Tuesday, April 19, 2011

Advertising, the Fallacy of Perfectibility, and the Best Minds of My Generation

Between men and brutes, there is another very specific quality which distinguishes them, and which will admit of no dispute. This is the faculty of self-improvement... perfectibility... It would be melancholy, were we forced to admit that this distinctive and almost unlimited faculty is the source of all human misfortunes; that it is this which, in time, draws man out of his original state, in which he would have spent his days insensibly in peace and innocence; that it is this faculty, which, successively producing in different ages his discoveries and his errors, his vices and his virtues, makes him at length a tyrant both over himself and over nature. 
- The Social Contract and Discourses, Jean-Jacques Rousseau

An entrepreneur I'm working with on an adtech company asked me recently "does any of this make any difference?" It's a good question.

Here's something you probably didn't know about me: when I ran venture capital for the world's largest advertising agency holding company back in the '90s, I refused to invest in internet advertising companies*. I did not think banner advertising was useful. I have not come so very far from that view.

* * * * *

There is a sometimes infuriating disdain of advertising among those who wear Northface and Converse, drink Starbucks and Horizon Organic milk, and find out about the farmers' market from drop cards in the local organic grocery store. But that they can hate advertising while being avid consumers of it isn't irrational, because advertising has two faces.

Before World War I in America, a belief in perfectibility was widespread.  Not just human perfectibility, but technological. Businessmen created and grew businesses based on a belief in perfectibility. All success required was creating the best product at a fair price, driving competitors out of business and cementing a permanent monopoly, all for the betterment of society. Competition, to people like Henry Ford and Theodore Vail, was a waste of resources. Creative destruction would have seemed like madness.

In this no-nonsense model, advertising was product news, an attitude typified by the Bates agency in New York in 1904, who viewed anything more as "bad copy--too literary and too general, lacking prices and good information." John E. Kennedy, the head copywriter for Lord & Thomas in those years thought that "instead of general claims, pretty pictures, or jingles... an ad should offer a concrete reason why the product is worth buying."  One of the students of this method said this method of copywriting "aimed at an appeal to reason and intelligence rather than the time-honored assumption that the public was a mass of dumb, driven sheep, who could be swayed with mere picture-and-catch words."**

This approach, though it was itself a reaction to an earlier character-and-jingles driven approach (Aunt Jemima, the Uneeda slicker boy and the Arrow Shirt man were all products of this earlier approach) finds its intellectual rationalization in the Chicago School. George Stigler described it: advertising provides information to buyers, allowing them to make better choices.  Because the Chicago school believed that economic actors were rational, and that economic activity must have some underlying sense, this was the only coherent explanation... even if the facts on the ground at the time did not bear it out (Stigler published his seminal Economics of Information [pdf] in 1961.)

By that time, advertising had changed. Many times. The War to End All Wars itself may have been the catalyst. At the beginning of the conflict, fact-based ads played well to a righteous population. But later, when war-weariness had taken hold, patriotic advertising showed that appealing to the emotions may be even more powerful, especially when the facts aren't all that pretty. Advertising can persuade. Posters of Uncle Sam pointing his finger and saying "I Want YOU for U.S. Army" worked.

But the creator of that image, James Montgomery Flagg, had misgivings: "A number of us who were too old or too scared to fight prostituted our talents by making posters inciting a large mob of young men who had never done anything to us, to hop over and get shot at... We sold the war to youth."***  These are the poles advertising swings between: providing information so people can make better decisions about which products to buy, and persuading people to do things they might otherwise not have done. This is why people can hate advertising while listening to it closely, both of these approaches are at work, sometimes in the same ad.

The carnage of WWI had another effect: the idea of perfectibility itself fell out of favor. There was no one after that war that could still believe that those in power were infallible or even that doing the right things leads to the right outcomes. A belief in the universal power of reason now had a powerful enemy in American culture: pluralism. I'd argue that the battle between openness and control that we see happening to the internet now (cf. Google v. Apple) is a battle between perfectibility and pluralism, between one person knowing what is best and the belief that progress proceeds from chaos.

* * * * *

Productivity growth has made our lives enormously better. And it is one of the keys to making the lives of our offspring better than ours. If there is one guiding principle in my work, it is trying to help nurture innovations that create productivity growth.

Productivity is not just doing more with ourselves, it's also preventing waste, and guiding resources to their best use. This last is what Hayek called "the economic problem." Hayek said that the solution was the price system, the "invisible hand" that put resources where they are needed. This is an astonishing insight, but it falls short. Hayek, I have to assume, never bought a car.

