14 DAY TRIAL // Most TV and radio stations as well as web sites are funded by ads. You don't actually pay to see or hear the program or to get the information on the site, or to view the pictures or movies or to download programs etc. It seems you actually get a great deal for nothing. The only inconvenience is that you have to see or hear the commercials. There are even printed magazines that are freely distributed and whose profits come solely from advertising.
In most cases, these ads try to convince you to actually buy something. Then, part of what we actually pay for these other products or services goes back to the TV or radio station or web site or newspaper that originally directed us to that product or service. In fact, the firms are so confident that some of us will be influenced by their ads, that in most cases they actually pay the TV stations or web sites or newspapers before we actually buy anything from them. These ads are part of their investment. Only in case of some of the Internet ads the web site is holding a commercial for firm X is paid only if the directed surfer actually buys something from X (this is possible with the help of cookies that allow the X's web site to know what other site has sent you).
But now there's a funny thing: Some ads don't direct us to some firm that wants us to buy something from them; some of them direct us to other TV station or web site or magazine that also lives on advertising. So, sometimes we might encounter quite long chains of advertising-dependent firms until we finally reach a firm that actually sells something.
Moreover, it seems to me pretty obvious that these chains tend to become longer and longer! The reason is simple (and it is especially obvious on the Internet): more and more complex products are offered for free - these represent quite a competition to the firms that offer similar products for a price. These other firms are naturally forced to scale down their prices and eventually become advertising-dependent themselves. It is no wonder that today we can find much more complex programs offered gratis then we could have found a few years ago. The open-source format also creates an additional drive toward more complex free programs. (One can wonder for instance for how long Microsoft Office will manage to cope with the competition from Open Office or Microsoft Windows to that of Linux. Not for very long, I would guess.)
What happens on the Internet isn't fundamentally different from what happens in the rest of the economy, it's only more dynamic and less hampered by the government. It is conceivable that more and more products and services in the real world would also become "free" and that the profits would increasingly come from advertising. It's already happening - for instance there are theaters that get up to 90 percent of their income from sponsorships and not from ticket sales (e.g. one of the most prestigious private theatres in Bucharest, ACT, is in this situation), some buses are beginning to have TV screens showing commercials, the subways are filled with advertising (besides the genuine graffiti), the stores are offered free fridges by e.g. Coca-Cola, the outdoor restaurants have the opportunity to use large umbrellas labeled with one firm imprint or another etc.
By using commercials, the firms can lower the prices for their own services and thus attract more customers. But then, by attracting more customers, the advertising revenues increase. Thus, there's a positive feed-back mechanism that lowers the prices of their own services more and more. What stops this process from reaching zero is that the firms that advertise cannot sufficiently increase the sums they pay for being advertised - i.e. we're not willing to buy a sufficient number of their products or services. However, the ads themselves tend to increase precisely this - they increase our willingness to buy their products.
In other words, what happens is that when we are willing to buy more products from the firms that advertise, these firms are capable of using even more money for advertising - this furthermore decreases the prices for things like transportation and theatre and restaurant dinners etc. because such firms can rely more on the advertising revenues. But more the firms advertise even more products they would sell (if their products are not totally awful). So, there is a second positive feed-back mechanism, on top of the other one, which ultimately favors the appearance of more and more advertising-dependent firms (firms that offer products or services for free and have profits from advertising).
But what also happens is that we are actually spending money on progressively fewer types of products or services and we are buying these in increasingly larger amounts. The chains (or networks) of advertising-dependent firms become longer and longer and at the end points, the firms that actually sell things, sell increasingly larger amounts of their products or services. So, eventually, virtually the whole market will be conquered by advertising-dependent firms that offer free products and services.
At first, you might think that such a system would collapse in the same way as communism collapsed because it seems that it has also abolished the price system almost entirely. A certain firm is efficient if it transforms some resources having a certain value into some products that have a higher value (i.e. the products are more wanted in society than the resources themselves). A firm can actually determine whether it's efficient, i.e. if it doesn't destroy precious resources by turning them into unwanted crap, by seeing if it has a profit - the price of their products or services has to be higher than the price of the utilized resources. Thus, prices are a measure of value in the same way as for instance the height of the liquid inside a thermometer is a measure for temperature. In communism, the government in its infinite genius imposed arbitrary price controls for almost all the existing products and services - this in turn made it impossible for anybody to calculate whether any producer was efficient or not (i.e. if it made valuable things or crap). Ludwig von Mises called this the "planned chaos". Naturally, as nobody could tell any longer what producers and what methods of production were efficient, everything went astray and all sorts of valuable resources (including human) were awfully wasted. The communist governments thought that if you abolish all thermometers you solve the problem of winter heating. Each time one thinks the problem is that prices are too high and wants to impose price control, one behaves like someone who blames the thermometer for the actual temperature.
But the land of rampant advertising isn't like that. Although almost everything is for free, the idea of profit is still strongly in place: the amount of advertising money some advertising-dependent firm manages to get depends directly on how many people are actually willing to accept its free products or services. People don't accept crap products even if they are for free (for example, some years ago there was a survey that showed that most people in Paris would be willing to use the subway only if they would be paid to do it - the Paris subway is actually an interesting experience, it allows you to get a fairly good idea of how a mole probably feels on a daily basis). So, in the land of advertising the abolition of the price system is only apparent.
Suppose that Alice is you and you are hired by an advertising-dependent firm. Your salary comes entirely from the advertising revenues. Now, when you go out there in the real world to spend your money you receive all sorts of products and services gratis but in the same time you are bombarded with tons of commercials. Most of these commercials send you to other firms that are also eager to give you products and services for free - they also have profits entirely from advertising. But, occasionally, from time to time, you end up in places that actually sell things, and then you buy enormous quantities of what these people sell, yes indeed, you buy things you need in large quantities, things like air you could actually breathe or water you could actually drink or maybe even drugs that could revert the effects of the deadly radiation.
