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Research on the significance of demand and consumption, on the empirical and theoretical understanding of competition and markets, and on the complex inter-organisational basis of innovation processes, provides the thematic linkage between the successive volumes of the series. At the interface between the different disciplines of economics, sociology, management studies and geography, the development of economic sociology lends a unifying methodological approach.

The series is based on international workshops hosted by cric which have encouraged debate and diversity at the leading edge of innovation studies. An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while. They indicate that mainstream economics is now taking consumption seriously, even if the core of demand theory still has a very strong hold. The fifth and final section takes a brief look at the future. This is a huge change from the traditional view of economic equilibrium. In the traditional view, the economic system has a state of grace to which it will converge, and any disturbances simply delay the achievement of that state.

In economies with dynamic increasing returns, the final outcome of an economic process is not like this state of grace: indeed, the character of the outcome is dependent on all the disturbances that have taken place along the line. Such thinking has started to permeate economic analysis of consumption.

An intriguing prospect emerges from the convergence of virtual reality modelling and agent-based modelling of consumption. The economics of consumption 25 The mainstream: rigour and revealed preference Let us start with the hard core of the modern mainstream economics of consumption. But remember — as noted above — that this is not to start at the beginning, chronologically speaking.

The next section will revisit the work of the nineteenth- and early twentieth-century pioneers and asks why economics got stuck on the particular track described in this section. Utility theory is based on a very small number of axioms. These may be strong and they may sometimes be unwarranted, but they are not many. The core theory is as follows. The consumer is assumed to have a complete, transitive, reflexive preference ordering over all possible bundles of goods and services. Complete means that, for any pair of bundles i and j, either i is preferred to j iPj , or j is preferred to i jPi , or else the consumer is indifferent as between i and j iIj.

There are no instances where the consumer is incapable of ranking alternatives. Transitive means that if i is preferred to j iPj , and j is preferred to k jPk , then i is preferred to k iPk. Reflexive means that i is as good as itself, so that iIi — a seemingly trivial requirement, but a mathematical necessity. These are the three core axioms of utility theory, though, as Deaton and Muellbauer , pp.

If these axioms hold, then this preference ordering can be summarised by the function u x , which is defined over all possible bundles described by the vector x. As the important work of Gorman , among others, went on to show, the economically interesting part of preferences can be defined by the dual cost functions which define the cost of reaching a certain value of u as a function of prices Deaton and Muellbauer, Strictly this is a Hicksian demand function — that is, it defines demand as a function of prices and real income.

This has been hugely important for the development of empirical studies of demand in mainstream economics. It meant that the empirical tradition of estimating demand functions from actual market data with the use of econometrics could be integrated with the mainstream theory of consumer demand. Setting aside the small matter of aggregation1 — that is, whether market demand functions can be interpreted as the demand function of a representative consumer — this gave a strong theoretical underpinning to common empirical practice.

In this neoclassical theory of consumption, stemming from Marshall and surveyed most comprehensively in Deaton and Muellbauer ,2 the consumer is an isolated optimiser. Choice is constrained maximisation, and while the constraints always bite, the consumer nevertheless has a large degree of discretion.

Deaton and Muellbauer show how the theory can be extended to human capital and labour supply, durable goods, choice under uncertainty, consumer index numbers, household characteristics and household welfare comparisons, and social welfare and inequality. While the main focus of Deaton and Muellbauer is on circumstances in which consumers have a lot of choice, they also examine consumer behaviour under familial or life-cycle constraints.

Two of the classic econometric studies of consumer demand build on these foundations. Throughout, he consistently uses economic theory to guide his applied econometric method. Empirical economists have for the most part had a strong preference for what is called the technique of revealed preference.

The aim is to make inferences about preferences from observed market behaviour. Many sociologists, of course, would dispute whether observed behaviour does actually reveal much about preferences. As Warde makes clear in Chapter 2 of this book , this is not a view with which sociologists have much sympathy. Why do economists prefer revealed preference as a technique? Why do economists still make relatively little use of the stated preference methods used in marketing, and elsewhere? There are several reasons for this, and The economics of consumption 27 there is not space to cover them all here.

But the two most important are probably these. First, applied economists have traditionally been sceptical of explanations offered by consumers or businessmen, for that matter. Typically economists believe that if a consumer or other actor is asked to account for his behaviour he will give a distorted response. The reasons for distortion are twofold.

