Economists suffer from a collective blindness that is due to their particular form of sloth, the fact that they do not bother to verify their theories, beliefs, and predictions – in this case their belief that the things people buy are determined by their personal tastes and preferences, and therefore are more or less fixed. As a result of this collective blindness, economists have missed one of the most important economic developments of the nineteenth and twentieth centuries. To illustrate how astonishing this is, it is comparable to most or all of the physicists in the world failing to notice what happened in Hiroshima on 6 August 1945, and three days later in Nagasaki.
The world of business and economics believed, and for many years yet would continue to do so, that consumer demand somehow just arose. But, wrote Samuel Crowther admiringly, looking back nearly twenty years later on these early days of [the] United Fruit [Company] in his book The Romance and Rise of the American Tropics, what was being discovered was that ‘demand is a thing which must be created’[1].[2]
The manufacturers of many products have realized that consumer demand can be increased or stimulated above its present or “natural” level by advertising and marketing. This was one of the great economic discoveries of the twentieth century, an important discovery which has yet to be recognized by the economists in their stodgy considerations of supply and demand. Instead, they blithely continue to declare that consumers’ preferences, which determine the things they buy and also how much of them they buy, are determined solely by each individual’s rational desire to maximize one’s utility. But if this is indeed the case, then why do corporations, and companies in general, spend so much money on advertising? For if consumers’ preferences were not so easily altered or manipulated, then much of this money is wasted, since the rational consumer would already have decided in advance the things one wants to buy and how much of them one will buy, and no amount of marketing or advertising, no matter how clever, would have any effect on these supposedly rational decisions.
Speaking in the language of moving images, television offered capitalism its greatest opportunity ever to accelerate consumer consciousness.
Over the last half century, the combination of television and astronomical advertising spending has effectively reshaped the consciousness of the United States and the entire planet: our self-image, the way we aspire to live, our habits, our thoughts, our references, desires, memories. Total U.S. advertising spending, which was only $2 billion in 1940, grew to $12 billion by 1960, then $54 billion in 1980. By 2010, even while recovering from the recession, the U.S. advertising industry was still spending well above $150 billion, with by far the largest percentage of that going to television, says Adweek. This represented more than one-third of total global advertising spending, which by 2010 reached $450 billion. […]
Meanwhile, the U.S. Bureau of Economic Analysis indicates that the U.S. (GDP) showed corresponding growth, from $100 billion in 1940 to $525 billion in 1960, to nearly $3 trillion in 1980, to $14 trillion in 2007.[3]
In other words, what is obvious from these statistics, except perhaps to economists, is that the demand for a company’s product can be manufactured and manipulated. This is, after all, why companies pay advertising companies so much money and why they are willing to pay millions of dollars for a brief thirty-second commercial on national television. Companies are no longer willing simply to inform consumers about the existence of their product or service and then let them decide whether they will buy it or not. Because of unbridled price competition, they have been obliged to manipulate consumers’ preferences and manufacture demand for their often artificial and unnecessary products and services, otherwise a more aggressive or unscrupulous competitor will gain sales and possibly drive them out of business.
There are several widespread real-world phenomena that show that consumer demand can indeed be increased by skillful marketing and advertising: obesity, lung cancer and other harmful effects of smoking, and the high level of consumer indebtedness in the United States and elsewhere. It is not rational to eat significantly more than one needs to, to perform an activity that can cause serious health problems and premature death, or to spend more money than one earns, especially when that money is spent on inessential items. Clearly these are not rational behaviours, and the commonness of these behaviours shows that the economists’ belief that we human beings are rational maximizers of our utility is wrong.
An important consequence of this discussion for economic theory is that the supply and demand curves, which are familiar to all economic students, and whose intersection is supposed to determine a product’s price, are not completely independent of each other. According to standard economic theory, the determinants of the supply curve are completely different and separate from the determinants of the demand curve. In other words, they are independently-generated real-world phenomena that only meet, or intersect, in the free market. But due to the greater efficiency of modern industrial production methods, as well as a high degree of specialization which also increases efficiency, it often happens that all the companies that produce the same thing are able to produce much more than the market can absorb. According to standard economic theory, what should happen in this case is that some of the producers will go out of business because the product’s price will drop as a result of oversupply, at which new point the market will again be at equilibrium. But the reality is not always so simple, for there are many manufacturing plants that can only be operated profitably if they are kept running at a certain (fairly high) minimum capacity, since they have fixed maintenance and other costs. All these factors give many producers a strong incentive to try, as much as possible, to increase or at least maintain demand for their product.
