Advertising, IP Law, and the Invisible Hand

Accounts and Accountability #3

Drawing Hands, MC Escher.

But wait, you’ll say, reducing the working week would reduce the incentive to innovate, it would distort the market and lead to misallocation of production effort. We actually do want policies that encourage mass consumerism, because consumption can function as a decentralized mechanism for steering investment and innovation in new products and services.

When Adam Smith talked about the invisible hand, he was describing two features of markets. First, the ability to efficiently set prices (yielding an efficient allocation of resources). Second, the efficient coordination of labor and production, whereby each individual’s self-interested goal of maximizing their own profit would lead them to produce what is most valuable to society more broadly.

If the invisible hand was functioning as Smith described, there’d be no need for policies and government campaigns to promote consumption, and no need for advertising more broadly. The existence of advertising is antithetical to Smith’s idea that the profit motive will efficiently coordinate the production of what is most valuable to society.

Demand generation, via Drift.

Profit was supposed to be a way to incentivize and measure innovation, but a few examples of industries where advertising is particularly prevalent should help illustrate how advertising seeks profit at the expense of innovation.

(1) A completely saturated market with little to no product differentiation and no innovation happening: Coke vs Pepsi, Bud Light vs Coors Light, Toyota vs Ford, etc. Not exactly the picture of the production of what is most valuable to society.

(2) A race to a monopoly. This often happens in a low margin industry, like air travel or ride sharing or retail, where competition is fierce and the only way to create a profitable business is to establish a monopoly that eliminates competition so that you can increase prices above the competitive equilibrium price and extract rents.

(3) The mass media and information landscape, where there is zero marginal production cost and you can use IP law to create an artificial monopoly such that distribution (via paid advertising) becomes your only cost.

I find this last example particularly troublesome, because it uses artificial constructs (paywalls, encryption, DRM, etc) to make non-rivalrous goods (something where my use of it does not preclude your use of it) excludable.

Theoretically, a society should want all good ideas spread as broadly as possible to eliminate as much wasted effort as possible, yet we’ve created an entire branch of legislation dedicated to locking down ideas and information.

The main argument for artificially creating monopoly on ideas with IP law is that no one would invest effort in creating new ideas unless they’re compensated for the investment with the financial reward of monopoly over their invention.

Based on the motivations of most of the most creative people I know, I’m skeptical of this particular argument. They are rarely motivated by financial profit.

And without IP monopoly, inventors would still share in the benefits of truly great ideas – cures for diseases or revolutionary technologies. They’d just get the same benefits as the rest of humanity, rather than capturing large rewards for themselves. Without IP law, there’d be strong incentives for innovation that truly grows the pie for everyone (and not much reward for zero-sum innovation).

The other argument for IP law is that if you don’t grant ownership to the inventor, distributors will extract all the profits. This is a real concern. It happened with books shortly after the invention of the printing press, and it happens today with a lot of open source software.

But shoe-horning ideas into an artificial private property construct is not the only solution to this problem (I’ll discuss some others later). It’s just one clever solution that a monopolist distributor can use to placate inventors by dealing them in for a small share of extracted rents. (There’s an argument that IP law might actually stifle innovation – it’s common knowledge that industries that rely on rents are the least incentivized to innovate).

In each of these examples, the tail has come to wag the dog.

The profit motive was supposed to incentivize innovation by measuring growth in productivity and direct effort towards what is most valuable to society, and perhaps it would have done so if left to its own devices. But our society has built up artificial constructs like mass media advertising and IP law, which, while effective at protecting and growing profits, ultimately create a bunch of feedback loops that diminish innovation.

Even if you’re not convinced that corporate advertising and government PR promoting consumer spending are making things worse and stifling innovation, I think we can view the very existence of ‘demand generation’ as a failure of the invisible hand of the market to direct individual effort towards what is ‘most valuable society.’

They Live (1988).

The last unmeasured externality of a mass consumption economy I want to discuss is the psychological consequences of the ways it co-opts the ideas of meaning and dignity we have developed as social creatures.

Our society trains us to view our primary form of self expression as consumption, which is now viewed as a fundamental human right on par with freedom of speech. It puts democracy at risk, as Christopher Lasch notes in Culture of Narcissism, when pervasive advertising promises emancipation and “disguis[es] the freedom to consume as genuine autonomy” and gives consumption precedence over civic duty.

To make matters worse, the Protestant work ethic – at the very least, a secular version of it – still runs strong in American culture, and many people view work as fundamental to human dignity.

But when you recognize that huge portions of the economy exist only to meet demand that has been artificially generated by advertising, it sucks the dignity out of work.

On top of all that, the commodification of domestic work – housework, care for children and elderly, education – has diminished the perceived value and dignity of this essential work. As all of this labor intensive, low margin, and therefore low wage work has transitioned from familial or societal duty into paid labor, it has become less attractive, less celebrated when held in comparison to the higher paying, salaried jobs at the most profitable corporations.

It is unsurprising we have a crisis of meaning, when you recognize this feedback loop implied by demand generation:

→ We want more productivity, so we can produce surplus reserves to endure hard seasons.

→ We use wages to encourage participation in labor.

→ We use profit to incentivize productivity increasing (labor saving) innovation.

→ We innovate and reduce the need for labor.

→ There’s not enough work to do, and workers don’t get wages (because profits go to capital).

→ We incentivize over-consumption to create demand for labor by teaching people that consumption is their primary means of self expression.

