The Psychology of Money and Public Finance_6 docx

Table 3.14 Consumption standard and income in DMaTotal net income of household monthly N Equipment levelb a Level of aspirationb b Consumption of standardb a + b aThe data are taken fro

Table 3.14 Consumption standard and income (in DM)a

Total net income of

household (monthly)

N Equipment levelb( a) Level of aspirationb

( b)

Consumption of standardb( a + b)

aThe data are taken from a survey directed by the Forschungsstelle für empirische

Sozialoeko-nomik, Cologue, 1969; they are based on a random sample representative of all households

in the Federal Republic of Germany and West Berlin ( N = 1682).

b‘Equipment level’, ‘level of aspiration’ and ‘consumption standard’ show the averages of an

index calculated from 29 durables presented to the interviewed households (see Appendix).

income under DM 600 are below average; and although the level ofaspiration does increase slightly within the next income group (DM700), further increases in income do not result in further increases inaspirations Indeed, in the highest income bracket, a remarkable drop

in the level of aspiration may be noted

The factor of saturation represents a major problem in determining therelationship between income and demand This saturation is expressed

by a relatively flat curve of needed goods which in the highest incomebracket may even turn in a negative direction The point of saturation

is reached much sooner with respect to the requirements of subsistencethan to luxuries The flat curve of the level of aspiration, expressed byour data, and the negative ratio of increase of the level of aspirationover DM 1500 income, point to tendencies which Morgan noted forthe US as early as 1958: expenditure for ‘consumer investment goods’

at that time – contrary to previous times and to conditions in othercountries at the same time – could be represented by an Engel curve;this suggests that in the US many durable goods had at that time alreadybegun to be considered as necessities Today, this explanation seems to

be applicable to the Federal Republic of Germany: as incomes increasemore and more, former luxuries are included in the purchase horizon

of average households At the same time the significance of these goodschanges They lose their character as ‘luxuries’ accessible only to peoplewith higher incomes These assumptions are supported by a generaltrend towards saturation observed by other authors (Katona et al., 1971)

In considering the relation between income and level of aspiration, wemust not forget, however, that the level of aspiration was measured onthe basis of a broad though limited choice of consumer goods Inclusion

of items representing a higher order of wants would probably weakenthe negative tendency of the level of aspiration in the upper-incomeclass If new or additional goods or goals are offered to a household, it

is possible to arouse new desires (Hörning, 1970, p 151)

Regarding the list of goods included in our study, our findings cated that ‘rising’ occupational status was linked to a rising equipmentlevel (Tables 3.15 and 3.16) An interesting comparison of workers onone hand, with employees, civil servants and professionals on the other,revealed that a larger percentage of the former than of the latter ownedrefrigerators, washing machines, television sets, radio-phonographs andfreezers, and an equally large percentage of both the former and ofthe latter owned a car, although the workers’ average income waslower Non-manual workers were found to prefer higher expendituresfor furniture, typewriters and similar objects

indi-Hamilton (1965/66), using data from another study of theForschungsstelle für empirische Sozialoekonomik (Research Centre inEmpirical Economics) (Schmölders, 1969) has pointed out that there arestill significant differences between the consumption levels of manualand non-manual occupational groups, and of the working class andmiddle class He found that the consumption patterns of the best-paidworkers corresponded to those of lower-paid workers rather than tothose of middle-class groups with the same income To Hamilton, it is

Table 3.15 Consumption standard (in DM) and occupational groups

Level of aspiration (b)

Consumption standard ( a + b)

aGroup A: Professionals, upper management and civil servants.

Group B: Self-employed, craftsmen.

Group C: Medium and lower employees and civil servants.

Group D 1 : Skilled workers.

Group D : Unskilled workers.

