Discussing the neoclassical basic assumptions

The assumptions underlying the neoclassical theory of consumption have been criticized by mainstream and non-neoclassical economists.⁷However, as outlined in this section, most of the alternatives have relaxed some of the neoclassical assumptions, drawing on evidence from research in sociology, psychology and anthropology, while maintaining the others. This implies that besides the framework offered by institutionalists, there have been few successful attempts to provide a comprehensive alternative to the neoclas-sical paradigm. This section examines some of these attempts following the structure of the previous one.

Consumer sovereignty

The leading role of the consumer in the market has been widely criticized in the institutionalist⁸tradition mainly in the works of Galbraith (1977).

He claimed that consumer sovereignty no longer stands as marketing, advertising and the prescriptive power of social norms subject individuals to supply pressure. Galbraith highlighted the creation of wants by the pro-duction system that influences consumer decisions not only by persuading them through advertising and marketing but also through the search for increased support from the state and related institutions. Wetherly (1996) expands on the effect of institutions other than markets, pointing out that they provide the requirements of the capitalist system to fulfil its basic need, that is, the pursuit of profit. Individual sovereignty seems to be constrained by the needs of capital not only through direct persuasive action but also indirectly through other institutions, such as, for instance, economic and social policies. By deciding the direction of policies such as transport, opening hours, working time and so forth, social policies guarantee pro-duction and the realization of profits, providing the necessary stable envir-onment for the system to operate. Thus, consumer sovereignty is being challenged not just by the positive interference of the production system

but by the socioeconomic systems that create the setting in which con-sumption takes place.

Exogenous preferences

Within mainstream economics some efforts have been made to recognize the endogeneity of preferences and incorporate them into the neoclassical formalization. Akerlof and Dickens (1990) consider that the analysis of consumer choice has to account for the behavioural assumptions behind psychological, anthropological and sociological research because they offer more plausible explanations of human behaviour. In their work, they apply the psychological theory of cognitive dissonance to the study of consumer choice. Cognitive dissonance theory introduces the fact that individuals manipulate their beliefs to confirm their desires. The inclusion of this assumption implies the need to incorporate into the formalization of con-sumer behaviour the process by which preferences are generated. This approach explains, for instance, the role of advertising as a mechanism that offers individuals the external justification they need to believe that they have acquired the goods that satisfy their needs. However, Akerlof and Dickens do not disregard the whole neoclassical paradigm, as they consider that the manipulation of beliefs is a conscious process.

Institutionalists have always accounted for the influences of social factors when approaching consumption. In particular, Duesenberry (1967), on the grounds of empirical evidence, rested his theory of the consumption function on the assumption that consumer preferences depend on relative social status. He based his assumptions on the fact that despite economic growth, savings were decreasing at all levels of income. He claimed that the reason for this happening was that individuals who were exposed to higher standards of living and better consumption goods longed to acquire them for themselves. Thus, in growing economies, as everyone’s consumption rises, households will increase their consumption as well as decrease their savings.

Analytical Marxists such as Roemer (1986) have also addressed the issue of endogenous preferences. Roemer introduces in his formalization of con-sumer behaviour the productive forces and economic structure that deter-mine preferences at a moment in time. When constructing his model he accounts for the effect of technology, institutions and ownership relations in the previous period and defines present preferences as being shaped by previous individual preferences. He still takes consumers as rational indi-viduals but he sees them as being under pressure from institutions, tech-nology, the position in the productive system and habituation when they choose among consumption bundles. As Philp and Young (2002: 327) point out, even ‘those such as Roemer who have (sometimes) emphasised the

social formation of preferences have often constructed models which rely on a broadly instrumental/calculating theory of human agency’.

Rational behaviour

Regarding the rational behaviour of consumers, Sen (1977) questions the adequacy of treating them as utility-maximizing egoistic individuals. He considers the neoclassical approach to be reductionist given that, for instance, choices driven by moral attachments to a group or collective are not taken as rational. Sen claims that there is no inconsistency in the behav-iour of individuals acting because of compromise, therefore he proposes, within the neoclasical framework, to widen the concept of rationality to incorporate behaviours motivated by feelings other than egoism, such as compromise with a social, political or religious group.

