Time to overthrow the arithmocracy?

"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."

J M Keynes

Steiff, the German maker of teddy bears, is re-locating production back to Germany from China because, in their own words: "cost isn't everything".   Ref: Financial Times (UK) - from Brainmail

[On the bailout of AIG]  "It's a little scary that the world's largest insurance company hasn't planned for a rainy day." Tyler Cowen at Marginal Revolution (www.marginalrevolution.com)

"The economic fallout from these events is dominating the headlines.  The intellectual and ideological fallout we are just beginning to contemplate." ibid

Based in Canary Wharf, as we are, it would be impossible for us not to have noticed the change in mood in the last few weeks. It is, in some ways, an improvement. The parking at Sevenoaks station is more plentiful, for a start. And, once in Canary Wharf, there is finally something interesting to look at. My biggest complaint about E14 (aside, that is, from the E and the 14) was there was never any pleasure to be derived from people-watching there. Anywhere else in London, the passing cast of characters provides endless entertainment, even scope for Sherlockian speculation about their lives. Out here the opportunities for detective work are few: "Dr Watson, save that our caller was young, slim, a banker, ambitious, a gym-goer, materialistic, a BMW driver and a bit of a twat, I fear that there is little I can deduce from his general appearance. Now pray pass the syringe......"

Today the mood is a little more self-aware, and the expressions on the faces more interesting. "I notice from your large cardboard box and fraught demeanour that you were until today an employee of the Lehman brothers' once respectable bank." But it is a little too easy to be mean. Occasionally I travel in to work on a 7am train from Kent, a journey which teaches you that for every Master of the Universe with a six-figure bonus there are ranks of overworked, not particularly well-paid drudges living month to month like anyone else.

Yet if there is one welcome casualty of this crisis it is the widespread and unquestioned belief that unending growth is the only proper pursuit of any business, and that a business has no responsibility other than to its shareholders. 

I am not saying this belief is necessarily wrong, by the way. I am merely suggesting it is worth debating - and should not be treated as axiomatic. And it needs to be questioned a little more now, when the businesses who have most enthusiastically espoused this particular ideal seem suddenly to be desperate for government help. 

The economist who seems to have started this whole shareholders-first-and-last assumption is Milton Friedman. Yet even on the Libertarian right his assertion is the subject of much vigorous debate. Here's John Mackey, the avidly pro-free-market founder of Whole Foods.

In 1970 Milton Friedman wrote that “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” That’s the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders.

I strongly disagree. I’m a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor’s perspective, the purpose of the business is to maximize profits. But that’s not the purpose for other stakeholders–for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.

He goes on:

I believe [our philanthropic] programs would be completely justifiable even if they produced no profits and no P.R. This is because I believe the entrepreneurs, not the current investors in a company’s stock, have the right and responsibility to define the purpose of the company. It is the entrepreneurs who create a company, who bring all the factors of production together and coordinate it into viable business. It is the entrepreneurs who set the company strategy and who negotiate the terms of trade with all of the voluntarily cooperating stakeholders–including the investors. At Whole Foods we “hired” our original investors. They didn’t hire us.

The shareholders of a public company own their stock voluntarily. If they don’t agree with the philosophy of the business, they can always sell their investment, just as the customers and employees can exit their relationships with the company if they don’t like the terms of trade. If that is unacceptable to them, they always have the legal right to submit a resolution at our annual shareholders meeting to change the company’s philanthropic philosophy.

And.....

....turn to one of the fathers of free-market economics, Adam Smith. The Wealth of Nations was a tremendous achievement, but economists would be well served to read Smith’s other great book, The Theory of Moral Sentiments. There he explains that human nature isn’t just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as self-interest. For many people, they are more important.

He is suggesting that the assumption that a business can be judged on its recent financial performance and nothing else seems open to question on several levels. I would add a few more.....

1. The reductionist "it's all about the money" view will always prove especially popular with stupid people. In other words, even if it is true, it has the dangerous effect of disproportionately empowering a small caste of Aspergerish people whose outlook on the world is unsubtle, amoral and uber-rational. There is no need for refined judgment, taste, morality or any other human virtues when your spreadsheet provides you with all the answers you need.
   
