The Concise Encyclopedia of Economics
FEATURED TOPIC

Advertising

George Bittlingmayer

Economic analysis of advertising dates to the 1930s and 1940s, when critics attacked it as a monopolistic and wasteful practice. Defenders soon emerged who argued that advertising promotes competition and lowers the costs of providing information to consumers and distributing goods. Today, most economists side with the defenders most of the time....

While advertising has its roots in the advance of literacy and the advent of inexpensive mass newspapers in the nineteenth century, modern advertising as we know it began early in the twentieth century with two new products, Kellogg cereals and Camel cigarettes. What is generally credited as the first product endorsement also stems from this period: Honus Wagner's autograph was imprinted on the Louisville Slugger in 1905....

Contrary to the monopoly explanation (and to the assertion that advertising is a wasteful expense), advertising often lowers prices. In a classic study of advertising restrictions on optometrists, Lee Benham found that eyeglass prices were twenty dollars higher (in 1963 dollars) in states banning advertising than in those that did not....

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ALSO OF INTEREST

Transition Economies

Anders Åslund

Creative Destruction

W. Michael Cox and Richard Alm

Energy

Jerry Taylor and Peter Van Doren

Health Care

Michael A. Morrisey

Price Controls

Hugh Rockoff

Minimum Wages

Linda Gorman

Health Insurance

John C. Goodman

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FEATURED BIOGRAPHY

John R. Hicks

(1904-1989)

The British economist John Hicks is known for four contributions. The first is his introduction of the idea of the elasticity of substitution. While the concept is difficult to explain in a few words, Hicks used it to show, contrary to the Marxist allegations, that labor-saving technical progress--the kind we generally have--does not necessarily reduce labor's share of national income....

Hicks's fourth contribution is the idea of the compensation test. Before his test, economists were hesitant to say that one particular outcome was preferable to another because even a policy that benefited millions of people could hurt some people. Free trade in cars, for example, helps millions of American consumers at the expense of thousands of American workers and owners of stock in U.S. auto companies. How was an economist to judge whether the help to some outweighed the hurt to others? Hicks asked if those helped could compensate those hurt to the full extent of their hurt and still be better off. If the answer was yes, then the policy passed the "Hicks compensation test," even if the compensation was never paid, and was judged to be good. In the auto example economists can show that the dollar gains to car buyers far outweigh the dollar losses to workers and stockholders, and therefore, by Hicks's compensation test, free trade is good....

In 1972 John Hicks and Kenneth Arrow jointly received the Nobel Prize for economics "for their pioneering contributions to general economic equilibrium theory and welfare theory."...

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