Consumers Are Merciless Bosses
“The direction of all economic affairs is in the market society a task of 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.”
—Ludwig von Mises, Human Action
Every day the business pages of the newspaper affirm Mises’s claim about consumer supremacy. Within a three-week span last fall, the Washington Post reported:
Toys R Us to Close 90 Stores
Retailer Announces Restructuring, Charge Against Earnings
Boston Chicken Files for Protection, Lays Off 500, Shuts 178 Restaurants
For years, Toys R Us has been the largest toy retailer in the United States, with 25 percent of the market. Yet in September it announced it would close 90 of its 900 stores in the United States and elsewhere around the world and redesign the rest. Boston Chicken (which calls its restaurants Boston Market) said in October it would close 178 of its 1,143 outlets, lay off 500 employees, and reorganize under the bankruptcy laws. It was once a hot stock, as patrons found the rotisserie chickens and other dishes attractive dining alternatives. But from a high of almost $40 in late 1996, the company’s stock closed at 50 cents a share when the bankruptcy was announced.
What happened to these once-booming companies? Captain Consumer found something he liked better.
Parents came to feel the Toys R Us stores were poorly organized and unfriendly; kids’ taste in toys shifted to high-technology, and the chain was slow to notice. Hungry folks decided that, rather than stop at Boston Market for dinner, it was more convenient to buy rotisserie chickens and other ready-to-eat meals at the supermarket.
People changed their minds. Without notice and without asking anyone’s permission, they abandoned Toys R Us and Boston Market and took their money elsewhere. (Try that with the public school or post office.)
Mises had it right: consumers “are merciless bosses, full of whims and fancies, changeable and unpredictable. . . . If something is offered to them that they like better or that is cheaper, they desert their old purveyors. In their capacity as buyers and consumers they are hard-hearted and callous, without consideration for other people.”
Critics of the free market focus their animosity almost exclusively on the businessman. He is the boss. He decides what to produce and what to charge for his goods. He decides who is hired and at what wage. As Mises notes, it does look that way. Appearances, however, are deceiving.
Entrepreneurs at one level drive the market process. But in an important sense, they don’t act independently. They try to anticipate what Captain Consumer will want. He doesn’t always know what he will want tomorrow because he doesn’t know all that there is to want. No one wanted a personal computer before the idea was thought up. But a few entrepreneurs bet that people would want PCs when they learned of their existence. In that case, the businessmen were right. With the Edsel and countless other things, businessmen were wrong. Those who anticipate correctly make money; those who don’t, lose it. Bankruptcy is the consumers’ way of telling a businessman they would prefer that his capital were in more capable hands.
“Their buying and their abstention from buying decides who should own and run the plants and the farms,” Mises wrote. “They make poor people rich and rich people poor. They determine what should be produced, in what quality, and in what quantities.”
In terms of law, particular individuals own the means of production. But in economic terms, they hold their property only at the pleasure of consumers. “Thus the owners of the material factors of production and the entrepreneurs are virtually mandataries or trustees of the consumers, revocably appointed by an election daily repeated,” Mises said.
The point applies as well to the businessman’s employees. He may write the paychecks, but “The consumers, not the entrepreneurs, pay ultimately the wages earned by every worker, the glamorous movie star as well as the charwoman,” Mises wrote.
That’s the answer to the market’s critics, who can’t understand why Jim Carrey or Mark McGwire command such high salaries, while people in “more important” occupations are paid much less. When fans stop going to Carrey’s movies or McGwire’s ball games, those salaries will fall. The same is true for the “obscenely” large paychecks that corporate executives collect. If consumers reject a corporation’s products, its executives will see their incomes shrink.
Unless the government intervenes. The market’s critics will point to notorious cases of highly paid executives who run inefficient companies. Blame the mixed economy. That term is a euphemism for a market-based society in which government routinely countermands Captain Consumer. When the government bailed out Chrysler, permitting Lee Iacocca and his managers to remain in charge, politicians forced people to do as taxpayers what they had refused to do as consumers. (The bailout consisted of taxpayer-backed loan guarantees. Diversion of capital to Chrysler of course left less for projects consumers would have embraced.)
Government has more subtle ways to keep consumers from carrying out their will. In a free market, if they are unhappy with a corporation’s products, investors will anticipate low or no profits in the future. That will translate into a lower stock price. Noticing the squandered potential, an entrepreneur specializing in takeovers might buy the stock (undervalued in terms of the profit potential), put in better managers, and reap the benefits of a later rise in the stock price. This process is what economist Henry Manne calls the market for corporate management. It protects consumers and stockholders. Of course, it also threatens the jobs of bad managers, which is why the takeovers are called “hostile.”
How might the government, backed by incumbent managers, interfere with the market for corporate management? It can enact measures to impede takeovers. The federal Williams Act, for example, makes it illegal for entrepreneurs quietly or anonymously to buy up controlling shares of a company’s stock. Under cover of “full disclosure” and “investor confidence,” the Act requires that entrepreneurs show their hands early. That of course gives targeted managers time to defend their jobs. Disclosure also tends to push stock prices higher, spoiling many takeover plans.
Ironically, the same market critics who believe that businessmen rule consumers also favor anti-takeover laws, which shelter businessmen from the same consumers.
Maybe it’s not so ironic. Maybe the market’s critics think someone else should be captain.
