Economics Debate
Posted by
tgirsch
I’ve repeatedly had a debate with Tennesseefree’s Glen Dean about this subject (most recently here), but I figured I’d toss the question out to the peanut gallery: Can demand be created, or can one only ever hope to respond to demand?
Have at it.
Surely the Madison Ave crowd would say demand can be created… (I better read the link tho, this seems too obvious).
Comment 2/25/2008
I’m with Ted. Um, hello ’80s?
Comment 2/25/2008
Who is Glen Dean and what hole did he crawl out of? He appears to have never seen a single commercial for a toy. Or alcohol. Or a car. Or a movie.
Comment 2/25/2008
I got a real kick out of the guy who said “oil is not a fossil fuel - it did not come from dinosaurs”. Not a real high signal to noise ratio in that thread…
Comment 2/25/2008
Say’s Law
Comment 2/26/2008
The question is really going to depend on how broadly the terms are defined. For example, consider Dan M.’s references to commercials for various products: The particular product may be new - a new toy, a new booze, a new car, a new movie - but the product line is not: Toys, booze, cars, movies, all pre-existed. How much of a variation on a theme does there have to be before we declare it truly creating a new demand?
Then consider the car a little more closely. Did the invention of the horseless carriage create a demand for cars? Or did the demand already exist in a desire for faster, more efficient transportation as the population (and industrial growth) expanded, and the car was just the way that demand was answered?
I was going to say that the question of creating demand v. responding to demand seemed a chicken-and-egg thing, but there is an evolutionary answer to that, so instead I’ll say that it seems more a hot-cold thing: Can one be said to exist in the absence of the other or can each only be defined in terms of the other?
Comment 2/26/2008
LarryE,
You have a point, but I think it’s a weak one, insofar as marketing is more about advocating desires than about fulfilling them.
Sure, everyone wants toys. But balls and building blocks are cheap and ancient, while Transformers and Tickle-Me Elmo get advertised on TV. The “demand” for cheap plastic and recorded laughter is artificial. Indeed, all children’s toys that are designed to take the effort out of pretending are unnatural.
Again, advertising cars isn’t about a faster, cheaper car; it’s about a car that lets you not pretend that you spend enough time with your kids, or one that does the terrible work of learning to read a map.
Sure, there’s real demand, and meeting that’s a fine way to make money. And then there’s lying about what makes people happy. And that’s why we have Windows Vista and Bratz dolls.
Comment 2/26/2008
If demand can’t be created, then there’s a whole industry that is fictitious.
Comment 2/26/2008
I would say it is semantics. Desire can be created through advertising, seeing what others have, etc. Then demand grows out of that. As proof, look at how many products chains like McDonalds produce that fail (McRibs anyone?) and yet the same advertising techniques and market studies produced super-sized drinks.
Desire can be created but demand can not. Demand, however, will follow if desire is strong enough.
However, companies DO respond to demand. That has been proven over and over.
Comment 2/26/2008
“then there’s a whole industry that is fictitious.”
No, that would just make it useless, not fictious. Lots of useless industries have survived for a long time.
Comment 2/26/2008
All the above is valid (the true parts of it, that is).
But note that, aside from merely manipulating people’s “felt needs”, you can also manipulate their actual needs. Entire industries exist on the basis of the exercise of monopoly power to prohibit alternative consumer choices.
The most egregious example is health insurance. By strangling political initiatives to provide for people’s actual - not merely “felt” - needs, the insurance industry has created an utterly bizarre and unconscionable scenario in which the provision of health care is controlled by, and dependent on, an industry that makes its entire profits from denying the care people need and have already paid for. This control is so extreme that it has not merely created demand in the absence of desire, but demand for a given product in the presence of an overwhelming national desire for a completely different industrial structure in which that product wouldn’t even exist (a situation so unnatural that it exists in only one country in the world).
Another example is the deliberate destruction of urban street car service nationwide by the General Motors corporation before WWII. A company that was not in the public transportation business bought out city street car services in major cities (notably, LA) all over America. They then deliberately dismantled the systems they were supposed to be operating, while replacing them with less-desirable bus routes and lobbying the government to build more and more roads. GM profited by selling its own buses to its bus lines, but, even more, the discomfort of the bus service also drove demand for private cars, resulting in the mandatory car culture that has defined California, and America, ever since. One entire viable, popular industry was replaced with another that is more expensive, massively polluting, and created our foreign oil dependency; there is now exactly one major American city (New York) where significant numbers of citizens go without cars, in favor of public transit, by choice, where previously public transit was the norm in most cities.