The price system may be the best way to make sense of decentralized knowledge when the resource being apportioned is tin, as in Hayek's example. But when we go to buy a car, we have many choices at any given price point. The cars, although similar in most regards, are different, and we can't choose on price alone. Choosing the car that is best for us requires more information. Some of this information (mpg, how it looks) we can find out ourselves, if we know to look. But in many cases putting the onus on the potential consumer to discover all possible choices is inefficient. When looking for a place to buy produce, I will not know to look for the farmers' market that I do not know exists. Advertising is key here.

I believe that after an efficient price system, an efficient matching of people with the provider of a product or service that is most appropriate to them is the economic problem.  When Jeff Hammerbacher laments that "The best minds of my generation are thinking about how to make people click ads," I think he's falling for a technocratic idea long discredited, one that only engineers still believe: perfectibility.  Jeff is young, and very smart. He may believe that there is a single best product or service in each category that can be found using the appropriate Google search. And perhaps he believes that he himself should be the person who can decide what people really want, as Theodore Vail did, or Henry Ford tried to do, or Steve Jobs tries to do. Because if he didn't believe in his own omniscience, and if he personally would prefer not to have some other person making his choices for him, then he would have to agree that each person needs information to make the right choices for themselves. In that case, if I put an ad in front of someone, and that person decides to click it, then I must be solving a very difficult problem indeed.

Getting a click means that you have shown the clicker something valuable to them. If you don't believe in perfectibility--in making peoples' choices for them--then the click is a win.

* * * * *

I make a sharp distinction in my ad-tech investing between better matching and persuasion.  I only invest in the former (although sharp lines can not always be drawn.) The data-driven media buying and ad placement companies that are a large part of my portfolio are all clearly aimed at putting the appropriate information in front of the right person****.  I see companies that I think will be successful persuaders, but I don't invest in these; they make me uneasy. I suppose you could say that I'm not very businesslike in that regard, that I don't appreciate the art of selling, that I don't appreciate the art of advertising, that I don't appreciate the cultural value of advertising, that I don't have a sense of humor. I guess that's all true.  But, in my opinion, the companies that make the biggest difference to their customers are the ones that make their lives better.  While I recognize that the customer of the ad-tech company is the advertiser, not the potential consumer, and that the advertiser's life is certainly better if it sells more product, I'm not buying it. While being once-removed from treating the consumer like a mark may ameliorate the ethical considerations, it does not make it good business, not in the long-term.

[Edit, five hours later: I will revise something I wrote forever. So, on the blog, I try to finish and then hit publish. This time, as soon as I did, I realized I had not closed the loop on the argument.

Here's my point: if you believe in perfectibility, that your product is the best one for everybody, you probably also believe that all you need to do is buy mass media ads telling everybody about the existence of your better mousetrap. If you have lost the belief in the perfect, then you will feel the need to compete for the attention of people on other than the facts, because the facts don't differentiate you. Competing on facts is better for society, and for the regular person who sees ads.

The people who are thinking about how to get people to click on ads are of two types: those who just want you to click on the ad, and those who want to put an ad in front of you that would be valuable for you to click on. Saying that the latter is somehow of ephemeral benefit is misunderstanding what is economically worthwhile. By matching the right ad to the right person, we can provide information even while allowing everyone to have their own individual tastes.]

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* OK, that deserves some caveats.  I did invest in an ad network... two weeks before their IPO. I sold in the IPO. There was free money like that in 1999. I also heavily invested in the interactive agencies but, and this is my point, none of them would stand for being characterized as purveyors of advertising or, in many cases, any sort of marketing at all. Jeff Dachis' infamous difficulty in describing what Razorfish did on 60 Minutes being a case in point. It wasn't until Agency.com acquired iTraffic that any of the companies I worked with became involved with display advertising in any meaningful way.
** The Mirror Makers: A History of American Advertising and Its Creators, pp. 49-51.
*** Ibid, p.76.
**** While these technologies can also be used to put a persuasive ad in front of the person most liable to be persuaded, I don't think this use provides as much lift, and I hope it will be squeezed out.

9 comments:

miked98 said...

Advertising is the inefficient allocation of capital to promote the diffusion of information.

The promise of better technology in advertising is that the messages we receive are, as you say, better matched. It propels us toward a more perfect union of advertiser and consumer.

I am quite confident Jeff's quote was taken out of context. After all, he founded a firm that earns its cash selling to firms that "make people click ads":

http://www.cloudera.com/customers/

(Hat tip to Joseph Reisinger, my colleague at Metamarkets, from whom most of these thoughts originated).

