Is advertising a tool for economic growth?

Index

1. Extract
2. Tool of microeconomics
3. Advertising modifies the qualitative structure of the market
4. The market grows only if there is an augment in the income of the factors of production
5. Effect on the nominal and real income
6. Potential demand and effective demand
7. Only the macroeconomics policies modify the market
8. Advertising, economic growth, balance or recession
9. Conclusions 

1. Extract

Many people think that advertising increases market size. That idea is logical because advertising augment the sales of products advertised, however, it really does not expand the size of market. Therefore, advertising is not a tool to reach economic growth, in terms of net accumulation of capital; in the following paragraphs is explained why.

2. Tool of microeconomics

One of the main goals of microeconomics is the study of consumers and businesses conduct to improve its behavior. The basic function of advertising is to present the choices of goods and services of the market; advertising, then, is a tool used by microeconomics to obtain one of their fundamental objectives.

3. Advertising modifies the qualitative structure of the market

Though advertising exerts a global effect on consumers it does not change the quantitative structure of market; hence we say that advertising is not an instrument for the economic growth in terms of net accumulation of capital.

Advertising modifies the qualitative structure of market because it forces competitors to improve their products. Competition embraces price, quality and quantity. Generally advertising is developed in a positive sense highlighting the advantages of products. Although there may be an implied comparison between products, advertising prevents a direct or negative mention of competitors. All these facts contribute to modify the qualitative structure of the market.

Consumers would not know the advantages or disadvantages of the products if there were no advertising.

4. The market grows only if there is an augment in the income of the factors of production

Without an increase in the remuneration of the factors of production it is not possible the market growth and vice versa: the market reduces its size only if occur a reduction in the income of the factors of production; this happen because of: a) the reduction of the public and private investment, b) the decline of the consumer spending and c) the augment of inflation.

Advertising changes the habits of consumption and the demand of goods and services. The market is comparable to a cake. The cake is divided in many parts. Ones part are big and other small. Advertising only modifies the size of the parts but the cake, as a whole, does not change by effect of advertising. For example, if a company advertises its products is very likely to increase their sales, but not due to market growth but because it has taken away customers from competitors, so that gain of an advertiser is usually due to the loss of its competitors.

Advertising can be compared with a zero sum game where some win and other lose.

May be that the market grows, in other words, that the cake increases its size but the only way is through the increased income of producers and consumers.

5. Effect on the nominal and real income

An augment in the remunerations of the factors of production represents other problem: the situation of the nominal and real income. When nominal income increases the real income tends to decrease, because the purchasing power is affected by inflation. So that it is necessary to take measures to diminish the effects of inflation after an increase of the nominal income.

6. Potential demand and effective demand

Advertising has other important economic effect: as a result of advertising, consumers know the products and services that exist in the market; sometimes they cannot buy products because they have not enough money; this is the potential demand. This becomes effective demand when people obtain the money to buy.

7. Only the macroeconomics policies modify the market

Only the big decisions of economic policy change the quantitative structure of the market; those policies are the monetary, fiscal and financial policies, the concrete policies of production in the primary and secondary sectors: energy, mining, agriculture and industry and the policies in the commercial and services sector.

But the most important policy is the policy of employment and wages; it determines the wellbeing of society. Without jobs and appropriate salaries there is not possibilities of social progress. The governments set the minimum wage and create incentives or perturbations to the generation of employment in the private sector of the economy, so that the attitude of the governments is key to increase the effective demand of the society.

Moreover, the governments, through the public spending are the locomotives of the economy. The public spending is essential for the collective wellbeing. The restriction of the public spending only brings more poverty, unemployment and less consumption.

8. Advertising, economic growth, balance or recession

Economic growth is the net accumulation of capital and is a consequence of new investment; economic growth is what creates new jobs.

The other economic option is the balance, the status quo, which is a result of the replacement investment.

Other economic alternative is recession, which is a consequence of the reduction of the volume of investment and consumption.

The investment in advertising has a special feature: advertising is made the same in times of economic expansion, balance or recession. It is obvious that in times of expansion the investment is most. However, still in the most adverse economic circumstances advertising stay in the market.

9. Conclusions

- Advertising does not increase the size of the market, its quantitative structure; therefore it is not a tool for the economic growth.

- Quantitative market structure augments only due to the expansion of the factors of production remunerations.

- On the contrary, advertising changes the qualitative structure of the market because it forces competitors to improve their products and services.