→ We continue to invent labor saving technologies, and an increasing portion of labor serves demand that is artificially generated through ads.

→ An increasing portion of people recognize their work is not essential, but the result of artificial demand generation.

With respect to meaning and dignity, we’re not in a great place. But, with respect to generating / extracting profits, we’re pretty efficient.

We’ve optimized to the level where there’s not enough essential work to do, so we have to invent things for people to want to buy and we have to use ads to train people to want them.

We’ve invented a hugely complex system of law to grant monopoly rights over non-rivalrous information goods for the sake of ensuring we count as much of the value created in our measures of profit and GDP.

We’ve figured out how to exploit unmeasured material waste and energy usage to bolster our measures of growth.

These are some ingenious accomplishments, and we have the profit motive to thank for all of these (along with many or most of the truly innovative ideas, processes, and technologies that have made humanity far more productive since the industrial revolution). And, I doubt we would have accomplished much of this with a planned economy.

But I want to suggest that it’s not so much the profit motive itself that was important, but the fact that we had A METRIC to optimize.

A metric allowed decentralized coordination towards a common end.

A metric allowed creative and diverse solutions directed towards its optimization (even some perverse but nonetheless creative solutions like advertising and IP law).

And, critically, a metric gave us a way to hold our leaders accountable. At the country level, GDP. At the firm level, profit. Within a firm, P&Ls for business units, and correlated metrics for other contributors. At each of these levels, we saw a century of solid performance across millions of groups and individuals towards optimization of our chosen metrics.

But I don’t think the metric of profit or economic growth remains aligned with what is most valuable to society. Just look around at all the ways the world is fucked up right now and I think that is clear.

On the other hand, I also think you can look at the absurd level of optimization of our entire society around a measurable goal as evidence of the power of metrics. And, I’m not sure we can extract ourselves from our predicament without some sort of alternative measure of success.

I’m NOT one of those people with a blind faith that we just need to invent the perfect number or algorithm and never think about it again and everything will be OK forever. But, I think we’ve created an incredibly powerful and efficient system designed around one particular metric that will be difficult to displace without organizing around an alternative.

I think we need to decide collectively on the metric / metrics we want to use as replacements, rather than wait for some deus ex machina to set the new direction for civilization.

… Now, I don’t love ending rants like this one without any specific suggestions of my own, so here are a few:

(1) Public ownership of all non-rivalrous goods. This means ideas, knowledge, IP, data, information of all sorts. These make up an increasing share of the economy and (i) continuing to grant monopoly rights over them where we do today, or, (ii) expanding monopoly rights over non-rivalrous goods in new categories, eg, data, will just concentrate profits even more, especially where there are already network effects at work. This would lead to more inequality and exclusion from assets that should benefit everyone. It would take the ‘edge’ value out of information (an inherent zero-sum view that only values asymmetric information), but would not decrease the value (to society) of knowledge that increases overall productivity. (This topic merits an entire follow-up post… I also Rx this great long read from my friend Sam on the information economy vs capital economy.)

(2) Radically increase individual and corporate taxes using an inverse power function to distribute profits more equitably with a per capita dividend. Think of this as a strategy akin to collective ownership of all corporations. This would be particularly important if (per #1) all information were public domain, for in that case, there would be a tendency for rents to be extracted by distributors. I prefer this strategy to state run distribution mechanisms, because it might still allow for competition among distributors.

(3) Place an inverse power tax on advertising. This would effectively make it cheaper for new entrants in a market to place ads (about their potentially innovative new products), but make it prohibitively expensive to use advertising as an incumbent in a saturated market or as a corporation attempting to use ads to establish monopoly power to extract rents.

(4) Rather than using per capita GDP to measure productivity at the country (or potentially global) level, use a number that (i) gives more attention to income distribution, which should make society more durable (economists are already talking about a ‘GDP 2.0’ towards this end), and also one that (ii) places downward pressure on hours worked. As an example, consider GDP divided by median hours worked per person – instead of incentivizing artificial demand generation, useless consumption and production, we’d be equally (if not more) incentivized to reduce working hours across the country when we achieve productivity increases. In the same way that a universal basic income might fund people doing research and innovation, I think a reduction in the working week would enable pursuit of knowledge in the free time it opened up. (Another topic that merits an entire follow-up post…).

(5) Establish some measure that internalizes the cost of material waste, similar to carbon credits. Material and energy waste are essentially transfers to the current generation from future generations that when left unpriced, incentivize a sort of injustice not unlike the looting of a conquered nation. Properly pricing these (or pricing them at all) would incentivize material saving / sustainable innovation, rather than incentivizing waste.

(6) The profit motive seems to under-allocate towards human labor intensive work where there is not a huge opportunity for technological innovation (care for sick and elderly, education). Are there metrics that better capture the value of (and incentivize) investment in this sort of work? Will giving people back time (in the form of reduced working hours) suffice to properly allocate resources to these efforts? Could there be mandatory service programs run by the state, sort of like the non-war-focused version of Israel’s mandatory service program, where we forced every citizen to work for a year after high school (perhaps even 1 of every 10 years?) in education or care, and took pains to mix workers from zip codes with different median incomes?

This has been a long and desultory exploration, but these are hard, systemic problems, and I find myself going in circles on them constantly. Hopefully laying out some of the thinking helps you from getting as lost as I have been at times.

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