Table 3.16 Consumption standard, occupational groups and income

N Consumption standard Income up to DM 699

differ-‘standard package’ of goods; since wants can be ‘learned’, they arise or arecreated among the working class in an affluent society by the influence

of mass communication media and contacts with the middle class.The differences in the ownership of consumer goods which, according

to our study, may be traced to differences in education appear to besmall and could also be due to influences of income (Table 3.17) An

exception are the households with Abitur (high school graduates) and

higher education with an income of less than DM 700 who are less wellprovided with consumer goods than those with less formal education;

Table 3.17 Consumption standard (in DM) and education

Education Monthly income

(net average)

Equipment level ( a)

Level of aspiration ( b)

Consumption standard ( a + b)

a high school education report desires much more frequently (57 percent) than those with secondary school (41 per cent) or elementaryschool education (with apprenticeship 35 per cent, without apprentice-ship 30 per cent)

For all three status criteria (income, occupation, education) a similartendency concerning the standard of consumption showed up at firstglance: the higher the status of the group in each category, the higherthe standard of consumption However, since income obviously has astrong influence on the level of consumption, that one factor had to

be eliminated before the effect of the other two factors could be seen.When that was done, it became clear that the level of consumptionstandard was primarily determined by income This finding empha-sizes the importance of the absolute level of income, if conceptions

of an appropriate standard of living are to be transformed into actualconsumption The achieved equipment level showed substantial differ-ences for each income class Other studies in earlier years also failed

to find any significant correlation of occupation and income with thefrequency and size of demand for durable goods (Klein and Lansing,1955/56)

The equipment level of households was found to be influenced bythe stage of the life cycle The introduction of the life-cycle conceptinto our studies of consumption and aspirations represents a transitionfrom a static to a more dynamic approach Though the data concerningthe structure of a family are usually collected in cross-sectional studies,they may also be used in a longitudinal analysis so as to represent the

behaviour of the same group of households during the complete familylife cycle (Schmucker, 1956, p 2).

Influences of the life cycle can be observed both in the areas of earningand of spending For our purposes, we broke down the individual stages

of life as follows:

1st phase: Young people, no children (average income of husband DM

837; total family income DM 1137)

2nd phase: Young family, children under six years (DM 1034/DM 1111) 3rd phase: Normal family, children over six years, living with their

consump-is under 34 years of age are, in all income brackets, significantly betterequipped than older households If one takes into account the size ofthe household, the households composed of three or four persons gener-ally reach the highest level of ownership; in households of five personsand more the possession of durable goods decreases (Table 3.20) (Ferber,

1955, p 80)

Despite the above-average equipment of their households, youngfamilies are not at all satisfied with their situation Their aspirationsconcerning standards of consumption far surpass those of older families;the levels of aspiration decline over the life cycle This result is againindependent of income Breaking down the households into groupsaccording to the age of the husband emphasizes even more strongly the

Table 3.18 Consumption standard (in DM) and life cycle

Life cycle Monthly income

(net average)

Equipment level ( a)

Level of aspiration ( b)

Consumption standard ( a + b)

Equipment level ( a)

Level of aspiration ( b)

Consumption standard ( a + b)

N

Table 3.20 Consumption standard (in DM) and size of household

Level of aspiration ( b)

Consumption standard ( a + b)

highest aspirations, thus with the highest standard of consumption.

A decline in the household’s equipment, which starts in the thirdphase of the life cycle, is not completely overcome by the children’sfinancial contribution in the fourth phase Although the average income

of the head of the household decreases, total income of the household

reaches its highest level in this phase Yet the contribution of workingchildren to the household income seems not to be used for renewal

or additions to the stock of consumer goods People think rather ofaccumulating funds for the future households of their children, who willleave the parental household at the end of this phase The desire to add

to existing durable goods seems to be weak The level of aspiration ofthe adult household falls under the overall average A second indicatorprovided further evidence that these households were relatively morecontent: only 32 per cent of the households still had ‘unfulfilled wishes’

in the fourth phase of life cycle as compared to 45 per cent in the third,

47 per cent in the second, and 55 per cent in the first phase

Older households no longer think of an expansion of their stock ofconsumer goods but rather strive to maintain its level Their equipmentand their aspirations are rather low as compared to younger households.Schelsky (1960) has said that in the ‘area of consumption’ the ideal ofold age is an expansion of needs, although he goes on to admit thatthe old-age pension is a restrictive factor Our findings contradict theformer notion: purchases of new products and additions to equipmentrequire a dynamic attitude which weakens with growing age, especiallysince old-age pensions are indeed very restrictive