   
2. Most people, as Adam Smith observed (and as the superb Indexed blog shows - see right), are not solely motivated by material wealth, with many valuing social capital more highly.  This, incidentally, may be true of investors as well as of most employees. Institutional investors, it's true, only seem to justify their performance in numerical terms. However I suspect some individual investors (whose money it really is) would prefer to support businesses whose aims they shared. What would happen if you disintermediated investment just as, say, Kiva.org has disintermediated charity?
   
   
3. The profits-only approach is a licence to be amoral. Not unreasonably, people do not want to do business with amoral people. If you want to know why this country has always had high house prices and low rates of savings, it may just be because people trust bricks a lot more than they trust bankers. The Friedman belief, if pursued excessively, destroys consumer trust in your business. 
   
   
4. A business bent on only one end may be an uncreative business. What makes a business and a brand interesting (Virgin, Apple, Nike, blah.....) is the tension between its pursuit of money and its pursuit of some other wider aim. This conflict allows for diversity of opinion - and diversity of people. One of the problems with banking's naked and unalloyed greed is that it risks disproportionately attracting a dangerously homogeneous group of people. Last week I saw a presentation by an HR specialist on Generation-Y; the Gen-Y people going into banking and finance, she remarked, were completely unrepresentative of their age group - and disproportionately self-interested.  All this is a pity when thinks of the ethical origins of most financial organisations, often created with a social purpose as well as a financial one: Quakers, interestingly, seem especially good at building long-lived brands.

Most of us pay in advertising pay unquestioning lip-service to the idea of shareholder value being the one desirable purpose for any business, our own included. Are we right? Or are we just the "unwitting slaves of some defunct economist"? Let me know what you think.

Is advertising the problem? Or is advertising the solution?

There is a universally-held belief that advertising makes people want more things. This may indeed be true. But an equally important (and perhaps even more lucrative) use of advertising is to make people content with less. 

This year I have been mostly reading about behavioural economics.

I find the subject endlessly fascinating. Partly because the subject offers up endless counter-intuitive insights into human behaviour of the kind which research companies should generate but frankly never do (the fact, for instance, that in defiance of economic rationality, prostitutes almost always end up losing any clients whom they offer to serve for free* - I mean you don't generally get that from Millward Brown, do you?) 

The other reason I am captivated is a more self-interested one: I suspect it is the new behavioural-economic models which will form the model for the most successful (or at least the most interesting) agencies in the next ten years.

Why? Partly because this subject provides a robust intellectual link between understanding human nature and knowing how to make money, which is the only proper area of study for anyone in marketing (remember when we used to sell things?) Secondly, unlike the models prevalent in marketing, behavioural economics hasn't been designed to suit the needs of one media solution. Thirdly, I like it because it offers a practical alternative to the "messaging model" of advertising which everyone good in this business (see Russell Davies in last week's Campaign, or Paul Feldwick and Robert Heath passim) admits is a heap of old crap.

In fact behavioural economics offers the only current model I see capable of displacing the current lazy consensus around "how advertising works". As such it is vitally important since, as scientific historian knows, the only way to kill off an entrenched model is by replacing it with a new one.   

There is another reason it's useful. Quite simply economics has an extensive and precisely defined vocabulary (in stark contrast to marketing language where the word "brand" can mean three entirely different things within the same sentence).

For instance in the last month I have learned about "Veblen Goods", "Inferior Goods" and "Giffen Goods". (The idea of the Giffen Good is fascinating, but I don't propose to cover it here. Have a shufti at Wikipedia here if you want to know more.) 

The Veblen good, meanwhile, is a kind of product or service named after the rather austere looking Norwegian-American cove to the left, one Thorstein B. Veblen, a distinguished economist perhaps most famous for coining the phrase Conspicuous Consumption.

Veblen goods are those items which defy the usual price-laws of supply and demand because demand for them seemingly increases as their price goes up; indeed it is their high price and corresponding rarity which largely gives them their value. Caviar, an immensely expensive product which is decidedly less enjoyable to eat than, say, a packet of salt 'n' vinegar crisps, would be a good example of such an item. "Reassuringly expensive", the 30-year-old strapline for Stella Artois, is an elegant attempt to create a Veblen good using two words.

