Commentaries on Ratchford, "The New Economic Theory of Consumer Behavior: An Interpretive Essay"

Abstract

In the introduction of his paper, Ratchford states that his purpose is to diffuse the of consumer behavior in economics to noneconomists. This is a worthwhile undertaking, because, for several years, it has been clear to those of us in economics concerned with applied demand analysis that the provides a natural bridge between the analysis of consumer behavior in economics and in marketing, sociology, and psychology. Until now, the situation has been that noneconomists have had little time for the economist's approach to the study of consumer behavior, and conversely. Probably more than anything else, however, this disdain of one discipline for the approach of the other is the result of a gap in communication, and Ratchford's essay is an important contribution to the elimination of this gap.1 Thus, on the whole, I feel that Ratchford has been successful in meeting his objective. The of consumer behavior in economics is popularly credited to Kelvin Lancaster (1966), although Richard Muth (1966) has equal claim as an originator.2 In essence, what the does is to apply the linear activity analysis model of the firm, developed in the late 1940's by Dantzig, Dorfman, Koopmans, and others,3 to the theory of consumer choice. The impact of the new theory was immediate, and in the 10 years since its publication in the Lancaster and Muth papers, it has acquired a substantial literature. Still, readers of Ratchford's essay should not come away with the idea that the theory has completely replaced the theory of consumer behavior in economics, for this is not the case. Neither in theoretical discourse nor in empirical application does the new theory form the principal framework of analysis. There are two reasons for this, the first being the fact, and I wish to emphasize this, that the old and the new theories are not contradictory. By making characteristics, rather than goods, the objects of choice in the utility function, the new theory constitutes an important theoretical advance; for, as noted by Ratchford (a) it can deal in a natural way with new goods (which the conventional theory could not), and (b) it provides an operational, and highly practical, way of defining substitution and complementarity among goods. However, perhaps the most important contribution, at a theoretical level, that the new theory made is that it caused economists to recognize that the utility function, when defined with respect to goods, reflects not only the preferences of the consumer, but also the technology of consumption. The profession was quick to note the importance of this separation, for as observed by Tibor Scitovsky (1966, p. 47) in his discussion of a paper given by Lancaster at the American Economic Association meetings in New York City in December, 1965: