buy a Ferrari, but since it costs more than I make in a year, I will stick with my Smart car awhile longer.

Ok, back to the bread and beef eaters you say. When the price of a cheap good rises (bread) and there is no substitution product available, then the poorer person is faced with a choice. Either buy beef, which they can't because their income is too low or suffer the higher prices of the bread. In fact, because they need to buy the more expensive bread what little beef they could afford must now be sacrificed (substituted) to get the bread. The overall impact of the Giffen Good is thus to increase the demand for the cheaper product. Now to ease your mind, economic conditions that create the Giffen Good storm are rare since there are so many substitutes for common items.

Answer: Wimbledon Effect

Who says economists don't have a sense of humor? The "Wimbledon Effect" combines local economic success with British tennis futility. Wimbledon is the oldest and arguably most prestigious tennis tournament played in the world. The Championships, as they are called, were first played in 1877. Winning the tournament has remained a highly coveted price ever since. From 1877-1909 British men won every championship except one. However for 77 years, starting in 1936 when Fred Perry won his third Wimbledon crown until Andy Murray's win in 2013, the UK earned no men's singles titles (no tournament was held 1940-1945).

Fascinating as the story of British tennis futility is what does this have to drop with economic theory? The answer requires an understanding of the changes in the London financial market since the 1980s. In the 1980s the UK government deregulated much of the financial services industry. These favorable laws caused many foreign-owned banks to acquire ownership of UK banks. However, rather than see a drain of capital or jobs leave London the capital market sector grew rapidly in size and actually increased London's importance as a financial market. The "Wimbledon Effect" is the name given to the phenomenon of a local industry prospering despite a lack of local ownership (or - in the case of tennis - local success).

Answer: Population

Malthus believed that the only check on population growth was the ability of a society to feed and support its people. Malthus was pessimistic about any society's ability to slow down breeding and develop new advances in food production to create an environment where all people had enough to eat and were free from depredation. As a society increased its ability to provide, through say technological improvements in farming, people would breed more people to wipe out the gain. Malthus postulated that corrections in population growth (such as famine, war or uncontrolled disease) would occur periodically in a society to return the population to the sustainable level of food production. Malthus stated that society would teeter between advancements in food production and uncontrolled population growth, followed by periodic corrections or "Malthusian catastrophes". This cycle of growth and reduction is called the "Malthusian Trap".

Malthus died in 1836 and did not live to see the advent and impact of the Industrial Revolution. Most economists after Malthus concurred that the Malthusian Trap and the advancement-breed-catastrophe model matched pre-Industrial Revolution history. However, 20th-century economists argued that starting from the 1850s Malthus' model ceases to be accurate. The argument was that the multiplicative advances in agricultural production obtained from 19th-century industrial advancements created a "breakout" from the Malthusian Trap. Malthus, however, may yet end up chortling in his grave. 21st Century trends in socio-economic theory are returning to a belief that global population growth is unsustainable; and that the entire planet is headed for another Malthusian Catastrophe.

Answer: Trickle Down

The "Trickle Down" theory in one form or another has dominated global economics since the advent of human society. In its simplest form the Trickle Down theory says that by giving or allowing those who are already wealthy to increase their wealth they will inevitably trickle down the benefit of the new wealth to the poor. As an example, when the king cuts the taxes of the nobles, the noble will in turn reduce taxes on the poor. In modern economics, the "supply-side" or trickle down approach to tax policy was the keystone to the 1980s US "Reaganomics" and the UK policy of "Thatcherism".

The phrase "Trickle Down" is often used as a negative term in some modern political and economic rhetoric. For example, humorist Will Rogers once quipped "money was all appropriated for the top in hopes that it would trickle down to the needy" as a way to deride solutions for the Great Depression. In contrast to Trickle Down is the "Trickle Up" theory espoused by noted economist John Kenneth Galbraith. Trickle Up theorists argue that you should directly improve the lowest economic performers' income in order to stimulate a corresponding increase the demand for goods. In theory, increased demand stimulates economic growth that will "trickle up" to increase the wealth of those at the economic top.

