Sir Robert Giffen and the Great Potato Famine: A Discussion of the Role of a Legend in Neoclassical Economics
McDonough, Terrence, Eisenhauer, Joseph, Journal of Economic Issues
It is widely believed that British economist Sir Robert Giffen observed Irish peasants consuming increasing quantities of potatoes as potato prices rose during the mid-nineteenth century famine. The conventional explanation for this purported behavior assumes that potatoes were strongly inferior goods and constituted a large portion of the typical Irish consumer's budget; consequently, the demand curve for them was upward-sloping. The historical evidence, however, appears to contradict this view. Indeed, the very nature of a famine implies that this behavior could not have been characteristic of the populace as a whole. There is no way to buy more potatoes when there are fewer potatoes. Thus, the Giffen legend concerning the great potato famine appears at best to be a misinterpretation of some observed but misunderstood phenomenon, and at worst a kind of hoax.
The purpose of this paper is to examine the perpetuation of the prevailing theory despite its historical inaccuracy. We briefly review the controversy surrounding the Giffen legend and examine the paradigmatic value of the existing legend. Some concluding remarks are given at the end of the paper.
The Gifen Controversy
Between 1845 and 1849, Ireland experienced what is commonly referred to as the great famine: a blight that destroyed enormous portions of the potato crop. In 1848 alone, for example, the blight reduced the yield per acre by nearly 50 percent, from 7.2 tons to 3.9, while in other years the blight destroyed virtually the entire crop [khtchell and Dean 19621. By all accounts, potatoes were a staple of the Irish peasants' diet, and the ensuing starvation was a direct consequence of the potato blight.
Aside from the tragic nature of this history, there is nothing remarkable about these events. Rather, it is the behavior of the peasants during this time that is of interest. According to popular economic lore, the blight created a supply shock, which raised the price of potatoes, inducing both income and substitution effects among consumers. Potatoes are said to have been income-inferior goods, so the income effect of the price rise encouraged an increase, rather than a decrease, in the consumption of potatoes. Indeed, as the story goes, the income effect so dominated the substitution effect that Sir Robert Giffen observed peasants actually consuming greater quantities of potatoes as their price rose, thus exhibiting a positively sloped demand curve. A popular presentation of the story is given in the principles text by Paul Samuelson:
... When the 1845 Irish famine greatly raised the price of potatoes,
families who consumed a lot of potatoes merely because they were
too poor to consume much meat might have ended up consuming
more rather than less of the high-P[rice] potatoes. Why? Because
now they had to spend so much on potatoes, the necessary of life, as
to make it quite impossible to afford any meat at all and hence were
forced to become even more dependent than before on potatoes. In
brief, the substitution-effect was here overcome by the perverse income-effect
applicable to a peculiar "inferior" good such as the
potato, which tends to decrease in the poor man's budget when incomes
rise. This curiosum is attributed to Sir Francis [sic] Giffen, a
Victorian economist [Samuelson 1964, 432n].
In a later edition, Samuelson and Nordhaus are somewhat less cautious in their presentation and more clearly identify the alleged source of the story:
What happened when the 1845 Irish famine greatly raised the price
of potatoes? ... After the potato blight, potato prices rose so sharply
that the family's real income actually fell. As a result, they ended
up consuming more rather than less of the high-P[rice] potatoes!
... This curiosum is attributed to Sir Robert Giffen, a Victorian
economist [Samuelson and Nordhaus 1985,416]. …