Tag Archives: Advertising

Veblen Goods and the impact of advertising.

When a firm advertises it does so to make consumers aware of their product / service so informed decisions can be made which ultimately, making the firm and consumer better off – positive advertising. But the way adverts are targeted, they can contribute to long-run health risks especially on those that are very impressionable – London has banned junk-food advertising on its public transport. Advertising a top of the range 4 wheel drive car on its way up to a chalet in the picturesque Swiss Alps doesn’t do much for the majority of people who can’t afford them – they see what others can afford but know that they are not in the same league – negative advertising.

Positive: advertising informs. It may promote human welfare by allowing people to make better choices about products. 

Negative: advertising stimulates desires that are not feasible. This creates dissatisfaction. Hence, advertising might reduce welfare by unduly raising consumption aspirations. 

So if advertising encourages people to have things they cannot have does this leave society worse off? Recent research by Chloe Michel, Andrew Oswald, Eugenio Proto and Michelle Sovinsky – Advertising as a Major Source of Human Dissatisfaction: Cross-National Evidence on One Million Europeans – did analysis of approximately 1 million randomly sampled European citizens across 27 nations over 3 decades. They showed that increases in national advertising expenditure are followed by significant declines in levels of life satisfaction. They estimated that a doubling of ad spending is associated with a subsequent drop in reported satisfaction of 3% – an effect about a quarter as strong as a spell of unemployment. Although the authors cannot be certain that advertising has this effect this area is not new to economists.

Conspicuous consumption was introduced by economist and sociologist Thorstein Veblen in his 1899 book The Theory of the Leisure Class. It is a term used to describe the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status.

Economists and sociologists often cite the 1980’s as a time of extreme conspicuous consumption. The yuppie materialised as the key agent of conspicuous consumption in the US. Yuppies didn’t need to purchase BMWs or Mercedes’ cars for example; they did so in order to show off their wealth. This period had its origins in the 1930’s with Austrian economists Ludwig von Mises and Fredrick von Hayek – the latter being the author of “The Road to Serfdom”, in which he said that social spending rather than private consumption would lead inevitably to tyranny. Margaret Thatcher (UK Prime Minister 1979-1990) and Ronald Reagan (US President 1981-1989) believed in this ideology and cut taxes and privatised the commanding heights in a move to a free market environment.

So-called Veblen goods (also as know as snob value goods) reverse the normal logic of economics in that the higher the price the more demand for the product – see graph below

Over the last three decades conspicuous consumption has accelerated at a phenomenal level in the industrial world. Self-gratification could no longer be delayed and an ever-increasing variety of branded products became firmly ingrained within our individuality. The myth that the more we have the happier we become is self-perpetuating: the more we consume, the less able we are to tackle the myth.

Conspicuous consumption plays a significant role in society. Most people in the developed world have their basic needs met but to keep workers (on higher incomes) striving for more stuff there must always be more desirable consumer goods out of their reach. Never ending dissatisfaction can increase the demand for goods and services and the desire to earn more income. However it is a sort of prosperity that depends on consumers never being satisfied with what they have.