While composing my post on Veblen goods, I came across the concept of a “Giffen good”, which was new to me. It’s a fascinating topic that I think is worth a post.
A Giffen good, like a Veblen good, disobeys the law of demand. That is, while demand for a normal good decreases as the price goes up, demand for a Giffen good actually increases along with the price. Yet this has nothing to do with status seeking, as in the case of Veblen goods. The cause behind Giffen goods is more depressing: the straitened circumstances of the poor.
The Wikipedia article on Giffen goods includes this description:
The classic example given by Marshall is of inferior quality staple foods, whose demand is driven by poverty that makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food.
As Mr.Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises the marginal utility of money to them so much that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.
—Alfred Marshall, Principles of Economics (1895 ed.)
It’s been a while but I seem to recall something about “goods with cultural significance” – Potatoes and the Irish was the example used but I can’t remember the mechanics of it : It was the 80s and I was very drunk.
Potatoes showed up a lot in my reading about Giffen goods, but the consensus among economists seems to be that they weren’t actually a Giffen good during the famine, and that the price increases were purely due to the reduced supply.
I wonder if they might have been a Giffen good before the famine, however. One of the papers I read said that per capita consumption of potatoes was nine pounds per day on the eve of the famine. Potatoes definitely become an “inferior good” when you’re eating nine pounds day after day!
Doing some research on the likely world-economic effects of CA drought, I came across the term Giffen goods for the first time. Turns out that evidence for the existence of any actual Giffen goods is slim. Here’s the abstract of one paper claiming that potatoes were not a Giffen good:
Potato Paradoxes; Sherwin Rosen; Journal of Political Economy
I wonder if used cars or used clothes are Giffen goods. It seems that, in the USA at least, social/political trends continue to amplify the necessity of individual motor transport for persons who need to get to work, get to school, get out of zoned-residential-only neighborhoods to bring home groceries, etc. Meanwhile, wIth widespread economic uncertainty in the middle class, more people are hanging on to their old cars longer rather than spending on a new one, so fewer used cars enter the market and – I think – the price of a typical used car has gone up. But in spite of the fact that the price is going up, and that no one actually wants to buy an (inferior good) used car, poor people are forced to “consume” more used cars than previously because they have been completely priced out of the (loan) market for new cars, and because without a car they will go hungry when they can’t get to work.
Dunno. It’s just speculation on my part, since I don’t see that any economists have written about it, one way or the other.
In this audacious study, the authors set out to create Giffen goods temporarily:
hotshoe:
I don’t think that qualifies as a Giffen good because as you describe it, the increase in demand comes from being priced out of the market for new cars.
To make the case for used cars as a Giffen good, you’d have to argue that by buying a more expensive used car now, some consumers will deplete their savings enough that they must buy a used car later when they otherwise would have upgraded to new. That could increase demand for used cars, at least in the long run.
On the other hand, folks who are on the new/used borderline are probably more likely to buy new when the price of used cars goes up and the new/used delta becomes smaller. Why drive used when you can drive new for a small premium?
I think the second effect would always win out over the first, and that used cars therefore could not be a Giffen good.
Yeah, well, this is why I think the concept of Giffen goods is so confusing – at least to me (and apparently some actual economists as well).
Take another look at the example given in the OP about the price of bread. Marshall restates Giffen as observing that the price of bread has gone up and is ruinous to the poor families, yet they buy more of it rather than less, because they have been priced out of the (marginally) higher cost meat / other desirable foodstuffs. But the higher-priced desirable good is often only the tiniest bit more expensive — it’s just that a family on the borderline between bread and meat does not come up with the “small premium” necessary, because they have already drained their resources to the point where they don’t / can’t spend more of their limited budget on a food category.
I’m not trying to make a case for used cars as Giffen goods; I just genuinely don’t see a difference between them and bread in terms of economic choices involved for the working poor. So what’s the economists’ take on the difference between poor folks’ undesirable bread and undesirable used cars?
Google doesn’t look helpful on “used car giffen good”.
Wikipedia doesn’t seem clear, either:
I certainly will not come up with the “small premium” between a used car and a new car, even if used cars have gotten pricier than they’re “worth”, while a new car with warranty and without repair problems is a better strategy (in the long run). But that “small premium” would represent more than my available cash. The more the price of used cars rises, the more likely that I will choose a used car, because that price signifies that I am even less able/willing to afford the additional cost of new. And I have to have a car almost as urgently as I have to have food. In the society in which I happen to live, when I don’t have a car I have no access to income and therefore, in short order, will also have no way to provide food for myself or my family. So, used it will be. By the way, there is no public transit in a radius of 100km of where I live, so that seems to meet the defined requirement for “limited availability of substitutes” also.
