Volume 3, Number 67
8 March 2003

Note: With this Letter, Asa Janney becomes the Assistant Principal Editor of TQE. This Letter is written by Asa. — Jack

Who Rules the Economy? Consumers or Producers?

by Asa Janney

Asa JanneyDear Friends,

Many Friends do not believe that consumers are in charge. I hear Friends say that instead of making up our minds independently, we are slaves of large corporations, who "persuade" us by advertising their products.

Suppose a crowd marched on Detroit to demand that automobile companies produce fuel-efficient cars. Would the demands be heard? I don't think so. In such a market, the automakers respond to consumers, building them the cars they want. When a few people make noise about wanting greater fuel efficiency, the manufacturers may slightly update their estimates of how many such cars are needed. But unless the fuel-efficient cars are snatched up from the dealerships while the gas guzzlers sit unsold, the mix of cars produced by Detroit will not change much.

So, if demanding that producers make more fuel-efficient cars doesn't work, what does? Only changing consumer tastes. We might organize a long-term campaign to alert consumers to the inexpensiveness of smaller cars and to sharpen their concern for the environment. Consumer sovereignty — or, the consumer in charge, runs the market.

The alternative view is "producer sovereignty:" that producers determine market outcomes by influencing consumer choice. The best known proponent of this theory is John Kenneth Galbraith. In at least three of his books, Galbraith asserts that big corporations choose what will be produced and use advertising to make consumers buy those products. He refers to the immense power of huge corporations. According to him, we buy what corporations say we should.

But what solid evidence lies behind such susceptibility to advertising that we march zombielike to the store to buy as directed by big corporations? Very little. Indeed, two kinds of evidence to the contrary are found: direct and indirect. The direct is that advertising often fails, sometimes spectacularly. Remember New Coke? The Coca-Cola Company spent a lot of money trying to make us switch to New Coke, and the campaign fell on its face. Classic Coke was right back on the shelves after a widespread consumer revolt. Other highly advertised failures include the Edsel, Premier (a smokeless cigarette), and Ishtar.

Large corporations test their new products extensively. Most fail and are never released to the market. Even after passing the tests, about a third of new products released are eventually withdrawn. These failures cannot be prevented by advertising. On the other hand, many products survive just fine with no advertising at all.

The indirect evidence comes from various surveys. These have found that consumers are generally skeptical of advertised claims. A 1980 survey found that 70 percent of Americans were concerned about the truthfulness of ads they had seen. Many people cannot recall correctly the details of advertisements, even the names of the manufacturers.

Is the effect of advertising so strong that we will not only buy an advertised product the first time, but then continue to buy it regardless of quality? When the microwave oven first came out, did you buy one just because you saw an ad, or did you buy and keep it because it was a useful appliance? Many economists think advertising mainly switches people among brands rather than creating wants out of thin air. (Most advertising is for repeat-buy products.)

Advertising is information. Sometimes a new product or service is introduced with an advertising campaign. Looking back later, some may claim that consumers were manipulated into wanting a product they did not truly desire. Would you seriously make this argument for VCRs, fax machines, or computers? Alternatively, did buyers simply find them useful and worthwhile?

Here is more evidence. In the 1960s, some states banned advertising eyeglasses. When the effect was studied, states that did not ban advertising had 28 percent lower prices for the same quality glasses. Why? Because advertising increased competition among brands, and the increased competition caused prices to fall. Advertising may persuade, or it may inform. Images used in persuasive ads are more quickly forgotten than the facts used in informative ads. Endorsements by celebrities are not effective, but showing how a product differs from its competitors is effective. We are not mesmerized by commercials. Instead, we use the information from them rationally.

Why, then, do producers get endorsements from celebrities? I don't know, but there may be other attractions, such as "name-dropping," or the personal prestige of knowing a famous person.

Finally, economic depressions are caused by consumers demanding less, not by companies making less. President Bush wants to incite consumer demand by lowering taxes. Many (including me) feel this will not work. But the underlying idea is correct, that consumers — not producers — determine the market.

Quakers often criticize "consumerism," particularly around Christmas time. I sympathize with this thought, which however refers not to the total quantity of products consumed but to our choices. If we decided to consume education and health care, or basic goods for the poor, instead of mechanical dolls and toys for our spoiled children, would we condemn consumerism?

