The spirit of capitalism among the income classes

• Date: 01 January 2014
• Author: H.J. Smoluk,John Voyer
• Published date: 01 January 2014
• DOI: http://doi.org/10.1016/j.rfe.2013.05.006

The spirit of capitalism among the income classes

H.J. Smoluk ⁎, John Voyer

1

University of Southern Maine, 96 Falmouth Street, Portland, ME 04104-9300, United States

abstractarticle info

Article history:

Received 1 March 2013

Received in revised form 16 May 2013

Accepted 20 May 2013

Available online 30 May 2013

JEL classification:

E21

G12

N39

Keywords:

Asset pricing

Consumption

Wealth

Cointegration

This paper tests the consumption-ba sed capital asset model within th e context of the spirit of capital ism.

The spirit of capitalism asserts that consumers gain utility not just from consumption of goods and services,

but also from the soci al status obtained f rom wealth. We examine two asset pricing models developed

by Bakshi and Chen (1996) that employ wealth in the utility function, for households sorted by income

quintiles. In the first model, household s obtain utility fro m both consumptio n and the social statu s that

comes from their own wealth. In the second model, households gain utility from both consumption and

the social status obtained from theirown wealth relative to the wealth of other peer households. Our results

indicate that bot h models are inconsist ent with the data regard less of income. Howev er, using cointegrati on

methods as a diagnostic tool, we find that the data are “loosely”consistent with the spirit of capitalism,

at least for the upper income quintiles.

© 2013 Elsevier Inc. All rights reserved.

1. Introduction

The notion that wealth enters the household's utility function is a

popular idea among financial economists wishing to explain con-

sumption patterns. In many asset pricing models, wealth represents

future consumption and may be used by households to reduce their

consumption volatility. In the “spirit of capitalism”literature, how-

ever, wealth brings additional utility in the form of social status. The

literature on the spirit of capitalism was introduced by Max Weber

in the early 1900s as he argued that capitalism and the accumulation

of wealth were consistent with Christianity.

2

In more recent times, Bakshi and Chen (1996) further develop this

idea by deriving several asset pricing models that are designed to em-

pirically measure the spirit of capitalism. Their work, like most other

empirical analyses of the consumption-based asset pricing model,

uses U.S. aggregate consumption and wealth data within the context

of a single representative agent. The representative agent model

employed with aggregate data, however, ignores important differ-

ences in wealth among households. Such differences in wealth are

crucial to an empirical analysis of the spirit of capitalism.

Our paper contributes to the spirit of capitalism literature by

examining the economic behavior of households with different levels

of wealth. Specifically, our analysis employs five representative

households (agents) based on their income quintiles. Empirical evi-

dence indicates that on average households sorted into income quin-

tiles are a good proxy for households sorted by their total wealth,

defined as income, housing value, and financial assets. Both the

Survey of Consumer Finance, published by the Federal Reserve, and

the Consumer Expenditure Survey, published by the Bureau of Labor

Statistics, support this finding.

In this heterogeneous environment, consumption and wealth de-

cisions for households seeking to gain social status critically depend

on the wealth levels of peers, which are typically households in

neighboring social strata. According to Duesenberry (1962, p. 30),

people will often make comparisons to others with similar income

levels. These comparisons will result in either favorable or unfavor-

able outcomes. Duesenberry conjectures that unfavorable compari-

sons bring about changes in household consumption of goods and

services that may help to eliminate this disparity. For example,

high-income households, say in the fourth income quintile, will man-

age their consumption and wealth based on the perceived wealth of

households in the same quintile, or the nearby third or fifth quintiles.

While the wealth of acquaintances is typically not known, it can be

reasonably deduced. Individuals are quite perceptive, for instance,

in determining the relative value of primary residences by their size,

style, and location. Therefore, it is important to include housing

values in the definition of wealth.

Review of Financial Economics 23 (2014) 1–9

⁎Corresponding author. Tel.: +1 207 780 4407.

E-mail addresses: hsmoluk@usm.maine.edu (H.J. Smoluk), voyer@usm.maine.edu

(J. Voyer).

1

Tel.: +1 207 780 4597.

2

Weber's work was originally published in two articles in 1904 and 1905 in German,

under the title “The Protestant Ethic and the Spirit of Capitalism.”Subsequent editions

have been translated and published since that time, see for example, Weber (1958).

1058-3300/$ –see front matter © 2013 Elsevier Inc. All rights reserved.

http://dx.doi.org/10.1016/j.rfe.2013.05.006

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