The Economist leads off its business section with a piece about the valuation of brands, and cites research suggesting that almost a third of the value of the S&P 500 index of companies stems from their brands.  That is a mind-boggling amount of value, trillions and trillions.

The article goes on to discuss how brands actually add value for a company.  There is a rich seam for MBAs here, as I can vaguely remember from mine in the early 2000s.  But now I am more interested in a fundamental economic question: how do they actually add to the value of an economy?

I think there are two types of answer.  The first intersects with MBA-world and explains how a good brand actually changes business/consumer activity and thereby the economy.  Brands send signals of quality, sometimes simply by being expensive to maintain. In a world where quality can be unknowable until too late, they help nail a company’s colours to the mast: sell a duff product (or just admit to it), and the whole product line suffers. They may cut down information gaps by providing easier ways to distinguish products.  In this answer, the brand is a useful capitalist innovation that improves consumer choice and gets us spending more on things we want. It completes missing markets.  If branding were banned, the economy would really suffer and be less efficient.

The other answer is about rent-extraction, or, in English: the sorcery by which some firms get you to pay far more for a product when it has a strong brand. The archetypal example is the fashionable T-shirt that retails for hundreds of pounds because of its label – but it could just as well be brown fizzy drink (BFD).

Imagine two economies.  One sells its BFD barely covering the physical cost of making and delivering it.  The other has a host of expensive extra activities around the drink: celebrity endorsements, sponsorships, billboards, the whole caboodle – which together encourage the consumers to spend five times as much buying just the same quantity.  The latter economy is larger: products are valued at the market price, and the BFD price is far higher.  A lot of that extra ‘value’ is scooped by the people who build the brand, from the agencies and bill stickers to TV crews and celebrities. The consumers of BFD are willingly paying more of what they produce over to that crew of brand builders, for the same amount of brown drink.

It would be tempting at this stage simply to insert a short lefty rant about how economies are based on a knowing illusion, a con. A great deal of those trillions mentioned earlier is smoke.  But for various reasons I don’t feel like that. My dim knowledge of the history of economic thought suggests to me that multiple past attempts to distinguish “real” value from illusory value have failed, embarrassingly: there is even a wiki page on the subject of why useless diamonds trade for more than useful water.

On the whole, the value embedded in a brand is something a consumer chooses, knowingly, to spend their money on.  The second economy with all its busy activity just to make you think the BFD is sexier is really a more active economy – it has more employed billstickers, advertising agencies and reality stars.  If this sorcery is what is needed to get them into work that is valued in the market, then so be it: lots of human activity is hard to justify a priori. Look at what silly factors help encourage people to spend more on wine.

What matters is our economy now is people willingly handing over their incomes in return for other things, not the intrinsic nature of the things.  If we were in a war time economy, it would be another matter – fire those brand merchants and get them to produce war winning material – but our problems are as much of abundance as constraint.

This is why I think my answer matters, because if brand value is real economic value, our constraints on growth are less.  Transforming an economy from one of homogeneous commodities to brands that people willingly like paying more for is real economic progress of a sort, and less prone to technological limits to growth.  If we don’t want more T-shirts, cars or cola but just those products branded into a form we like more, and will pay more for, well that counts too.

(PS: the fact that the Economist writes regularly on brands is a point in my favour, I think)

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3 thoughts on “Stronger brands stronger economy?

  1. As you say branding started as a method for solving the asymmetric information problem. In any standalone sale, the seller clearly has an incentive to skimp on quality. With brand investment the seller is effectively posting a perpetual bond where he has much more to lose than what he would gain from the reduction in quality on one sale. So brands encourage mutually beneficial transactions that would not happen otherwise. Fancy bank buildings are another example of this signalling.

    But brands as well as signalling quality to a potential buyer could now also signal the status of the buyer. Then as you describe buyers are perhaps being suckered into a potential arms race with other buyers . This might be non-socially desirable spending; going beyond a mutually beneficial transaction to something like the potlach ceremonies in Indian tribes which were banned by the Canadian government because their wastefulness was driving the Indians into deeper poverty. But, contrary to your “leftist rant” it seems difficult to believe that this is a serious problem in current western society. With my libertarian tendencies I say that unless we can identify really serious issues, we should let people do what they want. Yes there are examples of people over extending themselves to buy say fancy cars and at a higher level there are people using executive jets instead of flying scheduled. But I doubt that people are actually not eating properly or not buying shoes for their kids as a result. I would also say if there is blame going round that the purchaser also bears some responsibility (if not all) for this over-consumption, since many people (like myself) are able to resist the temptation.

    And I would like to challenge that this branding arms race is organised for rent seeking purposes. As competition also exists for these premium brands, maintaining an expensive seeming brand is not cheap! I can think of many brands that have gone under or lost money for many years (Burberry is one example).

    Some other thoughts – there are some possible socially desirable aspects of over-consumption. Perhaps over-consumers pioneer new technologies (like I-phones) with them bearing the initial development cost for future consumers benefits. And it is possible that signalling like this can actually have benefits in the environment – the classic reason for people buying a prius for instance is that the car makes a statement about them both being rich and green, since the cost of the car cannot be justified on economic grounds. So the environment benefits. Similiar story with organic veggies and fair trade products.

  2. I think I broadly agree. People are making free choices. Yes, there is “rent” in one way – the system charging more than the strict cost of making the product – but as you say there is competition in the market for creating the brand that allows such rent extraction – which dissipates it somewhat, albeit to other actors in the tale.

    I also agree it is less environmentally destructive than other issues with conspicuous consumption. Once this was associated with, say, vast quantities of food at banquets, which is clearly socially wasteful – but a pointlessly expensive branded pair of jeans? not so much

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