Consumption and satiation dynamics: an empirical analysis through Engel Curves

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UNIVERSIT `

A DI PISA

SCUOLA SUPERIORE SANT’ANNA

MASTER OF SCIENCE IN ECONOMICS Department of Economics and Management

Consumption and satiation dynamics:

an empirical analysis through Engel

curves

Supervisor

Prof. Alessio Moneta

Candidate

Julia Mazzei

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Abstract

In the theory of economic growth little attention is usually given on what is happening on the demand side in the process of economic growth. However, it is evident that a rise of real per capita income coincides with a rise of per capita consumption expenditures. Rising household income stimulates shifts in the composition of consumption patterns. How is it possible to sell always more goods and services to consumers in order to sustain growth of demand? Is the belief that human wants are insatiable acceptable? Utilizing a nonparametric re-gression technique, it is explored how different income level households change their behaviors regarding consumption and if some regularities exist across different commodity groups. The results suggest that, across different household classes, the propensity to consume varies, in particular, in the case of basic needs. Lower-income households have an higher propensity to consume necessary goods than higher-income households. Across different commodity groups, instead, a clear tendency is observed: in general, the needs for non-positional goods are easier to satiate than positional goods.

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List of Figures

1 Shape of Engel curves hypothesized by Pasinetti . . . 51

2 Engel curves for Boats, Trailers and Horses expenditure 2013, UK . . . 59

3 Engel Curve for Food after cleaning the data, 2013 . . . 62

4 Engel Curve for Food before cleaning the data, 2013 . . . 63

5 Engel Curve for Housing expenditure, UK 2013 . . . 66

6 Engel Curve for Clothing and Footwear expenditure, UK 2013 67 7 Engel Curve Food for rich households, UK 2013 . . . 68

8 Engel Curve Food for poor households, UK 2013 . . . 69

9 Engel Curve Personal goods and services, UK 2013 . . . 70

10 Engel Curve Recreational goods, UK 2013 . . . 72

11 Engel Curve Traveling expenditure, UK 2013 . . . 73

12 Engel Curve Restaurants expenditure, UK 2013 . . . 74

13 Engel Curve Positional goods expenditure, UK 2013 . . . 75

14 Engel Curve Non positional goods expenditure, UK 2013 . . . 76

15 Derivative Engel Curve for Food expenditure, UK 2013 . . . . 78

16 Derivative Engel Curve for Housing expenditure, UK 2013 . . 79

17 Restaurants income elasticity from 2001 to 2013 . . . 86

18 Food income elasticity from 2001 to 2013 . . . 87

19 Housing expenditure income elasticity from 2001 to 2013 . . . 88

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21 Participation rate Food, UK 2013 . . . 90

22 Participation rate Positional goods, UK 2013 . . . 91

23 Participation rate Non positional goods, UK 2013 . . . 92

24 Participation rate Fuel, UK 2013 . . . 94

25 Participation rate Household services, UK 2013 . . . 95

26 Participation rate Tobacco, UK 2013 . . . 97

List of Tables

1 Visibility Indices and Rankings . . . 60

2 Derivative values of Food for poor, low middle, high middle and rich class in 2011, 2012, 2013 . . . 77

3 Derivative values of Recreational for poor, low middle class, high middle class and rich in 2011, 2012 and 2013 . . . 80

4 Derivative values of Restaurants for poor, low middle class, high middle class and rich in 2011, 2012, 2013 . . . 80

5 Derivative values of Housing expenditure for rich, high middle class, low middle class and poor in 2011, 2012 and 2013 . . . . 80

6 Derivative values of Households Services expenditure for rich, high middle class, low middle class and poor in 2011, 2012 and 2013 . . . 81

7 Derivative values of Non-Positional goods for rich, high middle class, low middle class and poor in 2011,2012 and 2013 . . . . 81

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8 Income elasticity from 2001 to 2013 for High middle class (third quartile of expenditure distribution) for Food,

Posi-tional goods and Restaurants expenditure. . . 82

9 Income elasticity from 2001 to 2013 for High middle class

(third quartile of expenditure distribution) for Recreational

goods, Housing and Clothing . . . 84

10 Income elasticity from 2001 to 2013 for High middle class

(third quartile of expenditure distribution) for Non Positional

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Introduction

In the theory of economic growth little attention is usually given on what is happening on the demand side in the process of economic growth. However, it is evident that a rise of real per capita income coincides with a rise of per capita consumption expenditures. Several decades of empirical research reveal that rising household income stimulates dramatic shifts in the com-position of household consumption patterns (see e.g. Houthakker, 1957[44]). How is it possible to sell always more goods and services to consumers in order to sustain growth of demand? Is the belief that human wants are insatiable acceptable?

In order to answer these questions, a realistic understanding of how con-sumption has evolved in the long run is needed. The problem, with standard microeconomic theory, is that explaining the long-term evolution of con-sumption and the growth of demand is difficult on the basis of the rather sterile modern theory of preferences. In order to have a deeper understand-ing of the patterns of demand the modern microeconomic theory, that treats preferences as an unexplained “black box” (Witt, 2001)[78], does not offer, unfortunately, the right tools.

Since the seminal work of Ernst Engel[25], it was admitted that for many consumption items the demand could reach a point of satiation. Therefore, qualitative changes and the increasing variety in the composition of items consumed can be expected to play a key role for the sustained growth of demand. The tendency of sectoral demand to satiate has long been argued to be a key driver of the structural change in an economy (Pasinetti, 1981[60]; Saviotti 2001[63]). However, to go beyond the axiom of non-satiation and law of diminishing marginal utility, some more substantial conjectures must be introduced which can help to answer some important questions: how do consumers arrive at the preferences they have? What are the objects of the consumers’ preferences, i.e. what do people demand and consume, and why? Do the preferences change and, if so, how? Do the preferences change between different classes of individuals?

In the contemporary literature there exists a range of conjectures about what strives the co-movement between the average household income level and the estimated saturation level of expenditure (Moneta and Chai 2010)[14]. These conjectures explain indeed how rising social affluence can affect income elasticities and the composition of household spending.

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higher-quality products. The second one relates to the desire for social status that implies household spending on visible goods. The third one regards the importance of social comparisons and the emergence of “expenditure cascades” (Frank, 2010)[32]. Finally, it was argued that the demand for excitement and entertainment plays a key role.

What it is stressed here is that all these conjectures have as result a co-movement between the average household income level and the estimated satiation level of expenditure. However, in this work, a particular focus is on the desire for social status and the need for social comparisons, taking inspiration from the studies of Hirsch [42] and Veblen [74] and their concepts

of positional and conspicuous goods. The idea indeed is that household

spending on visible goods and the saturation points of these ECs co-move with the average household income level.

The “satiation-escape” hypothesis discussed in Moneta and Chai (2014)[11] points out that the actual rate of structural change observed in the economy is linked to the firms incentives for engaging in product innovation.

