The Mysterious Death of Duesenberry

James Duesenberry
(1918-2009)

No this is not about a conspiracy theory. For all that I know James Duesenberry died of natural causes in 2009 [I had the opportunity to talk extensively with him at a conference organized by Ed Nell in 1998]. I'm referring to the fact that he is relatively unknown in the profession, as I noted Thursday when I asked my students if they ever heard about him, with only a few affirmative responses. He is also completely absent in textbooks (e.g. David Romer's Advanced Macroeconomics).

This is surprising since, as noted by Robert Frank, "his theory of consumer behavior clearly outperforms the alternative theories that displaced it in the 1950's - a striking reversal of the usual pattern in which theories are displaced by alternatives that better explain the evidence." The alternative that displaced it in the 1950s was Friedman's Permanent Income, for which he got the Sveriges Riksbank Prize (aka the Nobel).

Friedman's more popular theory of consumption was developed as a response to Keynes and Duesenberry, in particular, as a way to suggest that the economic system did have a tendency to full employment after all. Friedman (1957, p. 5) argued:

"The doubts about the adequacy of the Keynesian consumption function raised by the empirical evidence were reinforced by the theoretical controversy about Keynes's proposition that there is no automatic force in a monetary economy to assure the existence of a full-employment equilibrium position. A number of writers, particularly Haberler and Pigou, demonstrated that this analytical proposition is invalid if consumption expenditure is taken to be a function not only of income but also of wealth or, to put it differently, if the average propensity to consume is taken to depend in a particular way on the ratio of wealth to income. This dependence is required for the so-called 'Pigou effect'."

Friedman conveniently ignores Kalecki's response to Pigou, which actually shows that if deflation does have positive wealth effects for consumers, which tend to hold assets, then it is also true that for those holding the corresponding liabilities (the debtors, which could also be consumers) there will be negative wealth effects. The evidence on wealth effects does not suggest that the Pigou effect is strong enough to get an economy out of a recession automatically. Note, however, that there is increasing evidence that real assets have had an impact on household indebtedness and consumption, and have been a source of bubble-led growth (which is unsustainable and prone to crises; see for example this paper).

Duesenberry's Relative Income Hypothesis, developed in his 1949 book Income, Saving, and the Theory of Consumer Behavior, is quite relevant now after the crisis. While Keynes theory of consumption was based on what he referred to as a psychological law, that people consume only a fraction of their income, Duesenberry suggested a sociological explanation. Duesenberry argued that the poor tend to consume a higher proportion of their income than the wealthy, and that, as income increased, the relatively poorer members of society continued to consume a higher share of their income, since their patterns of consumption changed to emulate their well to do peers. A notion that has elements in common with Veblen's notion of conspicuous consumption. Note that this suggests that re-distribution towards the less privileged would boost the economy, since they have a higher propensity to spend (see this paper).

PS: Tom Palley developed a bridge model he calls a Keynes-Duesenberry-Friedman Model (see here). See also Garegnani and Trezzini's paper on consumption and cycles.