Does brand differentiation lower prices?

Over at the Demos dot org slash blog, I discussed this Bernie Sanders quote:

If 99 percent of all the new income goes to the top 1 percent, you could triple it, it wouldn’t matter much to the average middle class person. The whole size of the economy and the GDP doesn’t matter if people continue to work longer hours for low wages and you have 45 million people living in poverty. You can’t just continue growth for the sake of growth in a world in which we are struggling with climate change and all kinds of environmental problems. All right? You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.

The media seemed to have missed the point of the bolded part in which Sanders makes fun of those who say egalitarian policies will cut down on innovation. This was the subject of my Demos post.

In the aftermath of this comment, there was another less important thread that I also want to comment on. Multiple people (again in media) tweeted at me that this market of 23 brands of deodorants competing with each other brings prices down and therefore makes people less poor (adjusted for the cost of deodorant). Like most Econ 101 truisms, this is not exactly right.

If things are working according to design, the way you would get the cheapest possible deodorant prices is by commoditizing deodorant and then having firms compete to provide it in its commoditized form. By commoditize deodorant, I mean make deodorant akin to soybeans and corn, where one train car of deodorant is totally indistinguishable from any other train car of deodorant. In a world with commoditized deodorant, firms competing in the deodorant space will only be able to compete on price because there is no other way to distinguish deodorant units from one another.

The major point of brand differentiation is to fight commoditization. The goal is to make it so that you do distinguish between Speed Stick on the one hand and Old Spice on the other, instead of just categorizing them at Deodorant.jpg. If you can successfully pull off the marketing and branding, you don’t have to compete absolutely on price anymore, and so you can charge more (and make more profit) than if you were dealing with a pure commodity. The teen boy who has seen your slick ads must have Axe, regardless of whether it’s actually physically distinguishable from other deodorants, and so you can score extra margin out of that marketing-induced consumer preference.

So, in fact, extreme brand differentiation of the sort Bernie jokes about is not about driving prices down, but rather driving prices up by getting people to spend more on deodorant for brand premiums. Now, of course, defenders of this would say there must be something of true value in the extra money you can charge for a brand. Don’t they feel better for buying the cool deodorant than otherwise? Is that psychological feeling not real hedonic value? And, maybe it is, maybe it isn’t. However the point is that this sort of thing is not about competition driving down prices, but rather competition pushing innovation to give people different deodorant experiences at different price levels.

Ultimately, I really just could not care less about this whole topic (except insofar as I think its at least somewhat funny to mock “innovation” as inherently good). But if you are going to lose your shit over it and prove how smart you are on the internet about it, pretending as if deodorant brand differentiation is premised upon some vicious price war is not the way to do it.

Wages of Abstinence and Risk

Two posts ago, I rehashed the point that owners of capital income do not produce it and therefore have no desert-based claim to it. One post ago, I responded to the rebuttal that they do in fact do work to receive capital income, namely the work of deploying and managing capital. In that post, I rehashed the point that capitalists don’t do this work, but rather money managers and executives (who are paid) do it. So, it would seem, we really do have 30% of the national product flowing out to people who have no recognizable desert-based claim to it.

Of course, as I pointed out in my first post, this is not a total bar to arguing against the current set of arrangements. There still remains the utilitarian argument for them: regardless of whether capitalists can be said to deserve this 30% of the national income, providing it to them in the manner that we do creates specific price signals and incentives that leave people much better off than if that 30% was distributed in some other manner. This is a viable enough argument (though I think it too is defective), but crucially it is not a desert argument. It does not proceed by explaining why specific capitalists can be said to individually deserve the income they receive based on their production; rather, it makes a much more collectivist welfare point about why it is good to give it to them anyways. (Although I won’t pursue it here, this is identical to the dominant argument for transfer incomes as well.)

You might think that the utilitarian argument would be enough to satisfy the pro-capitalist side. But, quite remarkably, it doesn’t seem to do so. Deep down, it appears that they still crave some way to attribute capital income to something the capitalist is doing. This impulse is understandable: it’s hard to legitimate a system that gives the wealthiest among us 30% of the national income each year while also admitting that they didn’t do anything to produce it. In the cloistered world of higher-level philosophical debates, you can sustain an argument of that sort. Selling it to struggling people who, though actually working for their income, receive a tiny fraction of what billionaires passively capture each year seems like it could be difficult. Those who receive this capital income don’t generally seem too enthused about the purely utilitarian explanation for it either.

When first faced with this problem, the natural first move appears to be to claim the capitalist is actually working. That was what my second post (linked above) was in response to. Once that is knocked down, the capitalist apologist moves into ever more abstract terrain.