Sometimes the value of a Veblen good lies in its display or status value - the "I am rich" iPhone application would be an extreme example of this. Sometimes it may be simple human snobbery which believes that a rarer, pricier item will be better (the American Institute of Wine Economics has found that the safest way to guarantee enjoyment of wine is simply to tell the drinker that it cost a lot of money).

I here quote Wikipedia

"The Veblen effect is one of a family of theoretically possible anomalies in the general theory of demand in microeconomics. Other related effects include:

• the snob effect: preference for goods because they are different from those commonly preferred; in other words, for consumers who want to use exclusive products, price is quality;^[3]
• the bandwagon effect: preference for a good increases as the number of people buying them increases (see network externality);
• although some have suggested (Lea 87) that there is also a 'counter-Veblen' effect: preferences for goods increasing as their price falls, this is in essence merely traditional supply and demand theory " 

An "inferior good", finally, is one which people generally buy less of when they get a bit richer. Polyester or coach travel would be generally regarded as inferior goods. This distinguishes them from normal goods, of which people buy more when they get richer - such as, say, holidays.

Got that?

Right, now an almost universally held criticism of advertising is that most of it exists to amplify Veblen effects, and in particular that it prompts people to want things they don't need and can't afford. Worse, it promotes a kind of consumerist arms-race with everyone seeking to outdo each other in displays of conspicuous consumption.

My own belief? We all believe this - even advertising's most ardent defenders, don't we? And indeed advertising can do this. But in my opinion it very rarely does. In fact it is far more likely to have the opposite effect.

Okay, let's accept there is an economic case to be made for disliking conspicuous consumption, since (intentionally or not) it may create more net envy and misery in bystanders than it creates happiness in the consumer, while leading to elaborate forms of expenditure which are in many ways wasteful and unproductive (eg most women's fashion, two parking spaces at Harrods, that kind of thing). Certainly Veblen himself, being an austere Nordic type, disliked conspicuous consumption.**

But let's assume that Veblen effects are bad. Does advertising do much to create them?

Just a few points.

1. There were Veblen effects long before there was advertising. People have worn extravagant regalia or eaten expensive food to demonstrate status and wealth since the beginnings of hunan life and perhaps before (large antlers are probably a Veblen good). The women's clothes and footwear industries are extraordinary examples of conspicuous consumption, but this predates advertising by a few millennia (sumptuary laws were introduced five hundred years ago to limit which cloths such as silk could be worn by which ranks of society). In some cases mass advertising may actually destroy the rarity value a Veblen good seeks to create.
   
2. People who despise consumerism and advertising are usually just as guilty (possibly far more so) of seeking status through Veblen effects. The Guardian-reader who shops organically and holidays in Macchu Picchu is far more guilty of displaying rarity-snobbery than a Sun reader who goes to Burger King and Benidorm. Even if the first three are not overtly commercial, they are status seeking activities nonetheless.
   
3. Fashion and luxury goods advertising is very rarely done by ad agencies. Nor is most advertising for upmarket or luxury products. In fact for the most part Veblen goods are not promoted through advertising at all, but PR. Why would you spend £20,000 to advertise a $50,000 Ecological Treehouse when the Sunday Times will happily run a stupid article on them, next to a piece on funny-shaped swimming pools and holidays in Uzbekistan. And when the wonderfully non-commercial BBC will run hours of programming dedicated to the proposition that if your house doesn't have decking or a tossy water-feature then you're a loser. 
   
4. Against this backdrop a few purchases stand as a glorious counter to innate materialism. Things which ought to have become inferior goods but somehow aren't. Things which are the very opposite of Veblen goods - indeed they manifest bandwaggon effects or possibly even counter-Veblen effects. They are wonderful social levellers. I'll name some of them now.

 IKEA. McDonald's. CocaCola. Mini. LeviStrauss. The Ford Ka. Marlboro lights. easyJet. Pizza Hut. Gap. M&S. Tropicana. John Lewis. BT. Nokia. BP. Tesco. BA. Heinz Baked Beans. Nike. Kelloggs. Sony. Vodafone. Tabasco. Sky. Toshiba. Apple iPod. Volvo. Google. Centerparks. Virgin. Disney.

