From information economy to marketing economy

Over a year ago I wrote about how the United States is moving to a marketing economy, but I don’t feel like I did a very good job of it. So this essay represents a rewriting of my previous thoughts.

Introduction

It is widely agreed that the United States has moved from an agricultural economy to a manufacturing economy to an information economy. But what most people don’t know is that we are currently in the process of moving from an information economy to a marketing economy.

Agricultural economy to manufacturing economy to information economy

The move from an agricultural economy to a manufacturing economy is mostly a story of technology. Before the industrial revolution, the vast majority of people were farmers. But technology allowed fewer people to produce the same quantity of food, as well as other agricultural based goods such as wool and cotton.

The move from a manufacturing economy to an information economy is also partially a story of technology. Better technology allows fewer people to produce more goods. But technology is only part of the story. It’s not really that the world as a whole has moved to an information economy. Information jobs have always gone hand in hand with manufacturing. Even back in the 1800s we needed people to design what was being manufactured and handle the accounting. We even had lawyers.

The other half of the story is globalization. As transportation technology improved, we became better able to trade manufactured goods between nations. It turns out that less developed nations had a comparative advantage when it came to manufacturing. This is because most manufacturing requires a lot of unskilled labor. Less developed nations have a lot of people willing to work for low wages. But in the past, the less developed countries lacked what many economists call “human capital.” Their people lacked the education and training needed to perform information tasks. But they were able to do factory work just fine.

From 1950 to 2002, the percent of non-farm workers in the manufacturing sector decreased from 34% to 13%. (Source: USA Today.) There is no doubt that the decline of manufacturing in the United States is a real trend. This is often hailed as a good trend. After all, many of the factory jobs were unfulfilling, hot, and dirty. Isn’t it better to work at a desk in a nice air conditioned office doing information work?

The decline of the information economy

The information economy is only a temporary state of affairs. Just as transportation technology allowed manufacturing to be moved overseas to countries with a comparative advantage in unskilled labor, new communications technology allows information jobs to be moved overseas to countries with a comparative advantage in skilled labor.

People don’t yet understand that this change is happening. There is a lot of hubris involved. We have convinced ourselves that we are the best. Only Americans can do high end intellectual jobs. This is hogwash. People overseas are very bright. When we compare American school children’s performance in math to those of children in other countries, the American children do not come out on top. And then if you visit the engineering or computer science department of a major university, it seems like you’ve left the United States and entered a country in Asia.

Just as foreign countries were perfectly able to supply unskilled labor at much lower prices after we provided them with factories (physical capital) and with transportation to bring the goods back to the United States, they can also supply skilled labor at much lower prices when we provide them with human capital and with communications technology (think internet) to bring the information back to the United States.

This change is already happening and can be seen by anyone who opens their eyes. All sorts of information jobs, from call center workers, to accountants, to engineers designing the next generation of microprocessors, all of these jobs are moving overseas. The change in the American workforce will be just as dramatic as the decline of manufacturing. Just as American workers who chose a career in manufacturing in the 1950s were screwed when their jobs moved overseas, American workers choosing information jobs today will be equally screwed.

The rise of the marketing economy

But what is left for the United States to do if both manufacturing and information jobs are moved overseas? The answer is marketing. Marketing is the craft of linking producers of goods and services with customers. And the customers exist in the United States because we are the world’s richest nation.

Only Americans know what other Americans want to buy. Only Americans know how to create the perception of value where none actually exists. Two days ago I wrote about an $88 t-shirt. The Chinese can manufacture a t-shirt for $1, but they will never be able to figure out how to get Americans to pay 88 times what it costs to manufacture.

When you take a look at what American industries are doing and how they make their money, it turns out that marketing is often the dominant theme. We already looked at how clothing is mostly about marketing. Even the more moderately priced clothes we buy have a huge markup. All of retailing is about marketing. When you walk into a Walmart, nearly all the items you see for sale were made overseas. But it’s Walmart making over $10 billion per year in profits, which is greater than the GDP of many of the nations where the goods are manufactured!

When you look closely at any big U.S. company, you will likely find that the marketing is done in the United States but the manufacturing (and soon information work) is done overseas. ExxonMobil is the biggest U.S. company, both in sales and profits. What ExxonMobil does is transport oil produced overseas to the United States where it’s sold at ExxonMobil branded gas stations. This is a marketing function. If you visit ExxonMobil’s website today, the big news story is the new ExxonMobil credit card. There is no news about oil production.

The pharmaceutical industry is mostly about marketing. I previously estimated that two thirds of Pfizer’s expenses are marketing related. Only one third of Pfizer’s expenses go towards R&D and manufacturing.

As we see, the marketing economy is not a fairy tale about what might happen in the distant future. The marketing economy is the present. People just haven’t figured it out yet.

Comments

[Michael H.]

Hi Half Sigma
This is a very interesting post.
I cannot see American all selling stuff to each other. The economy may move in that direction, but most people will not be in marketing. Marketing is still a small part of the total economy.

And some marketing will go overseas. For example, one part of market research is to do phone interviews to determine customer preferences. I see that going overseas in the very near future (if it hasn't already).

[Half Sigma]

Responding to Michael H:

"part of market research is to do phone interviews to determine customer preferences. I see that going overseas in the very near future (if it hasn't already)."

Call center work is just a relatively unskilled information job that has moved overseas. The people directing the research and figuring out what to do with it will be Americans.

"I cannot see American all selling stuff to each other."

That's the part that everyone has the most trouble with. But why not? All the "stuff" we need can be made overseas for less money than the same stuff made here, so there's no reason for any of it to be made here.

But we add value to the "stuff" through marketing.

[Michael H.]

Hi Half Sigma
So if I buy the $2 tee directly from China with nothing printed on it and no marketing instead of the $88 tee that was brilliantly marketed by some American, would the new U.S. economy collapse?

I think you need to think about this model a bit more, it seems unstable.

[erader]

The idea US will become a marketing nation is questionable. A marketer adds value by creating a perceiption about the product. How many people do we need researching that?

1. Inside the US. When there is one Avon lady in the neighborhood, she can make a good living. What happens when every woman is an Avon rep? Further, this idea only works if US remains the biggest market on the globe. If the US economy tanks, the US based marketing job will be history.

2. Outside the US. The type of marketing that works in the US does not necessary work elsewhere because local tastes might differ. This means US based market film have no real advantage outside its home turf. What American's knows how to sell is its culture. But that is totally different topic.

[Michael A. Clem]

It sounds like something out of a science fiction story, or comic book: everybody in the U.S. are salespeople, selling products made outside the country.
But even if we're heading towards such an idea, there still have to be people who have to handle the orders, transport and store the goods, and the service necessary for goods, not to mention for the infrastructure that handles that stuff. So we may be able to go a long ways towards a marketing economy, but never completely so. Besides, how do salespeople respond to sales pitches?

[Michael H.]

Hi Half Sigma
One big problem with this "marketing economy" is that we need to produce and sell something to the Chinese in return for the goods they produce and sell here. Sure, it the short run we can print up T-bills and the Chinese seem happy to have them. But our long term economic prosperity cannot depend on running some sort of Ponzi scheme with the Chinese.

[Rob]

The idea of the future marketing economy occurred to me recently, so I enjoyed this post immensely. However, it is a longer term development and, as such, may be difficult for some to identify easily. And as with the previous transitions, there will be a period where the economy is decidedly mixed. But if one looks where jobs are growing the most quickly, it is in the marketing disciplines.

[Lurker]

$88 for a T shirt! Whats wrong with you man?

[analystprice]

So America has come full circle. Remember Death of a Salesman.