In this analysis, the same conclusions about the chance of escaping sati-ation are drawn by arguing that social comparisons and the need for social status are other drives of the co-movement between income level and satia-tion level. These social forces affect income elasticities and the composisatia-tion of household spending with rising average income.

In sum, these results call forth a more nuanced understanding of demand-driven structural change.

Using data from the UK Living Costs and Food Survey, published by the Office of National Statistics, it was found evidence that the tendency for Engel curves to flatten out, or, in other words, to reach a point of satiation, is present across categories of goods and services, in particular those underlying basic needs.

On the contrary, the need for positional and conspicuous goods generally shows a lower propensity to satiate with respect to non-positional (non visi-ble) goods. The former classes of expenditure, indeed, have higher derivative values. Also categories like food, traditionally seen as basic need, could reveal a positional aspect underlying their consumption.

Moreover, from the analysis of the income elasticity values, a slowly in-creasing trend is observed over time for many expenditure categories. This happens because of the tendency of Engel Curves to shift over time, co-moving with changes in the income distribution of households. Engel curves that exhibit cross-section satiation tend to show over time an upward shift

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in the satiation level jointly with a shift in position and shape (Moneta and Chai, 2014)[11]. Therefore, the shape of the Engel curve is not an intrin-sic and invariable property of demand but is affected by the interactions of demand with other components of the economic system.

How are these shifts in both the position and shape of ECs over time related to the growth rate of household income? In other words, focusing on the behavioral aspect of the question, how does the tendency for household alter the spending on a good as the income rises?

Trying to answer provides an opportunity to examine a question of peren-nial interest, which is how the composition of household spending evolves as society becomes wealthier.

In “Economic possibilities for our Grandchildren” Keynes presented some conjectures about 2030 and the society where his grandchildren will live. Keynes predicts that, by 2030, the grandchildren of his generation would reach a state of abundance, where satiation would be reached and people, fi-nally liberated from such economic activities as savings, capital accumulation and work would be free to devote themselves to arts, leisure, and poetry.

The continuous upward shift of Engel curves in time, however, clearly shows that individual needs seem insatiable and increasing expenditure can always be stimulated. Keynes’ error in predictions was not to consider that the economic system could become far more differentiated and this differen-tiation could provide an important growth mechanism.

Demand satiation does not seem to pose an inevitable or imminent threat to sectoral growth, partially due to increasing needs arising from social com-parisons and the desire for social status.

Finally, extending the analysis about positional and conspicuous goods, it could be argued, in line with the studies of “Happiness economics”, that a rise in the positional goods’ expenditure gives rise to negative externalities and thus a lowering in subjective well-being.

According to some economists (see e.g. Bartolini et al. (2002)[5]), in-deed, in spite of the exponential growth of well-being, western societies are populated by individuals neither largely not satisfied nor “happy”.

The promise of economic growth of prosperity for everyone, indeed, seems to be yet disregarded, in line with what already observed by Hirsch in the ‘70s and in sharp contrast with Keynes’ predictions about 2030.

In the first section of this thesis it is described the essay of Keynes, “Economic possibilities for our Grandchildren”, and his predictions for 2030.

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In the second section it is analyzed the concept of satiation and the notion of wants, with a particular focus on the post-Keynesian literature and the Evolutionary approach. The third section deals with the idea of socially determined consumption preferences and the concepts of positional goods and conspicuous consumption. In this section the discussion about Hirsch’s idea of social limits to growth is introduced. In section four it is presented the link with innovation and how the latter co-evolves with demand. Section five collects some empirical results, carried out through Engel Curves, presented in the literature. In section six the main results of the empirical analysis of this work are presented. Finally, the conclusions of this thesis are drawn.

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1 Keynes in “Economic possibilities for our

Grandchildren”

In winter 1928, John Maynard Keynes composed a short essay, titled “Eco-nomic Possibilities for Our Grandchildren”, and in the space of a few pages he imagined what the world would look like a century hence.

By 2028, he predicted, the “standard of life” in Europe and the United States would be so improved that no one would need to worry about making money. Using his own words: “Let us for the sake of argument, suppose that a hundred years hence we are all of us, on the average, eight times better off in the economic sense than we are to-day (. . . ) I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not – if we look into the future – the permanent problem of the human race” ([48]). Keynes indeed predicted that, by 2030, the grandchildren of his genera-tion would live in a state of abundance, where satiagenera-tion would be reached and people, finally liberated from such economic activities as saving, capital accumulation, and work would be free to devote themselves to arts, leisure, and poetry.

The short essay contains three relevant elements: a remarkably modern account of the determinants of economic growth, a set of predictions con-cerning living standards and working habits one hundred years on and some speculations about people’s future lifestyles, based on his moral philosophy and aesthetical views (Pecchi et al 2010)[61].

Regarding the first, Keynes argued that “the standard of life in progres-sive countries one hundred years hence will be between four and eight times as high”. This prophecy turned out to be right on average, although making such predictions in England in the 1930s would not have been obvious.

As Zilibotti (2010)[80] calculated, “Keynes’s forecast implies an upper bound growth rate of about 2.1 percent. The population-weighted average growth rate over the half-century in question is 2.9 percent per year, imply-ing a 4-fold increase in the standards of livimply-ing in just fifty years (. . . ) If the 2.9 percent annual growth is projected over one century, it corresponds to a 17-fold increase in the standards of living, amounting to more than double Keynes’s upper bound”. However, data presented by Zillibotti (2010)[80] show also how growth has been very different over time and various

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geo-graphical areas. In Europe, per capita income growth was very high in the 1950s and 1960s, slowing down afterwards. In North America, the oppo-site occurred, with per capita income growing moderately in the 1950s and 1960s and picking up later in the next decades. Japan and other Eastern Asian countries suffered quite a lot in the 1990s, while India and China have experienced an exceptional growth in the last two decades. Latin Ameri-can countries presented a strong economic performance in the third quarter of the century and later went through a series of crises. A similar destiny awaited North African and Middle East countries. Unfortunately, no signif-icant progress was made by sub-Saharan Africa in the last 50 years. Only on average then, humankind has been able to progress in line with Keynes’s most optimistic expectations.

Income distribution remains a problem that Keynes overlooked: not only we observe extremely poor countries next to affluent countries (cross-country inequality) but also extremely poor individuals living next to rich individuals both in developed and developing countries (within country inequality).

Keynes’s forecasts were based on the assumption that, with technical progress and increasing capital-labor ratios, wages will always increase. He did not pay attention to distributional issues and their consequences.

Regarding the set of predictions concerning living standards and working habits Keynes forecasted a society where production was robotized and where humankind worked very little and had lot of free time. He had in mind an income effect caused by increasing real wages that would lead individuals to substitute labor with leisure, a superior good, to the point that the normal working week would be of only fifteen hours.

