Consumer power and market control: Exploring consumer behaviour in affluent contexts (1946–1980)

Abstract

The aim of this essay is to present and explain the emergence and decay of two unorthodox views of consumer behaviour that developed from the mid-1940s to the mid-1970s: the view of the powerful consumer and the view of market control by producers. It begins by presenting their common origins in empirical studies that opposed the Keynesian-type analysis of consumption. While the first developed into the program of behavioural economics defended by George Katona of the Michigan Survey Research Center, the second nourished the contributions of authors like Galbraith (1958, 1967, 1977), Scitovsky (1954, 1962, 1976) and Mishan (1960, 1967).

Keywords:

• George Katona
• James Duesenberry
• John Kenneth Galbraith
• Tibor Scitovsky
• Behavioral Economics
• Affluence

Acknowledgements

A previous version of this essay was presented at the regular seminars of the HOPE Center at Duke University in 2010. I want to thank Bruce Caldwell, Craufurd Goodwin, Neil De Marchi, Roy Weintraub, Béatrice Cherrier and Tiago Mata for their comments at the occasion of that seminar, as well as Philippe Fontaine, Wade Hands, Annie Cot and two anonymous referees, who also helped improving this project. The usual disclaimers apply.

Notes

 1 This view is, of course, subject to qualifications, for many of the psychological topics put forward by Katona and the other authors dealing with affluence were, indeed, explored by Keynes both in his economic papers (Drakopoulos 2010) and in his contributions to the Bloomsbury group creative community (Goodwin 2011).

 2 The first national ‘Survey of Liquid Asset Holdings, Spending and Saving’ (1946) used this method to collect both financial data and ‘motives for, attitudes toward, and expectations of saving’ (Katona and Likert 1946: 197). It was directed by Angus Campbell, Rensis Likert and George Katona, who subsequently created the University of Michigan Survey Research Center (SRC) in charge of developing the Survey of Consumer Finances (SCF) under the auspices of the Federal Reserve Board. See Edwards (2012) for an account of the theoretical underpinnings and design of the SCF.

 3 This set of studies originated in a 1944 joint conference session of the Econometric Society and the American Statistical Association entitled ‘Forecasting Postwar Demand’. Contributions by Smithies (1945), Livingston (1945) and Mosak (1945) are reproduced in Econometrica (Vol. 13, No. 1).

 4 As noted by Cook (2000), the ‘stylised history’ presented in macroeconomics texts differs significantly from the actual studies of consumption. This section is focused on Duesenberry's (1949) contribution, acknowledgedly overlooking alternative studies, such as Brady and Friedman's (1947), which decomposed consumption functions for: ‘nonfarm families’, ‘urban families’, ‘farm families’ and ‘negro families’. Doing so, Brady and Friedman discovered that expenditures and savings were ‘without doubt dependent upon the expectation of a continuation of a given level of income’ (ibid.: 262), which led to M. Friedman's (1957) permanent income theory.

 5 The importance of this contribution, meaning that ‘relative, rather than absolute, levels of income often determined patterns of consumer demand’ (Mason 2000: 556; Drakopoulos 2010), is acknowledged in reviews by influent authors, such as Arrow (1950), Pigou (1951) and Shackle (1951). Duesenberry explained spending as being pushed by the dissatisfaction felt by an individual when comparing his living standard to that of others: ‘The analysis of the forces causing impulses to consume shows that these arise when an individual makes an unfavorable comparison of his living standard with that of someone else […] the dissatisfaction with his consumption standard which an individual must undergo is a function of the ratio of his expenditures to those of people with whom he associates’ (Duesenberry 1949: 32).

 6 In this paper, Katona's approach is exposed, mainly, as presented in The Powerful Consumer (1960) and The Mass Consumption Society (1964). See Katona's Psychological Analysis of Economic Behavior (1951) for a detailed account of his overall project, and Warneryd (1982) and Edwards (2009) for complementary reviews of Katona's life and work.

 7 Katona (1960) claimed that unlike the American postwar economy, ‘Economies are conceivable in which consumer expenditures do depend solely on consumer income. Indeed, as of fifty or one hundred years ago in the United States, and even today in many countries, this may constitute a fair approximation to the actual situation. We may think of a poor economy in which most people devote all their income to subsistence’ (ibid.: 11).

 8 Katona (1964) also criticised Galbraith's views on ‘private affluence vs. public squalor’ and the ‘nuclear threat’ (Section 5). As for the latter, Katona claimed that ‘Unscrupulous leaders can easily create war frenzy if the people are poor. But fighting for national or ideological glory appeals less to those who have a decent standard of living and who can look forward to a better life for themselves and their children. Decent material standards for all the peoples of the world and a justifiable expectation of their improvement represent, therefore, our best hope for peace’ (Katona 1964: 68).

