Excerpted from chapter 5, section 4:
Not every economist is impressed by the law of demand. In 1899 Thorstein B. Veblen published an unusual book, The Theory of the Leisure Class, arguing among other things that emulation, status, envy, the desire to make "invidious distinctions," not price, were the big drivers of demand. He coined a term-"conspicuous consumption"-to describe what the rich do when they go to market. Buying more when the price is high, especially for items that signal your status, such as bright trophies, green lawns, and even mistresses, said Veblen, makes sense. What better way to show off your great wealth and status? Veblen, and especially Veblen's many followers, such as John Kenneth Galbraith (1908-2006), thought that social pressures like status and advertising were more important than price.
Neoclassical economists don't believe that Veblen's critique of the law of demand cuts very deeply. For example, there are substitutes for everything, they say, including status and other forms of invidious distinction, and people economize on them just as they do bread and beer. A stranger or best friend will not be able to tell that your Prada purse came from T. J. Maxx in Peoria and not from Prada in Paris. But the contents of your purse prove the point. Fake status goods can be bought at a low price, and the lower the price, the higher the quantity demanded. Do all those wearers of Louis Vuiton handbags pay full retail price?
And does advertising really do what its critics think---"manipulate" consumers? That's you. The neoclassical economists doubt it. One among several warrants for their doubt is that if advertising were so powerful then advertiser would be rich. It's the $100 Bill Theorem again.
Economists subscribing to a school of thought called "Institutionalism"-to which Veblen largely contributed-persist in their disagreement with neoclassical economists. The status good in question will lose its status at a high volume of circulation, they reply, turning the neoclassical response on its head. Fake Vuiton's will cause people to shift to other signals of status and wealth. And on advertising theinstitutionalists, and many others, claim to the contrary that advertising is essential for late capitalism. And so on. Science, you see again, is a conversation about exactly where we agree and disagree.