Veblen Good

In the words of Adam Smith, “Man naturally desires, not only to be loved, but to be lovely.” Maybe you feel lovely by volunteering at the dog shelter, or by providing for your family, or by owning a Tesla, or by having the “GUCCI” on your butt (sweatpants, not a tattoo). Hmm...the latter two are pretty conspicuous.

Thorstein Veblen thought so, anyway. He zeroed in on the Tesla and Gucci types of feeling lovely: buying expensive things for status reasons, which he termed as “conspicuous consumption.” Out of this came the idea of a Veblen good: a good whose demand increases as the result of the price increasing, because the price increase makes it more desirable as a status symbol.

For many goods, this is not the case. When prices go up on your coffee, bananas, and gas, you will probably buy less of them...maybe find substitutes for the food-stuffs, and stop taking joy rides, reducing your gas consumption, until prices go down. But if that fancy Rolex increases in price, or that hairless designer cat costs you an arm and a leg (it only cost an arm last year), then the demand for those things goes up. The more expensive (and thus scarce) a luxury good is, the more it’s demanded by the people who can afford it.

A less conventional type of Veblen good? Some colleges. An elite college lowering its tuition might be a sigh of relief to current students, but to the outside world, it may have a cheapening effect. Conversely, if an elite college raised its tuition, people often assume it must be worth the high price tag, making it a school worth going broke to attend.