So, those are the reasons why I think the market is determined by consumer sovereignty. Also, I believe that if we make the wrong choices, that is our fault, not the fault of the market.

I believe the market exists to facilitate consumption, and that this has always been the case. The first time a cave dweller found that he could make stone tools more efficiently than his fellow hunters and started trading his weapons for food, he did it not because he or society valued tool making per se. He did it because he got more meat that way.

A while ago I was in an evening discussion with a roomful of Friends. One topic was what to do about the plight of bakers in Brazil when a new, more efficient firm moved in and produced bread at half the going price, using fewer bakers than the established firms. My opinion, that doing nothing was the best response, was ignored in favor of various protectionist measures. Friends were concerned for the bakers who had been thrown out of work. That the consumers who benefited from less expensive bread far outnumbered the unemployed bakers did not count for anything. Actually, by spending less for bread these same consumers would now have money to buy other goods and services that out-of-work bakers could choose to provide. It's not about baking bread, I claimed, it's about eating bread.

It is not just ordinary people who make this mistake. In the last two presidential elections, I have watched the candidates debate the removal of trade restraints and the inevitable job changes that would follow. In these debates the consumer was consistently left on the sidelines while the producer was "protected." Maybe the government has too long a history of favoring producers over consumers. Every time a measure is passed that favors producers, such as farmers, by keeping prices high, the consumer pays.

The economist Henry Hazlitt makes this point in his marvelous book Economics in One Lesson. Hazlitt's one lesson is that the most common mistake in economic analysis is leaving a relevant group out of one's consideration. I believe consumers are left out quite often.

Sincerely your friend,

Asa Janney

Readers' Comments

Twenty years ago I was unemployed and got an offer from a market research company. I was hesitant, but prayed in Meeting and felt I was supposed to take the job because God wanted me to learn something. As a conforming 60's leftist, I was stunned to find how consumer driven our economy was, and how ineffective advertising is. We tested everything with consumers (almost always women) and a few comments from women in Des Moines would kill a product. We catered slavishly to their preferences. We once evaluated a TV program which consumers said was boring and something only "little old ladies" would watch. Pretty soon ratings were up by catering to younger preferences with stories like "Can-nuding down the Delaware (river)". As liberals, Quakers often want to blame it all on impersonal outside forces rather than on our own inner preferences. George Fox reminded us in his journal ''...the Lord showed me that the nature of those things, which were hurtful were within, in the hearts and minds... the natures of these I saw within, though people had been looking without..."

— Mark Cary, Middletown Meeting, Lima, PA

I completely agree with your assessment of the consumer being left out of many discussions on "economic development". In addition to my frustration of the folks who want to protect small bakeries in Brazil, I am frustrated with folks who want to prevent businesses from providing new work opportunities (demand for labor). Many folks who want to keep large multinationals out of developing countries because they offer "poor" working conditions or pay wages that are "too low", don't understand that they are denying those people of a choice of what to do to survive. A choice of a "low" wage versus no wage. Who are we to decide what is in their best interest? Let them decide. And when was the last time that these folks protesting these companies (or protesting the World Bank or IMF, for that matter) spent a day (much less a lifetime) bent over in a rice field in the heat of the tropics. They might think differently about sitting down inside making running shoes.

— Joyce Friedenberg, Sandy Spring Friends Meeting, MD.

As a Quaker business executive, I can attest that understatement sells.

— Lee B. Thomas, Jr. Friends Meeting of Louisville, KY.

I love complicated ideas expressed so clearly and simply! I wonder though if the analysis has a flaw. What Asa says is true in developed economies, but when Coca-Cola tries to convince a Somali of the benefits of coke over water, is this not "manufacturing" a want? How does the analysis change with respect to such massive gaps in knowledge?

— Javier Martinez, Piscataway, NJ.

Answer by Asa: I had the markets of developed countries in mind. I am not sure how my analysis would carry over to Somalia.

Welcome, Asa Janney; and congratulations on an interesting and informative inaugural letter. I look forward to many more; and I hope that we will continue to hear from Jack Powelson too.

— Stuart Ashman, Virginia Beach (VA) Friends Meeting.

