Originally posted on Mises Canada
One of the most popular proponents of BE is Rory Sutherland (who I’ve been praising for years), an ad executive with Ogilvy Mather. The interesting thing about Sutherland is that he also calls himself a follower of Mises, in addition to promoting popular BE concepts and nudges. He once gave a talk at Google titled “Praxeology: Time to Rediscover a Lost Science.” Praxeology, of course, was Mises’s preferred term for the general science of human action.
One quote he’s quite fond of, which he attributes to Mises, is “There is no sensible distinction to be made between the value a restaurant creates in cooking the food, and the value the restaurateur creates by sweeping the floor.” While I haven’t been able to source that exact quote, I do know that he made this statement in the section titled “Business Propaganda” in Human Action:
“If the manufacturer of candy employs a better raw material, he aims at an increase in demand in the same way as he does in making the wrappings more attractive and his stores more inviting and in spending more for advertisements.”
Replace “manufacturer of candy” with “restaurateur”, “raw material” with “chef”, and “making the wrappers more attractive” with “sweeping the floor”, and you more or less get Sutherland’s quote. The point Mises is trying to make is that there is no economic distinction between production costs and marketing costs. Replacing a mediocre chef with a great chef is a production cost, while sweeping the floors to make your business more inviting is a marketing cost.
Some economists hold that there is a distinction—namely, that production costs increase supply, while marketing costs increase demand. The chef supposedly “increases your supply” of great food, while janitorial costs will attract more people to your business.
But this is wrong. Production costs and marketing costs both raise per unit costs. All business decisions that raise the per unit costs are made to increase demand. Both the fancy chef and the janitor increase the cost per unit of the restaurant. Only when actions are undertaken that increase total costs but decrease per unit costs will total supply increase—hiring a whole fleet of chefs, say, or opening more franchises.
The bottom line is that what sounds like a technical point from 1949, but it has yet to be fully appreciated. Incurring costs to create a more valuable context for enjoying a product (in other words, marketing) is equivalent to creating an “objectively” better product. This has untapped implications for business, as evidenced by the rise of popularity of BE-inspired marketing and business consulting.
Ash Navabi 