As individuals, one of the most important roles we will ever play in the marketplace is that of the consumer. But this principle of consumer sovereignty is often lost on society today. For some reason, opponents of capitalism have adopted the belief that consumerism and the market process have made us less free, rather than granted us the opportunity to voice our opinions in the most powerful way possible.
But contrary to these beliefs, we are not slaves to a capitalist system. Instead, as consumers we are the kings of capitalism, determining which products are made and how much we are willing to pay for them.
As Ludwig von Mises wrote in Bureaucracy:
“The real bosses [under capitalism] are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or is cheaper, they desert their old purveyors.”
Each time we open our wallets and purchase a good or service we are voting in favor of the good or service purchased. Additionally, we are sustaining the practices of the businesses and entrepreneurs who are providing us with these desirable products. It is for this very reason that consumer boycotts have been such a powerful source for change throughout time. It is not enough to simply voice our dissent against someone or something. By refusing to give monetary incentives to companies with whom we disagree, we are sending a most powerful message.
However, a producer is, of course, free to take or dismiss this market feedback. Though if he or she does simply ignore it, they might soon see their sales suffer as a result. Again, we see this happen with boycotts often. But there is so much more to consumer sovereignty than just boycotts.
By letting consumers decide which products and services are in demand, consumers are effectively the captain of the ship and help the producers direct resources to whatever goods we so choose.
As Mises writes:
“The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.”
Consumers > Central Planners
At the core of the principle of consumer sovereignty is the belief that consumers, and not central planners, should determine what products get made and at what price point they are sold. Only a consumer can understand her own wants and needs; yet central planners have wreaked havoc on the market process throughout time, claiming that they know better what the people want and need.
But as economist F.A. Hayek has reminded us, a body of central planners cannot possibly possess the knowledge needed to make such decisions:
“To assume all the knowledge to be given to a single mind…is to disregard everything that is important and significant in the real world.”
Instead, a truly free market economy operates on consumer feedback. When consumers buy something they are not only supporting that product and its producers, but they are also creating jobs in a very real sense. By voting in favor of good or service, consumers are using their wallet to direct resources to that producer. The producer will then use that money to hire the employees needed to meet the production demands for the product. Obviously, higher demand for a product will result in a higher demand for workers in which case, almost everybody wins.
Contrast this system of consumer sovereignty with that of a communist state, where the government arbitrarily decides what products should be made and how many people should be employed to make them. And keep in mind, these decisions are not based on actual market interactions, but at the will of the state, in which case, everybody loses.
In many ways, this power placed in the hands of the consumer allows them to vote with their dollars every single day of the year, instead of merely going to the polls every two years.
Robert Murphy writes:
“Mises demonstrated that, as far as political analogies go, it would be more correct to view the consumers as the citizens of a giant democracy, in which elections are held daily. Those formally ‘in charge’ of the means of production are only temporary custodians, whose position can be revoked at any time if they fail to serve the wishes of the true masters, the consumers.”
For further commentary on consumer sovereignty, enjoy this video from Jacob Hornberger and Richard Ebeling.