Customer Reviews

Luxury Fever

5 star:		(12)
4 star:		(7)
3 star:		(4)
2 star:		(4)
1 star:		(6)

 

 

Economist Robert H. Frank has written a stimulating book that integrates research from psychology, evolutionary biology, and economics to address the raging "luxury fever" that is needlessly consuming precious resources in "overdeveloped" economies. Frank documents how luxury consumption in western industrialized countries has been rising at an astronomical rate, even though the latest psychological research shows that there is scant correlation between this consumption and levels of stated life satisfaction. Why, then, are wrist watches costing $20,000, huge houses of 10,000 sq. ft. and more, and myriad other forms of conspicuous individual consumption rapidly increasing, even as social spending on education, infrastructure, the environment, and other things that would raise the average level of life satisfaction in society decreasing? Frank describes how this perverse "luxury fever" occurs when individuals pursue their strong individual incentives to increase their relative position in society by consuming more than their peers. But when everyone does this, relative consumption (and perceived life satisfaction) remain constant, while absolute consumption (and related negative impacts on natural resource use, the environment, education spending, etc.) soars. Luxury fever is one of a class of phenomena known by various names in different disciplines, including: negative externalities, social traps, social dilemmas, the prisoner's dilemma, and the tragedy of the commons. Frank cleverly labels these phenomena as situations that are "smart for one, but dumb for all." Once one begins to look, there are clear examples of these situations everywhere, ranging from drug addiction to pesticide overuse to arms races to environmental pollution and even women's fashions. While economists have recognized these phenomena, they have largely been relegated to the status of interesting but relatively minor anomalies. But Frank clearly points out just how pervasive, important, and wasteful they are, and how eliminating them can save literally billions of dollars while actually improving welfare. The "invisible hand" of the market cannot be relied upon to solve these problems, because, as Frank notes: "Far from being a principle that applies in most circumstances, the invisible hand is valid only in the special case in which each individual's rewards are completely independent of the choices made by others. In the rivalrous world we live in, precious few examples spring to mind." (pp 271) Frank's solution to luxury fever is a strongly progressive consumption tax. This could be done in the US with a simple one-line amendment in the tax code to exempt all savings from income taxation. With this modification, the income tax would tax only consumption, without having to specify which consumption was "luxury consumption" and (because of its steep progressivity) without adversely affecting the poor. This consumption tax would have the effect of increasing the costs to individuals of conspicuous consumption (and thus reducing it), while freeing up significant resources to pursue increased "inconspicuous consumption" - things like education, infrastructure, environmental protection, and family time. Given the psychology of relative consumption and satisfaction noted above, this could occur with absolutely no decrease in welfare. In fact, average life satisfaction would increase because relative individual consumption would not change and the neglected forms of social consumption could be increased with the resources from the tax. Why has so obvious a "win-win" move not already occurred, and what are its chances in the future? Frank answers the first part of this question with the famous joke about the economist who sees a ten dollar bill lying in the street and concludes that it couldn't really be a ten dollar bill because if it were someone would have already picked it up. The first step is to clearly and convincingly lay out the problem and the solution as Frank has done - in effect to point out the existence of the $10 bill just lying on the ground. But the idea of a broad consumption tax (and the reasons for it) has been around for many years. It was first proposed by Thomas Hobbes in 1651 and has surfaced many times during the last 300 years. Frank concludes that it will just be a matter of time before the obvious benefits of such a tax are recognized and the plan is implemented - after all, most political changes have a significant gestation period. But there are also obvious impediments to implementing such a tax in the current political climate. In political systems run more and more by special interests it is difficult to implement any policy that might hurt even one of those interests - even if only in the short run. Overcoming the political impediments to any form of meaningful tax reform will require "government by discussion" rather than by interest groups and media manipulation. If social issues of the importance of those in Frank's book can be discussed rationally by the society at large then such obvious social "win-win" solutions as ecological tax reform and a progressive consumption tax can be appreciated and implemented. In a few countries this kind of social discussion occurs reasonably well, but in most it is a far cry from the current political reality. Just as it is very difficult for an animal caught in a trap to free itself, it is also very difficult for a society caught in a social trap to free itself, even when the nature of the trap and the way out has been clearly identified. Lets hope we don't have to bite off our social foot to escape the invisible hand.