There are numerous other examples. The egregious extensions of patent and copyright protections far beyond the point needed to encourage innovation - their only Constitutional purpose - create demand for expensive single-supplier drugs, by prohibiting competition, in the face of the desire for alternatives. The “Green Revolution” of pesticides, petroleum-based fertilizers, and monoculture crops essentially destroyed traditional agriculture: it is now impossible to grow most marketable crops without synthetic fertilizers and impossible to market traditional crops using modern machinery, creating rising costs for farmers, rising profits for chemical companies, and hard, force-ripened, tasteless vegetables for consumers. Chemical companies are even selling genetically-engineered crops that are bred to withstand new herbicides, while simultaneously prohibiting farmers from planting seed harvested from their own crops: farmers are legally required to purchase new seed for “Roundup Ready” crops every year, even though they have useable seed from their own crops from the previous year - Monsanto has thus used its monopoly power not merely to create market demand for a product the farmers don’t want to purchase, they have created market demand for a product the farmers already possess!
There is simply nothing they won’t do.
Comment 2/26/2008
Their is a HUGE difference between market demand and forced reliance KTK. What you are referring to is forced reliance. People are not going out and demanding this be done. They are being forced to respond to a created situation. MUCH, MUCH different.
And could you please clarify the word “they”? Are you referring to the thousands of people employed by said corporations or to the top few that would be considered the key decision-makers or the millions of investors that demand higher and higher returns on their investments??
Comment 2/26/2008
The question is not whether demand can be manipulated, but rather the opposite. Does the average individual have a single desire (beyond the most basic of needs) that has NOT been manufactured and created?
The real leg work of creating of markets/demand in the consumer form is done by creating imagined inadequacies. The majority of consumer investment is in one overarching “product line,” emotional surrogates!
After the whole culture machine has successfully convinced you that you don’t want to be you, that’s when advertising comes in. Do you want to be Brad Pitt, or do you want to be Jay-Z? The culture creates these demands, these voids. The advertisements are basically responses to the RFPs we send out, emotionally, to fulfill them.
In that sense, markets for specific products can always be manipulated, it’s just a matter of convincing people what will make them feel good, attractive, smart, socially responsible, or whatever void you are marketing you product to fill. The good itself is secondary.
The biggest problem with consumer based eco-revoultion, Buy Red campaigns or any consumerist-based “activism” is the promotion of false consciousness, that you can affect change by consumer action. That’s paradoxical when you consider the free market’s role in the initial problems. Additionally, consumer decisions are seen as isolated, you’ll have to fight the same battle over again everytime you want to create the same effect. It’s the classic symptom vs. disease paradigm.
It’s a tough line to walk because you have to get people to buy hybrid vehicles or whatever, but you can’t allow that action to alleviate whatever feelings or guilt or responsibility, (or whatever) that caused them to make the purchase in the first place. You can’t have people thinking that they no longer are part of the problem because they drive a Prius to their job at Monsanto!
Comment 2/26/2008
Dan M. -
I don’t think my point was “weak” especially since you did more to illustrate it than to refute it.
My point simply was that an answer to the question of if “demand” can be “created” rather than just “responded to” is going to depend to a significant degree on how broadly the terms “create” and “demand” are defined.
In the examples you cite, the “demand” supposedly “created” is not for toys but for a particular toy. Not for cars but for a particular car. And so on.
Is being able to sell a product that is essentially an incremental change to an existing design “creating” a new “demand” or not? How narrowly or broadly are the words to be defined? The answers to those questions will have a big impact on how one answers the original question.
Which was, again, my point.
Expanding on that just a little, it seemed to me that if the ability to sell this year’s car model is considered “creating a demand,” the question becomes trivial: By that logic, every day’s newspaper is likewise “creating a demand.” To have any substance, the original question had to be if demand can be created from scratch.
So given that there is already a demand for cars in general, is selling a particular new car creating a demand from scratch? I can see people arguing that from both sides and from that reaching opposite conclusions to the original question.
(There is also the underlying question of how much “created demand” is actually just manipulation of an existing demand, the human desire for some degree of novelty. Way too much novelty is frightening, a little too much novelty can put most of us off - consider the Segway PT - but a certain degree of novelty is attractive. But that’s a separate question.)
