On the eightieth anniversary of the 1929 Stock Market Crash that led to the Great Depression, the United States is once again caught in a Great Financial Crisis and deep downturn of an order of magnitude comparable to the 1930s. At the center of this crisis is plunging consumer spending, caused by the destruction of household finance as a result of decades of wage stagnation and the piling up of debt.1 Consumer spending in today’s economy, dominated by giant firms, is significantly dependent on the sales effort, i.e., marketing as a whole, with advertising as its most conspicuous form. But the sales effort is also ebbing in the crisis, contributing to the general decline. So integral is the sales effort to the regime of monopoly capital that one cannot be understood without the other.
Our goal in what follows is to provide a broad introductory sketch of the sales effort under monopoly capital (and more specifically the monopoly-finance capital of today) based on what we believe to be the most comprehensive foundational work on contemporary advertising: Paul Baran and Paul Sweezy’s Monopoly Capital. It built upon the pioneering economic scholarship on this subject in the middle third of the twentieth century.2 Among the questions we wish to address are:
- The historical connection between the emergence of advertising and the rise of monopoly capital;
- The importance of the sales effort in propping up an economy prone to economic stagnation arising from a lack of effective demand;
- The role of the advertising system in the creation of the dominant corporate media and the shaping of modern journalism;
- The social costs of marketing; and
- The political struggles to arrest commercialism.
Our analysis focuses principally on advertising as the most transparent form of the sales effort. Unlike most analyses of advertising, we are not concerned primarily here with advertising techniques, but rather its economic and social functions.
Much has changed since Monopoly Capital was published in the 1960s, yet it remains the definitive starting point for any effort to grasp advertising’s contours and significance. Since the middle of the last century, with only a few exceptions, as advertising has consolidated its role in the political economy, orthodox economists have shown little interest in pursuing the subject.3 "Modern economics," Baran and Sweezy observed, "has made its peace with things as they are, has no ideological or political battles to fight, wants no confrontations of reality with reason."4 In recent decades, what little research has been done is trivial and based on the idea that if an industry is making profits, it is, ipso facto, a socially necessary industry and it is beyond the purview of economics to question its legitimacy. Advertising is simply taken as a given, much like the Rocky Mountain range, a neutral institution there to connect businesses to consumers with the information they need to make buying decisions.
We begin with two simple points. First, any advanced and complex economy needs an information system to allocate goods and services effectively. Contemporary advertising is not the result of providing this necessary service—if it were, the information for consumers would be far more useful and intelligible than that provided by advertising. Rather, it is aimed principally at fulfilling the profit needs of advertisers themselves. Advertising thus reflects the balance of forces in the monopoly capitalist economy. It is, as James Rorty once put it, with regard to business power, "our master’s voice."5 This voice is more powerful in the United States, where the power of capital versus labor is stronger than it is in the other advanced economies. It was, as we shall see, not coincidental that when labor was strongest in U.S. history that the "master’s voice" faced its most serious challenge. Second, advertising as we know it, or the sales effort more broadly, is not the result of free markets or "free enterprise" or capitalism per se; it is the result of a certain type of capitalism, best exemplified by the United States; one typified by large corporations competing in oligopolistic markets. Indeed, advertising even in mainstream economics is seen as related to what is called "monopolistic competition."6
Advertising and Monopoly Capital
In a freely competitive capitalism dominated by mostly small family firms and competitive markets, such as those found in the United States through most of the nineteenth century, advertising played a much smaller role. What advertising existed at that time was primarily aimed at providing retail price and product information to prospective customers. Under these conditions there were innumerable firms competing in the economy and in each given market. Hence, the typical firm in this freely competitive economy was unable to exert significant control over price, output, or investment levels, which were imposed by the market as a whole. Price competition was the key form of competition, output was normally maximized, and the economic surplus generated within production tended to be automatically reinvested since investment outlets were not a problem.
The main constraints that faced firms with respect to growth in these circumstances were on the supply (cost) side rather than on the demand (sales) side. Advertising, which is aimed at expanding effective demand, made little sense under these conditions, and was kept to a minimum. Put another way, under freely competitive capitalism full-capacity output was the general tendency and prices normally fell to the point that the market was cleared, i.e., all goods were sold. Hence, there was little room for the management of consumption through advertising. Consequently, during the nineteenth century total expenditures on advertising were a fraction of what they would become with the rise of big business in the twentieth century.