This example, which considers a fundamental component of economic theory, illustrates the economists’ very bad – not to mention their completely unscientific – habit of merely reasoning about real-world phenomena, but without bothering to verify, by the tedious process of rigorous and meticulous examination and experimentation, that their conclusions in fact accord with real-world human behaviours and outcomes. By their failure to verify their theories, laws, and not-very-rational expectations, economists have shown that they have more in common with philosophers than they do with scientists.
An obvious example of manufactured demand is smoking, which satisfies no biological need and therefore is a completely artificial desire. In addition, we now know that smoking is harmful to one’s health and can cause premature death, besides causing a variety of illnesses.
In tobacco, James B. Duke was the first to appreciate the growing market for the cigarette, a new product which was sold almost wholly in the cities. However, after he had applied machinery to the manufacture of cigarettes, production soon outran demand. Duke then concentrated on expanding the market through extensive advertising and the creation of a national and then world-wide selling organization. In 1884, he left Durham, North Carolina, for New York City, where he set up factories, sales, and administrative offices.[4]
The great increase in the consumption of coal [in the U.S.] in the 1830’s did not come because there was a sudden new demand for it. American householders, merchants, and manufacturers, it must be stressed again, were not looking for new supplies of cheap fuel; consumption rose because the anthracite operators of eastern Pennsylvania first developed hearths and furnaces for the use of their product, built the canals to get the coal to tidewater, and then encouraged their neighbors to transport and sell anthracite coal to the potential markets of the Northeast.[5]
In the case of new products, companies often seek to entice consumers to try their products, such as by giving away free samples, hoping that they will later buy them, which changed consumer behaviour, so they hope, will be imitated by those who know the initial customers, until more and more people start buying the product. In other words, a market must often be created for a new product, since in many cases this requires the introduction and diffusion of a new model of behaviour that didn’t exist previously.
Another way that companies artificially stimulate demand for their products is by doing research into what people, including children, like and then incorporating this research into the manufacture or design of their product, its packaging, or the way it is presented to the public. For example, nearly all food products, many of which are quite different from unadulterated foods, the once-living organisms that either grow from the soil, walk on it, fly over it, or live in the water, contain additives that are meant to enhance their flavour, brighten their colour, preserve them from spoiling, or appeal to our senses in some other way. As consumers’ taste buds have been subjected to this manipulative chemical barrage, truly a glorious testament, if such were needed in this age of technological marvels, to human ingenuity, it is inevitable that their tastes will change so that they come to prefer the taste, aroma, texture, and appearance of the artificial food product over plain and simple foods.
The same is true of many other products that people consume in vast quantities today. For example, tobacco companies have successfully convinced smokers that smoke – a substance which all other animals sensibly avoid – is pleasurable when it is inhaled into the lungs, where it damages the lungs’ sensitive tissues, which are designed to absorb oxygen with each breath while expelling carbon dioxide. Of all the animals on the planet, it is only we supposedly rational human beings that engage in this stupid and harmful activity, an activity that kills millions of smokers annually while causing many more of them to suffer serious diseases and health problems, including cancer, emphysema, and heart disease. From the perspective of Nature or the planet, the only drawback is that it does not kill more people and kill them more quickly. But this, of course, would not be good for cigarette manufacturers, and so they have fine-tuned their products to increase their addictiveness while reducing their fatal effects.
The collective failure on the part of economists to see the obvious, because it contradicts one of their cherished theories, in this case the theory of individual utility maximization, demonstrates how foolish we have been to trust these intellectual charlatans. What we must do is to liberate ourselves from the economists’ harmful influence by ignoring their frequently false and misleading pronouncements, especially the pronouncements made by those who call themselves free-market economists.
[1] The author is referring to the fact that when bananas were first imported to the United States, there was little demand for the exotic and unfamiliar fruit.
[2] Bananas: How the United Fruit Company Shaped the World by Peter Chapman, p. 51. Canongate U.S., New York, 2007.
[3] The Capitalism Papers: Fatal Flaws of an Obsolete System by Jerry Mander, pp. 175-176. Counterpoint, Berkeley, California, 2012.
[4] The Essential Alfred Chandler: Essays Toward a Historical Theory of Big Business, p. 54. Edited by Thomas K. McCraw. Harvard Business School Press, Boston, 1988.
[5] Ibid, p. 323.
Homo Stupidus 