Canonical Consumer(was Re: Giffen Effect)

Richard_Marken2 · November 10, 2002, 6:33pm

[From Rick Marken (2002.11.10.1030)]

Bill Williams (UMKC 10 November 2002 00:30 AM CST) --

I think this is developing into an interesting thread.

Great! Me too.

A variety of "Giffen" type models have emerged.

I think we have seen only one type of model: a control model. I have seen two
versions of the control model: one which controls for calories, expenditures
and "prestige" and the other which controls for just calories and
expenditures. Both can produce a Giffen effect (upward sloping demand curve).
I think your graphical model is also a control model, it's just in your head
instead of in the computer. That is, when you look at a graph, like the one on
p. 537 in Hershberger's _Volitional Action_, I think you know that point E1
(say) is a solution with budget 1 in effect because the consumer is
controlling to meet the caloric requirement, come in at or under budget and
consume as much meat as possible.

I do think it would be nice to see a non-control model of the Giffen
phenomenon. Is there some existing, non-control economic model of this
phenomenon? The verbal explanations of the Giffen phenomenon that I've seen in
the economic literature look like control explanations to me. I can't really
think of any other way to explain it except in terms of a control model.

I don't think the data generated by the Giffen
experiements is close to being sufficiently accurate to allow a
discrimination between the various giffen models. The experiements which
I'm aware of have all been directed by a neo-classical pattern of
assumptions, and may not be entirely correct.

I didn't know that there were any experiments on the Giffen effect. It would
be great if you could tell us what's been done.

But, maybe it is time to think about what should be the ultimate
characteristics of a canonical Giffen model.

I think we should start with the simplest possible model and then look for
data to test it. I also think we should look at the control model of the
Giffen effect not just as a model of the Giffen effect but as a model of the
Canonical Consumer (I have changed the name of this thread to reflect this
preference). By assuming that the consumer consumes various goods and services
as the means of controlling various perceptual variables (such as caloric
requirements, expenditures, prestige, taste, etc.) we can observe all kinds of
different "demand curves" (relationships between cost and level of
consumption). These demand curves, which _look like_ causal relationships
between cost and consumption, are actually (according to the control model)
_side effects_ of controlling many perceptions simultaneously by varying
levels of consumption of many different goods and services. Depending on the
nature of the feedback relationship between goods consumed and perceptions
controlled there will be many different kinds of demand curves observed: the
traditional downward sloping curves (but with different slopes -- what
economists call elasticities) as well as "paradoxical" upward sloping curves
(the Giffen effect).

The control model of the canonical consumer suggests that "demand curves" are
not a basic economic phenomenon. Indeed, the control model views demand curves
as another instance of the behavioral illusion: behavior (level of
consumption) appears to be caused by a stimulus (cost ), but it is not. The
relationship between level of consumption and cost (the demand curve) is seen
as the disturbance-output component of a closed loop control process;
consumption being the action take to protect variables like caloric input and
expenditures from disturbances such as cost.

Best regards

Rick

···

--
Richard S. Marken
MindReadings.com
marken@mindreadings.com
310 474-0313

Bill_Williams_UMKC · November 10, 2002, 10:35pm

[From Rick Marken (2002.11.10.1030)]

> Bill Williams (UMKC 10 November 2002 00:30 AM CST) --
>
> I think this is developing into an interesting thread.

Great! Me too.

> A variety of "Giffen" type models have emerged.

I think we have seen only one type of model: a control model.

OK. As you say below there are several different versions.

I have seen two

versions of the control model: one which controls for calories, expenditures
and "prestige" and the other which controls for just calories and
expenditures. Both can produce a Giffen effect (upward sloping demand curve).
I think your graphical model is also a control model, it's just in your head
instead of in the computer.

I would agree.

That is, when you look at a graph, like the one on

p. 537 in Hershberger's _Volitional Action_, I think you know that point E1
(say) is a solution with budget 1 in effect because the consumer is
controlling to meet the caloric requirement, come in at or under budget and
consume as much meat as possible.

I do think it would be nice to see a non-control model of the Giffen
phenomenon. Is there some existing, non-control economic model of this
phenomenon?

It may be possible to generate a Giffen effect using the orthodox conception of
economic behavior. See the discussion Ref 60-63 in the list attached. But,
while I assume that it is possible to generate the effect by way of the
orthodox proceedure, as far as I know no one has yet done so. However, most of
the thinking about the Giffen effect has proceeded using implicit preference
functions, as does most of contemporary orthodox economics. Its much more
difficult to specify an explicit preference function that will generate a
Giffen good-- and conform to what is considered theoretically acceptable. The
criteria for what an orthodox economist thinks is theoretically acceptable
isn't entirely arbitrary, but it is largely a matter of esthetics. ( Don't
blame me. They didn't ask me.) Reference 64 consists of pages and pages of
equations. I haven't been able to understand what if anything it means, or what
it does.

The verbal explanations of the Giffen phenomenon that I've seen in

the economic literature look like control explanations to me. I can't really
think of any other way to explain it except in terms of a control model.

There are several papers in the following list that talk about survival as a
criteria of value, but while this makes some sense, it can't I am quite certain
be combined with the usual orthodox conception of behavior. Not at least in a
consistent system. I would agree, however, that only a control theory model
makes consistent sense. However, the story the orthodox economists tell is
sufficiently plausible and persuasive that many people find it easy to believe.
It is sufficiently persuasive that some people who detest it use it anyway
because they don't know of any alternative. And, some of these people consider
developing an alternative so difficult that an attempt the construction of an
alternative is suicidal.

