Commentaries on Katona, "Psychology
and Consumer Economics"
JEAN CROCKETT, Professor of Finance,
Wharton School, University of Pennsylvania
Professor Katona's provocative paper overstates
somewhat the doctrinal differences between behavioral
and other economists and attributes to the latter a
naivete regarding the consumption function which—
however prevalent it may have been thirty years ago—is
certainly not typical today. The notion of mechanistic
dependence of consumption on income could hardly be
maintained in the face of substantial fluctuations in the
macro-economic savings ratio during the more or less
normal period following World War II, even if we ig-
nore as aberrant the much wider variation occurring
over the period from 1930 to 1945. The theoretical
formulations of Milton Friedman and Modigliani-Brum-
berg-Ando, which have addressed this evidence, have
depended heavily upon expectational mechanisms.
Normal or permanent income, insofar as it differs from
observed current income, is inherently an expectational
variable.
Even in the pre-Keynsian age economists were aware
that expectations are important, not only as to their con-
tent but also in terms of the certainty with which they
are held. Thus an increase in uncertainty will lead both
households and businessmen to attempt to hoard liquid
assets and will thus discourage spending. In a competitive
environment businessmen must act on the basis of expec-
tations in making investment decisions. They cannot
afford to wait for an expected increase in sales to materi-
alize before expanding to meet it. It is much easier for a
consumer to postpone a major expenditure until an anti-
cipated increase in income actually occurs, but even here
his expectations as to the permanence of the increase
may be relevant to his decision.
Economists have further been aware that the elasticity
of expectations may differ in different situations. In
other words, an observed change in an economic vari-
able may sometimes generate an expectation of return
toward the previous level (when the change is believed
to result from purely temporary factors) or an expecta-
tion that the new level will be maintained (when the
change is due to a one-shot shift in structure, establish-
ing a new equilibrium which is promptly attained) or
an expectation of further change in the same direction
(when the causal factors are continuing to shift or when
the full effects of a shift are realized only gradually
over time).
In a dynamic world these three possibilities may be
translated as follows in terms of movements relative to
a long run trend. A departure from trend may generate:
(a) Expectation of a return to the initial trend line;
(b) Expectation of continuation of the same trend
from the new level (vertical shift without
change in growth rate); or
(c) Expectation of increasing departures from the
initial trend, constituting, in effect, a long run
change in the growth rate.
In any particular instance it may be extremely im-
portant to determine which of the three possibilities ac-
tually applies, and it has been a major contribution of
behavioral economists to supply us with tools for this
purpose. Professor Katona is quite right that economists
have tended to assume too mechanical a relationship
between expectations for an economic variable and the
past behavior of that variable. For example, permanent
income is approximated by a weighted average of past
incomes with declining weights, and expected price
changes are sometimes taken to ht analogously related
to the recent history of price changes.
Far too little is currently known about the generation
of expectations, and this is an area in which we must
look primarily to behavioral economics for help. Clearly
economic units must take account of past pattems in
formulating expectations but clearly this is not enough.
The perceived causes of current deviations from his-
torical pattems, whether clearly temporary (as in the
case of a strike) or encompassing a structural shift (as
in the case of a national policy for self-sufficiency in
energy sources), are of critical importance. The causes
attributed may depend on a great variety of elements
specific to the situation and on perceptions and inter-
pretations of these specific elements. Given the state
of the arts, attitudinal surveys have an inherent ad-
vantage over analytical methods, when we try to measure
expectations in a particular context.
This much being granted, we tum to the specific
evidence which Professor Katona adduces to indicate
the inadequacy of analytical economics in explaining
consumer behavior. The anomalies largely disappear if
we utilize a model only slightly more sophisticated than
JOURNAL OF CONSUMER RESEARCH • Vol. 1 • June 1974
10
the one he attributes to analytical economists. Suppose
we treat purchases of durable consumer goods as in-
vestment riather than consumption, as economists are
more and more inclined to do, and hypothesize the
following:
(a) That some items of consumption are conceived
as non-postponable—i.e., as being consumed
more or less continuously and paid for more or
less simultaneously with consumption—and that
the household is strongly concerned to maintain
some habitual standard of consumption of these
items, sacrificing investment, in both real and
financial assets to this end at least in the short
run;
(b) That increased uncertainty motivates a portfolio
shift from real assets, which are highly illiquid,
to more liquid assets;
(c) That increases in income which are per-
ceived as permanent generate increases both in
the standard for non-postponable consumption
items and in the desired level of real and fi-
nancial assets, which are conceived as gener-
ating over an extended time period certain
types of services, including protection against
contingencies, that are valued by consumers but
have relatively low priority and/or are con-
sidered relatively postponable.
With these hypotheses in mind what consumer
responses may be predicted from an expectation of price
increases? From cyclical fluctuations in income? From
long term income growth? From an increase in wealth?