There may be randomness: if asked how they would respond to a particular stimulus, the respondent may just give an unreliable answer. A hypothetical question yields a hypothetical answer. Probably more serious, the respondent may deliberately adjust his answer, as the following example suggests. Suppose a consumer is surveyed about his attitude to rail services, and it is clear that part of the purpose of the survey is to explore the scope to increase fares. Then it is reasonable to expect that many respondents will modify their answers to imply that demand exhibits a sensitivity to price, which in reality it may not.

Respondents do this in the hope that such responses will deter the rail operator from raising prices. This issue of respondent bias has been studied in the literature. Marketers are usually aware of it, but consider that the biases arising from it may be less serious that the difficulties encountered in the indirect inference required in revealed preference analysis — see below.

To understand this we need to take a little detour. In the Econometric Society was founded — a society that has been hugely influential on the subsequent evolution of economics, so much so that that Popper , p. Not all economists thought the research programme of the Econometric Society was a good thing. Indeed, one of the most influential founding fathers, Ragnar Frisch, who shared the first Nobel Prize in Economics in , had by the late s come to the view that econometric techniques alone would not unlock the relationships of economics.

The evolution of his thinking on this matter is summarised in Swann, The purpose of taking this detour is not to assess the success or otherwise of the Econometric Society experiment. Rather, it is to describe the setting in which revealed preference became the preferred empirical approach to analysing questions of consumption. Revealed preference required methodologies that are consistent with the Econometric Society vision: stated preference and ethnographic work did not. First, as noted above, it is based on the assumption that consumption behaviour reveals something about preferences — an assumption that is challenged by many most?

The economists would usually respond thus: certainly, choices are constrained, and the economic consumer choice theory can embody more and more subtle constraints if need be. But in most economic models of consumption there have to be some degrees of freedom: the consumer still has to have some — even if not very much — discretion.

The second reason is that revealed preference, like other methods of indirect inference, tries to make inferences about one magnitude by inference from the pattern of correlation among other magnitudes. Even if this is technically possible, it can — as a practical matter — be very difficult to disentangle the different effects of multiple influences on consumption. The third reason is perhaps the most serious of all. To use revealed preference, it is necessary to assume that the preference function to be revealed is the same for all the data used in its estimation.

But if the data come from different years, or represent the aggregate behaviour of an aggregate whose composition changes from one data point to the next, then this is a strong assumption. Moreover it has had the unfortunate effect unfortunate, at least, in the opinion of this author of focusing attention on fixed consumer tastes and away from the reasons why tastes may change.

Indeed, it was really only in the s and s, notably with the work of Becker and others, that the endogeneity of tastes came back on to the mainstream economic agenda — and then, essentially, only in theoretical work, and much less so in empirical work. The consumer of mainstream economic theory, as described here, is an unexciting individual.

He or she is an asocial hermit of fixed tastes. His or her behaviour is not, apparently, influenced by others. He or she has no need to experiment but, given the same products, prices and income, would continue to consume in the same way indefinitely.

In that sense he or she has little need of variety, though the standard assumption of convexity in consumer theory will tend to mean that the consumer consumes a collection of different goods, and does not just consume one good to the exclusion of all others. In short, he or she is probably not very exciting company. This has to be placed in the broader history of economic thought. When that has been done, it will become clear that the picture is much more interesting. Smith, , Book 1, chapter 11, part 2, p. For, although his contribution to sociology has exceeded his contribution to economics, at the time he wrote The Theory of the Leisure Class Veblen was the first editor of the Journal of Political Economy.

This journal, edited at the University of Chicago, is one of the very most influential and mainstream of economics journals, and its editor is by definition an economist! In view of these illustrious and imaginative origins, it may be puzzling why economics found itself going along the track described in section one. An important part of the answer is the immensely influential contribution of Alfred Marshall on the development of economics.

For, while he took pains to describe some subtle and rich consumer behaviour, he felt it was imperative that economics should develop a rigorous theory of consumer behaviour, and to do that he had to start with the simplest case. Marshall describes a consumer with some of the behavioural traits recognised in much more recent work on consumption. Marshall recognised this in an important passage about the consumer: Every step in his progress upwards increases the variety of his needs together with the variety in his methods of satisfying them.

He desires not merely larger quantities of the things he has been accustomed to consume, but better qualities of those things; he desires a greater choice of things, and things that will satisfy new wants growing up in him. Marshall is struck by the quotation from Senior, listed above. This observation has methodological as well as substantive implications. Economists see this as a remarkable observation, because it anticipates the development of modern consumer theory.

As Deaton and Muellbauer show, the modern neoclassical theory of demand has a very close The economics of consumption 31 formal similarity to that of production.

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This similarity is further exploited in household production theory, developed by Becker In household production theory, the household manager s combine purchased goods and services together with household labour to provide services to members of the household. In every stage of his progress he is destined to contrive and invent, to engage in new undertakings; and when these are accomplished to enter with fresh energy upon others.

Marshall, , III, II, 4, 5, quoting from McCulloch, , chapter II But having whetted our appetite by sketching this picture of the subtleties of consumer behaviour, Marshall then set it aside to concentrate on his rigorous economic analysis. While Marshall perhaps thought that the rigorous analysis of this particular aspect of consumer behaviour might take no more than a few years, it did in fact take many people much longer than that. Whether this is a case of lock-in to an uninteresting special case, or an indication of the sheer difficulty of developing theory in even this simple case, is hard to say.

One of the influences was the recognition in some of the macroeconomic studies of consumption9 that decent modelling of consumption required certain developments beyond core micro theory. The travellers A prophet is not without honour, but in his own country, and among his own kin, and in his own house.

Mark, Even some economists of distinction have spoken of a cool reception on their return from journeys to meet other social science disciplines. Scitovsky , for example, explored what the psychology of human motivation could teach the economist about consumption behaviour. Instead, it was enough to assume that these existed and that the consumer made rational, maximising choices consistent with those tastes. While he has been one of the most influential economists in the wider world, his work has not always been met with enthusiasm by his professional colleagues.

In The Affluent Society Galbraith , pp. Galbraith notes that the businessman and lay reader may be puzzled over his continual emphasis on what may, to them, seem an obvious point. But it does not sit easily with the notion of fixed tastes, and the role of economic growth in satisfying such fixed tastes. He brought back to economics a deeper and richer understanding of the role of consumption in different societies. It is interesting that development economics has perhaps been the area of economics most closely connected with the work of other disciplines, notably anthropology.

And, finally, Earl , a, b provides a compelling account of lifestyle economics, gathered by working at the interface of economics and marketing. It is interesting to find that some travellers from outside economics have been treated with reverence within the economics community. As noted above, Mary Douglas has left an important legacy in economic thought on consumption, and has written of how positively she felt about these travels in Douglas and Isherwood, The revival The previous section was about the contributions made by travellers who on their return have remained outside the mainstream of economic analysis of The economics of consumption 33 consumption.

This section picks up some of the subsequent contributions in this vein from authors who are still essentially part of the mainstream. What follows is no more than a small and rather idiosyncratic selection drawing heavily on earlier joint surveys by this author: Cowan et al. The papers collected in Becker show how far one of the leading economists in this field has moved beyond the narrow modern mainstream of section one.

Half his papers in that collection are concerned with personal consumption capital, or routine and habit; the rest are concerned with social capital, or consumption as a social activity. The former describe a theory of rational addiction, and an analysis of the effect of price on consumption when there is rational addiction. The latter provide an economic theory of social interactions, of social influences on price, and of how social norms shape preferences.

Cowan et al. This mirrors the distinction made by Becker between the roles of personal capital and social capital in shaping tastes in consumption. This basic observation has been variously interpreted as inertia or habit formation. Brown modelled habit formation in demand behaviour as a positive autoregressive component in a traditional demand model. Several of the more important subsequent contributions on the endogeneity of preferences have taken a similar perspective: for example, Becker and Murphy , Donckner and Feichtinger , Feichtinger et al.

While the origin of the demand for diversity is not developed in detail, it has sometimes been interpreted in the current context as a desire on the part of the consumer to differentiate her current consumption pattern from her past. Finally, the papers in Bianchi explore the active consumer: this is really the counterpart in consumption to the innovator in production.

The active consumer does not rely on the producer to create new products and services to satisfy his or her desire for variety and novelty. Most of the literature in this tradition has focused on microeconomic results, with less concern on detailed macroeconomic consequences and especially dynamic consequences , that follow from them. Consumption patterns of peers and rivals The consumer of mainstream theory was an asocial hermit.

But not all economic thinking has seen the consumer that way. Conspicuous consumption requires that individuals indulge in consumption activities recognised by their peers. But it also requires that they distinguish their consumption from that of ordinary people. And, indeed, it is not enough that consumption simply imitates that of the peer group: there must be imitation and innovation, so that the individual occupies a distinct place in the group. Several more recent contributions have re-examined this basic idea: Liebenstein , Mason , Earl , Bagwell and Bernheim and Ireland Much of the literature is not focused exclusively on consumption as such, but is broader and more abstract in conception.

Much of this work, admittedly, has focused essentially on equilibria, and has much less to say about dynamics.

