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November 01, 2006

How The Affluent Society Looks

The very smart Robert Schiller:

In 1958, the economist John Kenneth Galbraith wrote the best-selling book The Affluent Society , in which he argued that the advanced world as typified by the United States had by that year finally emerged from “grim scarcity,” when dire necessity dictated our lives, to a “world of affluence.” He wrote: “So great has been the change [in standards of living] that many of the desires of the individual are no longer even evident to him. They become so only as they are synthesized, elaborated and nurtured by advertising and salesmanship, and these, in turn, have become among our most important and talented professions.”

But real per capita GDP in the US is now three times higher than it was in 1958. What have people been spending all that extra money on? Is it all dictated by advertisers and salesmen who are inventing needs?

According to my calculations comparing 1958 and 2005 data from the US Department of Commerce, Americans spent 27% of the huge increase in income between 1958 and 2005 on medical care, 23% on their homes, 12% on transportation, 10% on recreation, and 9% on personal business activities.

The kinds of things that advertisers and salesmen typically promote were relatively unimportant. Food got only 8% of the extra money, clothing only 3%, and personal care 1%. Unfortunately, idealistic activities also received little of the extra money: 3% for welfare and religious activities, and a similar share for education.

That's a weird conception of advertising. Pharmaceutical advertising, for instance, is a pretty damn big sector, and the drug companies spend 250% as much on it as they do on research and development. Car and travel advertising aren't minor expenditures either. That's not to say Galbraith was right on where the increases would go, or even that the advertised goods are "bad," but it certainly wasn't clear in 1958 that Americans were crying out for Hummer SUVs, DVDs in their cars, the widespread use of antidepressants and betablockers, and granite countertops. Obviously, some people do need big cars, and many more need medicine. But very few need as much medicine as they get, and even fewer need the massive autos that they have. The difference between what we need and what we want may make us happy, or have a social utility, or whatever. But just because we've judged the product types "necessary," doesn't mean our desires aren't driven, in some degree, by advertising.

November 1, 2006 | Permalink


One might also look at how people are employed, to gauge how differently resources are allocated in an affluent society.

Roughly half of Americans, today, are employed, basically, as salesman or in selling, marketing, and distribution activities: selling, advertising, and marketing stuff. Makes Galbraith look pretty good.

Also, makes policies aimed at reducing the annoyance of pervasive advertising, or, more generally, decreasing the amount of time we work relative to the time we have at leisure or with our families, look feasible. We could cut back on our collective hours 15% without actually cutting into the production of any actual goods, only the effort devoted to selling the goods.

Posted by: Bruce Wilder | Nov 1, 2006 11:48:44 AM

While John Kenneth Galbraith is in the blognews, an article in the current issue of Mother Jones, by Galbraith's son, James K., asks: Mission: Control. Why can't economists admit that corporations serve themselves, not the market?

James discusses John Kenneth's long-out-of-print theoretical work "The New Industrial State" (1967), soon to be be republished with a new foreword.

Once control passes to the organization, Galbraith wrote, it passes completely; the economics developed to describe the small firm and its owner-entrepreneur becomes obsolete. Corporations work for themselves, not for their shareholders. In particular, they do not maximize profits merely to pass them along.
The New Industrial State is not a perfect book. I find in it a few orthodoxies from which I wish my father had escaped. He wrote for large audiences, but of all his books, this one is the hardest. And yet, it is a landmark. Among economists it is an ill-kept secret that in the 40 years since the book's publication, the robust faith that once surrounded the concept of the free market as an organizing principle has collapsed. Yet nothing much has emerged to replace it. The New Industrial State remains the doorway through which economics must pass, before progress starts up again.

Instead, The New Industrial State was Galbraith's major work of new theory. It was his effort to actually replace the prevailing economic model with something more meaningful and more real. In it he forged a vision of the business firm not as a simple seeker after profits but as an organization, and of the matrix of such organizations as the essential basis of advanced capitalism. Traditional economics, still in the thrall of a small-town view of business firms, largely rejected this vision, but the large corporation did not go away, and the world still needs the theory set out in this book.
Corporations exist to control markets, and often to replace them. Business leaders reduce uncertainty not through clairvoyance (or "perfect foresight," as the economics textbooks call it), nor by confident exploitation of probability ("portfolio diversification"). They do it by forming organizations large enough to forge the future for themselves. In politics these are countries and parties; in economics, big corporations.

1967 was a long time ago, politically and economically, but we have yet to fully understand as well as John K. Galbraith did nearly 40 years ago, that the modern corporation, now more international/supra-national than then, and now far more dominent of our public life and politics than then, has become an entity that cannot be expected to pursue the public good, but often to work against it. But we are without any countervailing force to reign in its amoral agenda.

Posted by: JimPortlandOR | Nov 1, 2006 11:49:06 AM

I think it's more that advertising determines where our desires are directed. Advertising plays a part in shaping our desires as well, but only as a part of our wider culture. So for example adverts exhorting women to dye their hair don't on their own make women insecure about their appearance, but they contribute to a wider culture that does, and direct women who desire to feel better about themselves to address that desire by buying products.

Posted by: Ginger Yellow | Nov 1, 2006 11:50:29 AM

Advertising and sales are pursuits Americans are very good at (selling the Iraq War internationally notwithstanding). As technology continues to change the media business, it's also changing the way sales and advertising is conducted (Craigslist is but one example). If the future is self-serve, the way the Freakonomics boys discuss, then those 50% of Americans who earn their living in these fields are in for a rude awakening.