Asa: This is a bang-up job. You sound just like Jack Powelson, and I mean that as the highest compliment.

A corollary to your piece is the "The (fill in the blank) Consumer Bill of Rights," meant, of course, to stop those horrible, manipulative — and dumb — companies from selling things their customers don't want — and refusing to sell them what they do want. What a strange Alice-in-Wonderland world that is.

— Michael Schefer, Philadelphia PA, children in Germantown Friends School

Knowing nothing about marketing, I feel free to share my intense hope that Arianna Huffington's campaign against SUVs will prove to be a useful part of advertising FOR smaller, more fuel-efficient cars. Certainly the producers won't produce unless we buy, but the success of the VW bug and the Mini-cooper show there are plenty of people willing to try automotive disarmament--giving up their tubs in favor of more economical cars. Public scorn of SUVs helps change the attitudes of the people buying the cars.

While Friends get into trouble every time we say, "everyone must" buy, wear, or drive the same product, if we believe that our actions have an effect on the world, I think it is fair to discuss in our meetings what products lead to a better environment, both physically and morally. The glut of 'R' rated movies (aimed at teenagers too young to see them legally) peaked a few years ago when public outcry mounted but also when non-R-rated movies started making money. I hope Friends parents tried to keep their kids from going to those movies. Speaking out and withholding our money from harmful products (as well as wars) is one way to advertise our beliefs.

— Signe Wilkinson, Chestnut Hill (PA) Friends Meeting.

I hear that advertised, new, more expensive drugs are "demanded" of our MDs, and so, in this case, advertising creates demand. Could you comment on this, because perhaps I have been listening to the wrong information.

— Lila Cornell, attender at Pittsburgh (PA) Friends Meeting.

Answer by Asa: There is a constant demand for more effective drugs; that's what drives research at the pharmaceutical companies. I think ads for new drugs just give people the information that the drugs are available. Often they buy generics when they are available.

Is Asa trying to convince me that advertising is only useful to corporations to encourage people to switch brands? I don't think so. Advertising is very complex, and this letter, while showing that of course consumers create demand and can affect corporate products, does not get at the insidious nature of advertising that stretches the truth, uses misleading images (such as sexy women to advertise cars, or naturally skinny women to advertise weight loss formula, etc.), and infiltrates our everyday lives in a way that causes people to lose perspective of what we really want as opposed to what everyone else seems to be doing — links to prestige and class and unrealistic expectations are essential to consider in this discussion.

— Carol Conzelman, Boulder CO.

Note by Jack: TQE #67 merely addressed the question of whether producers or consumers (or to what extent each) determine which goods are produced, bought, and sold. It was not intended to portray the good or evil in advertising or its "insidious nature." That is a different subject.

The critical dynamics at work here is the interplay among public relations professionals, advertising professionals, and marketing professionals as they go through the usual revolving doors of the academy, business, and government. They are as bees going from species of flowers collecting nectar to be brought back to the hive. We have all these wonderful kinds, but it's all honey.

— Maurice Boyd, Friends Meeting of Washington (DC).

If advertising does not make up the mind of consumers, then how do you explain why the political candidate who spends the most money wins in over 95% of the political races in the US? I guess that is an example of consumers deciding between brands.

— Larry Powelson, Seattle WA.

Answer by Asa: The problem with concluding that ads influence voters in the typical election is that the ads are funded by contributions from voters who have already made up their minds. Notice I said "typical." Steve Forbes gave us an atypical election observation some years ago when he spent millions of his own money to pay for his ads and found that advertising alone could not get him elected.

Answer by Jack: Asa did not say that advertising never influenced consumers, and I think thee has answered thy own question. Love, from Dad.

Thank you for this letter!!! I'm sending it to New Zealand to a Brazilian pal of mine, Flavio.

— Patty Ruger,

Yes! "It's not about baking bread, it's about eating bread." That's a quote I'll remember!

— Bob Sheffield, Boulder (CO) Meeting of Friends.

I am pleased to see your letter on the neglected role of consumers in a free economy. The question is why educated, liberal minded persons do not understand the independence of consumers and the dependence of businesses large and small on consumer choices.

— Bob Davis, Unitarian Universalist Church of Boulder Colorado.

