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Saturday, January 15, 2011

Mad Men: Entrepreneurs for an “Affluent Society”

Advertising often gets a bum rap, even by economists. Today’s document, though, a lecture by Israel Kirzner at a FEE Summer Seminar in 1971, attempts to argue for the benefits of the work of Madison Avenue. Advertising, Kirzner argues, is not only perfectly fine but would be an essential part of a pure laissez faire economy.

One reason economists often misdiagnose the importance of advertising can be found in the neo-classical models they use. In a general equilibrium model there is no need for advertising due to assumptions such as perfect competition, homogeneous goods, and full information, i.e. markets clear, each particular product is identical so there is no quality competition, and individuals have full information.

Now, of course, in the real world this is not true. Which is why, in looking at a question like this, Austrian models paint a more accurate picture. The market is a competitive process where individuals do not have full information and entrepreneurs compete on more than just price. This makes advertising necessary. For example, a hamburger sold on the market is going to differ from other hamburgers in regards to the grade of meat, toppings put on it, type of bread, etc. But the product is not only just the actual burger. The atmosphere of where you purchase it also matters, whether it is eaten at a restaurant or taken to go, the product is the whole package. Finding this information increases consumer satisfaction. Advertising helps consumers do this. Essentially, advertising entrepreneurs are picking up big bills on the sidewalk by matching the subjective preferences of consumers with what they desire but previously did not see.

If advertising is loud, big, and in your face it is only because it needs to be. We live an “affluent society.” Meaning a society were many, many opportunities are placed before consumers who must choose for themselves. Producers must fight to be heard over each other to get consumers the information they need to get the products they want.

If there is a distaste or moral repugnance to the advertising we receive, well it is our own fault. As Ludwig von Mises has noted, the consumer is king. The market is like an efficient democracy where each dollar is like a vote. In a free market, entrepreneurs would only provide the things consumers desire, this goes for advertising as well. H.L. Mencken once said democracy is the theory that people know what they want and deserve to get it, good and hard. And the market, as a democracy, is very good at doing just that.

Of course there will always be the cheats and the liars but in time the market will weed them out. For the market is a discovery process and advertising does play a vital role. So, we should raise our glasses of whiskey, or whatever we’re drinking, in thanks to the real life Donald Drapers of the world, for helping us find what we desire.

Download the Israel Kirzner lecture of Advertising here.

  • Nicholas Snow is a Visiting Assistant Professor at Kenyon College in the Department of Economics, and previously a Senior Lecturer at The Ohio State University Economics Department. His research focuses on the political economy of prohibition.