The ramblings of an Eternal Student of Life
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Sunday, April 7, 2013
Economics/Business ... Society ...

Even though I’m in the final decade of my working life (my so-called “productive years”), I still read articles and listen to radio programs about the many doings in the business world. Many years ago I tried to earn a living as a business economist, and I have a masters degree in the subject; despite the passing of time I still wonder at times what it is that makes the wheels of money, commerce, jobs and the overall economic infrastructure spin.

Lately, I’ve been hearing and reading a lot about social media, about why digital things like Facebook, MyLife, Pinterest and Twitter are of such concern to big business. Why do social media enterprises like Facebook have any economic value at all? (At last look, Facebook common stock shares were trading above $27, about halfway between the initial offering price of $38 and the low reached a few months ago of $18; implying a total enterprise value of around $75 billion.)

The answer, in a nutshell: advertising. Advertising is what allows “monetization” of social media. Big business sees social media as a potential magic bullet of advertising, the cure for the “internet ad blues” whereby tiny web-age ads just don’t have the selling appeal that TV and radio ads used to have (at least back when everyone watched TV and listened to the radio, i.e. before the internet). Social media is an incredibly rich source of information about those who participate in it. And Facebook and its relatives won’t blink twice before selling all of that info to interested advertisers, who can sift through huge databases chock full of information and history about the billions of people using their site, as to select people who might really be interested in buying what they are hawking. No more relying on TV ads for baby formula, cruise vacations or no-iron dress shirts that are of interest to perhaps 10% or less of those who view it.

Not only that, social media sites keep up with the lives of its users. Thus, advertisers can be alerted when someone “enters their zone”; e.g. a woman becomes pregnant, which is of much interest to sellers of baby strollers and clothing. Or, say a 23 year old out of college just got a job in a bank — she or he is now going to be interested in serious business attire. Hit ’em right when they’re weak; this was never possible before to the “mad men”from the advertising firms of Madison Avenue.

I myself, probably like most people, have a love-hate relationship with advertising. I accept the fact that we live in a nation having an economy that is driven by private capital, open markets and entrepreneurship. We reap many benefits from this economy, in terms of material necessities and additional comforts. I’m not ready to trade our situation for something a bit less materialistic, such as Cuba or Iran. One of the costs of having an aggressive, wealth-driven economy is the necessity of advertising. Corporate producers and their advisers and media partners will do most anything to make you aware of their product and get you to give up some of your hard-earned cash in return for it. For the most part, our society puts very few limits on them; other than perhaps a restriction against billboards in the Grand Canyon, and limits on ads for booze, smokes and a few other favorite vices.

For most of my life, advertising has been a generally tolerable intrusion into one’s everyday life. Newspapers were full of ads, but you didn’t have to look at them. Radio stations played ads every so many minutes, but you mostly tuned them out in your head and just did something else with your attention until they were over. Ditto for TV; the ad break might be a good time to get up and get a snack or a drink, or maybe even talk with whoever else might be in the room. Billboards on streets and roadways and buses and trains often seemed like part of the scenery, just what you expected; sometimes they even made a dull scene a little more interesting. And many people look forward to the supplemental entertainment offered by ads for a major event such as the Super Bowl.

Also, there is some social and economic benefit to all the advertising we are exposed to in the USA. It’s good to keep up on what’s out there for sale. Most new things haven’t been of interest to me, like peanut butter pre-mixed with veins of grape jelly. But once in a blue mood something comes along that might be of interest; e.g. in the 1990s when home computers were becoming affordable and useful. Advertising becomes more of a pain and disruption when it is injected into the normal channels of communication; you know, those telephone sales calls (often, just when you are sitting down to dinner) and junk e-mail. But thankfully, there have been means of controlling if not eliminating such disruption. Technology sometimes gives a cure for the disease that it helps to foster, e.g. spam filters and web-site ad-blocks.

But now the social media revolution threatens to take advertising intrusiveness to the next level by fostering targeted advertising. And that creates a bigger question with me, beyond the potential annoyance of continual bombardment of special offers. Before I get to the bigger question, though, let me say that to date, most attempts at targeted advertising aimed at myself have been laughable. I do a lot of business with Amazon, and they know a lot about what I buy. So I get various e-mails and messages while I am perusing Amazon tempting me to purchase something related to what I previously bought. If this “targeted advertising” technology really worked in reading minds, I might be happy to be its subject; if I really did need seat covers for my car, I might like to know what is available. But most of the targeted ads I get are for stuff that I no longer need, am no longer interested in. Amazon seems to think that my needs and wants are unchanging, in a rut. Hopefully Facebook and Linked In will do better in anticipating the needs of its “targets”.

OK, now for “the bigger question”. I wonder if targeted advertising can become TOO effective; i.e., will it start causing people and families to distort their purchasing decisions in ways that in the long term hurt them? E.g., everyone has an “appropriate budget”, everyone must split up their cash inflows between their needs, e.g. food, clothing, shelter, transportation, entertainment, savings / future security, education, etc. Can advertising make families buy too much of a particular product, at the cost of say saving sufficient money for a college education or retirement (or going into negative savings, e.g. borrowing too much)? The second phase of this question: has this already been happening, even before the internet and social media hit the scene (i.e., creation of “artificial demand” which “increases consumer welfare inefficiently”)?

