Conspicuous Consumption and Poverty

For something new, here’s a guest post by Katharina Allinger, currently studying at the University of Warwick. Developmental economics is definitely something I would want to cover more on this blog.

The first time I heard the term „conspicuous consumption“ was in a lecture given by Omer Moav at Warwick. He was presenting one of his papers on the topic.  For the non-native speakers among you, the term „conspicuous consumption“ describes the purchase of a good or service that is mainly motivated by showing off one’s wealth. We could take the example of buying a car. Maybe I need the car, because my home and my work place are far away from each other and so I determine what characteristics are important and buy a sensibly priced car to drive to work everyday. On the other hand, I might already have a car, but I want to show off to my friends that I earn a lot of money and therefore buy a luxurious and expensive sports car. The latter would be a definite case of conspicuous consumption.

While this is definitely an interesting topic related to developed countries and maybe elites in poor countries (see article below) a lot of research recently focused on „conspicuous consumption“  of „the poor“. (I’m putting „the poor“ in brackets because certain academics tend to like to talk about „the poor“ as if they were some kind of different and mysterious species of humans) Researchers have put a lot of effort into showing that “the poor” do not spend their money rationally. Instead of spending everything they have on food or health care or the education of their children they ACTUALLY go to weddings and festivals. And drink alcohol. In BARS! – How conspicuous! To go to a bar to show off that you can afford having a beer out instead of just having a beer at home…

Maybe some of you have the reaction I was hoping for. How did we get from sports cars to beers?

What exactly is “conspicuous” about having a beer with friends? Isn’t that just “normal” consumption? Of course, what constitutes a „luxury“ depends on your income, but at the same time, we shouldn’t DEFINE people by their income. Taking a more psychology or sociology based view of human beings, there is nothing weird about the poor not spending all their income on things with high future return (like education or a new agricultural machine). Like everyone else, poor people also want to enjoy life a little bit – and go to a bar to have drink. Should we really worry about this and try to encourage them to save more and enjoy less? Personally, I doubt that this is a very great approach to development. (Please note, that I’m not trying to say that we should not help the poor to save more and more effectively at all!)

I also think that, except for some very extreme cases like stories about a poor Indian guy winning money in the lottery and spending it all on a helicopter ride, we should be very careful when applying the term „conspicuous consumption“ to poor countries and people.

In his article Why Pay More? Peter Singer  writes about the origins of the term „conspicuous consumption“:

 “Thorstein Veblen knew the answer. In his classic The Theory of the Leisure Classpublished in 1899, he argued that once the basis of social status became wealth itself – rather than, say, wisdom, knowledge, moral integrity, or skill in battle – the rich needed to find ways of spending money that had no other objective than the display of wealth itself. He termed this “conspicuous consumption.”

Thus, unless we want to argue that for poor households the „basis of social status is wealth itself“ we should maybe think twice about applying Thorstein Veblen’s concept to „the poor“.

If you are curious about a very interesting and appropriate use of the phrase, please read Peter Singer’s article, which deals with corruption among Ukrainian officials.

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5 thoughts on “Conspicuous Consumption and Poverty

  1. During my exchange semester in Córdoba, Argentina, a professor asked me and a colleague to write a paper on possible reasons why governments might want to use in-kind transfers rather than monetary transfers for the poor, even though basic economic theory said this doesn’t make sense at all.

    It was a very crude exercise, but we thought that looking at survey data on how households with different levels of income consume could provide some insight – and indeed, even though I don’t remember the precise numbers, households considerably below a level of income that would be enough to purchase a consumption basket that was officially considered necessary to satisfy their basic everyday needs still used a considerable amount of their money to purchase totally unrelated stuff. By assuming these consumption habits remain unchanged for marginal changes in income (which doesn’t seem to be a terribly bad assumption), one could easily show that a large portion of a monetary transfer would be therefore “wasted”. Of course you could argue these households simply make bad choices, and in-kind transfers would allow governments to “correct” this, yet I was never quite happy with that interpretation.

  2. Interesting research question and definitely related to this. We talked about this issue in a model of mine and, as I’m sure you’ve figured out during your research project, there are in fact loads of reasons why you would use in-kind instead of money. I always thought “mental accounting” was a very interesting one. When you give people goods, even if they could be easily converted into money, they mentally label them and put them into a category like “food”, “health care”, “education”, whereas when you give them money even when stating the REASON why you give them the money they don’t label it yet and spend it as they would spend every other extra dollar of income.

  3. In any case, basically all those reasons involve either explicitly or implicitly assuming that governments or NGOs “know it better” (or that the preferences of the poor are simply “wrong”) which is a highly problematic assumption. In particular, there seems to be no grounds on which to argue that poor people are inherently less “rational” than rich people, and anyhow, who is the government to say what is rational and what is not? As a starting point I see no reason to assume that the choices “forced” on people by providing in-kind transfers are not equally as flawed as those made by individuals themselves.

  4. I agree partially. On the one hand, I’m totally with you in that poor people are sometimes treated as stupid idiots, who can’t make sensible decisions and that’s why they are poor and we need to make decisions for them. Which is complete nonsense. On the other hand, (a) if I have a certain objective as a NGO, government or researcher, then I might want to do everything to achieve this specific objective in that situation. In some cases a little bit of paternalism may be good – not matter whether you are in a developed or a developing country. And (b) specifically in developing countries you do have more issues because of uncertainty and capture (of savings through family members for example). And well-designed interventions can help overcome these problems. There is a really interesting paper on savings technologies (e.g. lock boxes) in Africa that goes into a bit more detail on problems of capture and commitment, if you’re curious.

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