While it is true that the fraction of an individual’s lifetime spent on working activities is considerably smaller today than in 1930 (Zilibotti, 2010) [80], it is also true that in countries like the United States we observe a counterexample to Keynes’s prediction that increased wealth would produce greater leisure. The United States has 30 to 40 percent higher GDP per capita than France and Germany, but employed American work 30 percent more over the year than employed persons in those countries (Freeman, 2010) [34].

Why do we work more than Keynes predicted? To answer to this question several factors are to be considered: Keynes’s underestimation about the pleasure of working, the compensation for the reduction in working hours by men by the increased participation of women to the workforce, inequality and globalization.

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Becker and Rayo (2010)[6] argue that “Keynes was misled in his predic-tions concerning the effect of higher income on hours worked by the behavior of gentlemen in Britain—who Keynes believed provided a window onto fu-ture behavior as everyone’s income rose (. . . ) English gentlemen indeed had mainly just an income effect, while those who have to work for their high in-comes also have powerful substitution effect”. But Keynes was wrong twice. He claimed not only that work would disappear but also that additional consumption needs, beyond the basic ones, would not materialize.

There is indeed another important ingredient in Keynes’s essay: stable

consumption and no (or little) saving. In other words it is argued that

humankind will face consumption satiation and the end of technological in-novation in the quasi-proximate future. Keynes was well aware that needs of human beings may seem to be insatiable, however he reached the conclusion of consumption satiation, which is a core point of his reasoning and the one that could mostly be criticized. Let’s analyze why.

In the essay he made an important distinction between “absolute needs” and “relative needs”. Absolute needs are those that “we feel whatever the situation of our fellow human being may be” and relative needs are instead those that “we feel them only if their satisfaction lifts us above, make us feel superior to, our fellows”.

Keynes admits that needs of the second class may be insatiable. But he also argued that this is not true of the absolute needs: “a point may soon be reached, much sooner perhaps than we are all of us aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes”.

Surprisingly, it seems that he discarded the relative need’s cause of con-sumption in his successive reasoning, as if to imply it was an unimportant component. Indeed one main problem was that he did not dwell enough on the concept of consumption desires that are relative.

As Frank (2010)[33] argued, “Keynes seems to have believed that context mattered only for goods that ’lift us above’ or ’make us feel superior to’, our fellows. Like most other economists, he believed that demands originating such feelings are at most a minor component of overall economic activity. (. . . .) But the ways in which context shapes demand run far beyond such feelings . . . [A] model [of the demand for quality] would be essentially identical to one based on a desire not to own quality for its own sake but rather to outdo, or avoid being outdone by, one’s friends and neighbors. (. . . ) The demand for quality is universal and inexhaustible”.

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Other authors also argue that Keynes neglected many facets of what mo-tivates consumption in a human being (Fitoussi, 2010) [26] and that growth may also contribute to the evolution of the concept of basic need.

Stiglitz (2010)[71] pointed out that preferences might be endogenous, with advertisement and marketing-shaping preferences inducing to value consump-tion more and to work more to satisfy changing needs. Rising real incomes enable new behavior patterns that may hardly have been feasible when the pressure to meet basic need was harsher. But people’s sense of standard of living adapts over time and over circumstances and depends on the prior experiences. By changing technology, economic growth provides people not only with higher incomes, that enable them to buy more, but also with new and improved goods and services. In time people might reach satiation in their consumption of any given bundle of goods and services. But by then, new technology will have created new and different goods and services.

It could be argued that the taxonomy of needs between absolute and relative is too crude to serve a hierarchy for human wants. The degree to which goods may satisfy those needs may vary widely with the quality of goods. Hence the positional concern of consumers is not the only sign of non-satiation of needs: the search for a better life suffices. Therefore growth in income does not automatically lead to satiation of consumption. Humans evolved so that they have reference points that adjust upward as their cir-cumstances improve. If Keynes had only placed more weight on relative needs his prediction would have been different.

Finally, regarding the speculations about people’s future lifestyles, Keynes believed that thanks to “purposeful money-makers” the world would achieve a state of economic abundance where people would be able to get rid of “pseudo-moral principles” (avarice, exaction of interest, love for money)—that have characterized capitalistic societies—and devote themselves to the true art of life. The “good society” was described by Keynes as a “return to some of the most sure and certain principles of religion and traditional virtue- that avarice is a vice, that the exaction of usury is a misdemeanor, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow”. Unfortunately, if we look at social customs, tastes, and at how people enjoy life in today’s affluent societies, it is hard to find something that resembles this lifestyle. It is also hard to believe that there will come a moment when people feel that the economic problem is solved and capital accumulation comes to an end.

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standards has been unfulfilled. With declining real wages (looked at another way, widening inequality), the median family income stopped rising at just the same time that the work- week stopped getting shorter. The continuing strong increase in per capita output that Keynes correctly predicted did not translate into rising living standards for the majority of families.

Summarizing, what Keynes got right was the continuing advance of eco-nomic productivity, in the standard sense of the economy’s ability to gen-erate even more output from any given amount of labor and capital and other resources, and therefore the continuing increase in the quantity of goods and services produced per person in the population. On the other hand, Keynes badly misconstrued how citizens of these “progressive coun-tries” would choose to enjoy the fruits of their economies’ ever-increasing productivity. The most criticized points in his reasoning are the weight given to relative need and the underestimation of increasing inequality.

It was presented a short overview of Keynes’ essay mainly because the effort of analyzing the limits of consumption of this thesis is done in order to reach a broader understanding about growth and its dynamic, in line with Keynes’s attempt.

As in Keynes’ essay, the main core of this work is the concept of satiation and how it can explain growth. Making the distinction between absolute and relative needs, Keynes also highlights the usefulness of considering the na-ture of needs for thinking about how consumption pattern will evolve as the economy continues to grow. Therefore, although reformulated and revisited according to the most recent studies and empirical evidences, many ingredi-ents identified by Keynes in “Economic Possibilities for Our Grandchildren” and the final attempt of explaining growth dynamic are also present in this work. In other words, this thesis could then be seen also as an attempt to understand where and why Keynes was wrong in his series of fascinating and daring predictions on social life and economic conditions.

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2 About satiation and the notion of wants

In this section it is presented the literature of reference used to analyzed the concept of satiation and the notion of wants. From the neoclassical represen-tation of consumers preferences to the post-Keynesian and the evolutionary approach, it is discussed the concept of satiation of demand and the notion of wants by different schools of thought.

2.1 The concept of satiation and the hierarchical

the-ory of wants

The description of the consumer as Homo oeconomicus in the neoclassical theory of consumer behavior is based on various versions of a very well-known set of axioms regarding choice theory (i.e. one of them is given by Mas-Colell et al., 1995 [51]).

One of the axioms is called the “axiom of monotonicity”, or in other words, the assumption of non-satiation (“never get enough”).