Spend a moment comparing, if you will, how incredibly democratic the soft drinks market is (mass production, mass distribution, mass advertising) compared to the market for wine (niche production, niche distribution, no advertising). The first is a model of egalitarianism - the second is riven by snobbery and status seeking. Remember Andy Warhol's beautiful insightful comment "What I like about Coke is that the President of the United States can't get a better Coke than the bum on the street." (True also of Google, incidentally). Do you think the Prime Minister drinks the same wine as the local wino? Fat chance.

Notice also how these democratic mass brands are disproportionately American (with healthily Protestant additions from Scandinavia and the UK).  The egalitarian French, meanwhile, are busy promoting luxury brands.

What fascinates me about these big brands is how astoundingly democratic they are, how devoid of any snobbery. Levi's denim (it's a rough, working man's fabric, for God's sake) should by rights be an inferior good, and yet it is worn equally by millionaire rock stars and impoverished accountants. In fact, amazingly, almost all of these brands enjoys what you might call the Cornwall effect - even if you're a billionaire, it's still okay to go there.

Some of you may quibble about McDonald's. I accept that (and I wouldn't have put it in the list myself until yesterday when I found myself queueing in the Drive-Thru lane behind a Lamborghini Diablo).

More important still, many of these advertised brands actually embody the counter-Veblen effect (IKEA, Tesco, easyJet are kind of cool because they are cheap - a characteristic once described as rational chic). This is also true of the Mini. These are all items which, no matter how rich you are, carry no stigma whatsoever.

So the peculiar irony is that big advertised brands, since they depend on mass distribution, ubiquity and fame, have it in their interests to be universal, democratic and non-Veblen. It is the unadvertised things which are divisive.

Large scale advertising may often work not by persuading people to trade up to more expensive variants, but in persuading them to keep their mass tastes instead. The idea that advertising creates social division may be quite wrong. Diametrically wrong, in fact. Advertising often works by persuading the market to adopt an efficient consensus solution, rather than fragmenting inefficiently and snobbishly.

It is, in a way, persuading people to be happy with less, rather than wanting more (brands, as I have remarked before, are environmentally very friendly - they require only electrons and neurons in their manufacture). Advertising is hence diminishing excess materialism by helping forge a common standard of "what's pretty good for all of us". And it prevents the inefficient creation of Inferior Goods - where people reject perfectly good solutions simply because they are "common" - and of Veblen Goods, the expensive things ehich people don't need.  Advertising is, in its way, pro beer and anti-wine.

So don't apologise, adland. Stick to your guns. And keep up the good work. We need far more advertising - and far more categories of expenditure where mass advertised mass brands render the category socially acceptable to all, destroying pointless and inefficient fragmentation in the pursuit of price discrimination.

Indeed George Monbiot believes part of the solution to global warming is to make coach travel cool (now there's a brand opportunity for someone). For Polyester I suspect it is too late. 

How do I know I'm right? Well I once got a room full of lefties to admit through clenched teeth that Karl Marx would have despised the organic movement, but would have loved McDonald's.  

Remeber Andy Warhol. A mass advertised brands is as close to egalitarianism as we'll ever get.

Yes people are tortured by social anxiety. But these things do not concern mass brands, which are a wonderful source of reassurance. My iPod is just as good as Steve Jobs's iPod. Anxieties and consumerism revolve around the areas where there are too few brands, not too many. Healthcare. Housing. Education. Travel. I wish Stelios would hurry up and open a school. I'd send my kids there in a shot.

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* The suggestion is that any form of discount or freebie moves the trick from the purely transactional realm (where the only currency is financial) into the social realm (where the currency is partly emotional). Clients wish to pay prostitutes in full to make clear that this is purely a financial transaction with no emotional component whatsoever.

** Having said which, it's worth remembering that the commissioning of much of the world's greatest art and architecture was probably motivated by no higher motive than the display of wealth - while the vanity which drives people to buy the latest fashions, cars or gadgetry funds innovation which fairly rapidly permeates to the lower end of the market. I can still remember the review of a new Rolls Royce in my childhood in which the reviewer was almost scandalised by the decadence of remotely adjustable wing-mirrors - something you would now get as standard on an £8,000 car, along with other shameful indulgences such as air conditioning or electric windows.