Vanity sizing is mainly a marketing tool created by retailers when they started making bigger clothes and marking them with smaller sizes. This trend starting occuring as early as the 50's and in todays retail market it is a common occurence. Truthfully this has made sizing labels practically useless. A woman's and yes even a man's sizing can easily vary 2 or 3 sizes brand to brand. It is even possible to take in three pair of pants labeled the exact same size by the same fashion brand and they will each fit completely different. Something that makes it very difficult in the changing room let alone ordering something online. Approximately 40% of online clothing purchases are returned because of sizing issues.
As you can see from the above chart, sizing has greatly changed over the decades. A good example is in the Sears catalog a 32" bust was a Size 14 in 1937, in 1967 it was a size 8 and in 2011 it was a Size 0. Twiggy was considered to be a Size 8 in 1967 now she would be a Size 0 or even 00. Marilyn Monroe was a Size 14 at the height of her fame now she would be a Size 6 or 8. Neither woman is the standard shape of most women of today.
The reason Vanity Sizing works is because deep down everyone is a little vain. If a customer has taken multiple pairs of pants in a change room to try and they have found two pairs that fit well, one is marked size 10 the other size 8, they will 9 times out of 10 buy the ones marked size 8. They will often even be willing to pay more for the size 8's. The smaller size number on the label makes them feel better about themselves.
In an ideal situation we wouldn't care what size the label said, instead we would only care about the fit and appearance of a garment. Self Esteem should not include a number on a label but sadly it often does, thus Vanity Sizing exists and prospers. Before the Great Depression and WWII Ready-to-wear(RTW) was not readily available so no sizing labels. Instead of RTW if women were wealthy they had their clothing made for them or if they weren't wealthy they made their own garments. This meant clothing was made to their individual measurements and personal preferences. Ideally size labels should not be a concern and Vanity Sizing has only added more confusion in the dressing room but both are here to stay.