 9 References to these subjects can be found in the analysis of the interdependence of preferences and habit formation (Pollak 1978; Bianchi 1998; Cook 2000; Mason 2000; Drakopoulos 2010), as well as in literature on the economics of happiness (Easterlin 2002; Bruni and Porta 2007) and reviews of J.K. Galbraith's contributions to economics (Vining 1959; Hayek 1961; Gordon 1968; Meade 1968; Friedman 1977; Skidelsky 2006; Dutt 2008; Pressman 2008).

 10 In The Affluent Society, the power of producers to influence consumer preferences was discussed as a complement to the ‘dependence effect’: ‘The even more direct link between production and wants is provided by the institutions of modern advertising and salesmanship […]. Outlays for the manufacturing of a product are not more important in the strategy of a modern business enterprise than outlays for the manufacturing of demand for the product’ (Galbraith 1958: 123).

11 That literature was described in the following terms by Scitovsky (1962): ‘Many attacks from many quarters have been launched in recent years on the principle of consumer's sovereignty. They have questioned the economist's wisdom in putting too great and exclusive a trust in the consumer's wisdom; and it is regrettable that these attacks have shaken the public's faith in the economist but have not shaken the economist out of his established modes of thought’ (Scitovsky 1962: 262).

12 See Edwards and Pellé (2011) for an analysis of consumer sovereignty as representing a value judgment in welfare economics.

13 In ‘Notes on the Producer Society’ (1973), Scitovsky claimed that ‘scale economies in production restrict the range of goods produced, scale economies in distribution restrict even further the range of goods widely distributed, and goods not distributed widely enough cease sooner or later to be produced. All this limits the economy's ability to cater the variety of consumers’ tastes and discriminates against the minority consumer […]. The loss is not only his but the whole community's, because the minority consumer is often the man (or woman) who could lead the majority towards the new and the better’ (p. 237).

14 Letter available in Paul A. Samuelson's Collection, Box 60, Economists’ Papers Project, Duke University Library.

15 In a nutshell, The Joyless Economy (1976) aimed at developing a choice theory for satisfied consumers (i.e. consuming in contexts of affluence rather than contexts of scarcity). Those consumers were assumed to face choices between comfort and stimulation goods rather than among alternative means of want satisfaction. See Edwards (2009) for a deeper analysis of Scitovsky's theory.

16 See Dutt (2008) for an analysis of interdependent preferences, consumption and happiness.

17 See Edwards (2012) for an account of the success of the Index of Consumer Sentiment developed by Katona and his associates at the Economic Behavior Program of the SRC, as opposed to the failure of the survey programs intended as contributions to Katona's project of ‘Economic Psychology’ or ‘Behavioral Economics’.

18 The Age of Uncertainty aimed at contrasting the ‘great certainties in economic thought’ of past centuries with the ‘great uncertainty’ of the postwar period (Galbraith 1977: 7). It presented the nuclear threat as one of the main sources of uncertainty justifying further government intervention: ‘after the first exchange of missiles, […], the ashes of Communism and the ashes of capitalism will be indistinguishable […]. In an age when so much is uncertain, there is one certainty: This truth we must confront’ (ibid.).

19 This happened originally in a lecture entitled ‘The Conventional Wisdom of J.K. Galbraith’ (1976), the same year Friedman received the Nobel Memorial Prize. In the published version (1977), the British editor deplored the fact that the BBC had awarded Galbraith ‘pride of place in the opportunities they [had] given to American economists’ to ‘explain to the general public what economists [were] saying’ (p. 8). He also argued that Galbraith had ‘made very little impact on economics or on his fellow-economists’ (ibid.: 8), and, additionally he included Gordon's (1968) critique to The New Industrial State as an introduction to the volume.

20 Scitovsky's (1962) defence of the superiority of educated tastes is a good example of Friedman's target: ‘Informed people are partly the experts who either as professionals or as amateurs have an intimate knowledge of a particular type of consumer's good […]. I should like to have the preferences of the generally educated public respected, because they have a wider perspective, apply a variety of criteria, and pay attention to the relation and connection between different criteria […]. I admit, of course, that the preference for an educated taste is simply the subjective preference of educated people; but they, or most of them, have the tremendous advantage of having, at an earlier stage, been uneducated and uninformed themselves’ (p. 266). Contesting that view, Friedman defended commercial advertising as being a form of free speech: ‘for those of us who believe in the dignity of the individual human being, in the pre-eminence of freedom among human beings as the objective of social organization: we must say that the only way in which we have any right to try to affect the values of others is by persuasion. And that, I may say, includes commercial advertising, which I view as a form of free speech and which ought to be just as much subject as other forms of discourse to the First Amendment of the United States Constitution prohibiting governmental measures against free speech’ (ibid.: 34).