The Economy: Is It All In Your Head?
Sen. Phil Gramm, an advisor to Sen. John McCain, just stirred a big controversy by maintaining that the economic downturn causing so much angst is largely the result of pessimistic thinking, rather than serious economic problems. Pointing out that we aren’t actually in a recession at all, with real economic growth anemic but still respectable at a 1% positive rate, he called this a “mental recession,” and said the problem is we are becoming a “nation of whiners.” McCain repudiated these comments as the Obama camp gleefully leaped on them as further proof that McCain was out of touch.
Ironically, however, the “mental state” of the economy is a lot more real than most people think. Students of recent economic thinking – much of which is based on studying the network effects of individual economic agents (i.e., people) choosing their own actions by paying close attention to the actions of other agents – will recognize that the way in which significant numbers of people are “thinking” about the economy does indeed have real-world effects.
In plain English: If you see others who think the economy is bad, then you are more likely to think so yourself. The more decisions you make that are based on this thinking, the more influence you will have on other people’s thinking as well, and so the economy really does become “bad.”
What this means is that while Phil Gramm is right, technically, that if we all just start thinking more positively about the economy it will get better, the fact that we are NOT thinking positively also means the economy really IS in bad shape.
The network effects of individuals choosing their actions based on the actions of others, in other words, means that the mental state of the economy IS its real state.
But these are the same network effects that, as business managers, we have to consider among our customers. Stock market investors have always looked over their shoulders at other investors’ opinions before making their decisions, and customers have, too – to a limited extent. Marketing fads like “Teletubbies” or body piercing or even “low carb” foods have their origins in network effects.
New social media technologies, however, are aiding and abetting the creation of such network effects, as customers go online to blog to other customers, post customer reviews and ratings, and circulate word-of-mouth via the Internet. You can’t afford to miss the implications of these new technologies, which is why we’ve collected a lot of our current thinking at our new microsite all about social media, Get Past the Hype.com.
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Great article Don. I do see the network effect happening and I'm not sure its going to get any better over the coming months as we head toward the election. I think it behooves each of the candidates to express how poorly the economy is so that they can talk about their strategy on correcting that. And they're going to have a tremendous amount of media dollars behind expressing that view (over $100MM likely).
Because of this viewpoint, we've been working with our clients to help them focus on marketing that will deliver positive and measurable results. You'd think working in the interactive marketing space that this is always the expectation, but there is still a great deal of digital marketing that is not measured properly. We also try to advocate that during a down economy, its the companies that continue to market themselves that will prevail when things begin to improve. You don't want to find yourself playing catch up once the economy bounces back.
It's amazing that a man like Gramm, who has taught economics to college students, would make the statement.
Sort of reminds me of when someone in the Carter Administration said the only real cure for inflation would be if we could all just stop raising our prices all the time. Again, technically true, but...
I agree with Axel (and Don) on the impact of the network effect. Perception is reality - and brand people have understood that forever. They just have no idea how - in the new economy of networked customers - to build brand.
On a separate note, someone please take Phil Gramm out to the dog track and let him feed the pigeons. The idea that the economy would be sailing along if we just wished it so is laughable. He's spent a few too many night curled up with "The Secret".
Excellent Topic.
And there may be an even deeper connection between the predicted downturn of the economy and the network effect.
Sales people realizing it is so much harder to sell, marketers realize a dramatic reduction in lead generation and brand reflection. This all translates to "Down turn". But business is still up? Yes - because consumer don't "Shop" the old way. They ignore traditional advertising and cold calling sales people - instead they network and make their product or brand decision before any sales process even started.
Now - that business to buyer disconnect is widening right now with even more and more boring advertising, resulting in buyers buying less and now there is indeed a reduction in consumption. Once producers of goods or services understand that network effect and leverage it - business will go up again. But it will take a while till the last business owner understand those dynamics.