I came across this a long time ago, while studying for my a-levels, so thank you Mr Sidemouth, but I have not heard much about him since. While considering the Tories attempts to reduce the penurious universal credit payments, and my own experiences as I move into retirement I am reminded of the ratchet. Here are my notes …
The author of this theory was James Duesenbury. It seems he was important for writing ‘keeping up with the Joneses’ into economic theory but to me,
… most importantly or most memorably, he posed that people who suffer a negative income shock reduce their consumption slowly, certainly more slowly than they increase it when they get an income increase.
They do this due to what he called a demonstration effect, but also due to habit. It’s hard to stop shopping at Waitrose if that’s what you’re used to and certainly accommodation and transport costs are sticky and hard to reduce.
In this paper, Supriya Guru looks these and other consumption theories and shows in diagram form the ratchet.
I wanted to reproduce the one I first saw, which was something like this,
- Duesenbury’s ratchet by DFL CC(0)
His magnum opus was called, Income, Saving and the Theory of Consumer Behavior, and if you query “duesenbury ratchet” on google, both it and other comments on its application to macro-economics can be found.