In John K. Galbraith’s famous book, The Affluent Society, he talks about the “dependence effect”, or how production creates wants:
If the individual’s wants are to be urgent, they must be original with himself. They cannot be urgent if they must be contrived for him. And above all, they must not be contrived by the process of production by which they are satisfied. For this means that the whole case for the urgency of production, based on the urgency of wants, falls to the ground.
The demand for goods does not rise because of “spontaneous consumer need”, but instead grows out of the process of production itself. Without this process, the increase in demand would not occur.
The theory was controversial when it was published and was attacked by many famous economists. One of those economists was none other than F.A Hayek, who called the idea a complete non-sequitur:
The cultural origin of practically all the needs of civilized life must of course not be confused with the fact that there are some desires which aim, not at a satisfaction derived directly from the use of an object, but only from the status which its consumption is expected to confer. In a passage, which Professor Galbraith quotes, Lord Keynes seems to treat the latter sort of Veblenesque conspicuous consumption as the only alternative “to those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be.” If the latter phrase is interpreted to exclude all the needs for goods which are felt only because these goods are known to be produced, these two Keynesian classes describe of course only extreme types of wants, but disregard the overwhelming majority of goods on which civilized life rests.
Libertarians cite this paper as evidence that Hayek “eviscerated” Galbraith. However, I think Hayek’s argument misses the mark on several levels. All of this essentially boils down to what Galbraith means when he uses the phrase “original within himself.” Hayek thinks that Galbraith eludes to something akin to human nature, but I think this is wrong. To understand why, we must look at the distinction between instinct and habit.
Instincts can be looked at as hereditary traits or innate propensities. This is distinguished from a habit, which is a propensity that is molded by environment. A habit is a propensity to behave in a certain way given some scenario; “habits are submerged repertoires of a potential behavior; they can be triggered by an appropriate stimulus or context” (Hodgson 2003: 164). Institutions depend upon habits. As a result, institutions are objective “things” out there as well as “subjective springs of human agency in the human head” (Hodgson 2006: 8). While the circular relationship between actor and structure is important, the relationship isn’t necessarily symmetrical in that institutions typically precede individuals; “we are born into a world of pre-existing institutions, bestowed by history” (Hodgson 2003: 164). It’s important to keep this information in mind when reading Galbraith. Although Galbraith doesn’t talk about this in his book, he was considered an old institutional economist and was heavily influenced by Thorstein Veblen, so I think this interpretation is appropriate.
With this in mind, why would Galbraith describe wants that are “original within himself” as purely instinctual? Why would he even talk about an individual as if he/she hasn’t been influenced by institutions? Galbraith, being an institutional economist, knows about this interplay between institutions and individuals. He also knows about the distinction between instinct and habit. So I don’t read Galbraith as saying that desires which “originate within himself” are purely “innate desires”. Rather, I read him as talking about the relationship between institutions and contrived wants. He is talking about how a specific institution shapes the habits of consumers. When one interprets Galbraith this way, Hayek’s charge that the dependence effect is a non-sequitur falls apart.
The main mechanism that the dependence effect works through is production, but more specifically Galbraith highlighted the importance of advertising:
The even more direct link between production and wants is provided by the institution of modern advertising and salesmanship. These cannot be reconciled with the notion of independently determined desires, for their central function is to create desires – to bring into being wants that previously did not exist.
While Hayek is certainly correct to point out that Galbraith overstated his case, I think he misses the bigger picture. Galbraith essentially rejected the idea that individual tastes are given and instead looked at how they can be influenced by institutions:
The idea that individual tastes are not given, but are shaped by institutional circumstances and by particular influences such as advertising, is a major theme in the writings of Galbraith. In the New Industrial State, Galbraith insisted that individual “wants can be synthesized by advertising, catalyzed by salesmanship, and shaped by the discreet manipulations of the persuaders.” The theme persists throughout his writings. Indeed, no author has brought these ideas to the attention of the modem reader more clearly and resolutely than Galbraith. His analysis puts particular emphasis on the effects of advertising on individual wants. This is one version of the core institutionalist story. More generally, recognize the potential influence of many institutions on individual habits, conceptions, and preferences.
I agree with Hayek that Galbraith overstated his case here. Advertising is one of many different things that will produce wants. However, I also think that advertising is a particularly important factor that Hayek seems to be downplaying and there is some empirical evidence to suggest this:
Growing evidence suggests that much of human behavior, including consumer behavior, is not under conscious control but occur automatically without cognitive intervention. This is particularly evident in the writings of behavioral economists, who have drawn on the findings of cognitive psychologists and decision theorists. The implications of these contributions, including the different types of cognitive biases of consumers, has been explored by Hanson & Kysar (1999a), who argue that sellers can make use of the cognitive failures of buyers to manipulate markets influencing, if not determining, market outcomes by controlling the format of information, the framing of choices, and the setting in which purchases are made. Hanson & Kysar (1999b) amass a large body of empirical evidence, which shows the extent to which such manipulation occurs, some of it purposefully by sellers of products with knowledge of the relevant literature on buyer behavior.
I won’t delve too deep into this, as there’s a ton of literature on the role of advertising in the economy, but it’s something to think about.
As I mentioned above, I’m might be reading way too deep into this, as Galbraith doesn’t really go into this level of depth. But looking at the big picture, I still think Hayek’s critique of the dependence effect is severely lacking and Libertarians shouldn’t be so quick to cite it. While it does hit some truths in that Galbraith does exaggerate his case, it still shows a misunderstanding of the old institutionalist tradition.
1. Hayek, F. (1961) The non-sequitur of the ‘dependence effect’, Southern Economic Journal, 27(4),pp. 346–348.
2. Galbraith, J.K. (1958) The Affluent Society (London: Hamilton).
3. Amitava Krishna Dutt (2008) The Dependence Effect, Consumption and Happiness: Galbraith Revisited, Review of Political Economy, 20:4, 527-550, DOI:
4. Geoffrey M. Hodgson “The hidden persuaders: institutions and individuals in economic theory.” Cambridge Journal of Economics, Vol. 27, No. 2, 2003, p. 159-75.
5. Geoffrey M. Hodgson “What Are Institutions?”, Journal of Economic Issues, 40(1), March 2006, pp. 1-25.
6. Geoffrey M. Hodgson. “What Is the Essence of Institutional Economics?” Journal of Economic Issues 34.2 (2000): 317-29. Print.
7. Geoffrey M. Hodgson, (2006) “Instinct and Habit Before Reason: Comparing the Views of John Dewey, Friedrich Hayek and Thorstein Veblen”, , Vol. Iss: 9, pp.109 – 143