Three Reasons Economists Should Oppose Advertising

Economists have not paid enough attention to the problems advertising creates in a market economy. Economists should oppose advertising because it distorts consumer preferences, because it intentionally creates externalities, and because it takes resources away from more productive activity.

First, advertising destroys the basic assumption economists use to evaluate social welfare. In theory, individuals have fully determined preferences, they know exactly what they want, they know how much they are willing to pay for it, and getting it really does make them better off. Now, due to cognitive biases like framing effects and priming effects, and the generally non-material determinants of human happiness this is never going to be true. But, if for some reason you believe it (and many economists do), you should at least want to minimize anything that would distort individual preferences. It’s extremely difficult to argue that if I satisfy a want that was induced by an advertisement I’ve been made better off. Economists talk all the time about how taxes distort markets, but for some reason if corporations are intentionally distorting human preferences through advertising it is treated as just part of the market, and not a distortion.

(Somewhat cynically, this economic viewpoint makes sense if you think the point of markets is to grow and expand GDP. It makes no sense if you think the point of markets is to improve human well-being. In general, I think most economists want to improve human well-being, but they’ve often lost site of this goal by assuming that increases in the market would translate into increases in human well-being.)

Second, advertising contracts are essentially contracts to create an externality. An externality is anytime a deal between person A and person B has an impact on person C. Normally an externality is a side-effect of an economic deal. For example, pollution might affect someone downriver or downwind, even though they did not agree to the economic activity that caused the pollution.

Advertising is slightly different in that the externality is the main point of the contract. The two contracting parties, for example a beer company and a cable executive, are literally attempting to get you to buy more beer. The entire point is that the cable company is trading away their audience (you) so that the beer  company can influence that audience (you) into doing something that the audience (you) wouldn’t have done otherwise.

Third, advertising drains resources from more productive activity. In the absence of advertising, companies would have to put that money into producing better quality goods and services. The only way to grow would be based on customers evaluating your products and telling other people about them, which means that the quality of goods and services drives the market, rather than the ability to advertise those goods.

The city of Sao Paolo, Brazil banned all outdoor advertising in 2006. Sao Paolo is Brazil’s largest city, and with 11 million people is larger than New York. The Center for a New American Dream reports on the progress:

Five years later, São Paulo continues to exist without advertisements. But instead of causing economic ruin and deteriorating aesthetics, 70 percent of city residents find the ban beneficial, according to a 2011 survey. Unexpectedly, the removal of logos and slogans exposed previously overlooked architecture, revealing a rich urban beauty that had been long hidden.

Sao Paolo is on to something, and the U.S. should definitely consider copying them.

P.S. The point of this post is economics, not law. But to briefly address free speech complaints let me point out two things. First, we’re talking about a specific class of paid contracts, advertising contracts. That’s not speech, it’s commerce. Second, even if you think you should have the right to pay someone to speak for you (just, please, don’t call this free speech) then it’s worth noting that there are actually all kinds of speech we ban based on its harmful effects to society: libel, slander, starting a riot, etc. Free speech protections are extremely important because they allow for political dissent. Somehow, I’m less worried about your right to intentionally manipulate consumers into buying Axe body spray than your right to disagree with the government, and so I’m willing to draw a line between those two categories of speech. I think my priorities are pretty solid here, but, of course, free speech does extend to you telling me I’m being an idiot. (It’s not nice to call people idiots, so I’d prefer that you kindly point out flaws in my reasoning, but being a jerk is not illegal, nor should it be).

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One thought on “Three Reasons Economists Should Oppose Advertising

  1. Pingback: This is your brain on advertising | Some Things Considered

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