Political economy, the paper of the State and of the market

Since the beginning of the times until now the chiefs of tribes, monarchs, feudal lords, statesmen and politicians decided the mode of production and the distribution of wealth in all the societies.
The main economic influence has been of the governments and not of the private producers, the farmers, fishermen, craftsmen, industrials, traders nor entrepreneurs. They have played a second place because all them has been controlled by the governments, through laws and administrative decisions.
So that it is a historic lie of the Marxist philosophy assuring that the mode of production and distribution of wealth determine the political and social regime of the society; on the contrary, the politics determine the economic and social system of the society. In consequence, may be assured that the laws of market (supply and demand) have not dominated the economy of the countries. The true is that was the monarchs and now the politicians whose decide the limits of the economy and until where the economics concepts are applicable or not. Moreover, they have decided ever something essential in all the historic stages: the fiscal (tax) and commercial policies. At difference of the laws of the science, the laws of the economy are relative and are linked to the social behavior of the big human groups.
It is obvious that the monarchs and politicians has not been isolated and non permeable people; they are too human beings and like the rest of the people they receive the influence of the social media, the custom and the economic institutions of the society. But, in the reality, they have accumulated the true power; that power, in turn, has been supported in the most important of all the powers: the weapons.
In all the times the common citizens has understood this reality and in the most of the cases they have accepted the authority of whose exert the political power; when this not happened occurred the great revolutions.
The modern world knew two great revolutions: the French Revolution (1789) and the Bolchevique Revolution (1917); they changed the course of history. The first led to the born of a new social class, the bourgeoisie; this class was dominated by many years by the monarchs and the feudal lords but in 1789 the bourgeoisie took the power and began to govern a part of the world. This political revolution was, at the same time, a consequence of other important historic fact: the First Industrial Revolution that began at the middle of the eighteen century with the development of the industrial scale of production and the modern machines.
The effects of the French Revolution are still present in the world; they are the abolition of the monarchy in France and other countries, the creation of the Bourgeois Liberal State that encompasses the representative democracy and the capitalist system of free market.
In 1776, thirteen years before the French Revolution, appeared in London the first edition of the book an Inquiry into the Nature and Causes of the Wealth of Nations of the philosopher Adam Smith; this book would be the economic bible of the new bourgeoisie class.
The second one, the Bolchevique Revolution, destroyed the Russia’s monarch’s power, imposed also a new class ---the proletarian class--- and the communist government in a very important part of the world: Russia, Eastern Europe, China, North Vietnam and North Korea.
The communism received their inspiration from the opposed thesis of the Wealth of Nations of Adam Smith. The new theory was presented in the book The Capital of the philosopher Karl Marx, in the year 1867, ninety one years after the first edition of the Wealth of Nations. The Capital became the new economic bible of the communists.
The effects of the Bolchevique Revolution are also still visible; these are the communist regimes that yet survive in some nations. The Communism demonstrated that is not sustainable in the time and for that reason disappeared in the Former Soviet Union and in Europe in the year 1989.
The capitalist system has passed also by serious and recurrent crisis; in the 20th century the most severe was the Great Depression of 1929 and now, in the 21st century, the international financial system fall in the years 2008 and 2009.
The indifference of the statesmen
It provoked those great economic crises. The lack of control on the financial system was one of the main causes of the economy fallout.
Until where the State must exert control over the economy is an old economic discussion.
The State has had ever the faculty of deciding the essential affairs of the economy but in some moments and circumstances the leaders of the governments has resigned to that prerogative. This caused the big economics problems.
It must have a balance between the State and the market, without this balance neither the economic development nor the business is possible.
In the last decades of the 20th century the monetarist thesis reborn promoted by Milton Friedman and his pupils of the School of Chicago. The principal idea of this conception is the absolute free market, this mean, the non intervention of the State in the economics affairs.
As it is obvious, because of practice and legal restrictions, the thesis of absolute free market was not possible of to apply in all their intensity, but she influenced the political action in some countries, especially in Great Britain and in the United States since the governments of Margaret Thatcher and Ronald Regan until the recent government of George Bush Jr.
As consequence of the most recent financial fallout (2008-2009), the authorities have tried of exert a major control on the economy and especially over the financial system; on January 3 2010 in Atlanta, the Federal Reserve chief, Ben Bernanke, declared that “…Regulation must be the first line of defense against speculation…” But the lobbyists of the free market have a great power and influence. They got the bailout for the banks without restrictions. Essential industries, like the automaker and the common citizens did not have the same luck.
The global crisis seems to be permanent. In the last days have appeared the financial problems of Greek and probably Spain, situation that might have an important effect over all the Euro Zone.
Meanwhile, the jobless, the poverty and the environment problem everyday affects a major number of people in the entire world, including the developed industrial nations.
Which will be the future? What do you think?