The standard of consumption and its determining factors were tained through a cross-section analysis Basically, we can therefore onlyindicate trends with regard to the behaviour of younger, middle-agedand older families There is no proof that the pattern of behaviour ofthe older group will repeat itself with those who are now young Onemay rather assume that the level of aspiration of young households willnever decrease to the level of today’s pensioners But neither can it bedenied that there exists a group whose expansion of needs comes to astop as a result of their age In a certain measure, this conclusion retainsits validity for every generation to come

ascer-Our findings concerning the effects of age on consumption and ations run parallel to reports of the Gesellschaft für Konsumforschung(1953/62), analysing the demand structure for the years 1953 and 1962

aspir-In 1953, 81 per cent, and in 1962, 69 per cent of the households viewed expressed intentions to buy; in the group of persons under

inter-30 years of age, in 1953, 87 per cent, and, in 1962, 77 per cent hadsuch intentions The percentage decreased with increasing age Amongpersons between 50 and 64 years of age in 1953, 81 per cent and, in 1962,

64 per cent still had intentions to buy; those over age 64, only 65 percent in 1953, and in 1962 49 per cent had such intentions These figuresreveal not only distinct differences among the several groups at a certain

period, but above all the extent of the changes that occurred between thetwo dates considered Between 1953 and 1962, the average percentage

of households with intentions to buy dropped by 12 percentage points.The reduction was most significant in groups which earlier contained arelatively small proportion of households willing to buy, and was smal-lest in those groups with the highest proportion of households willing

to buy

The rate of increase and decrease in equipment during different phases

of the life cycle, which was observed by us for all households, varies butlittle among the different status groups, although it does appear thatthe higher the occupational status the later in life does the householdequipment level reach its peak This is probably related to the growth

of income; top income and highest equipment level are reached in thesame phase

The size of the household plays an important role in the determination

of the equipment level in households Households consisting of three

to four persons have considerably larger equipment levels than

one-or two-person households (Table 3.20) But it is not sufficient to knowthe size of a household to determine a household’s equipment level:younger households without children are better equipped with durablesthan older families whose children have already left In this case, it isnot the size of the household but rather the position in the life cyclewhich results in a certain level of consumption, in one case directedtowards expansion, in the other case towards conservation

Contrary to the conclusions which were reached by David (1961),who found the household’s size played a greater role than the phase

of the life cycle in determining the level of equipment, in our analysisthe life cycle was found to be the better explaining variable (Lansingand Kish, 1957) The size of the household is important only in so far

as it determines the increasing and decreasing level within the cycle,but not the absolute equipment level The factor of age also has lessinfluence than the life cycle on the level of consumption (Lansing andKish, 1957) The size of the household contributes only little to theexplanation of the level of aspiration, but the two factors, age and lifecycle, show a closer connection with the level of aspiration Life cycle

is of eminent importance for the determination and explanation of theconsumption standard, as it correlates positively – more than any otherfactor – with the equipment level as well as with the levels of aspiration.Among various attempts to prove that life cycle determines economicbehaviour, only those were successful that did not eliminate income(Schrader, 1966, p 55; Hörning, 1970, p 121; Lydall, 1955, p 149)

Our results, however, show that, even after the elimination of incomeeffects, the strong influence of the life cycle still prevails The differentphases of the cycle should to an ever larger extent gain significance forthe differentiation of the standard of consumption.

