Naked Economics: Undressing the Dismal Science pdfdrive com

these things before you get out of your car in a state you’ve never been in.
Compare that to the billboard advertising Chuck’s Big Burger. Chuck’s may
offer one of the best burgers west of the Mississippi. Or it might be a likely spot
for the nation’s next large E. coli out-break. How would you know? If you lived
in Omaha, then you might be familiar with Chuck’s reputation. But you don’t;
you are driving through Nebraska at nine o’clock at night. (What time does
Chuck’s close, anyway?) If you are like millions of other people, even those who
find fast food relatively unappealing, you will seek out the golden arches
because you know what lies beneath them. McDonald’s sells hamburgers, fries,
and, most important, predictability.
This idea underlies the concept of “branding,” whereby companies spend
enormous sums of money to build an identity for their products. Branding solves
a problem for consumers: How do you select products whose quality or safety
you can determine only after you use them (and sometimes not even then)?
Hamburgers are just one example. The same rule applies in everything from
vacations to fashion. Will you have fun on your cruise? Yes, because it is Royal

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Caribbean—or Celebrity or Viking or Cunard. I have a poor sense of fashion, so
I am reassured that when I buy a Tommy Hilfiger shirt I will look reasonably
presentable when I leave the house. Michelin tire advertisements feature babies
playing inside of Michelin tires with the tag line “Because so much is riding on
your tires.” The implicit message is clear enough. Meanwhile, Firestone has
most likely destroyed much of the value of its brand as the result of the link
between faulty tires and deadly rollovers in Ford Explorers.
Branding has come under assault as a tool by which avaricious multinational
corporations persuade us to pay extortionate premiums for goods that we don’t
need. Economics tells a different story: Branding helps to provide an element of
trust that is necessary for a complex economy to function. Modern business
requires that we conduct major transactions with people whom we’ve never met
before. I regularly mail off checks to Fidelity even though I do not know a single
person at the company. Harried government regulators can only protect me from
the most egregious kinds of fraud. They do not protect me from shoddy business
practices, many of which are perfectly legal. Businesses routinely advertise their
longevity. That sign outside the butcher proclaiming “Since 1927” is a politic
way of saying, “We wouldn’t still be here if we ripped off our customers.”
Brands do the same thing. Like reputations, they are built over time. Indeed,
sometimes the brand becomes more valuable than the product itself. In 1997,
Sara Lee, a company that sells everything from underwear to breakfast sausages,
declared that it would begin selling off its manufacturing facilities. No more
turkey farms or textile mills. Instead, the company would focus on attaching its
prestigious brand names—Champion, Hanes, Coach, Jimmy Dean—to products
manufactured by outside firms. One business magazine noted, “Sara Lee
believes that its soul is in its brands, and that the best use of its energies is to
breathe commercial life into the inert matter supplied by others.”
5
The irony is
lovely: Sara Lee’s strategy for growth and profits is to produce nothing.
Branding can be a very profitable strategy. In competitive markets, prices are
driven relentlessly toward the cost of production. If it costs 10 cents to make a
can of soda and I sell it for $1, someone is going to come along and sell it for 50
cents. Soon enough, someone else will be peddling it for a quarter, then 15 cents.
Eventually, some ruthlessly efficient corporation will be peddling soda for 11
cents a can. From the consumer’s standpoint, this is the beauty of capitalism.
From the producer’s standpoint, it is “commodity hell.” Consider the sorry lot of
the American farmer. A soybean is a soybean; as a result, an Iowa farmer cannot
charge even one penny above the market price for his crop. Once transportation
costs are taken into account, every soybean in the world sells for the same price,
which, in most years, is not a whole lot more than it cost to produce.

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How does a firm save its profits from the death spiral of competition? By
convincing the world (rightfully or not) that its mixture of corn syrup and water
is different from everyone else’s mixture of corn syrup and water. Coca-Cola is
not soda; it’s Coke. Producers of branded goods create a monopoly for
themselves—and price their products accordingly—by persuading consumers
that their products are like no other. Nike clothes are not pieces of fabric sewn
together by workers in Vietnam; they are Tiger Woods’s clothes. Even farmers
have taken this message to heart. At the supermarket, one finds (and pays a
premium for) Sunkist oranges, Angus beef, Tyson chickens.
Sometimes we gather information by paying outsiders to certify quality.
Roger Ebert’s job is to see lots of bad movies so that I don’t have to. When he
sees the occasional gem, he gives it a “thumbs up.” In the meantime, I am spared
from seeing the likes of Tomcats, a film that Mr. Ebert awarded zero stars. I pay
for this information in the form of my subscription to the Chicago Sun-Times (or
by looking at ads that the Sun-Times is paid to display on its free website).