Comment 2/26/2008
LarryE:
Perhaps some context is in order (and perhaps a little bit of rephrasing). The subject came up in the context of whether businesses have a role in the demand side of the supply/demand equation. Can businesses influence demand?
The specific example we were working with was the “Super Size” promotion at McDonald’s. When McDonald’s introduced that promotion, were they simply (passively) responding to an existing consumer demand, or were they (actively) manipulating consumer demand?
The question is important, because your view on that is going to have pretty far-reaching effects on your views about how businesses, consumers, and “the market” interact, and what (if any) controls or regulations ought to be put in place.
So given those specifics, what say LarryE?
Comment 2/26/2008
Quick off the top of my head response is that you betcha, the question of manipulating demand is a lot different from the question of creating it. I would say that my answer is strongly hinted at in my parenthetical note in my comment above.
To use the example of “supersizing,” I think we can be pretty sure there was no specific consumer demand for it; people weren’t going to McDonald’s and demanding “Don’t you have anything bigger?” But there were some factors already there: The growth of the fast food industry in general, the long-demonstrated popularity of “The Large Economy Size!” in other products, and a general cultural sense of “bigger is better.”
Plus there was that always-present factor, the intriguing nature of something a little different from what we’re used to, which is so common across so many areas and cultures that it’s thought to be an inherent human characteristic. (Some evolutionary biologists have proposed an evolutionary basis for it.) I expect that’s less important here than in some other products, but still, it does exist.
So what McDonald’s did was to take advantage of existing conditions to create a product that really was just a minor variation on an existing one and market it as something sufficiently “different” to seem cool and desirable.
Which, to finally answer the actual question, I would call clear manipulation of demand and certainly not just a passive response to it.
So my own take is that while corporations can’t create demand from scratch, they can - and often do - manipulate demand, specifically, channel existing demands into establishing a market for a product or service they claim (sometimes truly, sometimes falsely) will satisfy those demands.
How’s that?
Comment 2/27/2008
LarryE, if one uses the generally accepted definition of economic demand, (and this is a thread about economics) then I disagree with you. Simple proof: remove all marketing of all products and what will happen to overall demand? It will decrease.
Now you and Digg can spin off on tangents, but if we stick to the basics, the answer is clear.
Comment 2/27/2008
[…] In response to several debates I’ve had with Glen about the subject, I posed the question over at Lean Left. Some interesting responses in comments. Have a look. […]
Pingback 2/27/2008
Again, I will state that desire can be created. A sense of lack can be created. But demand can not be created in an open-market system. Demand is something that comes from within a person, not without. Desire or a sense of lack can be created by outside stimulus. There is a huge difference.
Comment 2/27/2008
Big U, please read any basic micro economic theory and you will come to understand the meaning of the term “demand” as used in this thread about economics.
Comment 2/27/2008
Was there any demand for the iPod before it was introduced?
But there was record demand after it was introduced.
Comment 2/27/2008
Ted -
Actually, as I understood it, this is a thread about manipulation of demand. In that context, the trouble with the “generally accepted definition” is that it doesn’t actually measure demand (i.e., desires, preferences, wishes) but purchases - because the latter can be quantified and the former can’t. That is, it doesn’t reflect what people want, only how and to what degree those wants are expressed through how money is spent.
So I’ll accept that if you “remove all marketing of all products” that by standard measure “overall demand” will decrease. But all that really tells us is that you can’t purchase a product or a service you don’t know exists. At the same time, unless we’re to assume that such overall demand will not merely decrease, it will vanish, there will still be economic activity; there will still be demand.
So if I understand you correctly, the “clear” answer is that demand can exist independently of marketing but can be influenced by it. I don’t see how that is disagreeing with my description of “supersizing” as manipulating demand.
Finally, the reference to consideration of social and psychological factors in producing and shaping demand as “spin[ning] off on tangents” may be part of the reason why economics is called “the dismal science” and is one of the few professions where making persistently wrong projections is no bar to be hired to do it again.
Comment 2/27/2008
LarryE, in response to your claim this thread is about manipulation of demand, I direct your attention to the initial question asked by Tgirsch. Clearly he is using the term in the classical economics sense.
And if you think marketing is just about letting people know a product exists, well Coke, Budweiser, Honda, Microsoft, and the other Fortune 500-ish companies that comprise a very healthy percentage of the MSM advertising revenue stream must be throwing their marketing budgets away.
Finally, a tangent is a tangent, regardless of your opinion of economics as a science.