PRICE EXPECTATIONS
Suppose consumers anticipate an increase in prices
but are uncertain that their individual incomes will rise
in the same proportion—a plausible assumption a priori
and one supported by the evidence Katona cites. Saving
will be directed into liquid assets and reduction of debt
in order to protect the standard of non-postponable con-
sumption against a possible or probable decline in real
income. This is entirely consistent with the maximization
of household utility under the priorities hypothesized.
It is not rational to buy low priority items, even though
their price is temporarily attractive, if you fear that this
may leave you without sufficient resources to buy higher
priority items in the near future. Of course, the longer
durable purchases are postponed the higher their pri-
ority becomes; and when the old automobile or refriger-
ator ceases to function altogether, or when it is feared
such items may become unavailable for a prolonged
period, the priority may become very high indeed. The
shift from real to financial assets helps also to restore
portfolio balance in a situation where the value of
financial assets (other than corporate stock) has fallen,
perhaps to a level deemed inadequate, because of the
decline in the value of the dollar, while real assets have
maintained their value.
THE JOURNAL OF CONSUMER RESEARCH
The specific expectation of a substantial rise in the
price of meat (relative to the expected rise in income)
is a diflerent matter, however, and may predictably lead
to hoarding to the extent that freezer capacity permits.
Meat is so large and essential an item in the American
standard of non-postponable consumption, that the wish
to protect this standard over the near future leads ration-
ally to the hoarding strategy.
CYCLICAL CHANGES IN INCOME
To protect habitual consumption standards in the
face of cyclical declines in income, other uses of income
must be reduced. Considerations of portfolio balance
would suggest that investment in both real and financial
assets will decline, though increased uncertainty may
cause the former to bear the brunt. Cyclical increases
in income will permit the postponed accumulation of
real and financial assets to occur without impinging on
the standard of non-postponable consumption. It may
also provide funds for extraordinary consumption ex-
penditures, such as extensive trips.
NORMAL INCOME AND WEALTH
Normal growth in income on the other hand will lead
both to an increase in the habitual consumption of non-
postponable items and to an increase in the desired stock
of real and financial assets. In general the desired and
the actual stock of assets will expand pari passu, so that
saturation does not occur. Only when there is a large
unplanned increase in wealth might we expect to observe
an impact on consumption expenditures. Similarly an
unplanned decrease in wealth may well increase the
motivation to save, leading to perceptible adjustments
in consumption, since households at the given level of
normal income will want, and will already have become
habituated to, the contingency protection and other
services of a larger asset stock. On the other hand re-
duction in assets to accomplish the specific purpose
(such as a child's college education), for which they
were accumulated should not impinge on consumption.
Except in situations of high uncertainty, accumula-
tion of financial assets to protect against contingencies
and to provide for retirement needs and for bequests
may be assigned relatively low priority and may be con-
sidered more postponable than the acquisition of real
assets. It is plausible a priori that households provide
for the more urgent of their known present needs before
allocating substantial resources for hypothetical future
needs. Such an ordering of priorities is entirely con-
sistent with Katona's findings that many families who
are otherwise well content report themselves dissatisfied
with their holdings of liquid assets and that in reinter-
views a high proportion of families report smaller
increases in such assets than they had planned a year
before.
If at fairly high incomes the marginal propensity to
accumulate liquid assets becomes large, this may come
about partly or largely at the expense of a decline in the
 COMMENTARIES ON KATONA
income elasticity for durables. However, there is no
reason within our experience to expect this elasticity to
fall to zero, implying saturation with consumer durables.
Surely the ingenuity of Detroit and Madison Avenue
will preserve us from that!
In summary there is little in the findings Katona cites
that will surprise a modem consumption theorist. On
the contrary there is valuable confirmation of that theory
and some interesting insights into the characteristics
of the utility function.
G W E N J . B Y M E R S , Professor and Chairman,
Dept. of Consumer Economics and Public Poiicy,
N.Y. State Coiiege of Human Ecology, Cornell
University
It is fitting that Professor Katona should contribute
the lead article to this first issue of the new joumal. The
Journal of Consumer Research. Among social scientists
concerned with consumer spending, George Katona is
recognized as one of those who "has made a difference."
He and his colleagues have forced those of us educated
in traditional economics to recognize that "confidence
and people's perceptions" must be considered in addi-
tion to "ability to buy" if we are to predict consumer
behavior in the marketplace.
As a beginning instructor in consumer economics
and trained in the economics of the market, I literally
stumbled on the Michigan-FRB studies in the early
195O's. Needless to say, I found them particularly help-
ful in a period when traditional economic analysis
seemed to have let me down. We didn't have a post
World War II depression, and after an initial buying
spree in the summer of 1950, consumers once again
exerted an independence of economic theor)\ People's
perceptions were making a difference.
George Katona fit his time in history (What more can
a social scientist ask?). His theories are really theories
of discretionary spending and the last twenty-five years
refiect the first time in modern history when the majority
of consumers could really exercise discretion in when
and how they spend. It is probably fair to say that
neither Keynes, nor those who preceded him, ever
dreamed of an economy where so many would have a
margin over subsistence. This is not said to detract from
Professor Katona's contribution, but to point out that he
has expanded the potential of economics rather than
altering its fundamentals. There are still enough ex-
amples of consumers behaving as traditional economic
theory predicts to provide cheer for most dismal minded
economists. Last summer the price of beef was rising and
expected to rise and the demand for freezers and beef
carcasses went out of sight. More recently long lines
prevail at gasoline stations when only the top half of
the tank can hold more gas!