Given any bundle A, bundle B is preferred to A if B is obtained by adding to A more of at least one commodity. It means that if, for any amount of a good or service, more is preferred to less, then more will be preferred to less also at all larger amounts of that good or service. The standard theory of consumer choice indeed implies that the consumer always places positive value on more consumption and that indifference curve map stretches out endlessly (there is no upper limit to utility).

A weaker version of the monotonicity or saturation rule is local non-satiation (Mas-Colell et al., 1995 [51]). In the framework of indifference curves, the local non-satiation axiom rules out the possibility of having an area in which all the points are indifferent.

To the concept of non-satiation, neoclassical economists add the so called “law of diminishing marginal utility”: as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives by consuming each additional unit of that product. To non-satiation and diminishing marginal utility must be added other well-known features of consumer’s preferences such as completeness, transitivity and reflexivness.

As argued in Gowdy et al. (2001) [40], the origin of consumer choice the-ory can be traced back to Bacon, Bentham and Hobbes. In their mind human

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consciousness “was a sort of file cabinet for past experiences”, where ideas are stored in a logically consistent manner to be recovered later. These ex-periences stay logically ordered and constitute the context in which decisions are made.

As we discuss below, this view of the human mind is not supported by current scientific evidence. The assumptions about human nature contained in the axioms of consumer choice, such as insatiable wants for commodi-ties, is in many ways at odds with current scientific knowledge (in line with behavioral approach see for example Foxall (2001) [29]).

As it is claimed in Gowdy et al. (2001) [40], “perhaps one of the most basic failures of neoclassical utility theory is to treat all value as exchange value, thus ignoring the biological basis for human existence. In standard theory, biological needs are indistinguishable from whims of consumer choice”.

Using the words of Witt (2016) [76], “modern microeconomic theory treats preferences as an unexplained “black box”. More recent developments in behavioral economics, including the few contributions to establishing a behavioral welfare theory, have basically left the black box untouched. How-ever, the theoretical lacuna makes it difficult to explain the evolution of consumption and its welfare effects”.

2.1.1 Menger’s challenge

It is important, at this point of analysis, to very briefly discuss also the concept of marginal utility, how it was firstly defined during the “Marginal Revolution” in the late 19th century and how it influenced the following economic theories; in particular how the contribution of Menger has been rediscovered recently (Chai, 2016) [9].

Between 1870 and 1890 three different authors, Jevons, Menger and War-las, developed their theories, without knowing about each other and con-tributing to the economic theory by introducing the concept of decreasing marginal utility. Jevons (1924)[45] claimed that utility derives from the rela-tion between things and human needs. Both Jevons and Menger developed a subjective theory of value: the value of goods was given by the importance given to them by consumers.

But what distinguished Menger was that the notion of utility was re-lated to the principle of ordinalism. The various needs were classified in a decreasing order of importance, identifying a hierarchy of needs. Menger distinguished also the goods of first order (goods able to directly satisfy a

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need) from the goods of superior order (goods used in the production of consumption goods).

What distinguishes Menger and the Austrian approach from that of Jevons or Walras is that the Austrians did not accept the utility (or subjective value of commodities) as given but rather derived it from the importance of the wants that the good can be used to satisfy. They introduce a subjective rank-ordering of the set of all wants which arranges them in the order of their importance to the individual. The utility of a good will essentially be a position on this scale of wants. The Austrian theorem of diminishing ordinal marginal utility points up the substantial difference between the Austrian tradition and the orthodox theory of utility.

Such orthodox consumer theory forms the core of that traditional eco-nomics that is usually found in microecoeco-nomics textbooks. Its evolution culminated in the early half of the 20th century with the development of indifference curve analysis and the application of the methods of differential calculus to economics.

What is wanted to highlight here is the relevance of the notion of need in Menger’s definition of utility. Menger was convinced that to really under-stand the market value of goods, it is necessary to first underunder-stand how

con-sumers come to discover their usefulness (“N¨utzlichkeit”) (Menger,1871)[52].

Instead of specifying a utility function in which the set of alternatives and associated payoffs are assumed to be known to the agents, he underlines the set of needs that consumers seek to satisfy and the subsequent learning process through which they come to associate goods with the satisfaction of these needs. Consumers behavior is therefore more akin to a trial-and-error discovery process than a static optimization problem (Chai, 2016) [9].

2.1.2 The hierarchy of needs

While in 1954 was first published “Motivation and Personality”, present-ing the well-known Maslow’s hierarchy of needs, another author, Georgescu-Roegen (1954) [38], presented in the same year an article focusing on the importance of needs in the theory of consumers behavior. The author puts forward that “we have to go back, way back, before the Jevons-Walras team had, under the influence of the rapid developments in the natural sciences, oversimplified with great enthusiasm the behavior of the individual by plac-ing all his economic actions under a unique motor: utility. The reality that determines the individual behavior is not formed by utility, or ophelimity, or

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any other single element, but by his wants, or his needs”.

Describing the concept of the hierarchy of human needs, he developed also the four following principles: the principle of subordination of wants, the principle of satiable wants, the principle of the growth of wants (that means absence of an absolute of point satiation) and finally the principle of the irreducibility of wants. The latter means that not all human wants can be reduced to a common basis (as in marginalist’s effort).

Georgescu-Roegen claimed that the marginal utility theory has ignored the first and the last of the above principles and based its entire edifice on the Principle of Satiable Wants which was rechristened for the occasion as the Principle of Diminishing Marginal Utility, denying much more of the whole story.

Another interest aspect, regarding human needs, developed by Georgescu-Roegen (1954) [38], is that there is no one-to-one correspondence between wants and goods, “usually not a single good but a quantity of goods stands opposite not a single concrete need but a complex of such needs”. For ex-ample, fuel is connected with shelter and nourishment, while nourishment requires also water, wheat, meat. Most foods which are used for nourish-ment, are also used for the need of fellowship or social distinction”. More-over, wants pattern differs from one individual to another. However, “the hierarchy of wants seems to be for all men identical up to a certain rank. One may be almost sure that this refers at least to: thirst, hunger, leisure, shelter (. . . ) Individuals belonging to the same culture are likely to have in common still a greater number of wants at the top of the hierarchy than those common to all men” (Georgescu-Roegen, 1954) [38].

Later in this section, the notion of hierarchy of human needs is encoun-tered again by analyzing other authors.

Now, let’s briefly discuss how, in the last decades, some authors de-part from the neoclassical theory of consumer choice, highlighting the post-Keynesian stream of literature and the evolutionary approach.

2.1.3 Post-Keynesian’s theory of consumer choice

Post-Keynesians have spent a great deal of effort on macroeconomics and monetary issues as well as methodological issues, but they have devoted less attention to microeconomics, seemingly avoiding in particular the subject of consumer choice.

