MARSHALL IN the last quarter of the nineteenth century, representing the classical traditions of Adam Smith (1723-1790) and David Ricardo (1772-1823), based his theory of consumer behaviour on the cardinal concept of utility. This concept lay at the heart of the classical theory of demand in the form of the law of diminishing marginal utility until the 1930s, when J.R. Hicks and R.G.D. Allen rediscovered and extended the work of V.F.D. Pareto on indifference analysis, and recast demand theory in terms of ordinal utility. Beyond this came the contribution of Samuelson (1947) whose concept of ‘revealed preference’ revolutionized the theory of consumer behaviour by establishing the law of demand directly without the use of indifference curves and their restrictive assumptions.

The present-day economic thinking disregards even the Samuelson’s contribution, and talks of the ‘new’ theories of consumer behaviour that not only deal with a whole range of new problems- family decisions, work and leisure, risk, time constraint, and so on - but also bring microeconomics closer to macroeconomics in various ways. These ‘new’ theories show four alternative and seemingly more realistic directions in which the theory of consumer behavior has progressed.

These are briefly described below: a) The Demand for Characteristics: This is due to Lancaster (1966, 1974), who maintained that, as against traditional theories of consumption, which regard the consumption of goods and services as an end in itself, a consumer does not desire goods and services for themselves, but for their attributes or characteristics. For example, a consumer does not demand butter just for the sake of butter, but for its attributes say, vitamins and taste, and so on.

Hence, on the basis of this reasoning, the demand for goods and services, instead of being direct (as in the traditional theory), becomes derived as in the case of inputs in the theory of production. It is argued that different goods yield a given number of similar and desirable characteristics, though in different proportions and at different costs. A consumer is, therefore, able to compare these different yet related goods, in terms of their characteristics (unlike the traditional theory). The theory of consumption, thus, becomes similar to the theory of production where the consumer operates to maximize his utility (given his income) within the feasible consumption space (i.e., the consumption possibility frontier), which gives his preferences defined over the given characteristics.

This approach has two distinct advantages: it explains some of the commonly observed consumer behaviour, which traditional theory cannot explain (say, in respect of commodities having perfectly inelastic demand); and it facilitates computation of price indices when new goods are introduced.

b) Portfolio Choice: According to this Approach (Tobin, 1958; Sharpe, 1964) a consumer is also interested in investing his income in the available assets to maximize his utility, and for this he constructs his investment portfolio of assets on the basis of their expected rates of return and the amount of risk involved. His utility, therefore, depends on these two characteristics of assets, and he has to decide how best he can allocate his income between different assets. This problem is similar to the one mentioned in ‘The Demand for Characteristics’ approach as mentioned in a) above. Different assets have similar but related characteristics of return and risk- and, given his income, the investor (consumer) has to choose those which maximize his utility as depending on the given characteristics. There are, however, two problems in this approach. The first is concerned with the measurement of risk, and the other with the violation of the additive property of characteristics.

c) Allocation of Time: The conventional thinking is that a consumer is constrained by his income, but it is now felt that time is another crucial constraint, and any act of consumption requires both income and an input of time. In fact time is the bigger constraint, especially in the present-day competitive world, where there is a mad-rush for doing things. We have quite often heard people complaining of the shortage of time, and it is because of this that they are not able to ‘optimize’, no matter what they are doing and what their resources are. Imagine a situation when everything, we need, is ‘freely’ available, but then, remember that we just have ‘one’ lifetime within which we have to use and consume them. Time, therefore, is ‘the key to success’, as our elders have always said. Anyone who makes the best of it achieves the most in life.

It was Becker (1971), who in the mid-sixties in a ‘Theory of the Allocation of Time’ formalized this reality by inducting time in the theory of consumer behaviour as the most important parameter. As against income and the rate at which it is earned, time is strictly limited in any one day, and its availability does not rise with economic growth, as do other constraining variables like, income and wage-rate. d) Family Decision-Making: The last of the ‘NEW’ theories of consumer behaviour, as pioneered by Becker (1976), is called the ‘Family Decision Making’, which considers the influence of the family on the consumption and labour-supply decisions of its members.

It focuses on the differences in comparative advantage among the various family members. It is quite often seen that, at least in the past, men had a comparative advantage over women in market work, and women in homework. This is true even now amongst most of the families in the ‘conservative’ societies, especially of the third world countries. As long as men and women perform their roles according to their comparative advantage (i.e., the allocation of activities is Pareto optimal), the family would maximize its overall well-being, but if they work against their comparative advantage (i.e., the allocation of activities is not Pareto optimal), the result would be sub-optimal. This analysis is based on the hypothesis that families select Pareto optimal alternatives.

Some of the implications of this approach are briefly mentioned below: Larger are the opportunities available to women; the less Pareto optimal would be the family welfare; higher is the rise in the wages of women relative to those of men; higher will be the rate in the decline of marriages. It is seen that the four ‘NEW’ theories of consumer behaviour, as briefly discussed above, reflect the various aspects of consumer behaviour in their own way, but still they are largely additive and complementary. There is, however, a need to synthesize them fully by offering a ‘complete’ theory, which also takes into account some of the basic inputs of the conventional theories.

While concluding this Paper on Conventional Wisdom that guides contemporary economic thinking, let us hope that the contributions that have been made in economic theory over the last few decades, and the corresponding shifts, that they have led to, would make the science of Economics much more useful, matter-of-fact and relevant to explain and solve a variety of micro and macro problems as faced by individuals and societies all the world over.