BY ANTHONY KILA
As a discipline, one of the most impactful achievements of economics is making practically everyone that went through general education understand the relationship between demand, supply and price. Yes, that famous graph comes to mind. We were all taught the golden rule that tells us that an increase in the supply of goods and services will lead to a fall in the price of such goods and services, the situation is the reverse, we were taught. We also know and agree that when the prices of goods and services rise, the demand for such goods and services will fall and that on the contrary, when the prices of goods and services fall, the demand for them will rise. That is the general rule. A step further, we were also introduced to the concept of goods and services whose demand does not change with price: those are the goods and services with inelastic demand. In between the notions of inelastic demand and full elastic demand, we also came across the concept of degree in elasticity that explains the various levels of change in demand when there is a change in other economic variables such as price or income.
Yes, it is true, many stopped following the saga of demand, supply and price at the essential or basic level of high price meets low demand and low price meets high demand. There was, however, one man who did not only see beyond the essential, but he discovered and introduced us to what is known as the “paradox of demand” that violates the golden rules of demand. His name is Robert Giffen and he is the subject of attention in this piece chronicling his contribution to economic thoughts and their applications. It is worthy of note that it was Alfred Marshall who, in his 1920 book, “Principles of Economics”, mentioned Robert Giffen’s discovery, which he referred to as the “Giffen Paradox”.
A mathematical economist, understandably described by most as a statistician and economist, Giffen was born in Lanarkshire, Scotland in 1837 and died in Fort Augustus, Scotland on the 12th of April 1910. During his over 70 years on earth, he was awarded a Knight Commander of the Order of the Bath; he became president of the Statistical Society and was elected a Fellow of the Royal Society, as well as a Fellow of the Royal Swedish Academy of Sciences. He was also awarded the Guy Medal from the Royal Statistical Society.
Robert Giffen started his working life as a clerical staff at a solicitor’s office in Glasgow. It was in that period that he attended university. His professional life began in journalism, with a knack for financial reporting, first in Scotland, then in London where he moved around various publications including, “The Economist” and “The Times”. His aptitude for crunching data led to his appointment as head of the statistical department at the Board of Trade, and later as chief statistical adviser to the government.
Giffen is understandably known by most, for his articulation on an exception to the demand rule christened by Alfred Marshall as, the Giffen Paradox. The exception shows that there are some kinds of goods and services whose demand tends to rise instead of fall in the face of high prices and whose demand will fall instead of rise in the face of low prices. Such products and services are what are now known as the Giffen Goods. The case study used by Robert Giffen himself was that of the consumption of commonly essential and non-luxury items goods such as bread, wheat, potatoes and rice by low-income consumers. In simple terms, Robert Giffen, demonstrating an amazing ability to identify, understand and articulate details, showed us that given that these essential non luxury products do not readily have substitutes, low-income earners will continue to buy them even when their price increases and even when this price increase greatly erodes their already low incomes, because outside these products, they have nothing else to consume. The Giffen theory also called our attention to the fact that where prices of these products reduce, instead of low-income consumers to demand for more of them, they would demand for less as they can now shift some of their disposable income to seemingly more luxury items such as meat, which they could not afford when the prices of non-luxury items were high. Alfred Marshall put it this way: “As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and bread, being still the cheapest food which they can get and will take, they consume more, and not less of it.”
Many economists argue that the Giffen Theory and the Giffen Goods it depicts are a rarity in economics. But most of them do so from the comfort of western and fast developing systems; scholars, policy makers and all those that study and operate in Ghetto towns and rural areas and in underdeveloped countries will, or at least should, be able to readily identify and present concrete and contemporary evidence of Giffen goods that validates the Giffen Theory.
Another important but amazingly little-known and rarely celebrated contribution that Robert Giffen gave us was his understanding of the effect of the war on the world credit system. Before the First World War started, Robert Giffen foresaw that a world war would shake the international finance and credit system as it was known then; and in his 1908 speech and publication, he talked about “The Necessity of a War Chest in This Country, or a Greatly Increased Gold Reserve.” Robert Giffen got it right; sadly, a world war came and his insight and prediction formed the basis of the plans for economic warfare put in place by the British Admiralty for the First World War. Lessons from Robert Giffen’s insights continue to be useful for those truly interested in understanding the various disparities we deal with today in connected political-economic systems across the globe.
Join me on twitter @anthonykila to continue these conversations.
Anthony Kila is a Jean Monnet professor of Strategy and Development. He is currently Centre Director at CIAPS; the Centre for International Advanced and Professional Studies, Lagos, Nigeria. He is a regular commentator on the BBC and he works with various organisations on International Development projects across Europe, Africa and the USA. He tweets @anthonykila, and can be reached at anthonykila@ciaps.org