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to describe and summarise their theory of consumer choice, based on the indications left by the best-known and most productive Post-Keynesian au-thors, such as Joan Robinson, Luigi Pasinetti, Edward Nell, Philip Arestis, or Alfred Eichner. In Roy (1943)[62], for example, it’s possible to find some propositions that represent the core of a Post Keynesian theory of consumer choice. The first proposition claims that preferences of consumers explain the prices of consumer goods, thus rejecting the neoclassical view of value based on scarcity. Second, it is rejected the generalized use of indifference curves, because such a representation is not a realistic representation of hu-man needs. Finally there exists a hierarchy of needs, with consumers moving from one group of goods to another, as their most urgent needs get progres-sively satiated and as their incomes rise.

In Lavoie (2004) [50], Post-Keynesian consumer theory is represented un-der the form of the following six principles: principle of procedural rationality, principle of satiable needs, the principle of separability of needs, the principle of subordination of needs, the principle of the growth of needs, the principle of non-independence.

The second principle, that of satiable needs, can be likened to the neo-classical principle of diminishing marginal utility, but it takes a particular meaning in the Post Keynesian theory of the consumer: here satiation arises with positive prices and finite income. There are threshold levels of consump-tion beyond which a good, or its characteristics, may bring no satisfacconsump-tion to its consumer. Beyond the threshold, no more of the good will be purchased, regardless of its price.

In Lavoie (2004)[50] it i also argued that it is possible to make a distinction between needs and wants. On one hand, needs are subject to a hierarchic classification and are the motor of consumer behaviour. On the other, wants evolve from needs. They can be substituted for each other and constitute the various preferences within a common category or level of need.

It is important for this analysis, to briefly focus here also on the princi-ple of the growth of needs because is related to a concept discussed in the following chapters. Given the hierarchy of needs, how do consumers move up the steps of the pyramid, from the core basic needs to the higher but more peripheral needs? The basic answer is that individuals move upwards in the hierarchy due to income effects. Therefore, beyond the principle of satiation, lies the principle of the growth of needs. When a threshold level for that need has been attained, individuals start attending to the needs which are situated on a higher plane. There are always new needs to be fulfilled. If

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they do not yet exist, consumers will create them through innovation. In another words, to go from one level of need to another an increase in real income level is necessary.

Regarding the last principle of non-indipendence, post-Keynesian refer to the idea that preferences are not innate, they are acquired by experience and by imitation of the consumption pattern of friends or of people of higher ranks in the consumers’ hierarchy. Thus the impact of socio-economic contact on purchases reinforces the belief that the composition of demand depends on socio-economic classes.

This principle can be related to the large amount of socio-economic studies on conspicuous consumption and life-styles inspired by Veblen (1899)[74] or, to some extent, to the studies of Hirsch (1976) [42] about positional goods (to a better understanding,see the next section).

2.1.4 Evolutionary approach to the theory of consumer choice

The modern evolutionary economists have focused mostly on the supply side; however, recent effort has been made in order to analyze also the demand

side. In fact,some authors have taken steps towards developing a broad

evolutionary theory of consumer behavior (see for example Metcalfe (2001) [53]).

Nelson, a well-known evolutionary exponent, argues that Evolutionary economics “badly needs a behavioral theory of household consumption be-havior” (Nelson et al.,2010) [59]. In his view, the theory of household con-sumption behavior in the evolutionary approach is a “behavioral theory in the broad sense of the term” (Nelson et al.,2010)[59] . While in the neoclas-sical literature actors choose optimally, the strategy of behavioral theorists is to try to construct an abstract but realistic model of what they actually do. The attempt of this strand of literature is therefore bringing the the-oretical assumptions of economic theory closer in line with what is known about the processes that actually generate individual and organizational ac-tion. Nelson et al. (2010)[59] note two important weaknesses of neoclassical theory. One is the assumption that households have well defined preferences regarding goods and services they never have experienced. The second is the failure to recognize that even awareness of choice sets is to a consider-able extent dependent on what has in fact been chosen, and the process of choosing. Neoclassical consumption theory, for example, cannot deal ade-quately with consumer responses to new goods and services. Nelson et al.

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(2010)[59] underlines the need to incorporate “learning about, learning to use, and learning the value of, into analysis of what happens when house-holds do new things”. It is important to recognize that in many cases the purchase and use of new goods is associated with the attendance and meeting of new wants, which often had not even been recognized before. As argued by Nelson et al.(2010)[59] “the notion that new wants from time to time emerge, and often are associated with the emergence of new goods capable of meeting them, is completely foreign to the logic of neoclassical consumer theory”. In particular, it is argued, consumption behavior is a matter of routine and involves uncertainty and learning.

Despite it is noted the common basis between Behavioral economics and Evolutionary approach, it is important to underline also the different focus of this two stream of literature. Behavioral economics accounts for its influences on economic decision making by focusing on decision heuristics and bounded rationality. In an evolutionary perspective, that focus needs to be “extended so as to also embrace the motivational underpinnings of economic behavior” (Witt, 2011)[77]. In line with what has been presented above, we report the words of Witt (2001)[78]: “the long term evolution of consumption and the growth of demand is difficult to explain on the basis of the rather sterile modem theory of preferences. In order to add substance, recourse has been made (. . . ) to a classical notion in economics, the concept of wants”.

Witt’s effort is to understand what is going on the demand side of the markets in the process of economic growth. In particular, he tries to find an explanation for “why, in spite of the historically unique growth of per capita income in the modern economies, consumption has not been increasingly sa-tiated” (Witt, 2001) [78]. His hypotheses are based on conjectures about the genetic basis of human behavior and some insights from behavioral and cog-nitive psychology. A deep analysis of this literature is found in the following sections.

To conclude our review about the notion of demand satiation in different strands of literature, let’s use Chai (2016)[9]’s definition of satiation, devel-oped in an attempt of representing 15 years of “Learning to Consume”(Witt, 2001)[78]: “per capita quantity consumption of a good (with a fixed set of characteristics) ceases to rise beyond a particular level even as household income continues to grow and the price of good tends to fall”.

Following the definition, it is then argued that demand satiation repre-sents a growth bottleneck. Using some case studies Chai (2016)[9] claims

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that slowdowns in demand reflect changes in individual preferences that take place because the needs are fully satisfied. As a result of this demand sa-tiation, to avoid market stagnation, further gains in income “tend to be redirected towards the satisfaction of other needs” through the emergence of innovation.

This link, mentioned by Lavoie, Witt and Chai, between demand satiation and the emergence of innovation, in order to avoid market stagnation, has a more detailed representation in section four .

2.2 Pasinetti and the dynamics of demand

“Although possibilities of substitution among commodities are of course rele-vant at any given level of real income, there exists a hierarchy of needs. More precisely, there exists a very definite order of priority in consumers’ wants, and therefore among groups of goods and services, which manifests itself as real incomes increase” (Pasinetti, 1981, p. 73)[60]

This is how Pasinetti, one of the best-known post-Keynesian exponent, describes the concept of the hierarchy of needs introduced in the above sec-tion.