Let Them Be Lemmings

Some factual common trends are noted by Frank: in general, wages in the U.S. have been static and even in decline for most Americans in recent decades. Yet, proportional per capita spending on luxury goods has increased significantly. The results according to this author and others who've conducted numerous studies and research is a weaker economy, high personal debt, longer working hours, less sleep, and having to work until death, in debt of course.

We're all aware of the American "gotta have this or that" bug. Many have it, but many don't. Some don't want it. Why do certain luxury goods and "gadgets" become oh-so-popular in American society? Frank notes, and correctly, that the desire for many to purchase certain material things is by no-doubt influenced by what others are buying or want to buy.

The concept of "social status" is a concept where human beings in mass-consumption cultures judge each other in this context in RELATION to our peers. These "peers" may be the strangers we live next to in suburban anonymity, our co-workers, friends, or the strangers we see driving next to us in our daily suburban traffic jams. (Note my use of the word "stranger").

The commonly known terms such as "keeping up with the Joneses," the status treadmill" the "arms race of consumerism, Consumer Feticism," and Velben's "Conspicuous Consumption" are presented. But not from a moralistic standpoint but a behaviorist, biological, psychological, and an economic standpoint.

The first part of the book informs us about many things we already aware of but expands upon it through the various academic fields already noted above. The second part of the book is the "solution part." What the author thinks can be done to change the current pattern. Here's where it can get sticky for some. The solution Frank offers from his research is a thesis on Human Behaviour, and he proposes a "political-economic" solution: taxing consumption. The solution is the part of this work that leads to the economic analysis of the "hypothetical" once again, and there's nothing wrong with that. Although theoretical, the first part is interesting, and the second part may be for some.

Frank's point is essentially that Americans spend too much on luxury goods that don't bring them satisfaction, and too little on things they really could make them happier. He makes a good case for using a consumption tax to remedy the situation. I really enjoyed the analysis of homo economicus versus homo realisticus. Frank argues that homo economicus (as used in mainstream economics) is concerned with rational betterment of his situation, while real people are concerned as much or even more with doing better than those around them. When I studied economics I realized that something was wrong with the standard homo economicus model, but Frank lays out the differences very clearly, in ways I hadn't thought of.
Frank has some great commentary on the human condition here, too. My favorite is his analysis of why it helps to get up in the morning if you put your alarm clock out of reach of the bed. If you don't see what this has to do with economics--read the book!
Frank makes some proposals that I think are bluntly naive. For example, he proposes curing unemployment by a program of public works. This simply cannot work. It has, of course, been tried, including the attempt by the Washington DC municipal government in recent decades. Inevitably it leads to dependency and corruption, and a multiplication of the number of people needing public jobs. Frank needs to think more about where the incentives are in such a situation. In my opinion, if the streets are littered with garbage that isn't being picked up, you have to look at where the garbage is coming from and who is benefitting from creating it. It should be sellers of plastic bottles, paper cups, and the like who should be paying for picking up litter from the streets, not general tax funds. Frank also needs to pay more attention to population issues. No public works program can support a continually increasing number of people. I think Frank also overlooks the large role in overconsumption of having no limits on the interest rates which credit card and mortgage companies are allowed to charge. Unlimited rates means that such companies have a vested interest in keeping the maximum possible number of Americans on the edge of bankruptcy, and not much of an interest in making sure they lend money only to people who are likely to be able to pay it back.
Overall, though, this is a book with some useful and interesting ideas.

As the review title indicates, students & professors of economics, politics, psychology and other social & behavioral sciences will benefit from perusing the pages of Bob Frank's commentary on contemporary American life. Regardless of whether you agree with Professor Frank's solution to our society's "arms race of consumerism", the book makes the reader think about the materialism evident in much of the U.S. Using amusing analogies to describe human behavior related to "buying excess," Frank explains these activities with theories of psychology and economics. His insight provokes thought and entertains the reader throughout the book. Whether explaining why many middle class couples spend $5,000 for the latest Viking model gas grill for their patio, or describing how two millionaires childishly built larger and more lavish yachts just to own the biggest and best cruiser in the world, Frank delivers interesting examples which help provide an understanding for why many people do the things they do.

Read this book if you are a student or teacher of the social or behavioral sciences. Whether you agree with Frank's prescription to correct societal consumerism or you don't believe America has a problem, this book entertains the reader and stimulates ideas for discussion. Well worth the read!

I really did enjoy reading this book on a number of levels. I think Frank does a wonderful job of mixing research from a number of academic fields including economics, psychology, sociology, biology, and public policy. The result is a refreshing and multifaceted look at America's spending habits.

