It seems like everybody under thirty has had enough of capitalism. It perpetuates inequality by underserving minorities, it causes massive environmental damage by externalizing factors like pollution, and it seems to result in vast sums of money going to a small elite. American capitalism certainly seems to be floundering when compared to the golden age after the second world war. Proponents say if we don’t like it, it’s our fault, because capitalism just gives consumers what they want. But there’s a subtle flaw in that argument. Capitalism does not in fact give consumers what they want — it gives them what they think they want. That may seem like a trivial distinction, but it may actually explain how we got here, and more importantly, where we are headed.
The beauty of capitalism, we are led to believe, is that it relies on simple premises to deliver the most prosperous society possible. First, it assumes that consumers are rational, and carefully evaluate all their options when they are deciding what to buy. Second, it recognizes that companies want to make a profit and can only remain in business if they do so. That combination guarantees that companies must provide consumers with what they want. But it’s not quite so simple.
Imagine you have ten million dollars to start a company. You hire the best product designers you can find to make sure your product will be a joy to use. You source the best raw materials, and you hire the most talented engineers to make the product a reality. The finished product is amazing. Its design is exquisite, and the high quality materials guarantee it will last for a long time. Your product is quickly noticed, and it’s soon flying off the shelves. This attracts competitors, who design similar products to try to capitalize on your success. A competitor also raises ten million dollars, but decides on a different approach. He spends only five million to build the product. He hires designers and engineers who are good but not great, and uses some cheaper materials to stay within the budget. His finished product is obviously inferior, and you are not concerned. You should be. Because your competitor still has five million dollars left, and he decides to spend it on advertising. He hires social media stars to do product placements, and makes slick traditional ads that portray his product as stylish and desirable. Your competitor’s sales quickly surpass yours, eventually leaving you in the dust. In the end, you are forced to declare bankruptcy.
The above scenario may seem like an anomaly, but in fact it’s the norm. Companies that focus only on quality are quite rare. Patagonia makes clothing that can last a lifetime, and once told people not to buy its clothing unless they really need it. The company has existed for nearly 50 years with a rare commitment to making the highest quality clothing while minimizing environmental damage. Starbucks didn’t do any advertising for its first 25 years. It didn’t need to because it was the only game in town. When competitors finally started eating into its market share, Starbucks responded not by making better coffee, but by increasing its advertising budget. Because of competition, companies are forced to adopt our competitor’s approach just to survive. They must spend heavily to advertise, and those advertising dollars must come from somewhere, which means quality suffers. It turns out that making good products doesn’t pay off. It’s much better to make average products and convince people that they’re actually great. If McDonalds stopped spending their two billion dollars a year on advertising, they would quickly find their market share dropping. Consumers need to be constantly reminded they should eat there because, let’s face it, the food is not very good.
The power of advertising may be due to a relic of our ancient past. It may be that we evolved to find stories fascinating so that important knowledge could be passed on to the next generation. In early societies with no written language, these stories would have been crucial for maintaining a knowledge base of edible plants, dangerous animals, etc. This could explain why we find stories so entertaining. Of course, a brand is nothing more than a product with a story behind it. Companies have discovered that the story is almost as important as the product itself. So the mechanism which has enabled us to survive as a species is used today to drive our consumer society.
Critics will say consumers deserve what they get — if they are fooled by advertising, it’s their fault, and they need to wise up. But these critics are missing the point. We’re not arguing about whose fault it is. We’re just stating the facts. Humans are not rational consumers, so any system that is designed with that as a premise will be flawed. The important question now is can we do anything to fix this, or do we get rid of the system altogether. Fortunately, there are things we can do to get capitalism back on the right track.
Most societies have limits on advertising: no ads for alcohol on television, no cigarette ads, and no ads aimed at young children. In the United States, the Federal Trade Commission is tasked with ensuring advertisements are truthful and fair. But this agency is chronically underfunded, and seems to have no control over advertising over the internet. Outlandish claims and flat out lies predominate in internet advertising. The government simply cannot keep up with rapidly changing technologies for delivering advertisements to consumers.
Advertising consumes about 2% of GDP. Surprisingly, this number has stayed constant for decades. It’s possible that this hit to GDP is simply the price we have to pay. But perhaps there is a better form of capitalism out there. A version where there are fewer brands, and much less advertising. A version where companies are held accountable for the things they say. A version where there’s only one aisle of junk food, and many aisles of tasty, nutritious food. To get there, one of the things we need is a much more robust approach to regulating the advertising industry.