In order to understand his reasoning and its theory of demand, let us consider the theory developed in “Structural change and economic growth”, only focusing on the chapter about technical change and the dynamics of demand.

Pasinetti started arguing that consumer’s preferences may of course be widely manipulated but they “ultimately depend on human nature.” (Pasinetti, 1981 p. 68) [60]. Technical progress depends on potential demand: an in-crease in productivity loses much or even all of its meaning, if it takes place in the productive process of a commodity for which demand can only be small or negligible.

Unfortunately, he claimed, the consumers’ demand theory that we know today is built on static premises and relies on the existence of a perfectly known and consistent set of preferences defined at a given level of per capita income. This theory is thereforse unable to offer a guide to investigate the changes in demand following increments to income.

Pasinetti focuses on the empirical evidence coming from the study of the Engel Curves. The first empirical generalisation on the evolving pattern of demand, in response to increases in income, comes from an old discovery in economics which goes back to Ernst Engel (1857) [25]in the 1850s. The

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well-known “Engel law” states that the proportion of income spent on food declines as income increases. Since the empirical results about the demand, claimed Pasinetti, this law is confirmed for any type of goods. However, the standard demand theory today still give up all attempts to incorporate the information obtainable from Engel’s law into the formulation of consumer’s demand.

Regarding the utility-function framework of existing demand theory, Pasinetti recognised that “utility of almost any commodity depends on other com-modities having been consumed already”. This means that representing a consumer’s field of preferences by a utility function, this function has very different shapes in correspondence to each good and service, according to whether and how other goods and services have been consumed.

Thus the absolute level of utility does not simply depend on all consump-tion which has taken place already, but depends also on the order in which the various goods have been consumed. This order, claims Pasinetti “has nothing to do with the speed of variation of marginal utilities”. In order to better understand: there are some basic needs which have a related abso-lute utility higher than that of any other commodity, but once these needs are satisfied, the marginal utility of successive increments of the same basic good may fall dramatically and very quickly, even become negative. Before this happens, other commodities become capable of producing utility and demand will shift to them.

The post-Keynesian author claimed that the current demand theory has focused our attention exclusively on what happens at the margin (on marginal rates of substitution among commodities if a price changes, or on equalisation of marginal utilities).

Such an approach may have a justification in a static world, but in a world where per capita incomes are moving, there is a very little help we can get from marginal utilities, unless they are specified over the whole range of the utility functions, in another words unless we pass from them to absolute levels of utilities. It is the absolute level of utility of each commodity that will tell us which of the various commodities comes next into the range of consumer’s preferences, even if the corresponding want will then rapidly saturate. Then, it is possible to obtain, plotting expenditure for any particular good or service as a function of per capita real income, different kind of curves (the so called “Engel curves”).

Goods and services may be classified into three categories: those goods for which demand is at the bottom of the corresponding Engel curves (zero

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demand), those goods for which demand is somewhere in the middle of the corresponding Engel curves and those goods for which demand is at the top of the corresponding Engel curves, indeed at the saturation level.

For the first category demand is simply zero, irrespective of changes in

income. Regarding the the third category, demand does not respond to

changes in income any more.

This categorization simply depend on the nature of consumers’ prefer-ences, but which goods and services will fall into a certain category depends on the level of real income.

Using Pasinetti own words: “Gradually goods and services will be shifted from the first category to the second category, then their demands will be pushed up the corresponding Engel curve; and finally they will be shifted into the third category, where their demands have become independent of changes in prices and also in income (. . . ) There exists a very definite order of priority in consumers’ wants”. Moreover, “this order or priority is particular clear-cut at low levels of income (. . . ) but the order persists at higher levels as well” (Pasinetti, 1981) [60].

Pasinetti also underlines how learning is a more basic process than ratio-nal behaviour when studying the pattern of demand: as per capita incomes grow higher and higher, choices grow wider and wider and thus consumers’ demand becomes less dependent on instincts and more on knowledge.

Moreover, the quality of old goods and services may change with time and old needs can be satisfied with better and superior goods. Learning activity is thus required also in this situation.

To briefly summarise the results of what discussed above: each increment of consumers’ demand tends to concentrate on a particular group of goods and services. This group of goods and services gradually changes from one level of income to another.

Whatever the process through which consumers’ preferences are reached, they are such as to set up a definite order in the consumption of the various goods, i.e. to saturate higher-priority wants before passing to considering the satisfaction of further wants. Hence, as income increases the tendency is to buy new goods and services and to satisfy old needs with different (better) goods.

The conclusion reached by Pasinetti is that “there is no commodity for which any individual’s consumption can be increased indefinitely. An upper saturation level exists for all types of goods and services although at different

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some particular goods (inferior goods) may even decrease, after reaching saturation, if better (superior) goods exist and if real income persistently grows.

From this analysis arises the so-called “Pasinetti’s problem”: to find the institutional set-ups that ensure the emergence of new sectors to keep em-ployment at a given level. This reasoning follows from the previous one about satiation: given that productivity in each sector is always increasing, and that demand for the good of any sector will ultimately reach satiation (Engel’s law), it is obvious that the effort of the firms must be to create new goods and services and to stimulate innovation in order to give new impulses to the demand. As a consequence, the number of sectors increases and the economy is able to keep employment at a given level (Andersen, 2001) [2].

Pasinetti (1993, p.57)[60] claims that because growth implies a long-term satiation of demand for a given set of goods, “technical progress (. . . ) must always be channeled into new directions, which must themselves, bit by bit, be discovered and invented, as the old ones continuously become saturated.” The notion of wants played a role in the older economic literature, but disappeared from utility theory during its process of formalization. It was explained in the previous sections, however, how the concept of need appears again, first in Keynes’s essay and later, more strongly, in Pasinetti’s works and in following different strand of literature.

Keynes never identified a hierarchy of needs but made an important dis-tinction between goods, he divided them in absolute and relative needs. The latter were in his presentation subject to easy satiation.

In his essay, Keynes shows to be well aware about another important concept that is going to be discussed in the following sections: the role of socially determined consumption preferences (B.Friedman, 2015) [35]. In fact, during Keynes’s lifetime Veblen was trying to explain the psychological mechanics of a consumer society and the increase in the number and the types of the goods and services that people consider necessary to their lives in a developed economy. In 1899 he had indeed popularized the idea of “conspicuous consumption”. In his “Grandchildren” essay, Keynes similarly distinguished “those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be” from “those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to our fellows.”

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wants that a later thinkers like Fred Hirsch (1976)[42] formalized as “posi-tional goods”, arguing that “needs of the second class, those which satisfy the desire for superiority, may be insatiable”. The idea of positional good, developed by Hirsch, and the concept of conspicuous consumption, detected by Veblen, are discussed in details in the following section.

