Ghosts of Veblen still haunting us

One of the economists I most admire is Thorsten Veblen (1857-1929). He was a Norwegian immigrant who taught at the University of Wisconsin and is famous for coining the term conspicuous consumption.

Simply put, we often buy what we buy not so much because we need it, but because we want to be conspicuous – we are seeking recognition from others.

Entrepreneurs have made lots of money in Kenya because of being disciples of Veblen, either consciously or unconsciously. Maybe its a sign of economic growth that conspicuous consumption has become more noticeable and profitable.

A recent visit to a restaurant in the city left me hungry because I had no prior booking – yet the seats were empty. I assumed the guests were on their way. Not wanting to create a fuss, I left, but it got me thinking.

Why should a restaurant restrict the number of guests? Doesn’t basic economics dictate that the more you sell the more revenue you earn?

But think a bit deeper. Revenue is price multiplied by quantity sold, or in this case, customers served.

Increase any of these – price or quantity – and you make more money. But which approach is better? Increasing quantity or price?

The restaurants calling for bookings are reducing the numbers and increasing prices. But the same economics tells us that as the prices go up, fewer patrons will come to the restaurant. So what is going on?

You only understand when you come to realise the calibre of patrons booking. They are not hustlers like you and I – they are men and women who feel good that they don’t have to compete for space with anyone.

The idea of calling your friend and informing him or her that you got a booking is conspicuous consumption.

Balancing act

But it’s more than that. For Veblen goods, the law of supply and demand fails. The higher the price, the higher the demand. More people are likely to try and visit a restaurant that insists on bookings.

It is a delicate balancing act. If a product or service is common, you cannot make money from selling it at a high price. Suppose sports cars like the Maserati were common? Their prices would go down, but lots of people would avoid them. Can you now explain why Porsches, Jeeps and other previously rare brands are doing so well in Kenya?

By restricting supply, entrepreneurs can make lots of money per unit. From an operational point of view, this is very efficient; you use fewer resources, fewer waiters, fewer tables, get fewer headaches.

Veblen goods include jewellery, fine wines, watches and so on. But you can make anything Veblen, including services. Unfortunately, Veblen goods are the biggest targets for fakes because you stand to make lots of money. Fortunately, services are hard to fake.

So where do you find Veblen in Kenya?

Some private schools and universities make money by charging high fees, but parents keep coming because they stand out from the rest, conspicuously.

Ever wondered why Harvard has never opened campuses outside Boston, yet it could fill them overnight? We are doing the opposite in Kenya, opening campuses in all parts of the country, and even beyond our borders.

Some residential places are Veblen, charging high rents to attract more customers – Kenyans will say to avoid diluting class.

Some barbers will charge you Sh1,000, and require that you make an appointment. First-class plane ticket holders arrive at the same time as the economy class, but one pays twice as much.

Are some churches Veblen? What of weddings? What else?

Kenyan entrepreneurs have welcomed Veblen and are in the money. Do you need to ask why some things are so expensive in Kenya? The tricky part is convincing consumers that something is Veblen.

The media, through movies and advertising, has done very well in convincing the younger generation that the higher the price the better the product.

The younger generation is more attuned to class, recognition and status, without much thought for investment, because they feel secure without the responsibilities of educating their siblings or taking care of their parents. Conspicuous consumption has become their main sport. Who visits sports bars?

Mass market

Where do we go from here?

The mass market will not die. There is a big segment of the population that cares about low prices, and perhaps this is why Chinese products are doing so well here. But any entrepreneur who can create the impression or even the myth that their product is better will make plenty of money.

In a country where class and status have become so important, Veblen goods and services are likely to do very well. It has even been suggested that Veblen goods and services drive corruption as we race to show off.

A closer look at the economy seems to suggest that the country has more characteristics of a developed country than many are willing to accept. What would Veblen say? And you?

The writer is senior lecturer, University of Nairobi.