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Conspicuous consumption is the spending of money on and the acquiring of luxury goods and services to publicly display economic power—either the buyer's income or the buyer's accumulated wealth. Sociologically, to the conspicuous consumer, such a public display of discretionary economic power is a means either of attaining or of maintaining a given social status.
Moreover, invidious consumption, a more specialized sociologic term, denotes the deliberate conspicuous consumption of goods and services intended to provoke the envy of other people, as a means of displaying the buyer’s superior socio-economic status.
In the 19th century, the term conspicuous consumption was introduced by the economist and sociologist Thorstein Veblen (1857–1929), in the book The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions (1899), to describe the behavioural characteristics of the nouveau riche (new rich) social class who emerged as a result of the accumulation of capital wealth during the Second Industrial Revolution (ca. 1860–1914). In that social and historical context, the term “conspicuous consumption” was narrowly applied to describe the men, women, and families of the upper class who applied their great wealth as a means of publicly manifesting their social power and prestige, be it real or perceived.
In the 20th century, the significant improvement of the material standard of living of a society, and the consequent emergence of the middle class, broadly applied the term “conspicuous consumption” to the men, women, and households who possessed the discretionary income that allowed them to practice the patterns of economic consumption — of goods and services — which were motivated by the desire for prestige, the public display of social status, rather than by the intrinsic, practical utility of the goods and the services proper. In the 1920s, economists, such as Paul Nystrom (1878–1969), proposed that changes in the style of life, made feasible by the economics of the industrial age, had induced to the mass of society a “philosophy of futility” that would increase the consumption of goods and services as a social fashion; an activity done for its own sake. In that context, “conspicuous consumption” is discussed either as a behavioural addiction or as a narcissistic behaviour, or both, which are psychologic conditions induced by consumerism — the desire for the immediate gratification of hedonic expectations.
Sociologically, conspicuous consumption was previously thought to comprise social and economic behaviours primarily practiced by rich people. Yet the research of economists, such as Kerwin Kofi Charles, Erik Hurst, and finance professor Nikolai Roussanov, indicated a different understanding: that conspicuous consumption is a socio-economic behaviour very common to the poor social classes and economic groups, and common to the societies of countries with emerging economies. Among such people, the displays of wealth are used to psychologically combat the impression of poverty, often because such men and women belong to a social class or to an economic group whom his or her society perceives as poor. Similarly, in The Millionaire Next Door: The Surprising Secrets of America’s Wealthy (1996) professors Thomas J. Stanley and William D. Danko reported that Americans with a net worth of more than one million dollars are likely to avoid conspicuous consumption. In contrast, millionaires tend to practice frugality (e.g., they don't finance the purchase of new cars to avoid both the rapid depreciation of new vehicles and paying interest on loans, and instead pay cash for high quality used cars).
In the 21st century, there emerged the variant consumerist behaviour of conspicuous compassion, the practice of publicly donating great sums of money to charity, to enhance the social prestige of the donor.
As proposed by Thorstein Veblen in the 19th-century, conspicuous consumption (spending money to buy goods and services for their own sakes) explains the psychological mechanics of a consumer society, and the increase in the number and the types of the goods and services that people consider necessary to and for their lives in a developed economy. Supporting interpretations and explanations of contemporary conspicuous consumption are proffered in Consumer Culture (1996), by C. Lury, Consumer Culture and Modernity (1997), by D. Slater, Symbolic Exchange and Death (1998), by Jean Baudrillard, and Spent: Sex, Evolution, and the Secrets of Consumerism (2009), by Geoffrey Miller. Moreover, Hiding in the Light (1994), by D. Hebdige, proposed that conspicuous consumption is a form of displaying a personal identity, and a consequent function of advertising, as proposed in Ads, Fads, and Consumer Culture (2000), by A.A. Berger. Each variant interpretation and complementary explanation is derived from Thorstein Veblen’s original sociologic proposition, that conspicuous consumption was a psychological end in itself, from which the practitioner (man, woman, family) derived the honour of superior social status.