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3 Socially determined consumption preferences

In the previous sections it was argued that many authors, such as Keynes, note that agents’ wants, demands and pleasures are largely influenced by society. They were indeed well aware about socially determined consumption preferences. Veblen (1899) [74] for instance emphasized the importance of one’s relative position in society, with reference to the concept of conspicuous consumption. However, was Fred Hirsch to be the first coining the concept of “positional good” in Social Limits to Growth (1976) [42]; concept that greatly influenced many later authors, as it is shown below (to have, instead, an overview about earlier authors anticipating Hirsch’s concept see Schneider (2007)[68]).

3.1 Positional goods

Positional goods are a sub-set of those things whose utility to an individual depends on the behaviour of others (Schneider (2007) [68]). Using Hirsch’s words, what “is generally referred to as private or personal consumption is nonetheless affected in its essence—that is, in the satisfaction or utility it yields—by consumption of the same goods or services by others” (Hirsch, 1976: 3)[42].

The positional economy is composed of “all aspects of goods, services, work positions and other social relationships that are either (1) scarce in some absolute or socially imposed sense or (2) subject to congestion and crowding through more extensive use” (Hirsch, 1976: 27)[42] .

Hirsch distinguished different categories of positional goods. Some de-pend, essentially, on their relative positions (pride of superiority, status and power) and are hence socially scarce; others, such as land, are positional because their total amount is fixed and, hence, physically scarce. However Hirsch focuses on the former: his reasoning around positional goods is basi-cally linked to social scarcity (Vatiero, 2011) [73].

Although conventional economic theory proposes that only the absolute levels of income and consumption matter for people’s utility, there is much evidence that relative concerns are often important (see for example Carlsson et al. 2006 [8], Charles et al. 2007[17], Kaus, 2013) [47]. Regarding this dis-cussion, Hirsch’s starting point is the distinction between material economy and positional economy.

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mem-bers of society can ultimately be considered limitless, as long as the con-sumption of additional goods provides any marginal utility to individuals. Material goods are hence those whose enjoyment is independent of the num-ber of others who are also consuming them.

In opposition, utility gathered in the positional economy depends on the scarcity of the items consumed (physically or socially). With positional con-sumption, one’s utility depends directly on the way other individuals consume the same product.

In the positional economy, the satisfaction of the needs yielded by “goods, services, work positions, and other social relationships (...) are possible only for a minority” (Hirsch, 1976: 23)[42]. In the case of physical scarcity “con-sumers derive at least part of their satisfaction just from the inherent char-acteristics” (Hirsch 1976: 20)[42], but “to at least some people, part of the attraction (...) of a particular natural landscape, is derived from its being the only one of its kind” (Hirsch 1976: 21)[42]. And “[w]here the sole or main source of satisfaction derives from the symbol rather than the substance, this can be regarded as pure social scarcity” (Hirsch 1976: 20-21)[42].

Hirsch discussed also work position and education and their positional features. Work positions are positional (“positional jobs”) in those cases where the work is “of fixed quality for some reason, for example, a particular leadership position or favored job” (Hirsch, 1976: 29)[42].

Education, similarly, is positional since its value, and the satisfaction an individual derives from it, depends upon how much education the man ahead in the job line has. As epitomize by his well-known expression, “if everyone stands on tiptoe, no one sees better” (Hirsch, 1976)[42].

Although many of these examples of positional goods, services, work positions and other social relationships, Hirsch failed to provide “succinct and logically consistent definition of ‘positional goods’” and this “left a vac-uum that economists subsequently attempted to fill in widely differing ways” (Schneider (2007)[68]).

Depending on the aims and goals of the research, the empirical tools available and the different interpretations made in the literature, different authors applied different definition of the concept coined by Hirsch.

Also for the purposes of this work, defining the concept of positional good and services was indeed complicated.

Since the similarities of aims and empirical methodologies, however,the following empirical evidence is based on the definitions of Robert Frank (1985)[31], even if, as it is argued in Schneider (2007)[68], it is quite

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dis-tant from Hirsch’s idea of positional good.

The definition chosen applies to all goods characterised by quality dif-ferences to which individuals attach sufficient importance. On the contrary, nonpositional goods are characterised by quality differences to which indi-viduals attach relatively little importance.

In this case, unobservable goods and goods with no quality differences are proxies of nonpositional goods. Visible goods are instead proxies of po-sitional goods. In general, the utility gained by purchasing popo-sitional goods depend indeed on how it enable the individuals to make comparisons with others in the same social class and reference group in the society. Therefore, individuals’ perception of the quality of a consumer item is determined by comparing it with what is in general consumed by the reference group and visibility helps in assessing it.

Visibility may indeed play an important role in theories where the utility from consumption is context-dependent (Heffetz, 2007)[41].

This is why, in this work, the concept of conspicuous goods (discussed below) coincides with that of positional goods. While in the original analysis of Hirsch, these goods were only a sub-set of positional goods.

As argued by Vatiero (2011) [73] people constantly compare themselves to their environments and care about their relative positions, which influ-ence their choices. Therefore, the paradigm of homo economicus should be extended, so that positional goods are included in theories of individual con-sumption and social concerns are considered among the basic motivations for individual economic behavior.

As Frank (2003) [30] claimed, according to the standard neoclassical eco-nomic model of choice, which holds that utility depends on the absolute amount of consumption, social strain can’t lead economic behaviors. How-ever, as it is deeply discussed in the next sections, in some domains, people appear willing to sacrifice absolute consumption for improved relative posi-tion. This has received strong support in the empirical literature on human happiness and well-being (for a comprehensive survey of this literature, see Diener, Kahneman, and Schwartz, 1998[21]).

3.1.1 Implications for growth

A good example to explain Hirsch’s idea of social scarcity is well represented by the towers of San Gimignano (Vatiero, 2011) [73]. During the middle age, towers were not built by aristocratic families just to live within them, but to

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“demonstrate” to community the power, the affluence and the status of each family. The tower’s status as the tallest building is socially scarce, due to the fact that it is defined in relation to the positions of other buildings and to the fact that only one building can be the tallest. In this case, the owner of a tower consumed a positive level of positional good, like power, instead the family which did not own a tower or owned a lower building consumed a negative level of positional good, that is, it consumed the exposure stemming from the power of the owner. There is a party consuming a positive amount of positional good and at the same time there is a counterpart consuming a negative amount of such a good.

Therefore Hirsch identifies negative consequences to well-being by the positional economy because the satisfaction of one individual implies the loss of satisfaction by other individuals. The nature of the purposes of individuals leads them to a competition over positional goods. By definition, the net utility provided by status consumption is socially limited, because status is a relative concept; any increase in satisfaction of an individual is formed at the expense of a correspondent decrease in the satisfaction of others. For example, when too many of us strive to buy houses in upscale neighborhoods the cost of such houses escalates and most of us are priced out of the market. In the language of game theory, the competition for positional goods is a zero-sum game.