Friend Janney knocks down the straw man of Galbraithism, and ignores the real reasons "Many Friends do not believe the consumer is in charge." The Nobel prizes in economics last year went to three economists who have shown that real markets do not work like the ideal markets beloved of conservatives, and that government intervention is required if we are to get more of the benefits markets can offer. One of the biggest problems is asymmetry of information for market participants--usually the producer/seller knows a lot more than the consumer/buyer. We can all think of government laws that even the playing field by forcing producers/sellers to give more and better information to consumers/buyers.

— William G. Rhoads, Germantown ( PA) Friends Meeting.

Farmers in this country have always complained about the "Cheap Food Policy" of our government. The Federals deny this accusation from time to time but I believe it exists. Having worked in the early '90's for the US Department of Agriculture, the agency that administered farm subsidy programs, I became a believer. Most commodity programs are said to be created to "protect or give a safety net" to farmers but many times they are actually a device to control production, of which the Wheat and Feed Grain program is a fine example.

— Stuart Greene, Annapolis (MD) Friends Meeting.

As a longtime, watchful consumer, I know that the lowest price is not always the best deal. The bakers put out of business by the new bakery factory may have made delicious, crusty bread from stone-ground wheat, baked in brick ovens. The bakery factory might be making a spineless white bread from highly processed, additive-laden white flour. Guess which one is cheaper? And if most consumers want to buy the lower-priced, less nutritious alternative, and I prefer the better tasting, more nutritious bread, what happens? I, as a minority consumer, get left out of the equation. This is not theoretical, it actually happens all the time, especially in limited markets such as smaller towns. Wal-Mart and other big box stores offer the less expensive goods. Some of them are less expensive because they're hastily made of less durable materials. Some cost less because the people who made them are paid less than U.S. or European workers.

— Pat Trostle, Logan (UT) Friends Meeting.

The major role that large corporations play in setting the public preference for SUVs and larger personal vehicles is in preventing government action to collect for externalities through an oil or carbon tax. By promoting low priced gasoline, the automobile and truck manufacturers assure themselves a market of profitable and inefficient SUVs and light trucks. The public will pay for the external costs, of course, but without associating the costs with purchase and use of inefficient vehicles.

— Thomas Loria, Chamblee, Georgia.

Although I agree with part of your basic premise, the truth is that we want to believe that someone else knows more than we do and will take of us. When advertising plays into our fears and needs, in areas such as health and baby formula and not just our taste in soft drinks, I think it is too much to expect that the average person is going to be able to calmly and intelligently resist those influences. When large corporations act with the implicit support of the federal government, it is pretty much hopeless.

— Bonnie J. Pinzel, Friends Meeting of Washington (DC).


RSVP: Write to "tqe-comment," followed by "@quaker.org" to comment on this or any future Letter. (I say "followed by" to interrupt the address, so it will not be picked up by spam senders.) Use as Subject the number of the Letter to which you refer. Permission to publish your comment is presumed unless you say otherwise. Please keep it short. Letters will be edited for spelling, grammar, clarity, and brevity. Any letter over approximately 100 words may be returned without being read. Please mention your home meeting, church, or synagogue, if any (this is not required), and your location.

To subscribe or unsubscribe at no cost, please visit our Home Page.

Each letter of The Quaker Economist is copyright by its author. However, you have permission to forward it to your friends (Quaker or no) as you wish and invite them to subscribe at no cost. Please mention The Quaker Economist as you do so, and tell your recipient how to find it.

The Quaker Economist is not designed to persuade anyone of anything, although viewpoints are expressed. Its purpose is to stimulate discussions, both electronically and within Meetings.

Publisher and Editorial Board

Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board:

  • Roger Conant, Mount Toby Meeting, Leverett (MA).
  • Carol Conzelman, Boulder (CO).
  • Ann Dixon, Boulder (CO) Friends Meeting.
  • Virginia Flagg, San Diego (CA) Friends Meeting
  • Asa Janney, Herndon (VA) Meeting, Assistant Principal Editor.
  • Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor
  • J.D. von Pischke, a Friend from Reston, VA.
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

Copyright © 2003 by Asa Janney. All rights reserved. Permission is hereby granted for non-commercial reproduction.

Previous Letter | Home Page | Next Letter