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).

While 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.

My 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.