Mises Wire

The Market is True Democracy

Disenchantment with the democratic process is a common theme of contemporary politics. The major complaint behind this trend is the idea that “our” political institutions have been subverted by powerful interests that deny voters a meaningful voice in the decision process. Concern is likewise growing that democratic decisions do little to safeguard the rights of voting minorities.

These criticisms hold some grains of truth, though just as often they’re used by losing parties to rationalize outcomes they don’t approve of. But it’s true that people are increasingly angry with a process that leaves them high and dry whenever they happen to be counted among the unlucky 49%.

If only there were a system of democratic decision-making in which all members of society had a voice, a system that couldn’t be controlled by the rich and powerful. If only there were a system in which all people could choose to distribute wealth to those that they feel are best at improving the lives of their fellow human beings.

Of course, there is such a system: it’s called the market. The free market is a genuine democracy that offers all the benefits supposedly found in democratic political systems without their drawbacks.

The analogy between markets and democracy has a long history in Austrian economics. For example, the American economist Frank Fetter argued that the market is “a democracy where every penny gives a right of vote” (Fetter, 1905, p. 394). When markets are free from monopoly privileges, consumers’ values determine the course of production:

Undoubtedly there is here a great economic force which an enlightened public opinion, even without a formal association, can make in large measure effective. Every individual may organize a consumer’s league.... He has a dollar; will he go to the theater or buy ten dishes of ice-cream? He decides to buy a book, and more type and paper are made, and more printers are employed.... Every purchase has far-reaching consequences… You cannot escape a choice even by burying the money, for that is either a demand for gold or a gift to the issuer of paper currency. (Fetter, 1905, pp. 394–395; emphasis added)

Each consumer constantly “votes” through buying and refusing to buy. Rich and poor alike have a say in what is produced, and in what quantities and qualities.

Mises adopted Fetter’s analogy in his own work, but pointed out that it’s mistaken to think that markets attempt to imitate democratic methods. Rather, the relationship is the other way around:

It would be more correct to say that a democratic constitution is a scheme to assign to the citizens in the conduct of government the same supremacy the market economy gives them in their capacity as consumers. However, the comparison is imperfect. In the political democracy only the votes cast for the majority candidate or the majority plan are effective in shaping the course of affairs. The votes polled by the minority do not directly influence politics. But on the market no vote is cast in vain. Every penny spent has the power to work upon the production processes. (Mises, 1949, p. 271)

If entrepreneurs want to survive in the market, they have no choice but to supply better goods and services at lower prices. They cannot afford to ignore the opinions of even 5% of voters, let alone 49%. If they do, their customers quickly find other candidates and parties to patronize. In Mises’s words, “entrepreneurs are virtually mandataries or trustees of the consumers, revocably appointed by an election daily repeated” (Mises, 1949, p. 271). Rather than pander to a few special interests, entrepreneurs cater to individuals and niche markets in addition to the needs of mass production.

Fetter and Mises both realized that the market economy offers a unique type of “democratic” decision-making in which the competing values of countless individuals are reconciled. This competitive method stands in stark contrast to the planned organization of a socialist economy:

Literary and oratorical contests are passed upon by a set of judges whose opinion of merit determines the award.… Yet there are literary and oratorical contests decided very differently. If a man advertises himself as an orator and charges fifty cents admission to his lecture, everyone who goes to hear the man votes that he is an orator; everyone having money but staying away votes that he is not of such value. The one is judgment by the authoritative, the other by the competitive, method. The essence of the method of distributing by authority is that one individual (or group of individuals) judges of the deserts or duties of others, decides what others must get or must pay, not what he himself is willing to pay.… It is the essence of socialism that it would make this plan universal. (Fetter, 1905, pp. 407–408; emphasis added)

The democracy of the free market is valuable precisely because it places power in the hands of only those entrepreneurs who demonstrate the ability to use it for the benefit of the masses. This mandate can be removed at a moment’s notice if consumers lose faith, so entrepreneurs constantly struggle to keep it. However, what Fetter calls the authoritative method overrides this mandate, replacing it with the arbitrary decisions of regulatory agencies and the business interests they support. Whether democratic or socialist, political organizations cannot live up to the standards set by the competitive market. An “I voted” sticker is no substitute for a simple receipt.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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