Key insights and ideas for thirteen core topics in economics, organised by selecting the most relevant theoretical approaches per topic and contrasting them with each other.
This chapter provides a map through the complex jungle of economic theories. There are many different theoretical approaches, and each aspect of the economy has been analysed by a number of different ones. However, it is neither feasible nor productive for students to engage with every possible angle for every topic. Hence, the chapters on different topics, together with Building Block 8: Economic Theories, sets out an alternative approach: pragmatic pluralism. Rather than pursuing the extreme of either only focusing on one approach, or including every possible strand of thought for every topic, we propose a pragmatic middle ground: teaching a select number of approaches for each topic. In this way, it is possible to introduce students to the variety and diversity of economic thinking, whilst still having enough time and space to properly discuss each of the insights in detail with them.
One of the purposes of our economy is to produce and distribute goods for consumption. It is one of the main activities that humans in an economy undertake. But there are many questions on the source and nature of various forms of this activity. A core point of contention is what determines buying choices: are people entirely independent, or are they influenced by their environments? Is consumption the highest goal? Or should we see it merely as a means to other ends, such as human wellbeing?
Main opposing perspectives
■ Institutional economics: Preferences are culturally and socially constructed
■ Neoclassical economics: Humans have insatiable and innate preferences
Main complementary perspective
□ Ecological economics: Material consumption ≠ human wellbeing
Additional perspectives and insights
+ Other: Surveillance capitalism
Main opposing perspectives: Institutional economics and neoclassical economics
There are two fundamentally different perspectives on consumption. One views it as the main goal of the economy as it allows individuals to satisfy their sovereign and given preferences. The other perspective sees consumption more as a social process in which learned habits and desires are met.
Already in the nineteenth century there was discussion about how autonomous consumers were in their decisions. Many classical political economists were arguing that consumers were sovereign, leading to a proposal of completely free markets, while most socialist thinkers questioned this sovereignty. Marx emphasised the distinction between use value and exchange value, with the former describing the intrinsic value which enables it to satisfy human needs or wants and the latter referring to what one can trade it for in the marketplace.
Neoclassical economics responded to Marxian political economy by basing its theoretical framework on the idea of full consumer sovereignty. In neoclassical economics the only goal for people is to maximise their utility. Utility is derived from people’s personal preferences, which are eternally stable and given from birth, and consumption is their only means to endlessly satisfy those preferences. In this perspective, consumption in consequence becomes the sole reason to undertake work or educate ourselves, as it in turn enables us to consume more in the future. These atomistic and rational utility maximizing consumers determine through their demand what is produced. As such, neoclassical economics replaced the primacy of production, as in classical and Marxian political economy, with the primacy of market exchange, which enables individuals to consume.
Institutional economics, as well as the cultural approach and field theory, argue forcefully against the neoclassical idea that people have given and constant preferences, put more bluntly that people are born with certain tastes for what they like to consume for the rest of their life. Institutional economics rather emphasises the impact of institutions, such as cultural norms and advertisement, on people’s preferences. The cultural approach focuses more on how all wants are culturally constructed. The cultural approach thus goes further, as it argues that practically all consumption is to socially communicate symbols, while institutional economics argues that our wants are merely influenced by our environment. Important among those influences is advertisement by companies, which convinces people that they need things they previously didn’t. This is called the dependence effect, as (production) firms create artificial wants. Institutional economists therefore argue that the neoclassical idea that production exists purely to satisfy wants, is therefore untrue.
Another important factor shaping people’s consumption is social class. Thorstein Veblen, a founder of institutional economics, argued that people consumed luxury goods and services to enhance their status by displaying their economic power. He called this ‘conspicuous consumption’. A related concept is conspicuous leisure, which describes the socially motivated idleness in which elites throughout history engaged as they despised labor and glorified non-productivity. Many sociologists and anthropologists have further developed ideas about how consumption functions within societies, chief among them the theory of social distinction by Pierre Bourdieu, a major field theorist. He argues that people do not only show their economic capital through their consumption, but also their cultural capital which refers to cultural knowledge and skills people obtain through their education and upbringing. Drawing upon a wider range of schools and disciplines one can see that deciding what to buy is not simply a hedonistic individual decision, but part of social status games.
