Monday, July 23, 2012

When Spending Hurts European Business Review (2012) 41-43

Thorstein Veblen coined the term conspicuous consumption in 1899 to describe spending with the intention of gaining social status.1 Back then, large estates, vintage silverware, and expensive clothes were the typical symbols of status and they were only available to the privileged few. With rising income and the emergence of a large consumer class, conspicuous consumption became a common phenomenon observed in all tiers of society. Today poor households spend a greater proportion of their budget on conspicuous consumption than richer households2,3 and this conspicuous consumption often comes at the expense of spending on healthcare and education4,5 and at the expense of saving, leading to increased household debt and bankruptcy.6,7 For example, in the years leading up to the recession, the saving rate in the US was only 1% in the lowest income quintile as opposed to 24% in the highest quintile.8 Still, we do not fully understand why people engage in conspicuous consumption and what could be done to encourage consumers to think more about their long-term needs rather than zero-sum status games. For example, an important question for social scientists and policy makers is whether increasing social equality would necessarily reduce status competition, and when it may actually backfire and encourage conspicuous consumption.