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An unfinished attempt at an economic critique of advertising.
  January 21, 2004

INTRODUCTION

Every once in a while, I like to pretend that I've been charged with developing a whole new society from scratch.  I can see it: a distant planet about to be colonized by the best and the brightest who need guidance in laying down their Founding Principles (the fantasy should end right there, because why on Earth would the brightest pick me to guide them?—but I have a healthy ego, so I shrug this question right off); a place far from the interference of the Earth's control-hungry great powers; a blank slate with the chance to finally get it right, and no one pushing your elbow.

To those who would accuse me of woolgathering, I say: Gedankenexperiment.  Known as a thought experiment to people who don't fancy German terms, it is precisely the exercise that my cosmic imaginings constitute.  Its usefulness lies mainly in stripping away certain obstacles that inevitably hamper policy advice in the real world.  For example, any advocate of gun control in the US has to contend with the fact that gun ownership is an entrenched historical tradition, a reality which will stubbornly, probably violently, resist change.  Objections to policy proposals based on practical difficulties are called consequentialist arguments, and they are nuisances easily expunged from Gedankenexperiments.

My distant-planet setup offers a testing ground for many ideas.  Since recently I have been reading about advertising (a topic that's never too far from my mind), this question occurred to me: what regulation would I suggest my fledgling society impose on commercial speech?  Do they need to regulate it?

They might.  I have a feeling that something is profoundly wrong with advertising, and many people I know agree.  This is a good enough departure point; it's smoke telling me there is a fire.  But what exactly is burning?

Two complaints spring to mind: advertising is exploitative and it's intrusive.  The first is a problem of content; it's a claim that people's minds are manipulated and opinions subverted to serve the advertiser's goals.  The second is a problem of the content's delivery; it claims that people are forced to suffer advertising when they don't want to.  Not all ads are guilty of both, or either, but enough are to get a reasonable person worried.  Let's examine these complaints a little closer.

EXPLOITATIVE CONTENT

Most messages, or content, or speech—pick a term that you like, I'm not about to split hairs—have a point.  Commercial messages in particular are never pointless (at least not intentionally), since they have a very clear purpose: to sell.  No matter what their form, they will tell you two things without fail: that a certain product exists, and that you should desire it for various reasons, sometimes explicit, sometimes not; sometimes logical, often not.  Ads inform you and cajole you.  These actions don't always come in equal measure but they are always present and, while informing is not necessarily exploitative, cajoling always is.  To identify any problems, we must examine the actions of advertising in their proper context—within the sphere of life which they affect.

This sphere of life is economic activity, of which advertising is a facilitator (the lubricant of markets, as some say).  Given this context, one might ask what economics thinks of advertising.  Since the primary concern of economics is efficient allocation of scarce resources, the question should be restated as: does advertising promote efficiency?  (Efficiency expressed very simplistically means that whoever needs something the most, gets it.  Keep in mind that economists have a narrow definition of “needing something the most.”)

Information—its manipulation—is at the core of advertising.  Information also has a direct impact on efficiency, because economic theory tells us that “perfect information” is a necessary feature of efficient markets.  In other words, in an efficient market, the sellers know exactly what they sell, and the buyers know exactly what they buy.  Such information is called symmetric, as in, no one has the advantage.  Information that is known to one side but not to the other is called, imaginatively, asymmetric.  Anyone who ever shopped for a used car will tell you just how unreal symmetric information is, but then we are talking about a perfectly competitive market, an abstraction on the level of ideal gas in physics.  (To be fair, certain markets, like the market for grain in the US, approach the ideal).

Given the connections between advertising, information and competitiveness, we can refine the economic test to say: if advertising detracts from information symmetry, it detracts from efficiency.  Specifically, if the two actions of commercial speech—informing and cajoling—distort information symmetry, we should be worried.

Take the informative action.  Its effect isn't clear-cut; it depends on how the action is carried out.  In theory at least, giving consumers knowledge is a good thing.  However, the problem often is not with the knowledge given, but the knowledge withheld.  Constantly presenting your product to consumers' attention raises its profile to the detriment of similar products which may have benefitted the consumers more.  Trumpeting the product's good sides and omitting to mention the bad ones creates a skewed picture of quality.  Finally, the quality of the knowledge itself may be suspect.  “Two out of three dentists agree” can be a statement contrived by surveying a limited sample of dentists, or through questions phrased to favor a certain answer.

Such one-sided presentations and half-truths are commonplace in today's commercial speech; this is public knowledge.  People are hired to create commercial speech based on their skill in manipulating information.  These practices do not make the informative action of advertising fail our test outright, but they do make it highly suspect.  The conflict of interest inherent in dispensing knowledge with an eye on the bottom line should be enough reason for suspicion.

Now take cajoling.  While more reviled, it's actually less vulnerable to economic critique.  True, it's pure flummery, an assortment of tricks that float like hooks in search of fish.  True, it's often designed to bypass rational thought and use people's cognitive weaknesses to achieve its effect.  One is even tempted to say that cajoling pollutes the information pool.  It may not violate information symmetry per se but it makes buyer knowledge irrelevant by getting even savvy consumers to act in favor of the advertiser.

The problem with such views is their ignoring the fact that demand is demand whether it's conceived from within or inculcated from without—a specious distinction since ultimately, all demand is based on what we learn from the outside world.  Economists simply take demand as given, a  reflection of consumers' preferences.  How those preferences are formed is left to psychology, neurophysiology and perhaps philosophy to explore.  (In recent years, psychological research of preferences made inroads into economic theory, much to the chagrin of the discipline's traditionalists.  Daniel Kahneman is one of the pioneers of this research; it brought him the Nobel Prize last year.)

And so—advertising makes us want, and that's perfectly fine (says an economist).  Economic damage, so-called deadweight loss, would result only if the consumer paid more money without getting more utility (it's a loss because that money could have been spent on something utility-giving).  But additional utility may be said to come from consuming products one has come to regard as needful under persuasion from commercial speech.  Demand is valid even when rooted in something as vain as the pleasure of showing off your Rolex, although a Timex may be just as accurate—utility is not a principled beast.  And since more is always better under the utilitarian calculus of economics, advertising may be said to steer you into extra happiness.  Don't forget that higher demand makes the producers happy, too—happy enough to incur the costs of advertising campaings.

To sum up, complaints of exploitative content are worrisome economically only if the content misrepresents facts.  Psychological manipulation finds no condemnation in economics—indeed, it may promote higher utility for both consumers and producers.  Its rampancy does create disuitility for a select group of consumers—call them ad-haters—but theirs is a peculiar displeasure.  It's derived from manipulation inflicted not on themselves (they usually strenuously avoid falling victim to commercial messages) but on fellow consumers who personally don't seem to mind it.  Regardless of its source, ad-haters' anger is a drain on overall utility, although I suspect that the gains I talked about more than compensate for it.  No way to know for sure until someone finds an accurate way to measure it.  […]

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