Wages of Abstinence
Perhaps the most amusing of these more abstract individualist justifications for capital income comes to us from old-timey economist Nassau Senior. Senior argued that the capitalist is being compensated (and indeed deserves to be compensated) for their sacrifice in the form of abstaining from consumption in the short-term. You see, these people could have just gobbled up their income in leisurely ways, but instead they forwent that leisure and consumption and invested it, taking a short-term hit to their well-being that deserves recompense down the line. Although this “wages of abstinence” argument is initially an old-timey justification for capital income, I still see it pop up in debates all the time.

In my view, this argument was well-handled by Ferdinand Lassalle in his 1864 tract “Kapital und Arbeit”:

The profit of capital is the ‘wage of abstinence.’ Happy, even priceless expression! The ascetic millionaires of Europe! Like Indian penitents or pillar saints they stand: on one leg, each on his column, with straining arm and pendulous body and pallid looks, holding a plate towards the people to collect the wages of their Abstinence. In their midst, towering up above all his fellows, as head penitent and ascetic, the Baron Rothschild! This is the condition of society! how could I ever so much misunderstand it!

Lassalle’s quote contains a number of interesting, and I think correct, threads. One of those threads pertains to the compensation of what we might think of as inframarginal sacrificers. For those with huge stocks of money, like Baron Rothschild, it is hardly any sacrifice at all to defer the consumption of even the great majority of their fortune. What else are they realistically going to do with it? They already live lavish lives and consume all that they can realistically want. The level of short-term hedonic sacrifice involved in their investing their fortune rather than consuming it is zero or nearly zero.

At the same time, though not mentioned by Lassalle, poor people who take pains to save money undertake relatively huge short-term sacrifices while receiving nowhere near the same compensation for that sacrifice as the super-wealthy. Even compensation per unit of capital invested clearly does not match sacrifice levels as the rich and poor receive the same compensation despite dramatically different levels of sacrifice involved in making the investment. (In reality, the rich actually receive higher return on capital than the poor, making this problem even worse.)

After wages of abstinence fades away for the silliness that it is, we are then told to look towards risk. You see, the capitalist doesn’t just put capital in and get passive income out. There is at least some chance that they don’t get passive income out and may even take losses. Indeed, the compensation of capital investment directly relates to the risk that such a thing will happen.

As I pointed out earlier, this argument also is not compelling. Under capitalism, two people taking on identical risks (e.g. equities with the same risk profiles) do not receive identical compensation for doing so. In fact, that is integral to the whole idea of risk. Compensation on the basis of risk is no different, on an individual deservingness level, than compensation for lottery winnings. In both cases, money is put into the system with some level of risk of loss (in the lottery winner’s case, huge levels of risk) and then, if you are a lucky one, you get a bunch of money out. This compensation is not based on individual desert (whether productive or otherwise); rather, it is based on the exact opposite of it: randomness and good fortune. It’s gambling.

“Have I Myself Not Worked?”

In my prior post, I pointed out that capital income is paid to non-productive people who don’t, under a labor-desert theory of entitlement, deserve it. In response to this explanation, some commenters have said that in fact capitalists do work in some way. It’s not that they just have capital and then income flows to it: they actually have to do work in planning how to employ it or hire workers to run the machines and so on.

I always thought Marx’s response to this particular argument was rather amusing:

Our [capitalist] friend, up to this time so purse-proud, suddenly assumes the modest demeanour of his own workman, and exclaims: “Have I myself not worked? Have I not performed the labour of superintendence and of overlooking the spinner? And does not this labour, too, create value?” His overlooker and his manager try to hide their smiles. Meanwhile, after a hearty laugh, he reassumes his usual mien.

Of course the planning and deployment of capital involves labor. But, as Marx points out, the capitalist does not do this labor. He hires other people — executives, bankers, and money managers — to do this labor. And, indeed, in the national accounts the money paid out to these kinds of people is scored as labor income. Capital income is thus the amount of money that flows to capital after the managers of the capital have been paid their labor income for managing it.

To be sure, sometimes capitalists are owner-operators of their capital and this ends up mushing together capital and labor income in such a way that makes it hard to disentangle. Someone who owns their own business and all the capital in it receives labor income from their work as a manager of the capital and capital income from the capital itself. Normally, income of this sort (self-employment income) gets portioned out as partially from capital and partially from labor when people are trying to estimate economy-wide aggregates.

What’s remarkable to me about the “have I myself not worked” defense is that, these days, it’s easier than ever to identify people clearly receiving pure return on capital. People who own capital are not generally also managing that capital in any meaningful way. Instead, they are invested in funds that buy up equity (and bonds) in thousands of different companies. They pay a management fee to whoever is running the fund (which is labor income) and the companies they are invested in compensate their executives (which is also labor income). So compensation for the work of managing capital ends up pretty neatly hived off from the pure return on it.

Anyone who is invested in a 401k or IRA should fully appreciate this as well. What production are you involved in when you click the button on the website that puts the money from your checking account into the index fund? Hell, sometimes you don’t even have to do that because your employer just puts the money straight into the index fund on your behalf!