The mysterious Giffen has once again risen from the ashes. In this iteration, it’s silver in the red-hot precious metals market. This so-called anomaly makes for a great story and interesting explanation, but it does not represent a genuine exception or a valid attack on the fundamental laws of economics. It is another example of the questionable scholarship of the Grand Wizard of Mainstream economics, Alfred Marshall.
Silver’s activity has been questioned on podcasts as a Giffen Good by some of the best minds in the precious metals market. Money Metals even took an in-depth look at the topic. It’s been a fascinating topic ever since Alfred Marshall created this topic in the 3rd edition (1895) of his famous Principles of Economics textbook.
The Giffen Good is a supposed anomaly because it suggests that, under the right conditions, people will buy more of a certain good at higher prices than at lower prices. This is a violation of the Law of Demand that people will buy more at a lower price than at a higher price.
Here is the story: Silver has risen in price at an historical pace, rising by more than 200 percent in the last year and yet more silver has been demanded by more and more people at these higher prices. The anomaly is that demand is supposedly increasing in response to higher prices, suggesting that demand curves have been twisted around from downward-sloping to upward-sloping. The implication is that the silver market is going to spiral out of control because of a fundamental flaw in the laws of economics.
As much as mainstream economists, engineers, and politicians would like our demand curves to be forever fixed and homogeneous, the reality of economic theory is that we can bring a brand-new demand to the market each and every day.
The solution to the puzzle is that, as the price rises due to changing market conditions, people’s demands are also shifting. What I am labeling as the Giffen scenario or Giffen condition, contends that relatively poor people may spend more of their income on subsistence goods when prices are rising and real incomes are falling. The fact that we increase our demand (curve) for the subsistence goods over time as we become poorer is not a violation of the law of demand but an application of it.
Another suggested violation of economic law, the so-called Veblen good, represents a similar misunderstanding of economics. It holds that, as the price of something increases, we will demand more of it because it is perceived as a luxury or status good. The fact that people judge silver chains as functional goods at $20 per ounce and later as luxury goods at $200 per ounce is not a violation of demand theory, but an application of it.
In other words, what we put on our body or in our body is an entirely different process than how nutrients and elements are used inside the body in biological and chemical processes. Humans have the ability to choose each and every day.
Time and information are some of the fundamental building blocks of our scientific understanding of the fundamental laws of economics. Hence, an individual’s demand at any point is premised by ceteris paribus conditions that all other things are held constant in our mental construct. To wit, changing market conditions can be expected to impact our demands.
So, let’s investigate the torrid history of the anomaly that periodically plagues men’s minds, distracts our attention concerning important historical junctures, and undermines support for free market policy.
So, if Alfred Marshall created the topic, why is it called a Giffen Good? It’s named after Sir Robert Giffen—a 19th-century Scottish statistician and economist—but we really aren’t sure about the connection to Giffen. Marshall provided no citation.
Giffen was a prodigious writer of many books, a contributor to many government reports, and as a journalist writing for many publications, including as acting editor of The Economist for almost a decade and he founded The Statist in 1878. So far no one has found Marshall’s source material to Giffen. Scholars such as Nobel Laureate George Stigler—a prestigious historian of economic thought—could not find a link to Giffen.
In stark contrast to his high standing in the economics profession, Alfred Marshall was unreliable when it came to his opinions of other economists. The great English theorist Edgeworth criticized Marshall on the Giffen Good, to which Marshall did not really respond. Marshall tended to elevate inferior contributors and downplay and denigrate superior contributors even in the case of fellow Englishman, the magnificent William Stanley Jevons. In the case of the Giffen Good, he seems to have misattributed to Giffen, slandering the man and his career.
To make Marshall even worse, his two noteworthy students were John Maynard Keynes and Arthur Cecil Pigou who did more to undermine good economics than anyone in history. Keynes and Pigou were both socialists and, while Keynes tried to undermine theory with respect to the market economy from the macroeconomic level, Pigou tried to undermine it at the microeconomic level.
Masuda and Newman (1981) undertook an even deeper investigation of the source of the Giffen Good and again could not find the link to Giffen. They did, however, find a link to Simon Gray. For Marshall’s purpose, however, Gray was entirely unusable because Gray was anti-theoretical and an obvious economic crank.
Like the elusive unicorn and Loch Ness monster, the Giffen-Gray Good has also lived a long life without any acceptable evidence of its existence. The most long-lived example is the Irish Potato Crisis, but economists now reject that as a valid example. Economists have attempted to use mice in the laboratory and even human guinea pigs in rural China to establish better evidence without much success.
The Giffen Good is not a theoretical possibility, but we nonetheless can sympathize with it as a socio-historical explanation for conditions during hard times: as times get harder and food and other prices rise because of inflation, low-income people are forced to allocate more of their income to survival foods.
A hint along these lines comes from Simon Gray himself who was employed in the British War Office in 1804 when he wrote his book The Happiness of States which was eventually published in 1814. This was a time when the United Kingdom was in a perpetual state of war with France, America, and India. Not surprisingly, the government unleashed massive government spending, debt, and inflation on the populace. Gray was witness to what I refer to here as the Giffen scenario.
With the English working class facing very high rates of price inflation and stagnant real wages, they were forced, overtime, in a step-by-step fashion to allocate more of their incomes into subsistence food purchases—the Giffen scenario. The Irish Potato Crisis—with its own onslaught of government interventions—similarly severely impoverished the Irish working class to the point of actual widespread starvation. See my article: What Caused the Irish Potato Famine.
Silver is not a Giffen Good, but as the “poor man’s gold” is merely the latest example of the Giffen Scenario.