In contrast, under the monopoly capitalism of the twentieth century and today the typical economic unit is not the owner-operated small firm, but the giant corporation. Here the playing field is not the mostly local or regional competitive markets of countless small firms, but a national or global oligopolistic market, where a handful of dominant firms control output, and barriers-to-entry limit new competition. In this context the giant corporation is not a price-taker, but a price-maker. The industry price tends to gravitate to the optimum point for profitability, closer to what one would find in a monopoly than in a freely competitive market. As all the main players tend to be large and do not want to put their large investments at risk, serious price competition aimed at driving competitors out of business is irrational and rarely undertaken.
During the transition to the regime of big business, in the early decades of the twentieth century, it was learned that profit maximization was better achieved by indirect collusion, whereby firms—often following a price leader, typically the largest firm in the market—raised prices in tandem. Competition between firms remained ever intense but shifted from price competition, which was effectively banned, to competition over cost and market share.7 The economy tended to be constrained on the demand-side, unable to absorb all of the surplus that it was capable of generating. It was therefore plagued by a chronic problem of effective demand, in which the role of advertising in promoting demand became crucial, both for the individual firm and the economy as a whole.
Chart 1. Print advertising per capita, 1865-1937
*The figures for total U.S. advertising expenditure become most reliable starting in 1935, when complete census data is available. Before this, analysts have made estimates based on various industry sources.8
Sources: Neil H. Borden, The Economic Effects of Advertising (Chicago: Richard Irwin, Inc., 1942), 48, table 1; "The Inflation Calculator." http://www.westegg.com/inflation/ (accessed February 28, 2009).
Under monopoly capitalism advertising (and in general the "sales effort") therefore moved front and center as one of the chief ways firms sought to compete. Advertising permitted large corporations, in particular, to expand or protect their market share without engaging in destructive price competition.9 It allowed firms to build brand identity and loyalty. Chart 1 illustrates how advertising exploded into prominence between 1865 and 1929, the period in which competition gave way to oligopoly in so many industries. The chart measures (in constant 1929 dollars) the per capita expenditure on newspaper and magazine advertising, the predominant media of this period.
To illustrate, with a simple example, why advertising became so important in the monopoly era, consider a hypothetical company and brand, the Acme Hammer Company. In this fictional account, Acme was a late nineteenth-century, owner-operated hammer company based in Exploit, Michigan. Acme Hammer provided little advertising, and what they did provide was simply geared to informing prospective customers that the Acme Hammer was an "all steel" hammer. Acme faced a highly competitive market and ran all of its hammer-making factories at full capacity 24-7. But together with the numerous other small hammer-making companies it ended up producing so many hammers that there was a glut and the price was driven down. To sell all of its hammers Acme was thus forced to engage in fiercer price competition with the other hammer companies. The price of hammers dropped to the point that it became a common saying that "hammers are now as cheap as nails." Labor and other costs did not fall anywhere to the same extent so profit margins simply vanished.
In the end, most of the small hammer-makers went belly up or, like Acme itself, were absorbed by larger tool-making corporations, such as the National Tool Company, a new oligopolistic enterprise that arose through the buying up of smaller companies. National Tool, which now faced three other similar large tool firms (American Tool, General Tool, and United Tool), no longer engaged in price competition, but colluded with its main rivals, generating higher prices and wider profit margins. The big four tool corporations used some of their increasing gross economic surplus to compete with each other for market share through large advertising budgets, which soon became a mandatory cost for each firm. National Tool’s best known brand was the Acme Hammer, which was said to "never miss its nail."
Of course no such fictional example can capture the actual historical complexity of the development of monopoly and the sales effort in the transition to monopoly capitalism. Advertising itself is only a component of the larger sales effort, which has become part of the system’s DNA from the firm level all the way up to the economy as a whole. Firms today plan and develop new products to meet marketing criteria. Differentiation of the product from other brands is built into the entire process from production to sales. For this reason, it is much more difficult to determine total marketing costs, as opposed to advertising expenses, which are more transparent.
