Who has the power on the market? Is it entrepreneurs? Is it consumers? Or is it the government? Consumer as a market roles.
▪ What entrepreneur does on the market?
Successful entrepreneurs are often called business magnates, barons, captains of industry and so on. These terms can suggest that the entrepreneur wields power on the market. But does he? Entrepreneur serve rather than rule. Who does he serve? His customers. A well-conceived entrepreneur role is to serve the customers, to correctly anticipate customers’ still unsatisfied needs, and do his best to satisfy them. As Ludwig von Mises wrote:
“The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that”.
People looking for work ask themselves “what would I like to do”? The entrepreneurs ask themselves a different question: “what would my clients like me to do”? There are lucky guys who like to do what consumers want them to do, but an entrepreneur cannot put higher his wants than consumer wishes. Mises puts it like this:
“If the consumers, without a taste for the beautiful, prefer things ugly and vulgar, he must, contrary to his own convictions, supply them with such things”
▪ Consumer as a boss
A consumer isn’t someone we would call a good boss. He is very demanding, he often changes his preferences, he “fires” one producer without notice or giving any reason, and “hires” the other producer, who he likes better now. The polish economist – Dr Matt Machaj – in his satirical text
“A retail sellers petition against junk sales contracts”
writes about consumers in this way:
“Clients make deals with whomever they want, and on conditions they want. “If you do not accept my price offer, I’m going to find someone else” – they bellow. In addition, as if it wasn’t enough, the consumer laws and state institutions protect them. Consumers are constantly blackmailing us – the sellers – that they won’t make a purchase. They don’t realize how humiliating for human dignity their constant visits, questions and window-shopping are. Terrorizing us – sellers – just to change their purchase decision at any moment.
One day clients will come and buy something. Another day they will change their mind, and choose services of the other desperate producer, who depends on their whims. None of us has the strength and courage to stand up against consumer diktat. We accept this state and unwillingly agree to the worst junk contracts of them all: incidental, imminent, non-renewable, and without any health insurance”.
As the producers’ boss – the consumer – is this harsh; he must take his wishes into account, if he doesn’t want to lose his position. At the same time, if the consumer is the producers’ boss, he is also his employee’s boss. The consumer is the one who, by buying or refraining from purchase, decides what should be produced, in what quantity and in what quality. He decides unknowingly about the prices and wages. To quote Mises again:
“In the conduct of their business affairs [entrepreneurs] must be unfeeling and stony-hearted because the consumers, their bosses, are themselves unfeeling and stony-hearted”.
▪ Why the consumer is a “bad boss”?
Why does Mises call consumers such mean names? Unfeeling? Stony-hearted? Well, if you could choose between two very similar products with similar quality, but one of them is half the price of the other, which one would you chose? Would you buy a more expensive one, so the producer could pay his employees better or would you rather take the cheaper one? If there was information on the label that this product is 20% more expensive because the producer pays his employees 20% more than the competition, would you choose it?
Peter Schiff conducted a similar experiment. He talked to people who were leaving Walmart and asked them if they think Walmart employees should earn 15% more? Most of people replied “yes”. Next, he asked if they would accept 15% product price rise. The answers were mixed after this question. Some people replied that they wouldn’t because the low prices are the reason they shop there, but the others said they would be ready to accept higher prices. For those people Schiff had a last question: Would you be willing to give us 15% of what you’ve paid today, and we will give this money to the Walmart employees at the end of the day? Not one of asked people decided to help the employees by giving them money.
The truth is, it doesn’t matter (economically) what people say, but what they do. It’s the actual actions that matter. Human preferences are revealed by action, not by words. It’s true, that consumer power is hard to notice, when we work for the company, and our boss is giving us our daily tasks. No one comes to him and tells him what to do. But the entrepreneur’s power is an illusion, because he cannot force consumers to do anything. The consumer can simply walk away, not use his product or service, or go to the competition if it’s available. The consumer is the king on the market. He decides what to buy and what not to buy, he decides by his choices what should be produced and what profit a producer would make.
▪ Consumer as a market role
Just to be clear, we are not saying that a single consumer will change the company policy, but a consumer as a market role, is a decisive role. Consumers as a group of market participants decide about all the mentioned things. But even as a single customer, you can’t be forced to do anything by an entrepreneur. Some company annoys you? You can stop using their products, and tell every person you can to stop using their products as well. Or you can use similar products from their competitor, who you like better.
At the end, it’s worth it to mention, that a division between producers and consumers is technical, and necessary to explain market roles or functions. People usually have few roles on the market, by being consumer, producer and employee at the same time – like someone who is self-employed. When he buys something, he is a consumer, when he is on the job, he takes a role of an employee, when he invests in new tools, he is an entrepreneur. We will say more about the role of an entrepreneur and his profit in the next video.