In 2022, Google earned USD 162 bn and Meta earned USD 114 bn from ads.
This means significant talent in these companies is deployed to get people to click on ads.
Should advertisers instead use these funds for producing better goods?
No. I explain why. Read this and you will never again look at online ads the same way.
First Order Thinking: Advertisers get increased sales. They recover ad spend through higher prices. Advertising company benefits. Google, Meta benefit. Consumers don’t.
Second Order Thinking: Ads match consumer demand with supply. They help make informed choices. Further, increased sales help companies achieve economies of scale. This reduces costs and translates to lower prices for consumers.
Ad Spends → Increased Sales → Economies of Scale → Reduced Costs → Reduced Prices
If Cost reduction > Ad spends, Advertising company benefits. Google, Meta benefit. Consumers benefit.
Third Order Thinking: Dollar is the world’s reserve currency. Demand for dollars would drive up its exchange rate and make US exports uncompetitive.
But US is also the world’s biggest consumer. Cheaper manufacturing in China has led to a proliferation of consumer choices. Making informed choices becomes vital. Ads serve this function and drive consumption. This consumption supplies dollars to global markets. It offsets the exchange rate increase and keeps US exports competitive.
Manufacturing industries typically experience much higher productivity gains than service industries (manufacturing prices have fallen rapidly). Ads complement this growth in manufacturing.
Ads are the linking pin of these software companies to Manufacturing. They enable software companies to grow faster, riding the higher productivity gains of manufacturing! The growth enables software companies to invest in technology breakthroughs.
Advertising company benefits. Google, Meta benefit. Consumers benefit. Innovation thrives by piggybacking on Manufacturing with seemingly trivial ads.
