But it is dysfunctional, or even anti-functional, for the economy. Because with advertisements we're not buying the "best" product, but rather the one with the biggest associated marketing budget.
It undermines the most important merit of capitalism.
First of all, who gets to determine what is "best"? You? The relativity of perceived product value makes it hard to prove that people are buying the "wrong" things. The whole point of markets is that it is impossible to determine in advance what people really want.
If what you said were true, the biggest marketing budget would always win, but it doesn't--far from it. The economy is littered with the wasted marketing budgets of failed products.
(In fact, most quotes are a form of marketing, not for products but for ideas.)
That would be true if ad budget = ad quality, but I don't think it does.