Alan Greenspan presents an incorrect example of a luxury good and defines the common economic term “luxury good” incorrectly. He argues that “wheat is a luxury in underfed civilizations… the term “luxury good” implies scarcity and high unit value.”i”
- There are two necessary conditions for categorizing something as a luxury good which Greenspan omits: 1) A luxury good is not a necessityii. 2) The economic demand for a luxury good is elasticiii. Greenspan’s definition of the term “luxury good” is false through omission.
- The vocabulary of economicsiv classifies food, especially staples such as wheat, as a necessity good, not a luxury good. The economic consequences are well knownv. Greenspan is incorrect.
- Elastic demand for luxury goods means people buy disproportionately less as their income falls. Demand for food is “inelastic”, which means people have to buy a certain amount even if they are poorvi or if the price is high. The high unit value of wheat for the underfed people in Greenspan’s example is due to the necessity of food (demand) and the apparent lack of it (supply). Greenspan’s characterization of wheat as a luxury for underfed people is false and incorrect.
Therefore, Alan Greenspan presents an incorrect example of a luxury good and defines the common economic term “luxury good” incorrectly.
iPg 97, Gold and Economic Freedom by Alan Greenspan in Capitalism, the Unknown Ideal by Ayn Rand, Signet, New American Library