Artificial Demand Creation - Essay Example

Running Head: Artificial Demand Creation in Advanced Market Societies Artificial Demand Creation in Advanced Market Societies Abstract This paper will examine the statement given by John Kenneth Galbraith that in the modern day markets the demand is created by the large corporate houses producing the goods and is thus artificial. Introduction John Kenneth Galbraith, a noted American economist, a prolific author and a scholar proposed in his book The Affluent Society that in advanced market-societies, many consumers' wants and demands are created by large corporate firms and are thus artificial. This statement was in departure to the theory of consumer demand and behavior. In advanced and affluent societies because the intrinsic demands of the consumers have been already met, there is an artificial demand which is generated by the corporate houses. This is done in a race to out do each other and sells their goods which are mainly consumer oriented products; however this statement of Galbraith goes against the theory of consumer demand and behavior. This paper initially examines the classical theory of consumer demand and the intrinsic demands of consumers. It explains the dependence effect as given by Galbraith in his book The Affluent Society and then later looks into the reasons why Galbraith rejected the theory of consumer behavior for affluent markets. Classical Theory of Consumer Demand The theory of consumer demand is defined as the analysis of demand with regard to consumer behavior. The theory predicts the demand under varying factors, such as price, income, and substitute goods. Opportunities and preferences are the two major components of consumer demand. The opportunity is, what the consumer can afford keeping the budget constraint and the preference is, what and how much the consumer likes a product keeping the utility constraint. The classical theory of consumer demand justifies the production of any goods or services on the premise that demand for these goods or services exist. It also goes on to explain that these demands or needs are not limited and their urgency does not appreciably diminish with satisfaction of these demands. The statement that the demands do not become less urgent even when they are satisfied may itself be in contrast to the common sensibilities of many, but it is true because these demands are not the basic physical demands, but these are derived demands which we inherit from the society that we live in and they continuously grow. The Dependence Effect John Kenneth Galbraith (1958) in his book The Affluent Society explains that the needs or demands of consumers in the developed markets are being created by the process that satisfies these demands. It is a known fact that the psychological needs take over, after the physical or the intrinsic needs of food and shelter are satisfied. These psychological needs are also the basis of all the other development which takes place in our societies. The classical theory suggests that the urgency of demands fuel production, however the demands of a sports car or fast food cannot be urgent as they are not the basic demands of an individual. These demands are the derived demands and have been created by the process of over production itself. Advertising and salesmanship act as a catalyst to this entire process and ensure demand creation to dizzying levels. Hence the urgency of demand cannot be used to defend the case of over production. The Dependence Effect therefore is the direct relationship between the production of goods and the demand which is generated for these very goods. In the affluent societies as the basic demands are mostly met the consumer is open to persuasion. The consumer falls prey to a large variety of goods that are made available to him, all of varying quality. As the production of these goods increases so does the expenditure on demand generation. The major methods that are employed for demand generation are advertising and salesmanship. Artificial Demand Creation-Viewpoints Galbraith argues based on the dependence effect, that the demand for consumer goods in the affluent and modern day market is artificial. However Hayek (1961) points out that production is determined by what the consumer will want in future. Hayek counters Galbraith by suggesting that producers cannot fully dictate the needs of a consumer and advertising on the other hand gives the consumer wider choice and makes him informed about the availability of goods. However it is an established fact that the affluent markets fall victim to the process of consumerism. A product is first produced and then a substantial amount of resources is spent in generating interest in the product. This is carried out by advertising and direct and indirect sales methodologies. Galbraith suggests that the classical theory of consumer demand is more appropriate when poverty is more widespread in the society, as the consumer then wants to satisfy his basic needs and the production is directed to satisfy those needs only. However as the economy grows, affordability also grows. The consumers whose all basic demands are already met have the power to purchase luxury goods. This fuels the production of these luxury and consumer goods. The use of directed advertising and salesmanship give rise to the dependence effect. This process leads to creation of artificial demand of these goods. Another major factor that fuels the generation of derived demand is the comparisons that are drawn by seeing others enjoying certain goods and services. This emulation process increases the demand in a manner that the consumers would buy the goods even if there was no inherent requirement that existed with him for that particular product or service. Conclusion Galbraith suggests that the classical theory of consumer demand falls short in modern affluent markets. This happens because the classical theory does not take into account the dependence effect which is deeply established in these societies. The demands in these societies are artificial as they truly do not represent the intrinsic needs of the consumers. These demands only suggest the derived needs which are based on advertising and salesmanship of the products which have been produced. The production of consumer related goods acts as the basis of demand generation. This is in direct contradiction to the classical theory which propounds that demand should dictate the production of goods. Hence the argument given by Galbraith that in modern day markets the demand of goods is artificial holds ground. Works Cited Galbraith, J.K. 1958. The Affluent Society. Penguin Books: Harmondsworth, Hayek, F.A. 1961. "The non sequitur of the 'dependence effect'", Southern Economic Journal, April. Miller, R.P. 1987. "Persuasion and the Dependence Effect" in Poff, D. & Walcuchow, W. (eds) 1991. Read More