Those of us who profess to study consumer behavior
are happy to recognize the contributions of Professor
Katona. His insistence that it makes a difference who
holds the purchasing power, what their asset structure
11
is and how they perceive the current economic scene,
fits the family economist's perception of reality. On the
other hand, we also need to remember that the findings
of behavioral studies are temporal and cannot be ex-
trapolated across cultures or time. Ability to buy is not
the only variable to consider but it is still a necessary
condition to a market transaction. This is a point well
appreciated by Professor Katona even when he chides
the economists for ignoring the subjective and behavi-
orial forces.
N E L S O N N. F O O T E , Department of Sociology,
Hunter College, CUNY
Economists still cling, it is true, to the assumption
that means are scarcer than wants, and that consumers
schedule their wants according to some ranking of nec-
essity or priority. It seems fair to say, however, that
economists concerned with the consumer sector have
been keenly aware of its increasing volatility as personal
incomes have increased. To discern that consumer be-
havior becomes more variable in both kind and degree
with rising discretionary income was predictable from
the century-old economic theory which Katona decries,
and was not an insight first vouch safed by psycholog-
ical economics. Consumer economists exhibit lively
curiosity and receptivity toward any contribution that
psychologists or any other social scientists can make to
aid them in dealing with this variability. Instead of imag-
ining Katona beating on a stone wall, the more accu-
rate metaphor might be to picture him falling through
an open door. The question to raise is therefore whether
the "behavioral or psychological economics" evolved by
Katona has indeed contributed to prediction and under-
standing of this variability.
George Katona and his associates at the Survey Re-
search Center have made solid and important contribu-
tions to understanding consumer behavior. Although
presented too briefly in his article to be self-evident, the
validity and central worth of his four examples of spend-
ing and saving behavior could only be gainsaid by deny-
ing the validity and worth of research itself. Moreover,
our acquaintance among economists and other students
of consumer behavior in forecasting, marketing and the
other social sciences indicates widespread awareness,
appreciation and use of such findings, insofar as they
have been found usable. Prof. Katona's paper nonetheless
voices nagging disappointment that acceptance and ap-
preciation of his contribution have not been fuller. Our
obser\'ation in one respect tends to agree: acceptance
and appreciation of his periodic Survey of Consumer
Finances, while real and demonstrable, have been lim-
ited. The reason, however, is not far to seek, and may in
fact be sufficiently evinced by the article in hand: the
findings themselves are limited.
Knowing the heroic struggles required to keep the
Survey of Consumer Finances going regularly for more
than two decades, gratitude is the only fitting attitude to
take toward those who have indefatigably perpetuated
12
that enterprise. Yet from the standpoint of those seeking
all the enlightenment they can get about the variability
in consumer behavior, have not the results of their
mammoth effort been relatively meager and repetitive?
Could it be that preoccupation with maintaining the in-
tegrity of the time series has precluded origination
of new lines of inquiry into content, metbod and theory?
As was said long ago, might not their enterprise exhibit
the defects of its virtues?
We believe so. And we believe this is why only lim-
ited use is made of the Survey of Consumer Finances by
forecasters, why it has not been fruitful and multiplied
among other scholars and universities (although sur-
vey research generally has obviously done so). There
have been some tentative ventures along this line—in
method, into panel analysis, as mentioned in the article;
in content, into time expenditure, but no major ventures
in theory.
Our concluding observation is perhaps the most dis-
appointing. We find that in the very area of assump-
tions about human nature and motivation to which
psychological economics is ostensibly addressed, Lewin's
theory of incremental rise in level of aspiration is still
being employed by Katona in the form in which Lewin
THE JOURNAL OF CONSUMER RESEARCH
left it thirty years ago. Many other studies demonstrate
that the consumer continually modifies his behavior to
implement his changing intentions, and concurrently
continually modifies his intentions on the basis of his
behavior, i.e. he learns from experience, including the
experiences of finding that he doesn't like what he pre-
viously wanted, and often learns to like what was im-
posed on him unexpectedly. Such findings force method
in the direction of panel design, and theory in the direc-
tion of a much more interactional and developmental
social psychology. Yet Katona clings to the archaic
model of intentions as merely intervening variables be-
tween independent (stimuli) and dependent (response)
variables. Most ironically, he also clings to the archaic
framework of the economists whom he professes to en-
lighten, their conception of the economy not as a diverse
and complex structure of contending groups, but as an
aggregate of individuals propelled by subjective percep-
tions, attitudes, expectations, aspirations.
Consumers may leam faster than those who study
their behavior. For example, we are now witnessing a
younger generation dallying more and more seriously
with the idea of reducing consumption itself. That in-
deed renders all previous theories archaic, regardless of
the discipline in which they originated.