The incentive of advertisers is very short-run: make the sale, as soon as possible. Smile, then take the money and run. The incentive for families and households, by comparison, should be much more long-term. You should (but many people do not) plan the use of your funds thinking about where you will be tomorrow, not just what you need and might enjoy today. Most advertisers do their best to weaken this long term view and emphasize short-run gratification.

Targeted advertising powered by information from social network web sites may well help to advance this trend; but it probably didn’t start it. Corporations have been working with psychologists for many years, as to learn how the mind works and how it can be manipulated with advertising imagery and messaging. Appeals are made beyond the merits of the product itself, encouraging possible buyers to think about how cool and well-regarded they will be if they buy product X, or how good they can otherwise feel about themselves. Sophisticated advertising specialists have lots of other tricks to create the right imagery and right mood in their commercials as to convince the viewer that their product is just what the viewer needs (whether or not it really is). One possible effect is the very low average savings rate of American households and the overuse of credit. Many Americans over 60 are found to have inadequate savings to realistically allow retirement by age 65 or 66. Too many people decided to consume instead of save, and thus will need to work longer, perhaps past 70, before they can think of retiring.

And then there is the amazing marketing ploy that gets many Americans to consume more fast food than they should, contributing to rising diabetes and obesity rates in the US. Yes, this is partly because fast food chains are very efficient and keep their prices relatively low, and offer tasty, satisfying food quickly and conveniently. But constant ads by McDonalds and Pizza Hut no doubt make having a mega-calorie blast of food more “cool” than making a more healthy and appropriately sized meal at home. Especially prone are young people and children, who are increasingly targeted by suggestive advertising. Parents have a hard time resisting the on-going demands of a 6 year old.

I don’t have any facts, but I believe that the modern state of advertising in the USA does have economic welfare distortion effects (aka “negative externalities”); i.e., the overall good of the masses is decreased while capital holders in various corporations benefiting from overly-effective ads further increase their wealth. Disclosure, I am saving for retirement and have money in some stock funds, which may well qualify from such welfare-diminishing levels of advertising.

As to what can be done, I have no panacea. Many economists say that this is a problem that does not have any sort of government cure. People just have to be left to their own devices; they should be smart enough not to be taken-in by luring ads if it comes at the expense of their longer-term safety and wealth. The internet provides an opportunity for more informed consumers (another example of what I said before, the technology sometimes provides partial-cures for the ailments that it inflicts). I myself do a fair amount of comparison shopping on the internet for my larger purchases, and I consult the many product rating sites available (although in many instances, Amazon reviews are the main source of feedback available from previous purchasers).

How can more people be made to better utilize this modern resource, so as to help people make good decisions that are not swayed by crafty advertisements? And what can be done to help people make better budgeting decisions and have the discipline to say “not now” to certain desired purchases, when there are clearly more important uses of their cash in the short run? There isn’t too much that can be done. One little suggestion would be that high schools require at least one half-term class on personal budgeting, and the real-life issues of handing money, especially as to setting priorities and sticking with them. I don’t remember anything like that back in my day, and I am not aware that a majority of high schools offer something like this today. It would not cure the problem; but in a time when corporate advertisers are getting even more of an edge against consumers by mining through huge banks of accumulated personal data from social media sites, it might at least keep things from getting much worse.

◊   posted by Jim G @ 8:41 pm      

  1. Jim, Lately, PBS has had a series on “Mr. Selfridge” (or at least I think that’s the name of the program). The store he built in London was one that was remarkably new: He described it as a store that would make people want things they never knew they wanted in the first place. I’d say that describes advertising perfectly! Seems to me Mr. Selfridge back in the 1800s was the start of getting people to spend more than they had a budget for. Now it’s simply ramped up to the n’th degree.

    As to the economic value of social media —- or any of the “stuff” being bought and sold on the various stock/bond markets, it seems to me that all that buying and selling is simply a different form of gambling –- legitimate, yet simply gambling.

    I am also amazed at the number of unwanted, even inappropriate, ads I am inundated with, e.g., for Viagra, for meeting singles under/over 25, etc. To say the least, these have no interest for me; yet I am plagued by them. Why? Seems to be anybody’s guess. (A side point: I can be plagued by Viagra yet birth control for women is still a matter of some debate in our society. What’s wrong with *that* picture?)

    Wondering why families don’t save enough money is certainly a problem and likely unending advertising contributes to this lack of saving. But I’ve found myself wondering about other types of problems too: e.g., I’ve noticed screens, both TV and computer, that have so much advertising on them, all going at the same time, that I wonder why attention deficit isn’t an even greater problem than it already is in our society.

    Adding to the points you make about remedies to all this advertising: I also think that children who are raised with all this advertising learn at an early age to block out a lot from their awareness, that is, until something that interests them catches their attention. Another thing I think that would help students is giving them a class in advertising itself, what makes a good ad, what makes a bad ad, what kinds of hidden messages are embedded in ads, etc.; that’s a point I think most people are completely unaware of, the subliminal messages in ads that influence one. If children learned at a relatively early age to become aware of all these things, they would tend to concentrate more on the ad itself than on the thing it was selling, that is, take the attention away from the “buying” of the thing and put the attention on how well (or badly) the ad itself is constructed.

    And another side point: The other day I found myself in a store, wondering just how subliminally influenced I was by ads when it came to buying what I was looking for. It’s difficult to figure out. Becoming more aware of how one may be influenced all unawares may be another way of curbing the influence of advertising. MCS

    Comment by MCS — April 8, 2013 @ 10:23 am

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