The Social Media Tax

I tend not to play the social media game. I use social media of-course, but I don’t feed it marketing data. I don’t like things very often and I’m not in many groups. As a result FB has the strangest idea of what I am interested in. it seems like it just makes random stabs at things I might like. As a result, since FB has started injecting those ‘sponsored’ status updates into my feed, I get notifications about completely random products and services. I get the obvious stuff like dating websites but also get things like electronic point-of-sale systems, management software, marketing services (ironically), industrial solutions, medical equipment, cars, random pop acts etc. Amazon, similarly, has literally no idea what I like and so will send me emails with selections of items that make no coherent sense. I once bought something from Amazon and afterwards got an email trying to sell me what just seemed like an arbitrary selection of things, like a lamp, a kids toy of some sort, Katy Price’s autobiography, and a hi-fi.  Funny thing is the thing I bought was a hi-fi. If I just bought one why would I immediately want to buy another?

Marketing, in this form, often leaves me wondering how it will play out over the next ten years. Whether it is stable or not.

In many ways it reminds me of the dot-com bubble. Everyone assumed that everyone could get rich providing free websites by just placing adverts all over them. Which worked at first because everyone thought it worked at first… which it did. Until some key stakeholder realised it was bullshit, and the whole thing collapsed.

I wonder if social media marketing is, to some extent, though not entirely, a bubble like that [4]. Social media provides a great way to get targeted messages in front of people (assuming it works as intended [1]). One of the key mistakes in the dot-com era was to overlook the idea that people might just learn how to ignore them. The marketers are now coming up with ways around this. For example there is a company (I know because they market themselves) that uses CAPTHA style interfaces that have  a marketing message embedded in them. So you have to learn the message in order to pass the authentication stage. Whether marketers can use these systems to make their message heard is something that can only be speculated about but it raises the point that they wouldn’t need go to such extremely coercive lengths if people wanted to be marketed to.

But let’s assume for a moment that marketers know exactly what they are doing and marketing works (and consequently that the dot-com bubble is just a lie that never happened).

Firstly, imagine a world without marketing. Everyone has money to spend and they spend it in some combination goods and services. They might choose not to spend but in any standard economic theory saving is itself like a good that is demanded [2]. If you add marketing to this, you add another service, and add the potential for a change in the combination of goods and services bought. Roughly speaking the purpose of marketing is to change the combination of goods sold or prices to favour a particular firm [3]. This is rough because this is only from the perspective of one firm. From a macro-economic perspective this might result in a different combination of goods and services or it might not.

There are a few things to notice:

1) Marketing doesn’t produce demand

The level of aggregate demand available in any society can’t be affected by the nature or quantity of marketing. Marketing firms might make more money, but they make it by charging other firms for it. An individual firm can change the proportion of aggregate demand that is demanded for their products, but by doing so they leach demand of some other products. They can encourage people to spend rather than save: whether you see this as a rise in demand really depends on how you view saving, but even if you see this as a rise in demand, it can only happen to a point. Further if they save money then they are going to spend it later anyway [2].

2) Marketing is a zero sum game

An extension of the above is that for someone to win at marketing someone has to lose.

So you can imagine marketing like a game with thousands of teams. The game is played on a muddy field. It’s messy and difficult but kinda works. Then Social Media comes along and says “you can play your game on my pristine and well maintained astroturf field, but it’ll cost you”. Now the players can start to play their game on the perfect playing field. It makes the game much easier to play. They can do things they couldn’t do before and the have fewer costs. Running around is much easier, they don’t get hurt as often and their kits are easier to maintain.

Early adopters of this approach get a boast over those firms that still play on the old pitch (and hit with a bill from the Social Media firms). But, eventually, everyone is playing on the new field. The thing is they are playing for the same prize as before. Some firms might well do better on the new pitch than on the old, so the combination of goods and services might change in favour of some firms and not others, but the overall aggregate demand is the same, so collectively they are all winning the same prize… but they’re paying a tax to social media companies for doing it. To me, it seems plausible that if all the firms in the world all payed twice as much for marketing the only change in combinations of purchases would be that marketing goods/services price would be doubled. The firms marketing efforts would all cancel themselves out. The firms (that aren’t marketing firms) would conceivably sell the same number of goods in roughly the same proportions. You could imagine that because they are pumping twice as much into marketing that they can convince people to buy their goods at a higher price, but the firms supply chains are made up of other firms for which the same is true. So the firms suppliers would also be commanding the same price hike, eating up the margin [5].

I think the idea held by most would be that this is progress. This is a ‘better’ marketing system and all firms will do better, and because they are doing better they make more money and therefor pay higher wages and therefor consumers have more money to spend [6].

To me, however, I can’t see where this extra money is coming into existence. All firms are doing ‘better marketing’ but all being equal it seems like that would completely cancel itself out relative to other firms. Plus they are all paying an economic rent for it, and the firms that charge that rent make a profit too.

If you leave standard economic theory for a moment then the explanation for this may well be as simple as “the extra money is created out of nothing by extending loans”. The growth of the economy creates confidence which results in people creating ventures (start-ups or firms expanding). Those ventures are initially funded by loans created by the banking sector (the ventures that are funded by past profits don’t represent an expansion of the economy). The government then normalises the books by creating the ‘fiat’ currency to match the credit money already created by the market.