Answer: Choosing leisure over earning more money

As strange as it may seem there is ample evidence that there is a limit at which workers will start rejecting work in favor of more leisure time. The phenomenon is called the "Backward Bending Supply of Labor Curve". Normally, workers seek to maximize total wages and desire higher per hour wages. As the rate of pay for hourly or incremental work increases at first workers are eager for the added income. Over time, many of the workers become sated and content with their wages and decline to earn additional wages in favor of more leisure time to spend their money. When the wages reduce again, workers return to work to regain the same level of total income they enjoyed.

A phenomenon like the backward bending supply curve is not the norm in the macroeconomic capitalist labor market. In individual microeconomic settings you can more readily find short term backward being supply curves, where employees decline overtime for more family time. Generally, in the macro sense, the supply of new entrants into the labor market make it highly unlikely that there would be enough satiated workers reducing the demand for more work to cause the total amount of work "consumed" to decrease.

Answer: Decoy Effect

The Decoy Effect combines human behavioral analysis and economic theory. As the example in the question indicates, when presented with two equally rational alternatives the spread of responses will roughly split equally. If London and Madrid are "equal" as destinations then choosing between a free trip to either should have the same predictive odds as a coin flip (over a large enough sampling the results would be fifty-fifty). When you add a third option that is, in essence, a distraction you would expect it to be ignored. No logical person would choose to reject the free trip to Madrid and accept the more expensive and less inclusive option. However, the mere existence of the "asymmetrical" or decoy option serves to highlight the now dominate (Madrid free) option and cause more people to choose that option.

Closely related to the Decoy Effect is the "Compromise Effect". The Compromise Effect also deals with how a person will decide between different options. Say for example you have a computer with 1-gigabyte hard drive priced at $1000 ("A"). You also can choose a 2 gigabyte model for $2000 ("B"). As such, roughly fifty percent of the population will choose either A or B. When a third product option of 3 gigabytes for $3000 ("C") is introduced, more people now choose option B seeing the middle choice as a good "compromise" to an otherwise hard decision.

Answer: Overall consumption increases

Economists Daniel Khazzoom and Leonard Brookes both published theories that stated that the introduction of energy efficiency into a market causes a total increase in energy consumption. The Khazzoom-Brookes Postulate is an expansion of a theory put forth by William Jevons in the 19th Century to explain why more efficient coal engines would increase the total consumption of coal.

Why does improved energy efficiency create more use of energy? The Postulate specifies that by selling a more efficient machine you are lowering the cost of the machine on a micro level attracting new buyers. New buyers of energy and the products they make stimulate an economy to make secondary goods that require energy. The aggregate of new business growth increases total energy usage despite the fact that each machine is more efficient than before.

Answer: Moral Hazard

The concept of "Moral Hazards" in economics may, but does not have to, convey a negative connotation. The concept is use to describe market behavior and acceptance of risk in financial transactions. A Moral Hazard occurs when a party creates a risk that another party is going to be responsible if there is a financial loss. The originator of a transaction will accept a higher degree of risk because the financial failure will be borne by another party. An example of a Moral Risk is found in the massive losses that financial institutions suffered from the collapse of the subprime mortgage lending business in the mid-2000s in the US. The originators of mortgage loans agreed to finance home purchases to highly risky buyers because they knew that these loans would be sold to investors. The originators of the loans were cashed out upfront, and only the investor was at risk for the pecuniary loss when the buyer defaulted on the mortgage.

There is very little morality in the concept of the Moral Risk. If the originator of a risk does not fully disclose the nature of the risk, then the action may be a fraud on the investor. However, no one is forcing the investor to buy the risk. Economic theory suggests that (and the subprime mortgage collapse is ample evidence) that it is not optimal to build your economy on actions made by people that will not face the consequence of their poor decision.