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April 19, 2009

Advertising and Supply and Demand

I'm sorry, I'm still working on this one

(#3 in a series of 5 including Lamar, Billboards, Advertising and Supply & Demand, Advertising and Propaganda, and Advertising and the Information Age.)

Advertising, marketing, public relations : an established industry whose expertise is communicating, framing discussions, and shaping public discourse. They don't make steel, they don't bring happiness, but they can change the results of an election (which is kind of a big thing for a country with nuclear weapons).

advertisingWhile we sometimes talk about the ads-in-themselves (Wow, that Burger King Sponge Bob ad, how could a corporation present women in that light? What audience do they think they're reaching?) we rarely talk about the advertising industry as a thing-in-itself. Perhaps we should.

The advertising industry (which I'll consider includes marketing, public relations, and social media) shapes our social awareness, politics, and economy. The economic impact is macro vice micro - advertising doesn't simply try to affect whether we buy a Honda or a Hundai; advertising artificially changes consumer demand.

If you're an Adam Smith devotee (and I am, at least, a fan) then you believe in the marketplace. The marketplace will set supply and demand, communicate values and pricing, encourage innovation, meet needs, etc. If the supply/demand thing gets out of whack, then the marketplace will correct it.

In order for the marketplace to work, it has to be relatively unencumbered. For instance, if the government said that banks in Texas would never go out of business, then those banks would make foolish decisions and the marketplace couldn't correct for it. The unintended consequences of an act or policy often exceed the intended consequences, and in a case like this the artificial constraint on the marketplace will produce rippling disfunctions that influence the entire economy over time.

Some regulation of the marketplace is called for. For instance, we prefer product safety legislation to avoidable infant mortality. This is not a loss of confidence in the marketplace as much as recognition that current GAAP does not perfectly combine costs with decisions. Most regulation occurs because the cost of a product or decision is off the balance sheet. I can produce something cheaply if I pollute the river and the costs of my output is not reflected in my balance sheet. Sometimes regulation moves transferred or abandoned costs back to the equation, and in doing so helps the marketplace to better reflect reality.

Supply Demand TensionMy point (at one time, I had one) is that the invisible hand of the marketplace (the correct functioning of supply and demand) is essential for a healthy, self-adjusting economy.

There's very little new under the sun, but one relatively nascent problem is that mass media allows advertisers to artificially manipulate demand, and that throws off the essential balance of the economy.

From Wikipedia's entry on John Kenneth Galbraith,
The conventional wisdom in economic thought portrays economic life as a set of competitive markets governed ultimately by the decisions of sovereign consumers. In this original sequence, the control of the production process flows from consumers of commodities to the organizations that produce those commodities. In the revised sequence, this flow is reversed and businesses exercise control over consumers by advertising and related salesmanship activities.

To restate, modern advertising permits businesses to create among consumers the demand that industry desires and has planned for. It's a perversion of the economy which completely divorces the economic process from reality. It's very profitable for industry until external events intrude upon the illusion, at which time the disfunction is unable to respond to the challenge and all equilibrium is lost. (I think that's economist-ese for A Train Wreck.)

Galbraith's thoughts on the role of advertising in destroying competition are best given in his book, The New Industrial State.

Advertising interferes with the balance of the economy.
Edited 4/25/09, one article split into two.


Jonathan Smith said...

How can I put this politely? What a load of complete cobblers.

The 'invisible hand' is invisible for the same reason god is invisible - it's a FIGMENT OF YOUR IMAGINATION.

Or, more correctly, a figment of someone else's imagination, and you've just taken their word for it, in the face of ALL EMPIRICAL EVIDENCE to the contrary.

Any economic theory that can't account for the REALITY of WHAT ACTUALLY HAPPENS in the marketplace (including advertising, gaming and erm... well human behaviour) is at best incomplete and at worst a dangerous religious dogma.

Vannevar said...

I don't believe that something has to be visible to be real - how do you feel about electromagnetism? Gravity?

I do believe that our economic theory may not be fully developed, and I'd even agree that the real economy may have changed (corporations, global economy, digital capital) to the point at which classical market theory may be losing it's value.

I must say, I don't see why you SHOUTED about God (I believe in Him, btw).

Outsource said...

Mr. Jonathan Smith response, apart from its affront, is somewhat ambiguous. Certainly it is so if one considered that one is living beyond the turn of the 21st Century and not even at the turn of the 20th Century.

Citing "Empirical evidence," and "human behavior" in a five line email sums up a blinding set of assumptions not usually made in academic theories. Certainly the latter needs pages of definition and elaboration given that national, regional and local cultures breaks up the 'unity' presumed in proffering the term.

It is important to note, however, that no Economic theory accounts for advertising as anything but marginal in the 'holy' game of 'Supply and Demand' and the presumed dominion of the of the even more sacrosanct, the 'Free Market.'

The discontented rarely understand that Economics is a descriptive social science. Its predictive capacity is marred by the irregularity of the described entity. one such irregularity lie in the assumption of pure 'Supply and Demand' and the reality that 'demand' is not pure, in the sense that it is manipulated, manufactured, cloned, imposed and it is far from being the product of 'in vitru' propensity on the part of the consumer.

Along the same lines, and as an illustration to Mr. Jonathan Smith (if that is his real name!) no Economist could have forecast, for example, the miserably anemic economic conditions that lasted for entire term of President George W. Bush, nor, for that matter, the crash that happened at the end of his term. And the latter took place when 'deregulation' gnawed at the statutes until none was left but the freedom of the bankers.

A term like 'human behavior' are impossible to abstract into a nationally reliable factor in artificial demand - demand created by advertising.

More to the point, the difficulty in assessing the impact of advertising leads to a general breakdown of our idealized model.

To refuse to believe that the supplier has turned the table on the consumer, one only need look at the state of the auto industry in the US. While the consumer is in dire need of hybrid and electric cars, GM produces one out of untold number of other gas-guzzling models at $40K, and Ford offers its Fusion and Escape Hybrid at $35K. And this is after the consumer saved the first from bankruptcy, and the boosted the second by the Clunker program. Going shopping for a hybrid is constrained to three US models. Shopping for a gas-guzzler is made from some 25 different ones.

So where is supply and where is demand?

One could go on further in breadth and depth to dispel the fantasy of laymen in both the validity of the law of 'supply and demand' and the existence of 'Free Market.' The breakdown of these concepts began quite early in as advertising and marketing became an essential part of a production enterprise, in the pre-war years, and as monopolies developed, at the turn of the century, respectively.

Warnings were made as early as 1939. Not many years after the great crash. Indeed, the decrease in the amplitude of the 'cycles' in the economic system we have, should be an ample warning that economic theory requires control of aberrations of the theoretical model upon its is based. That is regulations. Foolhardy individuals, usually beneficiary of such aberrations contended themselves with the calm assurance that any serious breakdown would lead to government bailout. And so it has been.

Sadly, this issue ultimately became ideological barring learned or reasonable discussion, and as a result, we do have today, in 2010, a rudderless economy increasingly working according to the whims of ideologues.

Ruwando said...

The invisible hand is based on the assumption that the market is efficient and information is perfect. Ask anyone if their are getting the best price on their cable bill (assuming more than one provider is available to them) and it is obvious that information is not perfect.

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