Question

At the macro level, Thorstein Veblen rejected the maximizing behavior of households and firms. Compare and contrast the marshallian view of behavior by firms and households with veblens view. (in depth explaination)

Answer 1

According to Marshallian view, the consumption behaviour of households and firms is such that it perfectly solves the utility maximization problem. In other words, the consumption is such that maximum utility is derived from the goods. This means that there is no wasteful consumption.

According to Marshallian view, wealth effects were disregarded. This means that, the consumption pattern of households and firms did not depend upon the wealth earned by them.

Marshallian views also gave no regard to social status and social classes. They are based on demand and supply, marginal utility and costs of production.

Veblen viewed the consumption differently. The key differences between Veblens's views and Marshallian views are :

1) Veblen's views are based on consumption, rather than production and demand (as is the case with Marshallian views)

2) Veblen gives great importance to wealth effects. He states that the rich class indulges in conspicuous leisure, or wasteful use of time, and hence calls them leisure class. He states that, for displaying social status, the leisure class indulges in conspicuous consumption, which is spending more on goods that their worth. Thus, Veblen says that the consumption pattern depends on percieved wealth of the household or firm. In contrast, the Marshallian view does not take the wealth effect into account and holds that the consumption pattern depends only on utility maximization, independant of perceived wealth.

3) Veblen states that wasteful consumption is a characteristic of wealthy class, or leisure class. Other social classes also get influenced by their behaviour and indulge in wasteful consumption. If the Marshallian views of utility maximization are taken into account, there can be no wasteful consumption.

4) Marshallian views do not take into accont, factors such as effects of social and cultural change. Veblenian views, in contrast to this, places great emphasis on the effects of social and cultural change.