Welcome to brain Stuff production of I Heart Radio. Hey brain Stuff, Lauren bog Obam Here. Let's say you're on a first date and anxious to make a good impression. The waiter arrives with the wine list, and your date asks you to order a bottle for the two of you. You know virtually nothing about wine, but you don't want to look like an idiot or a cheap skate, so you quickly scan the list and point to one of
the most expensive bottles on the menu. And while yes, it is ridiculous to spend a hundred dollars on wine that's only marginally more tasty than a twenty dollar bottle, it's actually standard human behavior. More than a hundred years ago, an American economist named Thorstein Veblen coined the phrase conspicuous
consumption to describe this very thing. You pick the expensive bottle of wine not because it's five times better than the cheaper bottle, but because you want to send a signal to your date, I have good taste and I can afford it. Wine is, to one example of what's known as a Veblin good, defined as any good or
service that defies the standard relationship between price and demand. Normally, when price goes up, demand goes down, but for Veblin goods like wine, fine art, jewelry, and cars, the rules change. We spoke with Ori Heffitt's, an economics professor at Cornell University's S. C. Johnson Graduate School of Management. He explained the high price is actually part of the attractiveness. In Veblen's classic book, The Theory of the Leisure Class, he
says that high prices have two functions. The first is basically marketing. Since winemakers and clothing designers know that most consumers don't have the knowledge or interest to figure out which products are objectively better than others, they use price as a shorthand for quality. Consumers assume, correctly or not, that a higher price corresponds to a higher value. The second function of high prices is Veblin called conspicuous consumption.
In this case, the consumer's decision to buy the more expensive option has little to nothing to do with the actual quality and functionality of the product. The whole point is for others to see you drinking the expensive wine, wearing the brand name clothes, or driving the fancy car. Hefitt said, when other people see me driving an expensive car. That's a benefit in itself. They might think that I'm more successful or that I'm more desirable as a mate.
And of course those two functions of high prices often work together. And just look at the recent college admissions scandal, in which wealthy celebrities were caught trying to buy admission for their children into elite colleges. One of the ways that schools market themselves as elite is through their high tuition costs. If the University of Southern California costs more than seventy seven thousand dollars a year tuition plus room
and board, it must be an amazing education, right. And because schools like the University of Southern California use their high cost as a signifier of quality, so do parents. The wealthy celebrities caught up in the college admission scandals were willing to go to a great expense to win brand name status for their kids in their social circles. Admission to USC is shorthand that their kids are smart and successful, which in turn means that they, as parents
are also smart and successful. Call it the virtuous circle of conspicuous consumption. Unless you get caught cheating. Vevlin first identified conspicuous consumption among the American upper classes in the late eighteen hundreds, but it wasn't until the nineteen seventies that economists figured out exactly how it worked as a
market force. In seventy three, the economist Michael Spence wrote a landmark paper on signaling in which he showed how our consumer choices send important signals that have real economic repercussions. Spence one the two thousand one Nobel Prize in Economics by explaining how education is used as a signal for produc activity in the labor market. The logic is pretty simple.
If an employer is looking to hire a new worker, he or she will use the status of the applicants college, in which tuition cost is variable, as a shorthand signal of the applicants relative productivity as a worker. Hefits cites the classic example of someone looking to hire a lawyer. The assumption is that a good lawyer wins cases and therefore has a lot of money. So if one lawyer shows up driving a two thousand four Honda Civic and the other arrives in a brand new Mercedes, they're sending
two very different signals. If the client defines a good lawyer by how rich here she is, then the Mercedes lawyer benefits from conspicuous consumption. Of course, a great lawyer could be thrifty, or a lousy lawyer could still drive a fancy car. But there's a far higher cost for an unsuccessful lawyer to buy a Mercedes. Hefitz said. For the good lawyer who actually makes a lot of money,
the Mercedes is pocket change. It's cheaper and therefore more likely for a successful lawyer to send the same signal. The larger question is why do we bother with all of these signals anyway? Hef It says that there's a much more efficient economic solution. Instead of buying a fancy car to show how rich you are, you could just walk around with copies of your most recent tax returns, or introduce yourself to potential clients by saying, hey, I'm
very wealthy and successful. But of course that's not socially acceptable. Instead, people who spend money on flashy cars or clothing can hide behind what economists call a functional alibi. If you buy a very expensive car, for example, you can claim that you didn't do it to send the signal that
you're rich and successful. But simply because expensive cars run better and are more reliable or have better features, have it said, But are they so much better that it's worth spending twenty times the cost of a good standard car. Probably not. Today's episode was written by Dave Ruse and produced by Tyler Clang. Brain Stuff is a production of
I Heart Radio's How Stuff Works. For more on this and lots of other economical topics, visit our home planet, how stuff Works dot com, and for more podcasts for my heart radio, visit the i heart Radio app, Apple Podcasts, or wherever you listen to your favorite shows,