As sociologic theory, conspicuous consumption proposes that the public display of discretionary buying power, either as income or as accumulated wealth, does not provide direct utility to the man or the woman behaving thus, unlike the consumption of food and shelter, necessary commodities which do provide direct utility — physical and psychological satisfaction — to the buyer.
A luxury tax applied to goods and services that are considered commodities for conspicuous consumption is a type of progressive sales tax that internalizes the negative externality associated with the conspicuous consumption of positional goods. In which case, the externality is associated with the loss of status suffered by people whose stock of high-status (positional) goods is diminished, in relation to the stocks of other conspicuous consumers, as they increase their consumption of such goods and services; effectively, status-seeking is a zero-sum game — by definition, the rise of one person in the social hierarchy can occur only at the expense of other people.
Therefore, collectively, expenditure on luxury goods and services (positional goods) is an economic loss, like competitive military spending (an arms race) — wherein each country must match the military expenditures of other countries in the arms race, or suffer a loss of relative military power. In the case of conspicuous consumption, taxes upon luxury goods diminish societal expenditures on high-status goods, by rendering them more expensive than non-positional goods. In this sense, luxury taxes can be seen as a form of market failure correcting Pigovian tax- with alleged negative deadweight loss they are a more efficient mechanism for raising revenue than ordinary 'distorting' labor or capital taxes.
This economic case for the taxation of positional, luxury goods has a long history; in the mid-19th century, in Principles of Political Economy with some of their Applications to Social Philosophy (1848), John Stuart Mill said that:
I disclaim all asceticism, and by no means wish to see discouraged, either by law or opinion, any indulgence which is sought from a genuine inclination for, any enjoyment of, the thing itself; but a great portion of the expenses of the higher and middle classes in most countries . . . is not incurred for the sake of the pleasure afforded by the things on which the money is spent, but from regard to opinion, and an idea that certain expenses are expected from them, as an appendage of station; and I cannot but think that expenditure of this sort is a most desirable subject of taxation. If taxation discourages it, some good is done, and if not, no harm; for in so far as taxes are levied on things which are desired and possessed from motives of this description, nobody is the worse for them. When a thing is bought not for its use but for its costliness, cheapness is no recommendation.
As an alternative to luxury taxes, the economist Robert H. Frank proposed the application of a progressive consumption tax. In the New York Times newspaper article “The Big City: Rich and Poor, Consumed by Consuming” (1998), to remedy the social and psychological malaise that is conspicuous consumption, Frank proposed eliminating the personal income tax, and replacing it with a progressive tax upon the yearly sum of discretionary income spent on consumption of goods and services.
Another economic option is to increase the supply of public goods, which are non-rivalrous, because the consumption of public goods is not a competitive matter of prestige. For example, whilst luxurious private gardens and personal art collections can be high-status goods, when similar goods and services are provided to the public, either as free or low-cost public parks and art galleries, they lose their 'positional' quality.
Yet another economic option, ideally in conjunction with the provision of public goods, is the redistribution of wealth either by means of an incomes policy or by progressive taxation. Because conspicuous consumption, itself, is a form of superior good, diminishing income inequality, by means of an egalitarian policy, which diminishes the incomes at the top strata of the income distribution of a society, will lead to the reduced conspicuous consumption of luxury goods and services. As pointed out by A. C. Pigou such redistribution may lead to large net social welfare gains, as reduction in the incomes of the wealthy may impose no welfare losses if they are primarily concerned with their relative, as opposed to absolute income,
Now the part played by comparative, as distinguished from absolute, income is likely to be small for incomes that only suffice to provide the necessaries and primary comforts of life, but to be large with large incomes. In other words, a larger proportion of the satisfaction yielded by the incomes of rich people comes from their relative, rather than from their absolute, amount. This part of it will not be destroyed if the incomes of all rich people are diminished together. The loss of economic welfare suffered by the rich when command over resources is transferred from them to the poor will, therefore, be substantially smaller relatively to the gain of economic welfare to the poor than a consideration of the law of diminishing utility taken by itself suggests.
According to Kaplow 2009, assets may themselves enter the utility function- individuals may horde assets because the horde itself is a status or positional good. In this case savings and bequests will be insensitive to inheritance taxes, reducing their excess burden.
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