James Duesenberry

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James Stemble Duesenberry (July 18, 1918 – October 5, 2009^[1]) was an American economist. He made a significant contribution to the Keynesian analysis of income and employment with his 1949 doctoral thesis Income, Saving and the Theory of Consumer Behavior.^[2]

In Income, Saving and the Theory of Consumer Behavior, Duesenberry questioned basic economic assumptions about consumer behavior. He argued that consumer theory failed to take into account the importance of habit formation in establishing spending patterns. He also stressed the importance of social environment in determining an individual's level of expenditures. He proposed a mechanism called the "demonstration effect" by which people would modify their consumption patterns not because of changes in income or prices but from witnessing the consumption expenditures of others with whom they came into contact. That phenomenon, he argued, was driven by the interdependence of people's preferences and the need to maintain or increase one's social status and prestige.^[3] The strong social component driving people's consumption was a key aspect in his formulation of a distinct theory of consumption called the relative income hypothesis. By that theory, an individual's consumption and savings rate is more dependent on their income relative to those in their community than on their absolute level of income.