Innovation and the Luxury Fever

I recently read Robert Frank’s book Luxury Fever – Why Money Fails to Satisfy in an Era of Excess (1999) after a particularly enlightening course on consumption theory. This was one of those courses that made me rethink some previously held philosophies about consumption, capitalism and even innovation. Among other topics, the professor talked briefly about the morality of current consumption patterns, innovation economics rhetoric and economic policy. All to my surprise. Why? That was the first time I heard a discussion about morality in an economics class, particularly a perspective that, as I understood it, challenged some fundamental principles of innovation economics.

Back to the book and author. Robert Frank, an economist based at Cornell University has authored several books focusing on consumption of positional goods, most recently, The Darwin Economy: Liberty, Competition, and the Common Good (2011). In both the Luxury Fever book and the Darwin Economy book, Frank tries to figure out why the accumulation of opulent material goods is wrong, whether societies should do anything about it, and what societies could do about it.

Basically he says that we (individuals and society in general) are spending too much on items that are presumably better because they are bigger, better, faster and more efficient. The rich are getting richer as the poor are getting poorer. We are working harder and for longer hours to sustain consumption of luxuries or to keep up with the Joneses, and as a result, propagating a ‘luxury fever’.  Meanwhile, social amenities are falling apart and the quality of life is declining. The level of happiness, satisfaction or well-being is not increasing as wealth increases. Net saving rates are plunging. We need to do something about the luxury fever if we want to improve aggregate welfare. He proposes a progressive consumption tax system which would incentivise people to save more and spend less. Resources freed up in this process would be diverted to useful public programmes that ultimately would improve the quality of life for all.

The book has a few inconsistencies here and there, but they do not take much away from the underlying message of the book.

Reading this book made me think further about the place of innovation in either propagating or constraining the luxury fever (these thoughts were initially stimulated by the consumption theory professor during his class). Research in innovation economics in part focuses on strategies for stimulating economic growth through innovation. For firms, this means increasing innovative capacity by spending more on R&D and skilled personnel, finding good networks of partners to collaborate with/in, patenting fervently to secure rents from new knowledge—the end-goal being to increase productivity. Higher productivity is good for society, so policy is nowadays designed to create an enabling environment for innovation and entrepreneurship.

Yet coincidentally, the luxury consumption boom is fueled by the capabilities of firms to engage in innovative activity, creating and upgrading consumer goods, making them bigger, better, faster and more efficient—exactly the nature of the vanity goods that the luxury fever malaise thrives in. Calling for less feverish consumption as Frank does therefore means, indirectly, curtailing innovation. Such a perspective casts a wet blanket on the discussion innovation economists hold about increasing productivity. Should firms stop producing larger sleeker yachts, more luxurious faster cars, louder larger plasma screens, more precise Rolex-es, tastier sauces and finer wines? Should this kind of innovation stop altogether? Is there a ‘common good’ aggregate welfare theme in such innovation, apart from the distressing trickle-down-economics argument?

This issue can be argued in many ways, of course. Frank’s perspective is that by curbing luxury consumption through a progressive consumption tax, the efforts of entrepreneurs would be diverted from the production of luxury goods to the production of capital goods. I include here sustainable production that’s more inclusive and more environmentally conscious. Such innovation may widen the scope of beneficiaries beyond the feverish ones. That is, if curbing luxury consumption is even feasible, though Frank believes it shall come to pass someday in the not-so-distant future. 

In such a paradigm, some of the rhetoric of innovation research may shift away from just advocating for more, more, more innovation as the means to the ultimate end: higher productivity. For instance, scholars would no longer use patent data to show that owning more patents represents more productivity (which is good for us all!), but having certain kinds of patents is more beneficial to society. Thankfully, this new sustainability research agenda is already gaining traction. I think such a more, dare I say, moral stance in innovation economics is worth pursuing.

Edward J. McCaffery in his review of the book points to the (im)morality of luxury consumption. He despises the Paretian approach adopted in the book that sees luxury consumption as bad, because it has bad effects that affect everyone. He considers feverish luxury consumption as a matter of social justice. It is unjust in its focus on absolute individualism, thus ignoring the moral obligation that we have to one another. I agree.

Update: And as expected, the Pope agrees too!

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