THE QUAKER ECONOMIST

March 8, 2003

Letter No. 67

Dear friends:

With this Letter, Asa Janney  becomes the Assistant Principal Editor of TQE.

This Letter is written by Asa.     Jack

Who Rules the Economy? Consumers or Producers?

Many Friends do not believe that consumers are in charge.  I hear Friends say that instead of making up our minds independently, we are slaves of large corporations, who "persuade" us by advertising their products.

Suppose a crowd marched on Detroit to demand that automobile companies produce fuel-efficient cars. Would the demands be heard? I don't think so. In such a market, the automakers respond to consumers, building them the cars they want.  When a few people make noise about wanting greater fuel efficiency, the manufacturers may slightly update their estimates of how many such cars are needed.  But unless the fuel-efficient cars are snatched up from the dealerships while the gas guzzlers sit unsold, the mix of cars produced by Detroit will not change much.

So, if demanding that producers make more fuel-efficient cars doesn't work, what does? Only changing consumer tastes. We might organize a long‑term campaign to alert consumers to the inexpensiveness of smaller cars and to sharpen their concern for the environment. Consumer sovereignty – or, the consumer in charge, runs the market.

The alternative view is "producer sovereignty:" that producers determine market outcomes by influencing consumer choice.  The best known proponent of this theory is John Kenneth Galbraith.  In at least three of his books, Galbraith asserts that big corporations choose what will be produced and use advertising to make consumers buy those products.  He refers to the immense power of huge corporations. According to him, we buy what corporations say we should. 

But what solid evidence lies behind such susceptibility to advertising that we march zombielike to the store to buy as directed by big corporations?  Very little. Indeed, two kinds of evidence to the contrary are found: direct and indirect.  The direct is that advertising often fails, sometimes spectacularly.  Remember New Coke?  The Coca-Cola Company spent a lot of money trying to make us switch to New Coke, and the campaign fell on its face. Classic Coke was right back on the shelves after a widespread consumer revolt.  Other highly advertised failures include the Edsel, Premier (a smokeless cigarette), and Ishtar.

Large corporations test their new products extensively. Most fail and are never released to the market.  Even after passing the tests, about a third of new products released are eventually withdrawn. These failures cannot be prevented by advertising.  On the other hand, many products survive just fine with no advertising at all.

The indirect evidence comes from various surveys.  These have found that consumers are generally skeptical of advertised claims.  A 1980 survey found that 70 percent of Americans were concerned about the truthfulness of ads they had seen.  Many people cannot recall correctly the details of advertisements, even the names of the manufacturers.

Is the effect of advertising so strong that we will not only buy an advertised product the first time, but then continue to buy it regardless of quality? When the microwave oven first came out, did you buy one just because you saw an ad, or did you buy and keep it because it was a useful appliance? Many economists think advertising mainly switches people among brands rather than creating wants out of thin air.  (Most advertising is for repeat-buy products.)

Advertising is information.  Sometimes a new product or service is introduced with an advertising campaign.  Looking back later, some may claim that consumers were manipulated into wanting a product they did not truly desire.  Would you seriously make this argument for VCRs, fax machines, or computers?  Alternatively, did buyers simply find them useful and worthwhile?

Here is more evidence. In the 1960s, some states banned advertising eyeglasses.  When the effect was studied, states that did not ban advertising had 28 percent lower prices for the same quality glasses. Why? Because advertising increased competition among brands, and the increased competition caused prices to fall.

Advertising may persuade, or it may inform. Images used in persuasive ads are more quickly forgotten than the facts used in informative ads. Endorsements by celebrities are not effective, but showing how a product differs from its competitors is effective.  We are not mesmerized by commercials. Instead, we use the information from them rationally.

Why, then, do producers get endorsements from celebrities? I don't know, but there may be other attractions, such as "name-dropping," or the personal prestige of knowing a famous person.

Finally, economic depressions are caused by consumers demanding less, not by companies making less. President Bush wants to incite consumer demand by lowering taxes. Many (including me) feel this will not work. But the underlying idea is correct, that consumers – not producers – determine the market.

Quakers often criticize "consumerism," particularly around Christmas time. I sympathize with this thought, which however refers not to the total quantity of products consumed but to our choices. If we decided to consume education and health care, or basic goods for the poor, instead of mechanical dolls and toys for our spoiled children, would we condemn consumerism?

So, those are the reasons why I think the market is determined by consumer sovereignty.  Also, I believe that if we make the wrong choices, that is our fault, not the fault of the market.

I believe the market exists to facilitate consumption, and that this has always been the case.  The first time a cave dweller found that he could make stone tools more efficiently than his fellow hunters and started trading his weapons for food, he did it not because he or society valued tool making per se.  He did it because he got more meat that way.

A while ago I was in an evening discussion with a roomful of Friends.  One topic was what to do about the plight of bakers in Brazil when a new, more efficient firm moved in and produced bread at half the going price, using fewer bakers than the established firms.  My opinion, that doing nothing was the best response, was ignored in favor of various protectionist measures.  Friends were concerned for the bakers who had been thrown out of work.  That the consumers who benefited from less expensive bread far outnumbered the unemployed bakers did not count for anything.  Actually, by spending less for bread these same consumers would now have money to buy other goods and services that out-of-work bakers could choose to provide. It's not about baking bread, I claimed, it’s about eating bread.

It is not just ordinary people who make this mistake.  In the last two presidential elections, I have watched the candidates debate the removal of trade restraints and the inevitable job changes that would follow. In these debates the consumer was consistently left on the sidelines while the producer was "protected." Maybe the government has too long a history of favoring producers over consumers.  Every time a measure is passed that favors producers, such as farmers, by keeping prices high, the consumer pays.

The economist Henry Hazlitt makes this point in his marvelous book Economics in One Lesson.  Hazlitt’s one lesson is that the most common mistake in economic analysis is leaving a relevant group out of one’s consideration.  I believe consumers are left out quite often.

Sincerely your friend,

Asa Janney

READERS' COMMENTS ON TQE #66 ON CHIAPAS

I do not believe in any such thing as "overpopulation".  There might be underemployment stemming from a lack of capital or from a lack of property rights, but "overpopulation as a problem" is a concept that I just cannot wrap my head around.  Compare the population density of Japan or Singapore or Hong Kong to Chiapas and then tell me that Chiapas is "overpopulated".

           Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

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NOTE BY JACK:

I am surprised that more responses on Chiapas did not come in. Does everyone out there agree with me?

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PUBLISHER AND EDITORIAL BOARD

Publisher, Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board:

Roger Conant, Mount Toby Meeting, Leverett (MA).

Carol Conzelman, Boulder (CO).

Ann Dixon, Boulder (CO) Meeting of Friends.

Virginia Flagg, San Diego (CA) Friends Meeting

Asa Janney, Herndon (VA) Friends Meeting, Assistant Principal Editor.

Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).

Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor

J.D. von Pischke, a Friend from Reston (VA).

Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

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