Main complementary perspective: Ecological economics
Ecological economists reject the hedonistic view of consumption from neoclassical economics, as they argue that there is no necessary link between material wealth and human well-being. Instead of seeing people as insatiable, they argue that people have a limited number of basic needs. The focus is therefore on how we can ensure all people are able to meet these basic needs while remaining within the planetary boundaries, rather than aiming for maximal consumption. Other economists, such as feminist and behavioural economists, have also been advocating to change the goal of the economy to a broader idea of human wellbeing. This line of research has initiated various alternative measurements to GDP, such as the Index of Sustainable Economic Welfare, Human Development Index, Happiness Index and the Better Life Index.
Additional perspectives and insights
In 2019, the social psychologist Shoshana Zuboff published the book The Age of Surveillance Capitalism where she argued digital companies have developed a new business model that relies fundamentally on behavioural data. Many online products seem to be ‘free’ for consumers because they essentially pay with their personal data which is commodified mainly through targeted advertising which often has the power to influence or manipulate people’s behavior. While digitalization was earlier hoped to bring about a democratization of society, it seems to create new profit-making opportunities which poses problems for privacy rights and mental wellbeing.
These new digital business models are also related to the concept of prosumption, in which the process of production and consumption become indistinguishable and are simultaneously performed by the same people, prosumers. Also within the energy sector the concept of prosumption is relevant, often seen in a more positive light, as solar panels, for example, allow households to simultaneously produce and consume energy.
Chapters & Papers:
- Economics: The User’s Guide by Ha-Joon Chang, from 2014, chapter 6. This brief and accessible pluralist book contains a useful introductory chapter on economic output and happiness.
- Economics After The Crisis by Irene van Staveren, from 2015, chapter 3. This well-written textbook sets out the neoclassical, post-Keynesian, social economic and institutional perspectives on consumption.
- The Economy by The CORE Team, from 2017, chapter 7. This successful and practical textbook introduces students to market demand and consumer behavior.
- Principles of Economics in Context by Jonathan Harris, Julie A. Nelson and Neva Goodwin, most recent edition from 2020, chapter 9. This useful textbook, which pays particular attention to social and environmental challenges, contains a chapter devoted to consumption and the consumer society.
- The Handbook of Economic Sociology by Neil J. Smelser and Richard Swedberg, from 2005, chapter 15. This extensive and yet accessible book for non-sociologists, provides an impressive and useful overview of the field of economic sociology, including a chapter on culture and consumption.
- Introducing a New Economics by Jack Reardon, Maria A. Madi, and Molly S. Cato, from 2017, chapter 13. This ground-breaking textbook weaves together pluralist theory and real-world knowledge and contains a chapter on consumption.
- Capitalism: Competition, Conflict, Crises by Anwar Shaikh, from 2016, chapter 3. This book discusses and compares the different theories and models that can be used to explain observed consumer behavior.
- Veblen, Bourdieu, and Conspicuous Consumption by Andrew Trigg, from 2001. This article discusses the ideas on consumption coming from institutional economic and economic sociology.
- The Affluent Society by John Kenneth Galbraith, most recent edition from 1999. An influential book critically discussing what it means to live in an affluent society and the roles that consumption, advertising, and institutions have in it.
- The Sociology of Consumption: An Introduction by Peter Corrigan, from 1997. This book introduces students to the vast literature on the social dynamics involving consumption with specific attention to topics such as shops, advertising, women’s magazines, the home, tourism, and fashion.
- The Ecological Economics of Consumption by Lucia A. Reisch & Inge Røpke, from 2004. This book introduces students to the growing literature on the ecological aspects of consumption, looking at its environmental impact, needs and wants, lifestyles and daily routines, consumer policy and possibilities for more sustainable consumption patterns.
- The Economics of Consumption: Theory and Evidence by Tullio Jappelli and Luigi Pistaferri, from 2017. This book describes different models of consumption, such as the precautionary saving and buffer stock models.