This explanation can’t work back in economics land because they tend to hold that money is created first by the government, which they tend not to like.

If money weren’t being injected into the economy (assuming these economic models), all that can change is the value of money. But, in the above example the whole point of marketing is to command higher prices, which is inflation, the opposite of currency increasing in value, or sell more which isn’t an increase in money value. But again, marketing can’t explain everyone having more money to spend. Everyone having more money to spend is what the expansion is… so it can’t explain the expansion.

If money is allowed to be injected by the government (assuming these economic models) then the economy goes into a kind of “would like to formally expand” phase, then as soon as the government prints some money it swallows it up to expand. In this model the government is ‘feeding’ the economy money, but it still leaves the question “what makes the economy hungry?”  If this is the case, however,  it seems like at the point the government prints money the expansion has already happened, they just dilute the money supply, inflating it. The market makes money more valuable then the government dilutes it again, changing the nominal money supply. So the same point arises: how can marketing push prices up universally and money value go up at the same time in an exogenous money supply system?

Well it seems like it can’t. So can it push some prices up and some down? Well sure but again this comes back to the idea that marketing just distorts market prices. And also this can’t really be the case because the marketers are charging, so the price of marketing is higher. And if aggregate demand is unchanged for their prices to go up… all other prices, in aggregate, would have to go down. Effectively this is a lottery. Everyone is slightly worse of in return for some people to be better off, but lotteries are profitable. So the people entering the lottery, on the whole, have to be worse off.

I guess this is all a very convoluted way of saying I can’t tell what the point of marketing is in general or in the specific case of new social media marketing. It seems like marketing makes a difference only when someone doesn’t use it, but once everyone uses its effects on firms cancel themselves out, but the system charges for it. So in the end marketing creates a service that does nothing (and I can’t see how it can contribute to productivity or economic expansion) but takes a share of demand. This only changes during transitions from one marketing paradigm to the next, so some firms can exploit differences in take up of the new marketing systems, for a time.

I realise however that this conclusion is a very neoclassical ‘Dynamic Stochastic General Equilibrium’ style conclusion. The idea that marketing is a kind of equilibrium that is sometimes shocked by new inventions that wobble it to a new equilibrium is very neoclassical. I think the fact that money is created by the market itself (contrary to neoclassical theory) makes the reality quite different, and a lot more chaotic, such that the equilibria are a lot less stable. There is a huge amount of speculation around social media companies, and that speculation is largely debt based and not productive; debt being the real money creation mechanism. The expansion of the economy comes largely from the belief that we have found a way to make supernormal profits through speculation, creating both positive and negative feedback loops that suck money from the productive economy but ultimately crashes when someone realises that we would have to sell Earth to aliens to pay off the debt.

[1] This might not be the case. I found a study recently that claimed that much of the marketing data mind by marketing firms is incoherent nonsense. There are also systems be designed that actively deny or distort these data gathering mechanisms. The most common is ad-blocking, of course, but there are even systems that inject intentionally misleading data into the web.

[2] Neo-classical economics has an axiom called Says / Walras Law/ Principal. It holds that people only want money because they want the things they can buy with it. So saving is really just buying something later. So in effect saving doesn’t change macro-economic demand levels it just puts it on hold for a while.

[3] This raises the mind-bending economics question: What is the market price for a service that distorts market prices?

[4] You could argue that the dot-com bubble was just the first incarnation of it.

[5] Of course this assumes a kind of homogeneity that is unrealistic, not all firms have the same marketing requirements (although a fairly standard approach in economics).

[6] The rose tinted interpretation of this is that marketing doesn’t expand or increase productivity, but it does result in a somehow ‘better’ rationing of goods and services. I think this is plausible only if marketing had very specific properties. Firstly it would have to be perfectly truthful. If it were then adding marketing to an consumer economy would result in a closer approximation of how economists actually model the economy i.e. everyone knows everything about all products. In this case marketing would have a finite (although very high) aim: to determine and distribute truth. Since the truth about goods and services is as finite as the goods and services, the aim would be finite. Once the truth is exhausted, and is being distributed in some perfectly efficient manner, marketing would be at it’s optimum. Marketing would constantly aim for this state. At this stage agents in the market would be ‘rational’. This is a very strange tangent from economic theory, however, because according to such theories marketing should be happening, somehow, for free as an axiomatic property of the market… so why would anyone pay for it? Secondly this is clearly nothing like marketing in the real world. Marketing in the real world is “do and say whatever you can to get people to buy your clients goods”. Again, if you assume rationality then this type of marketing is, actually, kind of a waste of money as well as agents are all supposed to be rational and would be impervious to being told anything about goods or services. So either market works, and breaches rationality axioms, or doesn’t work at all. All firms want to breach market price setting in their favour, but whatever optimum prices are it seems logically impossible that a marketing sector that aims to raise any and all firms market share will always move towards that optimum. Even if the market somehow arrived at that optimum (which would take a remarkable coincidence in starting conditions) the marketing sector would plough right past it.