[From Rick Marken (2002.11.14.1050)]
Bill Powers (2002.11.14.0647 MST)--
There must also be a preference
for the good with the higher price per unit value, so the person always
buys as much as possible of it, filling in with the other good when the
budget is tight to keep the total value at the reference level.
Yes. My quick experiments with the model suggest that the preference for the
higher price per value commodity (in terms of the amount consumed when there are
no budget constraints) must be at least equal to the preference for the lower
price per value commodity in order for the Giffen effect to occur.
You will notice that in your clever demo, the preference for meat lies in
the person doing the demo rather than in the conditions of the demo. If you
satisfy your caloric requirement with bread alone, which you can do in your
demo, there will be no Giffen effect.
>So the Giffen effect will only be shown by a system that has learned the
>_skill_ of controlling both V and B by properly increasing consumption of the
>good with a lower price to value ratio when the price of this good increases.
>This is likely to be a _learned_ skill.
Perhaps you can see now that this is not true. If you have the required
needs and preferences, the Giffen Effect _will be seen_.
Actually, I think it still is true, even if the system has the required needs and
preferences. What you need besides the required needs and preferences are the
correct connections between control systems and outputs. For example, in my model
of the Giffen effect, consumption of meat (X in your equations) is proportional to
the sum of the outputs of both the calorie (V) and budget (B) control systems
(Ov+Ob). Consumption of bread (Y in your equations) is proportional to the
difference in output of the calorie (V) and budget (B) control systems (Ov-Ob).
When the systems are connected in this way, an increase in the price of bread (Y)
causes the output of the budget system, Ob, to go negative (saying "buy less")
with the result that there is a _decrease_ in meat (X) consumption and an
_increase_ in bread (Y) consumption.
This is what I meant when I said that the system must be "wired" appropriately to
show the Giffen effect. If the system is not wired appropriately it will not show
the Giffen effect even if it has the required needs (for calories and staying
within budget, in this case) and preferences (bias for consuming meat relative to
bread). For example, you could have an "inappropriately" wired system whose
consumption of both meat and bread is determined by the sum of the outputs of the
calorie and budget control system. This system works fine (meets its caloric and
budgetary requirements) as long as it's budget always exceeds the cost of
commodities needed to control its caloric intake. But when this system's budget
goes below this level it's SOL. Depending on the details of the weightings of the
outputs of the calorie and budget control systems it will lose control of budget,
calories or both.
That's why I conclude that the Giffen effect is likely to be displayed only by
systems that have lived within the constraints of budget and expense that are
associated with observation of the Giffen effect. Such systems will have learned
(become "wired up") so that they will take the rather non-obvious action (buying
more of a product that is _increasing_ in price) necessary to keep both their
budget and their caloric requirements under control.
Richard S. Marken, Ph.D.
The RAND Corporation
PO Box 2138
1700 Main Street
Santa Monica, CA 90407-2138
Tel: 310-393-0411 x7971