|Table 1. Estimated advertising as percentage of sales, various commodities, 2009
Following Thorstein Veblen’s brilliant early discussion of advertising and marketing in his 1923 book Absentee Ownership, Baran and Sweezy argued that the sales effort often penetrated into the production process, with enormous costs of packaging, cosmetic changes in products, new models and fashions, branding, and product obsolescence—all aimed at increasing the consumer’s propensity to buy a particular product. As Veblen himself wrote, "much of what appears on the books as production-cost should properly be charged to the production of saleable appearances."10 Marketing was built into every product, often comprising a very substantial, even in some cases the largest, "cost of production." Advertising (together with sales promotion and direct marketing) is therefore the final commercial-propaganda arm of a commodity-sales system governing all aspects of production and consumption. The sales effort is a necessary expense for a firm under monopoly capital, although, as we shall see, a dubious one from the vantage point of society.
How much of the price of final products is accounted for by advertising? This question is extremely difficult to answer. Such information is treated as proprietary knowledge and closely guarded by corporations. Nevertheless, we provide a snapshot view in table 1 based on rough approximations for some common retail products.
Note that these estimates only specify advertising per unit sold. If we were to use the broader category of marketing (which also includes expenditures on targeting, motivation research, product management, sales promotion, and direct marketing) the amount per unit would be substantially higher. Because marketing costs are notoriously more difficult to determine we stick to the more conservative but acknowledged measure of advertising. Our estimates for advertising per commodities suggest that the share of advertising in sales price for various goods from soap and toothpaste to blue jeans and cars are significant portions of the whole, varying from, say, 4 percent of sales for a GMC Sierra pick-up to 12 percent of sales for certain brands of soap. Advertising as a percentage of sales thus often rivals profits as a percentage of sales. (Needless to say, advertising costs as a share of unit sales are sensitive to price changes, so that, with any given level of advertising expenditures, the advertising share of sales will fall as prices rise and rise as prices fall.)
The core contradictions of advertising and product differentiation (branding), and their ultimate asininity, are encapsulated in two paradoxes. First, it is said, that the more products are alike, the more the prices are similar, the more the firms must advertise to convince people they are different. Rosser Reeves, the legendary adman who is regarded as an inspiration for the popular Madmen TV series, which looks at life at an advertising agency in the 1960s, was reputed to have repeated the same presentation for years for newly hired copywriters at his Ted Bates advertising agency in the 1960s. He would hold up two identical shiny silver dollars, one in each hand, and would tell his audience in effect: "Never forget that your job is very simple. It is to make people think the silver dollar in my left hand is much more desirable than the silver dollar in my right hand."11
The second paradox of advertising is that the more firms advertise to distinguish themselves from their competition, the more commercial "clutter" there is in the media and culture. As a result firms are forced to increase their advertising that much more to get through the clutter and reach the public. Commercialism in this sense is not unlike a hurricane picking up speed as it crosses the warm salt waters of late summer. Monopoly capital begets advertising begets hyper-commercialism.
With the consolidation of the advertising system under monopoly capitalism in the early twentieth century, the advertising agency system, Madison Avenue in shorthand, developed. By 1920 advertising accounts for over 2 percent of the Gross Domestic Product, and it remains at that level to the present day, growing in tandem with the overall economy. The average annual share of advertising in GDP from 1920 and 2007 was 2.2 percent. As Baran and Sweezy stated, advertising becomes "as much an integral part of the system as the giant corporation itself."12
Stagnation and the Sales Effort
If the microeconomic role of advertising is made clear by the transparent economic necessity of oligopolistic firms, the other core function of advertising at the macroeconomic level under monopoly capital, as described by Baran and Sweezy, is less obvious. The central problem facing monopoly capitalism in the United States is that it has a strong tendency toward stagnation. Unlike orthodox neoclassical economists, who view full employment as natural and stagnation as the exception, Baran and Sweezy argue that stagnation is the normal tendency of contemporary U.S. capitalism. It is the boom periods (and not the bust periods) that are the exceptions that need to be explained. The system has the capacity to produce more gross surplus (or gross savings) than can be absorbed as investment spending. If these surpluses do not find spending outlets, production will stall with rising unemployment and overall crisis. From this vantage point, much of economic policymaking over the past sixty years has been about finding ways to absorb economic surplus, so as to stimulate the economy, and then dealing with the side effects and consequences of such policies.
Chart 2. United States advertising expenditures, 1920-2007 in constant 2007 dollars (billions)*
*The figures for total U.S.