The influence of attitudes and expectations on short-run consumer

behaviour in West Germany can no longer be denied (Biervert andNiessen, 1971) The influence on behaviour is apparent whether theexpectations relate to the households’ own financial situation or to thegeneral economic trend Optimists have not only a higher equipmentlevel but also show higher aspirations and thus a higher consumptionstandard than pessimistic or indifferent households, though the differ-ences are not very great (Table 3.21) Our findings in this respect clearlyconfirm those of Katona and his colleagues (1971)

A rather high percentage of households can usually be observed insurveys whose level of consumption seems to correspond to their idea

of an appropriate standard of living Asked about additional purchases

of consumer goods, they do not report further wants, i.e their level of

Table 3.21 Consumption standard and expectations regarding the general

economic trenda

Expectations N Equipment level

( a) Level of aspiration ( b) Consumption standard

( a + b) Income up to

aspiration drops to the value of zero The following considerations come

to mind:

• The theory of saturation, according to which the intensity of a wantdecreases with increasing satisfaction, maintains that the desire forfurther durable goods will continue to decrease as the equipment levelcontinues to increase, until at the moment of absolute saturation,the consumer’s felt needs have completely ceased to exist.78

• The theory of the level of aspirations, according to which aspirationsdepend on experiences of success or failure In the area of consump-tion, success reveals itself in a high level, and failure in a low level ofconsumption – the level being judged according to earlier consump-tion levels, or according to levels achieved by other groups

In our studies, households which had levels of aspiration for ment below the average, also had low levels of achievement Thus, thehypothesis concerning levels of aspiration was confirmed:

equip-People with low achievement and little success reduce their aspirations

or suppress them completely; ‘saturation’ in this case is the result of ahigh degree of resignation

Levels of consumption are greatly influenced by success or failure

in various spheres of life (income, education, occupation), as well as

by personal characteristics regarding a person’s dynamism required forimplementing a high level of consumption

Appendix to section 3.3 Durables selected for this research

References (for section 3.3)

Biervert, B and H.J Niessen (1971) ‘Consumer Attitudes and Purchase Plans – Consumer Surveys in the Federal Republic of Germany and Their Informational Value’, Paper for the 10th CIRET conference, Brussels.

David, Martin H (1961) Family Composition and Consumption, Amsterdam:

North-Holland Publishing Company, p 52.

Ferber, Robert (1955) ‘Factors Influencing Durable Goods Purchases’, in L.H.

Clark (ed.), Consumer Behavior, vol 2, New York: New York University Press Gesellschaft für Konsumforschung (1953/62) Die Bedarfsstruktur im Käufermarkt, Nuremberg, 1953; Die Bedarfsstruktur, Nuremberg, 1962.

Hamilton, R.F (1965/66), ‘Affluence and the Worker – the West German Case’,

American Journal of Sociology, 71, 144–52.

Hörning, K.H (1970) Ansätze zu einer Konsumsoziologie, Freiburg.

Katona, George, B Strümpel and E Zahn (1971) Aspirations and Affluence: ative Studies in Western Europe and the United States, New York: McGraw-Hill.

Compar-Klein, L.R and J.B Lansing (1955/56) ‘Decisions to Purchase Consumer Durable

Goods’, Journal of Marketing, 206, 109–32.

Lansing, J.B and L Kish (1957) ‘The Family Life Cycle as an Independent

Vari-able’, American Sociological Review, 22, 512–19.

Lydall, H (1955) ‘Life Cycle in Income, Saving and Ownership’, Econometrica, 23.

Schelsky, H (1960) ‘Die Bedeutung des Berufes in der modernen Gesellschaft’,

Unser Verhältnis zur Arbeit, Stuttgart, B.52.

Schmölders, Günter (1969) Der Umgang mit Geld im privaten Haushalt, Berlin:

Duncker & Humblot.

Schmucker, H (1956) Der Lebenszyklus in Erwerbstätigkeit, Einkommensbildung und Einkommensverwendung, Allgemeines Statistisches Archiv, no 40.

