Sunday, 21 December 2008

Madoff Unleashes the Counter-Veblen Effect

I seldom bother to read the Sunday Times, but today I had little choice but to learn how the Madoff scam has rocked the exclusive world of the super-rich.

We can skip the lecture on supply and demand, save to say that all the featured sob-stories suggest that Madoff targeted the mega-wealthy private investor on a personal level, triggering a snob effect and/or bandwagon effect. In other words, the mugs confused either exclusivity itself or popularity amongst their "circle", with the quality of the investment. According to the FT, even "Union Bancaire PrivĂ©e, the Swiss bank that is one of the world’s biggest hedge fund investors, told clients in a letter this week that it had spotted potential dangers but had been reassured by Mr Madoff’s reputation and clean regulatory record." More snobs on the bandwagon.

Of course, appealing to investors on this basis was especially insidious, as it robbed them of any interest in transparency. Whereas concern at the lack of it kept more rational institutions and professional investors safely at bay. Even the publication of Michael Ocrant's article in May 2001 ("Madoff tops charts: sceptics ask how") strongly suggesting a scam, failed to restrain the rampant enthusiasm amongst the wealthy elite for the long social climb ahead.

Well, they're all down from the mountain now, of course, claiming they should've been warned by the SEC and raging round their lawyers' offices spouting the whole sorry history of restaurant names and lunch dates while litigators take notes. But once they've ridden the whole length of the change curve, I have little doubt they'll get their own back without any help from the lawyers or regulators.

In fact, the backlash could well unleash what has been termed the "counter-Veblen effect: preferences for goods increasing as their price falls, over and above the traditional supply and demand effect, due to a conspicuous thrift amongst some consumers."

This will be more than merely an austerity measure. Like investing with Madoff, the counter-Veblen effect will be the product of a lifestyle choice. So, while it's interesting to see how it fits with the ways in which we are tightening our belts as a tactical response to the credit crunch, the counter-Veblen effect might actually chime better with, say, the actions of prominent people driven by environmental concern - like Darcey Bussell leaving for Australia to become an "eco-Mum", the committment of the entrepreneurs behind the Tesla electric car, and ultimately the Bill & Melinda Gates Foundation - as well as the authenticity demanded by the Web 2.0 community that clashed with "gut instinct" politics during the recent US Presidential campaign. Like these trends, the counter-Veblen effect could well turn out to be real and lasting.

So welcome, I suggest, to a new world of battered Bentleys, frayed collars and housecoats in Knightsbridge, where cheaper is better and champagne is for wimps.

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