Comment 2/28/2008
Ted, do some basic research on the complexity of what makes up demand within an economic sense: in its most basic sense, demand is made up of the desire, ability and willingness to buy a product.
The desire aspect can be manipulated by companies. However, there is only limited ability to affect ability and willingness. Those are factors outside of most companies’ positions. Thus, while desire can be affected, overall demand can not be created by companies.
Number9 > Apple was aware of a pent-up demand for a product that would provide what the i-pod does. They then went about creating a product designed to meet that perceived demand.
Comment 2/28/2008
Big U, no. At the basic microeconomic level, demand is simply the number of units of any product that will be purchased at a specific price. That’s it. And supply is the number of units of any product that will be produced at a specific price. The next step is to expand both demand and supply to be functions of price and plot them on a graph where the Y axis is price and the X axis is units. This is Economics 101, day 1.
Now one of the assumptions made when the topic is introduced at this level is that individual suppliers can not impact the supply curve. This (and other) assumptions must be made so the rest of the subject manner can be covered in a finite amount of time (digg would be muzzled on day two). In more advanced classes some of the initial assumptions are relaxed and the possibility of a supplier impacting the demand curve is examined. Believe me, things get complicated in a big hurry.
In any event, in a basic economic sense, the term demand refers to the number of units purchased at a specific price point. And yes, I do have a degree in the subject.
Now if you want to delve into the factors behind the demand curve, then you are leaving traditional economics behind and are moving into marketing, advertising, psychology, sociology and a host of other disciplines.
Comment 2/28/2008
Ted, make up your mind. In #17, you bring up marketing, in #20, you state that the word demand is about economics, but then in #25, you state demand ONLY refers to the number of units purchased at a specific price point.
You then state you have a degree in economics and follow that with a statement about leaving traditional economics behind and getting into marketing, etc.
So which is it? In 17 you bring in the impact of marketing and then in #25, you remove the impact of marketing.
Comment 2/28/2008
Big U, sorry my comments were confusing. Let me strip it down to the very basics.
I believe Tgirsch was asking the question “can a company increase the demand for its product(s) or must it accept the level of demand as fixed and simply compete for its piece of that fixed pie”. My interpretation of the question is based on numerous debates about demand, supply and other topics related to economics with Tgirsch. And he did title the post “Economics Debate”.
In this context, I believe the term “demand” is being used in the classical sense (ie number of units purchased as a function of price).
My answer to Tgirsch’s question is yes, demand can be increased by a company, and the most obvious way is via advertising. Effective advertising increases the number of units purchased as a function of price. In fact, that is the primary (and almost exclusive) objective of advertising.
So please disregard my previous comments and treat this one as my definitive statement on the subject.
Comment 2/28/2008
Ah. Now THAT I can agree with. I need to learn to be more clear.
Comment 2/28/2008
Okay, this will be my last on this:
Ted -
I direct your attention to the initial question asked by Tgirsch.
I direct you attention to Tgirsch at #15:
The specific example we were working with was the “Super Size” promotion at McDonald’s. … Were they simply responding to an existing consumer demand, or were they manipulating consumer demand?
Manipulation of demand was the topic. That is what seems “clear.”
And if you think marketing is just about letting people know a product exists….
Oh, don’t be silly. I said that in your proposed absence of marketing, overall demand would decline - because one of the purposes of marketing is to alert potential consumers to its existence. No marketing yields reduced knowledge yields reduced consumption which would be defined as reduced demand.
On the other hand, your examples are more about choice and brand loyalty than generating truly new demand. It’s not about selling soda, beer, cars, software; it’s about which soda, beer, car, software. And that’s a different topic.
Comment 2/28/2008
LarryE, I could be wrong, but I still believe the question relates to what you described as “purchases” (what I would call demand) and not the consumer’s desires, preferences, wishes. It is a fine difference tho, since in almost all cases a company can only increase demand by changing the desires, preferences, wishes, etc. of the market. However, from an economics POV, the business objective is increasing sales by increasing demand for its products. (In the specific example, the question was could McD’s influence the number of large drinks (meals?) it sells - ie increase demand for that product.
New demand vs increasing market share, from a specific company’s POV, both are elements of demand. Demand for the products that company sells.
Comment 2/29/2008
Digg is never muzzled, just sometimes really fucking busy at work!
It doesn’t matter, LarryE needs me in this debate like Michael Jordan needed needed the post presence of of Bill Wennington.
Comment 2/29/2008