Gerhard Tintner, External Economies in Consumption (1960)

Gerhard Tintner’s contribution to Essays in Economics and Econometrics develops a mathematical demand theory in which consumers’ preferences depend on their social environment. Its central move is to extend the familiar analysis of individual utility maximization first to preferences affected by everyone’s income, then to preferences affected by everyone’s consumption. “External economies” here concern interdependence among consumers, rather than productive efficiencies. The essay’s relevance to welfare economics lies in challenging the independence of preferences that makes conventional consumer theory tractable.

It is one way of getting away from the unrealistic assumption of a society consisting of atomistic individuals, who do not influence each other.

Tintner treats this departure as a correction to an unrealistic social premise, not as an abandonment of utility analysis. His opening reference to Aristotle’s political animal supplies a brief rationale for a predominantly mathematical investigation. Society enters the model through the arguments of utility functions and the resulting demand responses. The essay does not develop a substantive account of how tastes emerge or prescribe a welfare policy; it establishes a framework within which social influences can alter familiar economic conclusions.

The exposition proceeds through three increasingly interconnected models. Throughout, Tintner considers a society of (K) individuals consuming (N) commodities or services, with given money incomes and prices. Aggregate demand is the sum of individual demands. These assumptions delimit the analysis: the focus is on consumption responses, not on the determination of incomes, prices, or production.

We neglect the possibility of coalitions and other complications arising in the theory of games.

This restriction is important because the final model makes consumers mutually dependent without supplying a theory of bargaining or coordinated action. Interdependence is represented through utility functions and systems of demand derivatives. The mathematical apparatus expands as the social dependencies expand, while individual budget constraints remain central.

Tintner first reconstructs the “classical atomic theory,” in which each person’s utility depends only on that person’s own commodity holdings. Maximization under a budget constraint yields income and price responses expressed through a bordered matrix of utility derivatives. The price response separates into an income effect and a substitution term; the discussion distinguishes superior from inferior goods, substitutes from complements, and recalls the possibility of a Giffen response for an inferior good. Expenditure shares and partial elasticities of substitution then recast these relationships in elasticity form. At the market level, the stated price elasticity is a quantity-share-weighted sum of individual price elasticities. This baseline supplies the concepts against which the later extensions acquire their meaning.

The second model allows each individual’s utility index to depend on all incomes in society as well as on that individual’s consumption. Tintner motivates this specification through the connection between income, social standing, and tastes. Income now has two roles: it determines purchasing capacity and can change the preferences through which commodities are evaluated. Consequently, a change in another person’s income can affect an individual’s demand even when that individual’s own budget is unchanged. The demand derivatives acquire additional terms connecting income-sensitive marginal utilities with substitution relationships.

We see from this formula, that income elasticities and elasticities of substitution are no longer independent.

This is the essay’s most explicit conceptual result. In the atomistic model, an income response is derived with the preference structure held fixed. Once preferences themselves depend on income, the observed response combines the conventional budget effect with a socially mediated change in valuation. Substitution relationships therefore enter the income response rather than remaining a separate analytical component.

Because of the dependence of the utility function on all incomes, we may have in (25) $Ex_{ks}/EM_k < 0$ even if the atomistic income elasticity $(Ex_{ks}/EM_k)_0$ is positive, i.e. we have a superior good in the classical sense.

The significance is not simply that demand may fall as income rises; conventional theory already accommodates inferior goods. Tintner’s point is that a commodity classified as superior under fixed, independent preferences can exhibit a negative income response once income-dependent tastes are included. The classical classification need not survive the extension. He also carries these preference effects into the treatment of total demand, making changes in one income potentially consequential across the consumer population.

The third model generalizes the dependence further.

Now we consider the most general case in which the utility of each individual depends upon the consumption of all individuals in the given society.

Tintner invokes the Veblen effect as an example of the phenomena this formulation might capture. The analytical change is from incomes as social influences to the complete distribution of consumption as an argument of each person’s utility. He constructs a compound matrix whose blocks connect individuals’ marginal utilities and cross-consumption derivatives. Its inverse provides expressions for income and price responses across the system. The resulting substitution elasticities can concern how one person’s substitution between commodities affects another person’s demand. Market responses consequently involve relationships across consumers as well as across goods.

The essay closes by identifying a possible empirical route rather than reporting an empirical test. Wald’s work on recovering indifference systems from Engel curves and research using household budget surveys give Tintner grounds for hoping that the theory can be econometrically examined. This conclusion preserves the contribution’s exploratory character: the equations specify channels of interdependence, but the paper does not measure their strength or establish their prevalence. Its enduring conceptual contribution is to show why demand cannot always be understood as the aggregation of isolated choices. If income and consumption also reshape preferences, individual and aggregate elasticities become properties of a socially connected system.