Lifestyle Economics Blog

'Advertising in a Free Society' revisited

The economist Julian Simon once wrote that ‘the economic study of advertising is not deserving of great attention’, ruefully adding that ‘this is not a congenial point at which to arrive after spending several years working on the subject’. Few economists dedicate as much time to advertising as Simon. Most ignore it altogether because its impact on a nation’s economy, though broadly beneficial, is not seen as being terribly important from their perspective. Advertising is certainly important to businesses because it helps decide how much of a given market is taken by each firm, but it does not typically increase the size of the market itself.

This fundamental point is often missed by the critics of advertising who see it as a powerful and malign force that enables businesses to exert control over the hapless public. The most common complaint is that clever marketing manipulates people into buying products that they do not really want while encouraging a culture of rampant consumerism. Some want advertising heavily restricted or even banned.

The general indifference of economists towards advertising means that the popular literature on the subject (if the word 'popular' can be used in relation to this niche field) is often written by those who work in advertising or those who despise advertising. Neither provide a particularly balanced view.

When I first began roaming the staircases of the IEA a few years ago I picked up a copy of a book that was rather different. Advertising in a Free Society, written by Ralph Harris and Arthur Seldon and published by the IEA, was written in 1959 and has been out of print ever since. In it, Harris and Seldon weighed up the economic and social criticisms of advertising, as well as the claims made on its behalf, and concluded that advertising ‘has helped to keep markets competitive, tumbled oligopolists and monopolists, kept prices down, and in the long run made the economic system bow to the consumer’s will’.

This year, it has been my privilege to edit and abridge Advertising in A Free Society for a new edition that has been released today (click here to purchase or for a free download). 55 years after the original book was published, much new evidence has been produced and it largely supports Harris and Seldon's view of advertising as a force for good. Studies show that advertising can help develop brand loyalty in existing customers and it might - at best - entice us into trying a particular brand, but it cannot turn us into regular customers and it cannot coerce us into fundamentally changing our behaviour. The weight of economic evidence shows that advertising follows social trends, it does not initiate them, and companies only start spending the big marketing bucks when they are confident that demand already exists. Advertising is overwhelmingly aimed at getting existing users of a product to either switch brands or stay loyal to their current brand.  

Although advertising campaigns are often described as ‘aggressive’, the business of advertising is largely defensive. As much as companies want to attract new customers, their priority is to stop existing customers drifting off to the competition. The ubiquity of expensive marketing campaigns in developed countries is not an expression of corporate power, as critics claim, but of corporate vulnerability. We consumers are fickle, disloyal and light-footed.

It is not that businesses wouldn’t like to manipulate us into buying products we don’t want, only that the lever of manipulation has never been invented. As governments soon discover when they use advertising to encourage us to get out and vote or to eat ‘five a day’, it is very difficult make people do things that they are not already minded to do.

'Ah!', say the critics, 'but if advertising is not very important, why do businesses spend so much money on it?' The truth is that, for all its faults, advertising remains a better way of communicating with the buying public than any of the alternatives. Travelling salesmen and discount vouchers might work for some companies, but to reach a mass audience and develop economies of scale, the mass media is required.

Harris and Seldon noted that many critics of advertising ‘seem to have lost their sense of humour about persuasive appeals that exploit vanity and selfishness and shamefully contain no details of chemical or technical performance. The ordinary shopper has kept his head much better.’ Many of advertising's critics do indeed appear to have a low opinion of the public, whom they assume will buy whatever is put in front of them regardless of quality. In fact, people learn to treat advertising messages with scepticism from a very young age. As Harris and Seldon say in Advertising in a Free Society, ‘The sovereignty of the consumer is much greater than many economists who have never understood the market system have supposed.’

Advertising provides information, albeit from a biased source. It saves us time by reducing search costs, and it is generally associated with lower prices and higher quality. Advertising might be an imperfect means to achieve the goals of both the buyer and the seller, but we would all be worse off without it.

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