Contrary to other reviews, I did not find Frank's tone to be at all condescending. First and foremost, Frank is an economist, and he eloquently explains how we are all acting independently to maximize our own utility. However, borrowing from the other social sciences, Frank is able to show how these efforts can sometimes go astray. It is not that we are irrational, selfish, or stupid. The problem is that as a society we have not yet learned how to utilize the benefits of both individual freedom AND group cooperation.

I give this book 4 stars because I do agree with other reviewers that it does get a bit repetitive. Also, I believe that the first chapter, which highlighted many gross extravagances in spending by the ultra rich, was a poor introduction to the rest of the book.

The consumption patterns Frank addresses in this work apply to all Americans, as do the consequences in terms of our schools, health, roads, environment, etc. Frank's arguments are logically sound and backed by a large body of research. His solutions for change may appear unpopular, but upon further research, I could not find any strong arguments against them. Overall, I believe this is an important and thought provoking book.

Mr. Frank's thesis is this: many of the consumer goods we buy are purchased not for the intrinsic pleasure they bring, but for the pleasure of keeping up with or surpassing the Joneses. By taxing consumption instead of earnings, people will buy cheaper luxury goods. This will keep all of the pleasure of the consumption race but raise extra tax dollars to spend on things that everyone truly wants for their intrinsic value - like cleaner air.

It will also have the effect of increasing savings (because income is not taxed until spent, the incentive to invest is boosted). This makes us all richer long-term as capital investments grow our standard of living.

The theory is well-explained -- perhaps too well-explained -- but the proposed solution is not. While Mr. Frank spends a couple of hundred pages explaining the problem, his solution - taxing consumption - is presented without question. But will it work? The goal of producing income is to spend it, and whether it's done now or later, the rich want to spend it all before they die. Doesn't it make sense that not taxing saving would simply defer consumption until later in life, and the rich would buy even *more* opulent goods later? The author never discusses this, or any other potential difficulties. Won't the rich just rent everything instead of buying? Won't people who might otherwise save, be instead persuaded to consume now, since they will be taxed more if they save to buy their dream good in a single future year? The point is not that these objections are unanswerable, but that they seem to never even occur to the author.

As for the disdain with which Mr. Frank treats the acquisition of luxury goods, the reader should be made more than a little uneasy. What he says about social pressure may have some merit, but is this the *only* reason someone buys a Ferrari? And what about those of us who do not feel the need to keep up, and buy goods purely because they will enrich our lives in other ways? Again, these shades of grey do not slow down Mr. Frank's thesis. And the reader who is told he is "polluting" by choosing to wear an expensive suit - the author uses the analogy without qualification or irony - would be justified in feeling that Mr. Frank would have done well to temper the observations in his book with an understanding that human motivations are not as black and white as he thinks.

Frank's book looks at human nature as the underlying cause of increasing luxury spending and the consequent decrease in savings. His claims certainly make intuitive sense -- who can doubt that many of the goods we purchase are heavily influenced by what we observe others purchasing, or that some of our excess money could be better spent? The extent to which we can make more lasting increases in well-being by allocating money differently is less clear. Much of the evidence cited by Frank is more anecdotal than rigorous, and while it feels correct, he leaves a skeptical reader not quite convinced.

The biggest value of the book might be in bringing renewed attention to a very interesting idea, the consumption tax. Frank provides a nice history of the idea and why it has failed the past, leaving us with the hope that its shorcomings are not insurmountable.

Some parts of the book suggest Frank's leftward leanings, which may turn off conservative readers and cause them to dismiss his ideas out of hand. However, the open-minded reader will find much food for thought in this well-written, provocative look at consumer spending patterns and incentives.

About 100 years after Veblen coined the phrase, "conspicuous consumption," Frank finds himself trying to make sense of outrageous consumption patterns during another era of prosperity. Why the love for expensive grills, cars and watches? The answer, in brief, is status. Because social status is measured relative to others (rather than by absolute standards), consumers step on a treadmill that finds them trying to outmeasure their peers. This treadmill doesn't lead to any greater happiness. Though individual satisfaction tends to increase with greater income and greater income slightly associates with higher satisfaction in the U.S., the elevations in per capita income within countries over time don't correspond with greater satisfaction (above some threshold). We have more stuff than our grandparents but not more satisfaction because of it. Pointing out that society as a whole would be better served by reallocating the resources wasted on individual luxury items by investing in clean air and water, paying teachers and maintaining roads, Frank shows that this conflict between individual and group interests represents a public goods problem. Though legal restrictions, social norms and other mechanisms have been advanced to solve these dilemmas elsewhere, Frank favors a progressive consmption tax for the U.S. This contention muddies the water between advocacy and the science of economics. In his support of it, as elsewhere in the book, he overgeneralizes from a few lines of evidence ("all evidence shows that...") to broad conclusions, leaving the reader questioning how completely the relevant evidence has been reviewed. Yet the clarity, readability and timeliness of this book make it well worth reading. Will it help us get off the status treadmill?