I don’t want anyone to feel sorry for me: I’m clearly not starving. I get my internet by charity but in any case I do have access to a modern world full of entertainment and education, not lifelong drudgery and dull suffering. I’m fine, really, but not everybody is so privileged.
This seems apropro:
If you want to hear that song performed LOUD and RUDE:
the Bottle Rockets, youtube
I love the Bottle Rockets!
Here’s another great song about depending on others for your transportation.
hotshoe:
I won’t speak for economists, but it seems to me that neither bread nor used cars qualify as Giffen goods in the developed world. I made my case against cars above. For bread, the spoiler is the fact that cheap substitutes are available.
Giffen goodness isn’t an intrinsic property of a good, but instead depends on the economic context. Rice may be a Giffen good in Hunan, but it certainly isn’t in Alabama.
It’s Commander Vimes’ boots, redux.
I’m not arguing that the premium for new over used is small right now. I’m just pointing out that it will become “small” (which is relative to each consumer) if the price of used cars rises enough.
To take an extreme case, suppose the price of used rises to the point where it’s one dollar less than for new. If you absolutely have to buy a car anyway, you’ll find a way to come up with the extra dollar. It would be crazy not to.
As I said above, the size of a “small premium” is relative to the individual consumer. But unless a society is so stratified that no one is on the new/used “borderline”, it seems to me that the demand for used cars will always be self-limiting, because every price increase will push a group of people into the “worth it to buy new” category.
In fact, you could make a similar argument for bread or any other candidate Giffen good. Giffen goodness seems to depend on extreme stratification.
Well, I’m glad you have internet access. I think universal internet access is a moral imperative.
I wonder if toilet paper counts in. Venezuela.
Thanks for sharing. I’ve heard that song on KPIG but never noticed it was Wilco.
Wilco falls into a sorta gap in my listening standards. Their relation to other music I love should put them closer to the top of my lists.
We could do car-songs all day.
How’s about 15 Days Under the Hood, live 1977, youtube (not bad footage)
New Riders of the Purple Sage. Saw ’em play once at some dive; I don’t recollect they did that song. Must have heard it on the radio around that year, though; song got stuck in my head when I was pulling the transmission on my truck.
? ?
He’s talking about this:
Venezuela is Running Out of Toilet Paper
hotshoe:
They get bonus points for recently cancelling their Indianapolis show as a protest against Indiana’s so-called ‘Religious Freedom Restoration Act’.
Only those people who are politically correct get to discriminate. In much of Europe, holocaust denial is not just stupid; it’s against the law. In Turkey, genocide denial is the law. In Colorado, a baker can refuse to put anti-gay bible verses on a cake. It would seem that all over the world, the law is assuming authority to determine the truth of speech, and the power to forbid untruthful speech. This is interesting.
petrushka:
Not true.
For example, it would be perfectly legal for a Christian band to cancel an Indiana performance as a protest against the subsequent pro-LGBT changes to the RFRA.
In both cases, the only legal requirement is that the contract be honored and that ticketholders get their money back when the show is cancelled.
But that’s what I was discussing. On issue is whether a public business (bakery, printer, whatever) can refuse to produce content based on objection to the content. I think certain kinds of content are being priveleged based on political correctness. One fairly obvious example is european laws against holocaust denial. Although I think deniers are pretty scummy, it’s a rule of thumb that free speech is intended to protect speech you disagree with.
I would say that current policies are based more on expedience than on any general principles. Whoever is making the most noise gets the favors.
petrushka,
You wrote that
But that isn’t true. In my example, the Christian band is not being ‘politically correct’, but they can still cancel their show legally, just as Wilco did.
hotshoe:
Here’s another of my favorites from the Bottle Rockets. It has special meaning for me because I grew up in Indiana and couldn’t wait to get out.
Indianapolis, by the Bottle Rockets
Can’t go west
Can’t go east
I’m stuck in Indianapolis with a fuel pump that’s deceased
Ten days on the road now, I’m four hours from my hometown
Is this hell or Indianapolis with no way to get around
I woke up this morning with “Thousand Dollar Car” going through my head. 🙂
Tee hee. My work here is done. 😉