Institutionalists also criticize neoclassical rationality, highlighting the function of habit as a guide to human behaviour. They do not see individ-uals as utility-maximizing agents but as human beings following habits and routines in their decision processes. The imitation and spreading of habits generate institutions,⁹which are seen at the same time as reinforcing and fostering particular behaviours and habits. Therefore, to focus the analysis of choice on homo economicus is also seen as a reductionist way of approaching individual behaviour because current social, personal and induced habits are shaping and constraining individual preferences and choices.

Some of the previous considerations have been recognized by several mainstream economists, and preferences previously seen as irrational such as the ones generated by commitment to a specific group or by addiction (Winston 1980), have been included in the neoclassical analysis. Habit, which for institutionalists explains rational choice, has also been addressed in orthodox writings. Habitual behaviour has been formalized in terms of earlier choices made by individuals, or as a choice in itself because lazy con-sumers do not have time to gather the necessary information to make a new choice every time they need to (Hodgson 1998).

Analytical Marxists also consider that if some patterns of human behav-iour regarding choice can be traced, they are unlikely to be a consequence of the optimizing behaviour of homo economicus as the reasons for choos-ing a specific good might be of a completely different sort. Philp and Young (2002) give examples of the literature of internal conflict where people’s choices are thought to be the result of their personal conflicts rather than the reaction to their true preferences. They also point out how some ana-lytical Marxists, such as Hargreaves Heap, analyse action in the market as an expression of the beliefs of individuals rather than as an outcome of its maximizing process.

Insatiability

When man has satisfied his physical needs, then psychologically grounded desires take over. These can never be satisfied or, in any case, no progress can be proven. The concept of satiation has very little standing in economics. It is held to be neither useful nor scientific to speculate on the comparative cravings of the stomach and the mind. (Galbraith 1977: 119)

Critics of the insatiability assumptions, unlike neoclassical economists, have always distinguished among drives motivating consumption. Distinct psy-chological–social–economic forces influence different categories of goods, therefore their satiability also varies. The requirement for food would easily be satiated, whereas the desire for status symbols, reinforced by marketing and social pressure might not present a foreseeable satiation point.

In the early twentieth century, Alfred Marshall (1920) already acknow-ledged the existence of higher and lower desires. In the 1930s, Keynes (1963) believed that absolute needs, those that are independent of social status, were satiable and therefore they showed a decreasing marginal utility. Keynes claimed that the need to accumulate would become another pathology to be treated by psychologists in one hundred years’ time. Later, Scitovsky (1976) in his Joyless Economy, drawing from psychology studies, distinguished between the desire for comfort and pleasure, desires for the first being satiable whereas desires for the second might not be. As Ackerman (1997: 658) puts it, summarizing Scitovsky’s argument ‘as yes-terday’s novel pleasures become today’s habits and tomorrow’s socially defined necessities, maintaining the same level of pleasure requires new levels of consumption’. The distinction between higher and lower desires, absolute and relative needs and desires for comfort and pleasure show that satiation occurs for certain specific goods and should be incorporated into the theory of consumption.

The critics of these neoclassical assumptions have raised very important issues from which to rethink the theory of consumer choice. It is difficult to accept a theory of consumer choice that does not acknowledge the power of advertising, the framing power of socioeconomic institutions, the presence of habituation, commitment, beliefs and other factors affecting consumer choices. Moreover, not all goods have the same characteristics, and satiation plays an important role with regard to certain goods. Nevertheless, relaxing the neoclassical assumptions poses many problems with regard to formal-ization, making it difficult for neoclassical economics to build a completely new theory of consumption. Following Fine and Leopold (1993: 32):

‘orthodox economics cannot be amended to incorporate a richer theory of consumption. It would have to be discarded altogether’. Institutionalists, who have offered a holistic approach incorporating the effect of institutions

and culture in shaping individual behaviour, have been constantly accused of not being theoretically grounded and basing their analysis on the descrip-tion of economic reality. Therefore, their approach has not been successfully supported as an option for replacing the neoclassical one.

4. Consumption and well-being: challenging the neoclassical paradigm