This fascinating book describes how a new virus, the luxury fever has Americans seemingly inescapably in its grip: people spend a larger and larger proportion of our money on luxury goods. And, because for most people incomes have remained static or have even declined (in the US and the UK), this extra spending was financed by lower savings and higher debts, making the economy weaker and more vulnerable. Further, most people work longer and tend to spend less time on important activities such as vacations, being with family, sleeping exercising, etc. To make things worse: Americans spend less on vital public services which leads to a deteriorating infrastructure, to higher crime, to dirty streets and parks, to water pollution, to a deteriorating education system, etc. And what about health? 40 million Americans currently lack health insurance.... This book explains how there is a competition 1) between different forms of private spending (do we buy luxury or do we spend our money differently?) and 2) between private and public spending. To expand on the latter point: a growing share of the US national income is spent on consumption and spending on vital publics services is increasingly threatened. Frank explains (on the basis of well-being research and the adaptation-level theory) that the main reason we buy luxury goods is to demonstrate to others that we can afford to thereby trying to distinguish ourselves from them. In doing so we try to achieve happiness by improving our relative status. The irony is, however, this absolutely doesn't work! The satisfaction we get from luxury spending, which Frank calls conspicuous spending, depends largely on context. The satisfaction we get from luxury spending lasts only shortly. Two examples: 1) If we buy an expensive car, this distinguishes us from our neighbour and we feel happy. If, however, next month our neighbour buys an even fancier one, our satisfaction will be largely gone. You can see how this leads to an escalation, an arms race, with no winners. 2) The satisfaction we get from luxury goods tends to decline steeply over time. We tend to get used quickly to what we have and the favourable features of the luxury good tend to fade into the background rapidly: we no longer notice the fancy features of our expensive car and our satisfaction diminishes. Bottom line: this increasing conspicuous spending does more harm than good. We have to discourage conspicuous consumption in favour of inconspicuous consumption. Frank explains that no individual or family alone can solve this problem. It has to be solved at a higher level. He proposes a simple but effective measure to discourage conspicuous consumption, a progressive consumption tax levied on consumption rather than income. Frank claims this tax can stimulate radical changes in the ways we lead our lives. Contrary to the believe of many, he convincingly argues, this progressive consumption tax would not cripple the economy but invigorate it. A fascinating book also highly relevant for European countries I think.

Driving to work daily, my small but reliable Toyota Corolla is often surrounded by these massive SUV jeeps driven by single occupants. The local supermarket parking lot is littered with either yuppie BMW's or these obscene gas guzzler SUV vehicles. In my hometown of Colts Neck NJ, a very wealthy suburb of New York City, farmland is being devoured by huge 6,000 square feet mansions on 5 acre building lots. I was raised in the community when it was very rural. Now older residents of the community are being squeezed out as property taxes skyrocket to pay for paving new and bigger roads, more street lights, sewer drainage, etc. Does this luxury spending really contribute to a higher standard of living for all Americans or does this overconsumption represent collective madness?

As Robert Frank mentions, America is increaingly becoming a society of overconsumption by all income groups. A secretary in my office recently purchased a $40,000 Mercedes SUV. Just as the nuclear arms race betweeen Russia and the United States represented a misallocation of resources, luxury fever as he describes also has long term negative consequences. Already the U.S. trade deficit has skyrocketed to record levels as personal bankruptcies soar with household debt levels exploding and the national savings rate imploding to a negative rate. With farmland disapearing at a record rate and manufacturing employment falling last year by 300,000 jobs, I personally can't imagine that there will be a farm acre or factory left in America in twenty years. We will have to import everything from autos to basic food essentials. In the long run, America cannot and should not continue to finance this foolish excessive level of consumption from foreign creditors. No family or even nation can continue to consume more than it earns for an indefinite period of time. Maybe I'm too old fashioned in my views, but that's the way I see things.