Hirsch uses the concept of positional goods as the basis for his theory about social limits to growth. He attempted to analyze a set of three con-nected problems, which lay bare the mostly unspoken (but widely felt) notion that economic growth did not deliver the happiness it promised. This three connected problems are: the paradox of opulence, the distribution compul-sion and the reluctant collectivism.

These three issues, in his view, are interrelated and stem from a common source: the nature of economic growth in advanced societies. “The heart of the problem lies in the complexity and partial ambiguity of the concept of economic growth once the mass of the population has satisfied its main biological needs for life-sustaining food, shelter and clothing. The traditional economic distinction between how much is produced, on what basis, and who gets it then becomes blurred. The issues of production of individual versus collective provision, and of distribution then become intertwined” (Hirsch, 1976) [42].

Hirsch argued that consumers find that their access to goods and services is determined by their relative income and not by the absolute real income,

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thus the determining factor is the position of the individual in the distribution of purchasing power. This results in frustration due to a set hierarchy that reserves the goods socially scarce to those who occupy the upper rungs of the distribution scale, disappointing expectations of those who have seen their position rise thanks to the rise of the scale as a whole. There is indeed a distributive race, which is in opposition with the notion of growth. It is indeed pointed out that the idea of growth has functioned as superior substitute rather than the redistribution. While today the masses could never get close to the current level of wealth of those who have a position in the upper classes of the distribution scale, they can come close to this level in the near future due to the overall growth. However, once this growth has brought mass consumption to the point where they cause congestion problems (access to good and the service of someone excluded the consumption of someone else), the key to the well-being becomes the ability to stand in front to all the others. Indeed growth is increasing congestion. The frustration that follows from the opulence is thus generated just by the success in achieving those material needs that were dominant in the past. The satisfaction that individuals obtained today depends increasingly on their relative position in the economic distribution scale. This is why Hirsch called it “the paradox of opulence”. This paradox incorporates a distribution compulsion, which in turn generates our reluctant collectivism, the latter meaning the acceptance that individual actions cannot always achieve what is best for all individuals together. Positional goods become therefore a brake on the economic well-being.

Moreover, Hirsch argued that the inefficiencies on well-being, caused by positional consumption, increase with economic growth: “as the level of av-erage consumption rises, an increasing portion of consumption takes on a social as well as an individual aspect. That is to say, the satisfaction that individuals derive from goods and services depends in increasing measure not only on their own consumption but on consumption by others as well” (Hirsch, 1976)[42]. This happens because, as the economy grows, and with it consumer incomes, a higher share of expenditure can switch from satisfy-ing basic material needs, such as food and habitation, to positional goods. As a consequence, there is a growing relative importance of the positional economy over the material economy (Bernardino et al. 2009[7] .

Hirsch’s theory was well in tuned with the studies of “happiness eco-nomics”. In 1974, Richard Easterlin (Easterlin, 1974) [23] published some empirical results about the correlation between the well-being and economic

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growth and developed the well-known “Easterlin paradox”: data apparently showed that reported happiness was not significantly associated with per capita GDP, among developed countries. Ongoing body of research and de-bate followed these results, starting from the question of Easterlin “Does economic growth improve the human lot?”. Bartolini et al. (2008) [4], for example, argues that positive effects of income growth may be lost (or even more than offset) “if growth is accompanied by the impoverishment of social capital”. Thus, in order to answer Easterlin’s question, we have to take into account its relationship with social capital.

There are some models in which economic growth is explained by nega-tive externalities and are related to particular kind of goods that move the individuals to work more and consume more (see for example Bartolini et al. 2002) [5].

In such models with positional negative externalities (see Frank 1985 [31], Frank 2003 [30] and Frank et al. 2010 [32]) the reasoning follows from a pre-cise assumption regarding consumer preferences: individuals are particularly interested in the own relative position rather than the absolute one. As Frank (2003)[30] has argued, the competition for positional goods creates adverse side effects and externalities and, relating to this phenomenon, introduced the concept of “expenditure cascade”: increased expenditures by top earners results in increased expenditures even among those whose incomes have not risen.

In other words, this models, as the the theory of Hirsch, starting from the notion of positional good, try to answer the following questions: why, despite the high levels of well-being achieved and the high productivity of the work achieved, the working hours per capita did not decrease? What motivates individuals to provide a substantial part of their free time to work although their productivity has grown? In other words, why people are so much striving for money?

3.2 Conspicuous goods

In his “Theory of the leisure class” the fundamental assumption of Veblen (1899) was that individuals compare each other on the basis of their economic achievements. He emphasized that these interpersonal comparisons are im-portant for human behavior, as they constitute the individual’s recognition by others.

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be-ings is the basis for self-respect, missing recognition by them would lower the individual’s self-assessment. To satisfy the need for self-respect, indi-viduals aim to have at least as much as their own reference group and in order to be noticed by others and, to satisfy the desire for social recognition, individuals show their wealth to others. As wealth is usually unobserved, Veblen (1899)[74] identifies two different ways to demonstrate one’s position in society: conspicuous leisure (demonstratively engaging in everything but productive work) and conspicuous consumption (visible consumption of cer-tain goods, signaling a higher position in interpersonal exchanges); both are used to demonstrate one’s status.

Conspicuous consumption and leisure may give rise to certain dynamics within a society. If individuals from lower income groups aspire to the liv-ing standard of higher income groups, the demand for the relevant goods increases. Higher income groups, however, have an incentive to distinguish themselves from lower income groups and thus direct their expenditures to more visible goods. The more anonymous and the more frequent individuals interactions with others are the more conspicuous consumption matters as a means to signal one’s relative position.

As it is argued above regarding positional consumption, conspicuous con-sumption can be framed as an economic externality. A broad range of eco-nomic works has focused on ecoeco-nomic implications and possible policy rec-ommendations with regard to such an externality (see, e.g., Frank 1985 [31], Charles et al. 2007[17], Kaus 2013 [47]).

Consumption and satiation dynamics: an empirical analysis through Engel Curves

UNIVERSIT `

A DI PISA

SCUOLA SUPERIORE SANT’ANNA

Consumption and satiation dynamics:

an empirical analysis through Engel

curves

Supervisor

Prof. Alessio Moneta

Candidate

Julia Mazzei

Contents

List of Figures

List of Tables

Introduction

1

Keynes in “Economic possibilities for our

Grandchildren”

2

About satiation and the notion of wants

2.1

The concept of satiation and the hierarchical

the-ory of wants

2.2

Pasinetti and the dynamics of demand

3

Socially determined consumption preferences

3.1

Positional goods

3.2

Conspicuous goods