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Much of the literature, moreover, focuses on information contagion: fads and imitation take place because private information is considered inadequate for decision making. The concept of network externalities Katz and Shapiro, is of central importance in this context. As Farrell and Saloner put it, standards emerge because there are economies of scale in joint consumption. This was also recognised by Gaertner But in general this literature has a very simple concept of externality: the externality is positive, and The economics of consumption 35 applies equally to all members of the economy.

Put another way, there are only positive peer effects, and every agent is the peer of every other. Two papers that advance beyond this simple assumption are Cowan and Cowan and David et al. Akerlof has made an unusual and very welcome attempt to link ethnographic studies and interpretations of peer effects with some of these theories.

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This is no more than a selection. Indeed, a scan of many of the major journals in mainstream economics in the last few years would show just how much energy has gone into developing an economic theory of the consumer that goes well beyond the hard core described in section two. Even if the casual observer restricts his or her attention to the absolute mainstream, it is simply no longer tenable to say that there is nothing more to the economics of consumption than utility maximisation.

Conclusion: the future? The last section should convince the reader that, at the beginning of the new century, there is certainly more to the economics of consumption than utility maximisation. But thanks in some degree to the travellers, who visited other disciplines and brought back rather richer insights into consumer behaviour, the last ten to twenty years have seen a proliferation of studies that recognise the endogeneity of tastes, strong interdependence in consumption patterns, and the many constraints on consumption behaviour private and social which limit consumer choice.

Any wild guesses about the future of the economics of consumption would be unwise. However, let us venture one speculation. There is growing interest in some parts of economics in agent-based simulation modelling. This moves away from the representative consumer described above to recognise, and indeed to celebrate consumer diversity. Farrell describes applications of agent-based modelling to a variety of consumer behaviour. One application is to modelling record-buying behaviour. The simulation model has some 50, imaginary fad-following record buyers inside it.

The behaviour patterns of these virtual people are based on real data collected by a market research company from record shops and radio stations. More generally, Epstein and Axtell and Epstein et al. Ten years ago, simulation was unpopular in the mainstream of economics, though more widely used by evolutionary economists and in the economics of innovation. That is changing, and some exciting possibilities exist if economists can harness the potential of virtual reality and other visualisation technologies to illuminate their simulations.

Notes 1 The irony is intentional: aggregation is not a trivial matter. The aggregate of different consumer behaviours will look like the behaviour of a single representative consumer only under very strong assumptions. It seems more promising to seek to represent aggregate consumption by a set of representative consumers Swann and Tavakoli, Langlois also explores the important contribution of the American economist Wesley Mitchell, among others. References Akerlof, G. An, M. Arthur, W.

Bagwell, L. The economics of consumption 37 Banerjee, A. Becker, G. Berlyne, D. Bernheim, D. Bianchi, M. Bikhchandani, S. Bourdieu, P. Brock, W. Brown, T. Coelho, P. Corneo, G. Cowan, R. Dasgupta, P. David, P. Deaton, A. Donckner, E. Douglas, M. Duesenberry, J. Durlauf, S. Earl, P. Epstein, J. Farrell, J. Farrell, W. Feichtinger, G. Friedman, M. Furnham, A. Gaertner, W. Galbraith, J. Geddes, P. Gintis, H. Gorman, W. Granovetter, M. Houthakker, H. The economics of consumption 39 Ireland, N. Jevons, W. Collinson Black, R.

Katz, M. Keynes, J. Kirman, A. Langlois, R. Lewis, W. Liebenstein, H. Marshall, A. Marx, K. Mason, R. McCulloch, J. McCulloch, ed. Miller, C. Pesendorfer, W. Pollak, R. Popper, K. Scitovsky, T. Senior, N. Smith, A. Skinner, A. Stone, J. Swann, G. Thalmann, N. Veblen, T. Young, P. In other words, the composition of the economic system has changed enormously during economic development. The observation that there has been a great deal of qualitative change in economic development would probably not be denied by any economist. Where, however, there would be differences is about the role of qualitative change.

In order to facilitate the discussion two extreme hypotheses can be introduced: first, qualitative change is an accidental by-product of economic development; second, qualitative change is an essential component of economic development. The first hypothesis is the one implicitly present in most economic growth models, where qualitative change is not denied, but it can be accepted only ex post. The second hypothesis is central to a Schumpeterian approach, in which radical innovations change the nature of the economic system and allow the long-term continuation of economic development.

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In some previous papers by this author it was argued that the concept of variety is crucial in order to overcome the gap between modelling without qualitative change and more descriptive approaches which can encompass this phenomenon Saviotti, , The most important considerations about variety contained in those papers are summarised in the following section.

