Last month, at the ESA-Griffith-QUT-UQ Economics Summer School held at O’Reilly’s Rainforest Retreat, Griffith University Senior Lecturer Andreas Chai gave a fascinating presentation on his research on consumption patterns. Here are the important points from Andreas’s report for UNIDO on Household Consumption Patterns:

While low- and middle-class households tend to spend in a relatively similar manner, spending patterns among affluent households differ considerably, likely due to the greater discretionary power these households enjoy in terms of spending…

…Differences in spending patterns between households tend to grow as household income rises, creating new opportunities for niche markets and higher quality goods.

So some rich households will divert large parts of their income to luxury travel, others to haute couture; while the obscenely rich will buy properties in central London or Manhattan, Lamborghinis, and super yachts. How are we to make sense of what is driving consumption patterns as households get richer? One answer could be found in one of the best books I’ve read recently: This is Marketing by Seth Godin, arguably the world’s number one marketing expert. Indeed, Seth Godin could help us understand consumption behaviour across most households, with the exception of those at subsistence levels. His mantra is simple but compelling: “People like us do things like this.” For example, people like us eat sushi and do Bikram yoga; or people like us send our children to private schools and holiday at Noosa.

As the late Harvard economist John Kenneth Galbraith argued many years ago, our consumption preferences are not exogenous, but are subject to peer influences and can be manipulated by marketing. Once upon a time, during the age of the New Industrial State as Galbraith called it, when families sat down together to watch the Brady Bunch, Charlie’s Angels or Family Ties, advertisers could, in Seth’s words, “sell average stuff to average people” by buying enough TV ads. But that pre-internet world is long gone. We’re not willing to pay more than a commodity price for average stuff, and we’ll ignore all the spam and pop-up ads. We’re now more sophisticated and demand goods and services that can set us apart from the average person and can help us identify with our tribe; as Seth says, “people like us do things like this”.

Seth, therefore, sees a great mission for the marketer, catering to the smallest viable audience (p. 33):

…find a corner of the market that can’t wait for your attention. Go to their extremes. Find a position on the map where you, and you alone, are the perfect answer. Overwhelm this group’s wants and dreams and desires with your care, your attention, and your focus. Make change happen. Change that’s so profound, people can’t help but talk about it.

That Seth Godin can make marketing sound like a noble vocation shows he is indeed the world’s greatest marketer, but I do think there is a lot of truth in his book. And it’s likely to yield a high return on investment to anyone purchasing it, given the large number of marketing insights that can be readily applied, no matter what good or service you’re selling, even if it’s your own labour you’re selling to your current employer.

As QEW is an economics blog, I should note that in a section titled “The myth of rational choice” Seth writes on p. 23 “Microeconomics is based on a demonstrably false assertion” (i.e. rational choice). Of course, many economists now accept that the standard microeconomic model needs to be supplemented with an understanding of psychology, and that is where behavioural economics is making important contributions. I should also add that a model of rational economic agents does have substantial value as a guide to rational decision making when it comes to consumption, saving and investing. But economics probably went wrong in the 1940s and 1950s due to the incredibly influential contributions of Paul Samuelson and Milton Friedman.

Both Samuelson and Friedman made multiple important contributions to economics, and both deserved their Nobel Prizes, but they arguably set economics, particular in the US, heading in the wrong direction, so that many leading US economists, with notable exceptions such as Paul Krugman and Brad DeLong, were thoroughly unprepared for the 2008 financial crisis. Samuelson and Friedman, due to the power and elegance of their reasoning and expression, were too influential among their students, who should have been more skeptical.

Economists will recall that Samuelson showed them how to express consumption and production decisions as mathematical optimisation problems, using first-year college calculus; and Friedman persuaded economists they should model the actual behaviour of consumers and businesses as if they were solving those optimisation problems. But we’ve learned since then that, while our models are extremely useful as benchmarks for what the rational consumer or business person should do as market conditions change, we made a mistake by assuming the real world would work exactly as those models predict. As with artists, and to their detriment, economists fall in love with their models.

If this book from Seth Godin on marketing can make a mainstream economist like me question the progress of economics since the 1940s, it must be extremely good. And it is; it is highly thoughtful and practical, and I cannot recommend it highly enough.