Schrader, A (1966) Die soziale Bedeutung des Besitzes in der modernen schaft, Cologne/Opladen.

The Entrepreneur

Section 4.1 is translated from Günter Schmölders, Verhaltensforschung

im Wirtschaftsleben, Reinbek bei Hamburg: Rowohlt, 1978 (Rowohlts

deutsche Enzyklopädie 379), pp 43–56

Section 4.2 first appeared in Mark B Winchester (ed.), The International

Essays for Business Decision Makers, Vol III Published for the Center for

International Business Houston, Dallas, 1978

4.1 Entrepreneurial behaviour

Previously economic science has concerned itself far too little and toosuperficially with the person and the role of the entrepreneur, and hissignificance to the course of the economy J.A Schumpeter referred tothe ‘sin of omission’ of which conventional economic theory has beenguilty for 200 years, this theory now paying the merciless penalty that isfailure of state economic policy; handling of the entrepreneur problemwas described by Schumpeter as ‘not a glorious chapter in the annals

of socio-economic analysis’ ‘The theoreticians have almost managed tooverlook this most colourful figure in contemporary economic life.’

In fact from the very start economic theory has not rightly knownwhat to do with the entrepreneur In the early days of industrialdevelopment, the problem of capital formation was to the fore; thiswas the axis around which classic business life turned and thus theentrepreneur disappeared behind his ‘capital’ Another reason for thislay in the concept of the ‘economy’ as a closed ontosphere, governed

by its own ‘laws’ If, however, the economy performs according to

‘laws’, then the system cannot accommodate the factor of freedom ofchoice and freedom to act; it disappears in the face of the inevitability

of the economic process Directing the attention of economic theoryand economic policy more towards the human factor in business life,

136

to the living protagonists in its development, whom Adam Smith’smoral philosophy would still have placed at the absolute centre ofeconomic activity, also means simultaneously creating relationshipswith the course of this activity that are true to life, and that are also moreenlightening for everyone than neo-classical theory has ever been; andthe single most important protagonist in production and distribution,job creation and payment for work, recourse to savings and carrying outproductive investment is, quite simply, the entrepreneur.

The fact that the respective behaviour of the entrepreneur is of decisive

importance for the course of our market economy may in theory havebeen acknowledged by everyone since the time of J.A Schumpeter, butthe number of empirical studies of entrepreneurial behaviour in concreteeconomic and social situations has, however, remained very limited todate The (at the very least) thoughtless assumption that entrepreneurialactivity can simply be derived, without closer examination, from profitand loss accounting calculation data, prices, wages, the cost of carriageand materials, and interest rate charges should bear the blame for this

in no small part, since entrepreneurs’ behaviour is governed exclusively

or largely from the point of view of one-dimensional ‘maximizing ofprofits’

It is indeed this basic hypothesis, from which all ‘pure theory’proceeds, namely the hypothesis that the decisions of economicallyactive people can be derived from their economically rational, reflected

premises; in other words, the concept of homo economicus is not culled

from reality, but ‘pure theory’ An entrepreneur who searches for theplace on the map – or on the globe! – where he wants to establishhis production plant or found a company naturally ought in principle

to have included any locations at all worthy of consideration in hisdecision and carefully weighed up the advantages and disadvantages

of this choice of location (arithmetically) If one investigates the ality’, i.e the behaviour of persons and groups involved in the decisionsabout a company’s choice of location which apply in reality, then it

‘actu-is not possible to talk of either of these two ‘self-evident’ requ‘actu-isites; asurvey conducted in 1970/71 by my Cologne Research Department forEmpirical Socio-Economics about North Rhine-Westphalian industrialcompanies’ choice of location for new start-ups and relocations between

1966 and 1971 showed, for example, that in almost half of the cases(46 per cent) only a single site, in one-fifth of cases (22 per cent) atleast one of two alternatives, in 17 per cent of cases three and only

in 14 per cent of cases four to six different locations were considered.Precise calculation of the site advantages and disadvantages for the