Interpersonal Effects on Consumer Demand in Economic Theory and Marketing Thought, 1890-1950
Mason, Roger, Journal of Economic Issues
In the late nineteenth century, theoretical explanations of consumer demand were derived from the neoclassical microeconomic analysis developed by Alfred Marshall in his Principles of Economics . Neoclassical theory, however, was of limited use to market analysts because it took no account of the importance of interpersonal effects on consumer choice and could not offer an explanation of the increasingly strong influence of social factors, in particular the desire for status, on purchase decisions.
Marshall effectively ignored status-driven consumption in the first edition of Principles. He acknowledged "the unwholesome desire for wealth as a means of display" that was increasingly in evidence (particularly in the United States during the Gilded Age), and he condemned such expenditures, believing that they were rooted in personal vanity and created envy in others. However, there was no serious discussion of the economics of demand for status goods and, although recognizing the complexity of any consumption that was driven by social, rather than by utilitarian, considerations, the "special case" of interpersonal preference formation did not form part of Marshall's analysis. This reluctance to discuss interpersonal effects on demand was intentional, for it would have called into question a fundamental assumption of neoclassical theory--that aggregate demand could be derived from the simple compounding of individual demand schedules and that no part of an individual's demand for any product was determined by the consumption of others.
This assumption came under attack at the time. After the second edition of Principles appeared, Cunynghame  argued that Marshall could not ignore the fact that a part of the value of any article varied in direct proportion not only to its supply and availability, but also to its consumption. Individual demand schedules were therefore interdependent and could not be arbitrarily compounded to produce aggregate demand. Foley , writing in the Economic Journal, demonstrated the importance of fashion in determining the popularity of many consumer goods
and pointed to the almost total neglect of this fact in the emerging neoclassical theories of demand. While the role of fashion in deciding patterns of demand and consumption had been widely recognized by eighteenth and nineteenth century sociologists and philosophers, she argued, it was now being ignored by economists, either by accident or design.
Marshall, however, remained unimpressed. The third and fourth editions of Principles, published in 1895 and 1898, made no concessions, and interpersonal preferences continued to be treated as a peripheral issue. As economics entered the twentieth century, status-driven consumption had not been seriously discussed. However, developments in the United States were beginning to raise difficult questions.
In 1899, Thorstein Veblen published The Theory of the Leisure Class. Although intended primarily as an attack on American finance capitalism, it discussed in detail the economics of "pecuniary emulation," which generated demand for conspicuous consumption, for conspicuous leisure, and for conspicuous waste. Much consumer demand, argued Veblen, was not utilitarian, but social, with individuals attempting to secure social status through consumption. Furthermore, this pecuniary emulation could be seen at all social and economic levels.
The Theory of the Leisure Class in effect challenged many of the central tenets of Marshallian neoclassical theory-tenets with which Veblen and others had been unhappy for some time. In 1898, Veblen wrote that "economists themselves are beginning to feel the unreality of their theorems about 'normal' behavior," and he claimed that no definition of "normality" was possible. He questioned attempts to consolidate economics within a general theory and singled out Marshall as the principal culprit:
No economist today has either the hardihood or the inclination to
say that the science has now reached a definitive formulation,
either in the detail of results or as regards the fundamental features
of theory. …