This post is one in a series entitled Posthumous Refutations. Previously in this series: What That Jobs Report Might Really Mean.
This series sets the writings of Mises, Rothbard, and other departed Austrian economists against the economic illiterates staffing today’s punditry. Of course, while it might seem more fitting to set quotes from such great men against powerful individuals like Mortimer Zuckerman and Christina Roemer, it is also important to use their wisdom to refute small-timers as well. Economic interventionism has been swelling for the past 120 years, not just because of overweening elites like Zuckerman and Roemer, but because of millions of little busybodies agitating for local interventions.
One such control freak is Annette Floystrup, an anti-development activist in Oakland, California. Floystrup recently wrote a front page editorial for the Berkeley Daily Planet opposing Safeway’s plans to expand its store in the Rockridge neighborhood from 22,500 square feet to 50,400 square feet.
In the editorial, Floystrup rhetorically asks:
But does the neighborhood need a larger Safeway? Within a 1.6 mile radious of the College Avenue Safeway, there are seven other markets–Berkeley Bowl, Andronico’s, Whole Foods, Trader Joe’s, Village Market, Star Market and the Safeway at Broadway and Pleasant Valley. In addition, we have a Sunday year-round farmers’ market at the DMV on Claremont, Market Hall specialty shops and other locally owned independent food shops. We are well served.
Is that a royal “we”? In any case, it’s awfully imperious to presume to speak for every grocery shopper in the neighborhood regarding the degree to which they are served. She then flatly states:
Safeway is a big corporation.
For many East Bay readers, she might as well have just stopped right there. Case closed! However, she continues by presenting the reader with two blatantly false dilemmas…
It does what it does for its own bottom line. There is no public benefit concept underlying its development.
The true question is, will this project really benefit the neighborhood, or will it benefit Safeway?
Of course, the real answer is, “most likely, both”. Safeway’s proposed expansion is an entrepreneurial venture. The company has forecasted that it would indeed improve its “bottom line” (profits) by expanding the store, or else it would not want to undertake such a project. But implicit in any such profits would be the fact that Safeway is satisfying the most urgent wants of consumers to a higher degree. At bottom, it is the consumers who call the shots in a market economy.
As Ludwig von Mises explained in Human Action, chapter 15, section 4:
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. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.
The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities.(…)
Only the sellers of goods and services of the first order are in direct contact with the consumers and directly depend on their orders. But they transmit the orders received from the public to all those producing goods and services of the higher orders. For the manufacturers of consumers’ goods, the retailers, the service trades, and the professions are forced to acquire what they need for the conduct of their own business from those purveyors who offer them at the cheapest price. If they were not intent upon buying in the cheapest market and arranging their processing of the factors of production so as to fill the demands of the consumers in the best and cheapest way, they would be forced to go out of business. More efficient men who succeeded better in buying and processing the factors of production would supplant them. The consumer is in a position to give free rein to his caprices and fancies. The entrepreneurs, capitalists, and farmers have their hands tied; they are bound to comply in their operations with the orders of the buying public. Every deviation from the lines prescribed by the demand of the consumers debits their account. The slightest deviation, whether willfully brought about or caused by error, bad judgment, or inefficiency, restricts their profits or makes them disappear. A more serious deviation results in losses and thus impairs or entirely absorbs their wealth. Capitalists, entrepreneurs, and landowners can only preserve and increase their wealth by filling best the orders of the consumers.(…)
The consumers determine ultimately not only the prices of the consumers’ goods, but no less the prices of all factors of production. They determine the income of every member of the market economy. The consumers, not the entrepreneurs, pay ultimately the wages earned by every worker, the glamorous movie star as well as the charwoman. With every penny spent the consumers determine the direction of all production processes and the details of the organization of all business activities. This state of affairs has been described by calling the market a democracy in which every penny gives a right to cast a ballot. 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 policies. But on the market no vote is cast in vain. Every penny spent has the power to work upon the production processes. The publishers cater not only to the majority by publishing detective stories, but also to the minority reading lyrical poetry and philosophical tracts. The bakeries bake bread not only for healthy people, but also for the sick on special diets. The decision of a consumer is carried into effect with the full momentum he gives it through his readiness to spend a definite amount of money.
Mises called the principle he outlined above “consumer sovereignty”. While among modern Austrians, reasonable misgivings have been expressed regarding this term, it is a nice encapsulation of how the rational, purposive endeavors of the individual, through market exchange and the division of labor, gets extended to the quasi-rational, quasi-purposive quasi-endeavors of society.
For example, take a subsistence farmer named “Quintus”. “Quintus-the-eater” can be said to be sovereign over “Quintus-the-farmer”, because Quintus farms for the sake of eating, not the other way around.
Now let’s extend the economy from one person to two. Let’s say “Sextus” is a sheep-herder. Quintus and Sextus exchange corn for wool. Quintus and Sextus, qua consumers, can be said to be sovereign over Quintus and Sextus qua producers, because they farm and herd for the sake of eating and staying warm, not the other way around.
This principle is just as true for a global economy as it is for a two-man economy. We are all consumers, and most of us are producers, although I have doubts about Ms. Floystrup in this regard. Thus, we are all of us masters, and all of us servants.
Floystrup’s characterization of Safeway as somehow persecuting the neighborhood is false, because it gets the relationship between producer and consumer entirely backwards. Safeway as a producer serves at the pleasure of the neighborhood as consumers. Of course the owners, managers, and workers of Safeway live in their own neighborhoods, and there they are the masters (consumers) and others are the servants (producers).
Of course, unlike in political sovereignty, there is nothing wrong with all these relationships, because they are totally voluntary. The same cannot be said of Floystrup’s relationship with Safeway as she would have it. Through promoting zoning regulations, she would presume to be its sovereign in the political sense, thereby hamstringing Safeway’s commendable attempt to better serve its rightful “masters”, and frustrating her own neighbors’ opportunity to be better served.
