Thursday, October 7, 2010

Is free choice an illusion?

I am sometimes asked questions like: What is so wonderful about the free market? My answer is that the free market is about choice. You choose what you want to buy. The choices you make send signals through the market to huge numbers of people involved in retailing, manufacturing and production of raw materials. A lot of these people live in different parts of the world. They don’t even know each other – they are just responding to market opportunities. It is inspiring to think that this whole system responds to individual choice.

However, some people argue that free choice is just an illusion. These people include some famous economists, such a J K Galbraith, who wrote ‘The Affluent Society’ in the 1950s. He argued that your choices are manipulated by advertisers, who sell you things that you may not really need. Others argue that modern economies are geared to selling things that are bad for us – food full of fat and sugar; fuel guzzling cars; new fashions in clothes that serve no obvious purpose – often funded with credit that consumers have difficulty repaying.

How has the economics profession responded to this challenge? Over most of the last 50 or so years I think it is fair to say that the profession has largely ignored the challenge. That was easy to do because there was never any serious suggestion that advertising should be banned. Advertising of some addictive products that are harmful to health has been restricted and there has been some regulation to shield children from exposure. Everyone agrees, however, that it would be silly to discourage informational advertising about store locations, products sold and prices. As for more subtle forms of advertising, it is difficult to define activities that should be discouraged without infringing the rights of individuals to engage in persuasive communication with each other.

Much of the economic research that has been undertaken on the effects of advertising has suggested that they are small and do not last long. However, such findings raise more questions than they have answered. Why would firms spend large amounts on advertising if it has little effect on sales?

The findings of some recent studies on the evolution of brand preferences are consistent with Israel Kirzner’s view that it is the entrepreneur’s function not only to make the product available, but also to ensure that the consumer’s attention is attracted to the opportunities that the product provides (‘Perception, Opportunity and Profit’, 1983, p 10). These studies have shown that:
• brand loyalty tends to be a very important factor - many people prefer to buy a leading brand product, even though a less expensive product is indistinguishable when packaging is not visible;
• the first brand that becomes established in a market tends to maintain a substantial advantage over those that come later; and
• this advantage is greatest for products that are heavily advertised.
(For example, see “The marmite effect’, ‘The Economist’, Sept. 23 2010 and Bart Bronnenburg, Jean-Pierre DubĂ© and Matthew Gentzkow, ‘The evolution of brand preferences’, NBER Working Paper 16267.)

Marketing experts have a great deal to say about how brand loyalty is established. Conventional branding models assume that the purpose of advertising is to influence consumer perceptions about the brand (e.g., associations tied to quality, benefits, personality, and aspirational user imagery). In cultural branding, however, advertisers seek to establish a story about the kind of people who buy the product they are selling and how it fits into their lives. The product is simply a conduit through which customers can experience the stories that the brand tells. (see: Douglas Holt, ‘How Brands Become Icons’, chapter 2). Some people identify strongly with the brand’s story, some may see it as saying something relevant to themselves, others see it as irrelevant.

One of the most interesting marketing exercises in Australia is the advertising of Victoria Bitter. For a long time the story was about ‘Vic’ as a reward for a hard days work - the ‘hard-earned thirst’. It was the working man’s beer. Over the last couple of years the advertising has moved up market. Last year, the story suggested that VB was every man’s beer. The most recent advertising seems to be aimed at young men who sees themselves as a ‘authentic Aussie blokes’. (The latest ad is here). If you buy the story, you may buy the product and make a statement about how you see yourself and how you want to be seen by others.

Identity Economics: How Our Identities Shape Our Work, Wages, and Well-BeingHow can an understanding of the role of story-telling in marketing be incorporated into economics? There is a relatively new brand of economics developed by George Akerlof and Rachel Kranton that is helpful. Identity economics recognizes that people gain satisfaction from acting in accordance with their identity – how they perceive themselves – as well from the goods and services they consume. This explains why some people would prefer to buy the branded product they usually buy rather another product that is a lot cheaper and is indistinguishable in all respects when taken out of its packaging. They get satisfaction from being the kinds of people who use that brand. The satisfaction they get from acting in accordance with their identity – the story associated with the brand – may exceed the satisfaction they would get from paying a lower price.

Summing up then, advertising does not make consumer choice an illusion. Advertisers are often trying to sell you a story. If you don’t identify with the story they are telling, you don’t buy their product. It’s your choice.

Note: This post is based on a speech I gave recently at Nowra Toastmasters.


Brandon B. said...

I agree with your post! It's unwise to hamper a free market simply because that type of economic structure is what reflect human nature the best. We are naturally free to choose what ever we want to say, do or buy. Hampering that would be a mistake. Communism tried to do this under the premise that people are not truly individuals and they can be told what to do. That has pretty much failed miserably. While it may seem like a novel approach on paper, when you don't factor in the human element any economic theory is doomed.

On a side note, I tend to post about the economy a bit on my blog. No where nearly as extensive as this article but I would love to reference your blog and writings in future posts of my own, would that be a problem?

Winton Bates said...

Hi Brandon
Thanks for your comment.
You are most welcome to reference material on my blog.
If you leave a brief comment and link on my blog I might visit your blog to see what you have written.

Lorraine said...

I would not say free choice is an illusion. I would characterize it as an unattainable ideal. True, "you choose what you want to buy," subject to constraints. In economic theory this is the so-called income line that bounds region in which the indifference curves are feasible. It is no exaggeration to say that the smaller your income is, the smaller your world is. Sure, the whole system (the people all over the world who don't know each other) respond to individual choice; specifically individual choice backed up by money. A market economy is simply a command economy in which money issues the commands. This is the rationale behind the slogan, 'capitalism is to capital as monarchism is to monarch.'

'Free market' ideologues characterize constraints and restraints as mutually exclusive. I suspect the real world isn't so neatly categorical.

As for advertising, yes, I suppose my hatred of censorship dwarfs my distaste for shameless pluggery. But again pluggery to thuggery is more a slippery slope than a sharp dichotomy.

Winton Bates said...

Hi Lorraine. I don't think a free market economy can be characterized as a command economy in which money issues the commands. There is an inherent difference between a spontaneous order and a command economy. Command economies in which governments make decisions about production distribution and exchange on behalf of wealthy people are just as inefficient in giving people what they want as command economies in which governments make (or pretend to make) such decisions on behalf of the poor.

I probably should have mentioned the income/wealth constraint but it raises a somewhat different set of issues. It is worth noting that income security does tend to be greater in countries with relatively high average incomes. I wrote about that here.