Posted by: Roxanne | Nov 1, 2006 12:13:14 PM

"But very few need as much medicine as they get"

agree, but I'd propose a slight tweak on this.

Most DTC advertising is not oriented towards getting people to use a drug instead of not using a drug (some, but not most).

It is oriented towards getting them to use a newer, on-patent category-filler by Pharma Brand A, instead of a drug in the same category, very likely just as good in both safety and efficacy, that is older, or off-patent, or made by Pharma Brand B.

So, e.g., getting them to use Aleve when aspirin would do, or when Tylenol would do, or what have you. Getting them to use this statin rather than that statin--even if this statin is safer than that one.

So my proposal for a tweak would just be:

"But very few need the particular medicines that are being advertised, rather than some other medicine or none at all".

Yours is punchier, though.

Posted by: kid bitzer | Nov 1, 2006 12:16:47 PM

"safer" s/b "less safe",
though there are doubtless cases of each.

But the *majority* of ad dollars are spent flogging pharmaceuticals that are mere copy-cat me-too drugs, no better than available options.

Posted by: kid bitzer | Nov 1, 2006 12:19:02 PM

Perhaps I missed the 1958 where compact cars were ascendant. Granted, I wasn't born yet, but generally one doesn't think of 50s cars and how small they were.

The 50s Buick Roadmaster weighed more than a Ford Explorer.

Of course it is easy to imagine that the great command and control economy would lead to just us producing what we need, and enjoying the rest of the time in leisure. Sadly, in the real world it doesn't work out so good.

Posted by: Dave Justus | Nov 1, 2006 12:42:55 PM

The entire point of advertising is to create new "needs," to make people want things they didn't want before. A lot of that is done by capitalizing on insecurity - if you don't buy this product, you will be unattractive, unpopular, unhappy, unhealthy, dead. The tag line of a recent SUV ad, "It's not more than you need, just more than you're used to," is a classic statement of advertising in a nutshell. Well, yes, it IS more than you need, you just didn't think you needed it until we convinced you.

Posted by: bobbo | Nov 1, 2006 2:37:17 PM

Shiller is right. In 1968, I was driving a 1958 Ford pickup truck. I am now driving a 1987 GMC pickup truck, soon to be upgraded to a 1994 truck. Gas mileage hasn't improved much over those years, and it costs a bit more to fill the tank. What I am spending money on now are kids in college and medical care. I buy my own health insurance - and it's expensive! I am taking Lipitor, Plavix, and a host of other drugs. They don't cost me a lot, net of insurance, but of course, that is part of the reason that my insurance is so expensive. I would not want to give up the drugs, but otherwise the extras I get for the extra money I am earning don't seem like a big advance over where we were almost 50 years ago.

Posted by: Salmo | Nov 1, 2006 7:53:05 PM

Congratulations on being linked by the Economist. Yeah, it's gone downhill hard enough I let my subscription lapse a couple years back, but they still manage to break out the classy verbiage.


Posted by: wcw | Nov 1, 2006 10:38:08 PM

Oh, heck, in my hurry I forgot to mention: it's "Shiller".

Posted by: wcw | Nov 1, 2006 10:40:02 PM

Posted by: Dave Justus | Nov 1, 2006 9:42:55 AM Of course it is easy to imagine that the great command and control economy would lead to just us producing what we need, and enjoying the rest of the time in leisure. Sadly, in the real world it doesn't work out so good.

I quite agree. Many paens to the command-and-control corporation are, when you look at the actual outcomes, underwhelming in terms of their predictive power. After all, no matter how much corporate power is increased by bring activities out of the unruly markets and inside the organization, the unruly market still remains out there, with the demand to gain financial income in order to maintain and grow the organization.

That is, after all, why misinform and persuade is an essential supplement to corporate command and control, just as it was an essential part of the failed Soviet experiment with a One Corporation economy.

Posted by: BruceMcF | Nov 2, 2006 11:33:15 AM

My life's been pretty dull lately, but I guess it doesn't bother me. I haven't been up to anything recently. Maybe tomorrow. I've pretty much been doing nothing worth mentioning. I haven't gotten much done these days. Pretty much nothing seems worth thinking about.

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There are too many, not enough handicapped parking spaces in our city

Posted by: 19 cigar label | Aug 8, 2007 6:06:10 PM

Buyers of guns must take gun-safety courses

Posted by: budweiser beer ads | Aug 11, 2007 3:19:14 AM

I've just been letting everything pass me by lately. Maybe tomorrow. Today was a complete loss, but that's how it is. Eh. Oh well.

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Rural development is the main cause of wildfires

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Global Warming Isn't A Threat

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I feel like a fog, not that it matters. I've pretty much been doing nothing , but eh. Today was a loss. I haven't gotten much done for a while.

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I can't be bothered with anything recently. I've just been sitting around doing nothing. Today was a loss. I just don't have much to say. Nothing seems worth thinking about.

Posted by: cat suit pic | Aug 16, 2007 7:06:35 PM

Males should be allowed to go shirtless at home only - Or vary with places for another persuasive speech topic

Posted by: homer simpsons dad | Aug 21, 2007 12:41:30 PM

Males should be allowed to go shirtless at home only - Or vary with places for another persuasive speech topic

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We are killing the rainforest

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Sex offenders should be, should not be castrated

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Help the homeless down the street and persuade them to look for work

Posted by: antique auto glass | Aug 26, 2007 7:53:37 AM

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