Nosa Omoigui said...

Jeff's point (as I interpreted it) wasn't that advertising is inherently bad or that it can't be improved. His point, which I totally agree with, is that anecdotal evidence suggests that a disproportionate amount of brainpower is being allocated to the advertising space rather than a more diverse distribution of IQ to solve other technology problems with long-term economic implications.

This is a sound argument. No one is arguing that bright minds shouldn't work on advertising. The point is this: is that ALL they should be working on? Aren't there tough and very strategic problems in material science, fluid dynamics, climate change modeling, biotechnology, clean energy, etc. that deserve significant capital and IQ allocation?

The Businessweek article's core thesis is that an overemphasis on the application-layer of the stack (apps and ads) to the detriment of investments in the lower layers as well (foundational plumbing and middle-ware) is unhealthy for the long-term health of the economy. The article does not argue that advertising is useless or of pedestrian appeal from an intellectual standpoint.

Capital and cerebral allocation of resources is not a zero-sum game.

Jerry Neumann said...

Nosa --

When Hammerbacher paraphrases Ginsberg's lament about his junkie, psychiatric patient and other assorted artist and poet friends "destroyed by madness, starving hysterical naked, dragging themselves through the negro streets at dawn looking for an angry fix..." then I think he's given up any claim to attempting nuance.

But Jeff can say what he wants, and I've had more heated discussions over tea and crumpets with the Queen. Personally, I think there's over-investment in social networking, daily deals, and providing data to Wall Street, but that's just an opinion and I certainly don't think it should guide economic allocations of labor. I don't believe in central planning.

Saying all the bright minds are working on advertising is a teensy bit of an exaggeration. If we had 1% of the brainpower working on advertising that we have working on, say, string theory--which will almost certainly prove to be a complete waste of time--then the problem would have been solved already. The BW argument about atoms trumping ideas--which is the only coherent distinction it can be making--can be applied to more than advertising, it can be applied to the whole field of economics. Do you think we should defund economics and divert that money to materials science?

More seriously, while I believe in fundamental research, I have seen no work that shows fundamental breakthroughs provide more productivity growth (in themselves) than the follow-on exploitation of them. The internet is an excellent case in point. We need both the invention and the exploitation. Saying we should have the former and not the latter makes no sense.

I will continue funding ideas or, more particularly, the companies building the middleware/plumbing of enabling consumer choices. Jeff can keep selling open source to Wall Street. I think we're both contributing in our non-heroic ways. And somewhere else, someone is creating something that we'll all scoff at for decades before realizing it's the next foundational tech. I don't think you can find that person and I think if you invested in her you'd lose your shirt, but feel free.

Egbert said...

Great article!

You almost convinced me, but then I realised that in fact you *are* saying that marketing exists for the Greater Good of Mankind.

Maybe it's just my cultural indoctrination, but I find it very hard to accept that idea, even if I have no concrete argument against it.

Jerry Neumann said...

Egbert--

You'll have to figure out what your 'Greater Good' is yourself. What I'm saying is that, whatever it is, productivity growth will allow us the opportunity to pursue it.

Egbert Teeselink said...

Jerry,

Good point. I agree with that. I think the part I'm skeptical about is whether ads / marketing by definition leads to productivity growth. I mean, a lot of marketing I see is large, competing organisations essentially trying to outbid each other in their quest for the customer's attention, be it on google ads or by commercials at big sports events. I have the feeling that a large amount of ads I see is from products I am already closely familiar with. Coca-cola is a good example, I guess. How does that kind of marketing solve an economical problem?

Or is that just the kind of old-school marketing that you think will automatically stop reaching me once Jeff gets back at Facebook to work his magic in showing me only ads that I want to (but did not know I want to) see?

Jerry Neumann said...

Egbert--

I don't think 'old-school marketing' is efficient, and I don't think Coca-Cola will stop putting ads up in stadia. That was kind of my point, and the kind of advertising that we can do better than.

Anonymous said...

Jerry, just to understand your point better, can you give an example of an ad tech company that's in the business of persuasion ( other than of course an agency). Not sure how you are drawing the line

Vamsi

Jerry Neumann said...

Vamsi,

A company I really like, with great team and a great product, that is primarily about garnering consumer attention not product matching, is Solve Media. I think the idea is genius: people have to pay attention and interact with the brand. But the underlying mechanism is reallocation of attention, not an increase in overall utility.

Jerry