> I don't think the data generated by the Giffen
> experiements is close to being sufficiently accurate to allow a
> discrimination between the various giffen models. The experiements which
> I'm aware of have all been directed by a neo-classical pattern of
> assumptions, and may not be entirely correct.

I didn't know that there were any experiments on the Giffen effect. It would
be great if you could tell us what's been done.

Ref 25, 35, 42 and 50 describe experiments using monkeys and rats to
demonstrate a Giffen effect. You are probably better equiped to make an
accessement of how well the experiments were conducted. I am myself somewhat
doubtful about their worth. But, Battalio's work was eventually published the
American Economic Review which is I think ranked 2nd world wide in quality. THe
Chicago Journal of Political Economy is I believe ranked first. Ref 41 is a
statistical study of the insurance market and argues that there is a GIffen
effect involved. THere is also somewhere a study of the trade-off's between
fuel oil and kerosene. Fuel oil smells better than kerosene which is thought to
be a Giffen good. I thought this was in the list but I don't see it in the list
now. If it somehow escaped, it won't be hard to recover. Are you familiar with
the Journal Storage System (J-Store). It puts the more prominent academic
journals online. Most universities provide access to it. It's really handy.

While the idea that an animal is a control system may be present somewhere in
the orthdoox mind. THe focused portion of their thinking is dominated by ideas
about the maximization of preference functions. I would be interested in your
evaluation of the way they went about the experiments. I seems to me that the
experiments could be replicated and then modified by someone understanding
control theory with the result being much better experimental results. I
understand some people are now using cockroaches as experimental animals. (
Better Ask Linda first before trying this at home. )

> But, maybe it is time to think about what should be the ultimate
> characteristics of a canonical Giffen model.

I think we should start with the simplest possible model and then look for
data to test it. I also think we should look at the control model of the
Giffen effect not just as a model of the Giffen effect but as a model of the
Canonical Consumer (I have changed the name of this thread to reflect this
preference). By assuming that the consumer consumes various goods and services
as the means of controlling various perceptual variables (such as caloric
requirements, expenditures, prestige, taste, etc.) we can observe all kinds of
different "demand curves" (relationships between cost and level of
consumption). These demand curves, which _look like_ causal relationships
between cost and consumption, are actually (according to the control model)
_side effects_ of controlling many perceptions simultaneously by varying
levels of consumption of many different goods and services. Depending on the
nature of the feedback relationship between goods consumed and perceptions
controlled there will be many different kinds of demand curves observed: the
traditional downward sloping curves (but with different slopes -- what
economists call elasticities) as well as "paradoxical" upward sloping curves
(the Giffen effect).

It could be approached this way. What I've done is look for economic anomolous
behaviors such as the Giffen effect. Then See if I could develop a control
theory explaination of the aberrant behavior. Over time the anomolies explained
acumulates. When enough examples are availible they can be inspected to see if
there are common, or at least similiar features involved in the generation of
the anomolous behavior. As an example of this, there are three anomolous
behaviors that come to mind. 1) the Giffen effect, 2) the Veblen/Duesenberry
effect ( consumption increases more readily than it decreases ), I explored
this empirically and the numbers for the first four studies all had the right
sign and magnitude, but I havent' found a student incline to do a more
sophisticated econometric study, and 3) Veblen's notion of conspicious
consumption-- consumers control for outdoing the Jones in observable
expenditure. In each case the unusual behavior is the result of what might be
described as a conflict between goals. With this in mind, the role of
"conflict" in economic behavior, a further search can be made for unusual
perhaps more complex economic behavior that has its source in conflict. But, I
don't think there is any abstract reason to prefer one approach to another. I
assume that there are potentially multiple research programs that will generate
useful results. I have a student working on a dissertation concerned with the
history of mass consumer credit cards. To start with he's not approaching it as
problem in applying control theory. He may come around to a control theory
perspective. But whether or not he chooses to do so, I expect what he finds out
may provide a better understanding of the effect of mass credit card upon
consumer behavior and make it easier to construct a control theory application
to consumer credit.

One way of approaching consumer behavior in comprehensive terms might be to
consider rewriting existing explainations in control theory terms. THere is a
Marxist derived tradition in which conflict between economic classes is the
explaination of history. I'm not particularly enthusiastic about this pattern
of thought, but I don't its altogether mistaken. Or, it might be possible to
emulate Watson and become an advisor to an advertising agency. ( Just kidding )

The control model of the canonical consumer suggests that "demand curves" are
not a basic economic phenomenon. Indeed, the control model views demand curves
as another instance of the behavioral illusion: behavior (level of
consumption) appears to be caused by a stimulus (cost ), but it is not. The
relationship between level of consumption and cost (the demand curve) is seen
as the disturbance-output component of a closed loop control process;
consumption being the action take to protect variables like caloric input and
expenditures from disturbances such as cost.

I would agree if you mean that demand curves are what happens when people
attempt to control the economic aspects of their lives. But, a control theory
analysis would be fundametnally different than the orthodox conception in a
number of ways. One of these would be the possiblity that the prices of goods
which are the result of consumer preferences in the orthodox conception and
only serve as signals for the cost of goods, in a control theory analysis can
become valuable in themselves. So, the control theory analysis is at least
potentially far more socially sophisticated.

···

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