The main objective of this chapter, however, is the analysis of the implications of variety for demand. However, demand is seen here not on its own but as one of the components of economic development. As it will be pointed out in the section after next, one of the possible bottlenecks in economic development is constituted by the imbalance between productivity growth and demand growth within given sectors.

A way to overcome such a bottleneck is represented by the emergence of new sectors, providing compensation for the displacements caused by the imbalance in existing sectors. Long-term economic development and growth then depend on the ability of the economic system to create the new goods and services leading to new sectors. The dynamics of development of demand is thus a fundamental determinant of economic development. Such a definition, while not being perfect, captures the essential features of qualitative change and can be the basis of quantitative and analytical treatments of economic development.

The relationship between qualitative change and economic development is based on two hypotheses: 1 The growth in variety is a necessary requirement for long-term economic development. These have to be considered very strong working hypotheses, having a considerable empirical and theoretical support, but not yet definitively proved. Furthermore, these hypotheses can be valid in the long run and at sufficiently high levels of aggregation, for example that of a national economy.

The bottleneck created by the imbalance between demand saturation and continuous productivity growth in existing sectors can be compensated for by the emergence of new sectors. On the other hand, the resources required to perform search activities and thus to create new sectors can come only from productivity improvements in existing sectors.

In this sense the complementarity between variety growth and productivity growth in existing sectors bears a considerable similarity to that between productivity growth in agriculture and investment in the new industries during the process of industrialisation see Kuznets, ; Landes, Thus, demand is involved in an essential way in the longterm growth of variety.

Consumers have available a much wider range of these than was the case in previous economies.

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The demand theory that is normally presented in textbooks can deduce the behaviour that follows from a given set of preferences. Preference formation is not considered a legitimate subject of analysis for economics, but it is left to other disciplines in the social sciences. Such an approach would be perfectly adequate if consumers did not change. However, if we are concerned with long-term economic development the assumption of static consumers is inadequate. Unless we assume that they were already present in humankind before objects of consumption came into existence, wants and preferences have to be formed during the process of economic development.

The problem of wants and preference formation becomes particularly urgent, if, as Schumpeter tells us, radical innovations are essential to the long-term continuation of economic development. In fact we can argue that the more radical an innovation is, the less predictable its properties and uses are. Perhaps the most spectacular example of failure to estimate demand occurred in the case of mainframe computers, the total demand for which in both the United States and the United Kingdom was assessed at four or five machines, to be greatly outperformed by real demand.

This was not just a failure by producers or marketing experts to estimate a demand which was clearly there, but a case in which the demand itself was not formed because the potential users did not know about the properties of the object they were later to demand. In general, we can assume that the mental categories required to understand the properties of a good or service and the ways in which it can be used are not there before the good or service is created.

Therefore, wants and preferences will be created gradually during the life cycle of a good or service, and the mechanisms of their formation are a problem at least as interesting as the behaviour that can be deduced from them, if we are interested in long-term economic development. On this point see also Teubal, ; Teubal et al. Aversi et al. Moreover, habits and routines coexist with deliberative decision processes p. In general we can say that demand theory may require a number of modifications if our main emphasis is on long-term behaviour.

The process of choice can then be described as the encounter of an object of consumption followed by the comparison of the object with the internal ranking order and by the decision whether to purchase and what level of resources to allocate. In this context an object of consumption can be a good or a service and the encounter with it consists of information about the object and its properties.

The theory of demand usually found in economics textbooks amounts to considering that the internal ranking order is given ex ante and that it is sufficiently accurate to allow an unambiguous allocation of resources to different objects of consumption.

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Such a perspective may be entirely adequate if the choice is to be made among a set of objects of consumption which are known and for which individuals have a definite ranking order. The same perspective becomes insufficient if the problem to be analysed is long-term economic development, in the course of which entirely new and unpredictable new objects of consumption emerge. Thus the consumer cannot be considered constant and invariant with respect to economic development. On the contrary, we need to consider the consumer as an innovator Earl, , although the meaning of the word will be somewhat different here with respect to that customarily used in innovation studies.

The opportunity to study Italian beginners or advanced levels and advanced English will also be offered. These five blocks will provide top level and consistent training on knowledge and innovation policies and on key development issues, with their originality being a truly interdisciplinary approach. For the corresponding courses, the teaching language will be governed by the number of students that have opted for each focus. At least one of the two special focuses will be taught in English, i.

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Course details teaching hours, ECTS, teaching staff for the 1st year. Semester 3 at University of Paris The approach at University of Paris 13 is an extension of the specialised, systemic and interdisciplinary approaches developed at the University of Turin. It includes three courses:. It includes panel data, time series, sequence analysis…. In the third block , students choose one from two special focuses SF :.