My acquaintance’s son was over the moon when he got admission in Cornell University. The responses in his family were mixed. His mother was reluctant to send him to Cornell because she felt that the fees were exorbitant, compared to other universities. The son said Cornell was part of the Ivy League and studying in an Ivy League school was the holy grail for most students -- a matter of prestige, no matter what the fees were.
While getting admission in Ivy League schools or institutions like IIMs in India requires excellent grades and scores and only a few can make the cut, most universities know that students do not mind paying high fees because of the value that an Ivy League certificate brings to the table. An increase in tuition fees will not dampen the desire of students for admission to such colleges as they equate high fees to a higher quality of education.
This, any student of economics will tell you, is against the law of demand, which states that higher the price, lower will be the demand for any commodity, and vice versa. When the price of onions went up from Rs30 to Rs 200 per kg recently, the demand for it fell. Many hotels stopped including onions in salad; others took the onion uthappam off their menu. This reaction by consumers was normal, as explained by the law of demand.
The Veblen effect is, however, one exception to the law of demand. Thornstein Veblen, an American economist, coined the term “conspicuous consumption” in his book titled “The theory of the Leisure class,” published in 1899. The book was published during the second industrial revolution, which required the workers to be efficient and hardworking, while the owners raked in profits and spent them on goods that would help them gain or increase their status in society. Veblen referred to this spending by “the leisure class” as conspicuous consumption and conspicuous leisure.
“From the foregoing survey of the growth of conspicuous leisure and consumption, it appears that the utility of both alike for the purposes of reputability lies in the element of waste that is common to both”, he wrote in the book. “In the one case, it is a waste of time and effort; in the other, it is a waste of goods. Both are methods of demonstrating the possession of wealth and the two are conventionally accepted as equivalents. Each will therefore serve about equally well during the earlier stages of social growth. But when the differentiation has gone farther and it becomes necessary to reach a wider human environment, consumption begins to hold over leisure as an ordinary means of decency. Conspicuous consumption claims a relatively larger portion of the income of the urban than of the rural population. The result is that, in order to keep up a decent appearance, the former habitually live hand-to-mouth to a greater extent than the latter”.
Veblen’s findings are even more relevant in today’s consumerist society, which believes in the “buy today, pay tomorrow” concept, and the desire for conspicuous consumption continues to be an obsession among all classes -- not so much among the rich, but with other classes. The demand for luxury items and services like watches, handbags, jewelry, cars, fine wines and services like chauffer-driven cars has only increased even when the prices of such things are going up. Fossil watches are passé. Youngsters flaunt Rolex, Tissot or Hublot today to make a fashion statement. They feel that wearing them takes them a few notches higher in the esteem of their group. Ladies carry expensive handbags like Gucci, Chanel or Prada even when they know that an ordinary handbag would suffice. Economists refer to this as ‘snob appeal’ or the ‘bandwagon effect’, when people buy something because others are buying it.
The Veblen goods are in demand because they are expensive, and because they are expensive, people feel their mere possession brings them respect and status. When people buy them, they signal their status through their consumption choices. Consumers also associate price with quality -- high prices mean high quality.
When it comes to leisure, the leisure class has been evolving in the last 100-odd years since Veblen wrote the book. Owning a car in India was, at least until a few years back, a status symbol. It also had utility as it saved people the hassle of using the rickety public transport and travelling with the lesser mortals. It also meant that they could use the cars at their convenience and time. Today, leisure has moved to a different level, with a rising number of people hiring drivers so they themselves can relax in the backseat. The desire for leisure also explains why a rising number of people are going on vacations to exotic locations. Banks are enticing them by offering them loans to do so.
Is there a remedy for this malaise affecting the new “leisure class”? Economists, at least, don’t have one.
(The writer is a CFA and a former banker and currently teaches at Manipal Academy of Banking, Bengaluru)