Power & Market

It is preposterous to assume what customers say is more important than where they place their feet and the price they pay for products or services. The customer's mind is still elusive and challenging for entrepreneurs. If understanding the mind of the customer were easy, everyone would do it!

The insights of the Austrian school of economics tell us that people act purposefully toward future betterment. That is, customers and entrepreneurs both act to attain better future situations than their current situations compared to if they had not acted at all. Customers operate on a value scale, an important insight developed by Carl Menger, elucidating that value is in customers' minds. In this regard, Menger urged entrepreneurs to "reduce the complex phenomena of human economic activity to the simplest elements."1

I echo the sentiments of Menger, but some do not. For example, a recent article titled "2 Simple Steps for Testing If Your First Customers Like Your Product" recommends surveys and the search for "moments of truth" and "tipping points." The only simple way of ascertaining customers' product sentiment is through the market itself.

The market process provides excellent insights into customers' unspoken motives and whether they like your products and services. The best way to figure out if your customer likes your products is to turn to market phenomena. That is, the market price, as reflected by customers' subjective valuation and competitors' offerings. Different opinions about the value of a product or service are drawn out through this process. The real test, the market signals, shows how much and to what extent customers are willing to sacrifice to attain your product or service offering.

The customer wants the product with high use value, intended for whatever purposes to help them reach their end. The value of any product is in the customer's eye, the same way that beauty is in the beholder's eye! We never truly know to what extent a customer chooses your product over a competitor's. That is to say, the only reliable data on customer sentiments is that customers have purchased your products—the more, the merrier. Ludwig von Mises in Human Action expressed that "It is ultimately always the subjective value judgments of individuals that determine the formation of prices.”2

Market prices and exchanges alert the entrepreneur whether the product is more or less valuable to the customer than the forgone opportunity to withhold their cash holdings. Money measures prices, and prices measure value. Buying and selling or market abstention determine prices. As such, prices are what customers are willing to pay for a product based on their subjective valuation, keeping in mind their future benefit from that product.

In his salient book Economics for Real People, Gene Callahan agreed that "only real market prices convey information on the freely chosen values of acting man."3

Therefore, it is sensible to observe market price signals as a means of analyzing customer sentiments. Customer dissatisfaction and loyalty occur when product or service incongruities exist. Market incongruities also exist between the entrepreneurs' perceptions of changing market realities. The entrepreneur's function is to address any market incongruities in which the customer, because of market changes, is better off than they were before. The market is in constant movement, which means customer preferences are in perpetual motion.

Retention of customers is a less complicated phenomenon which an entrepreneur might observe. Only individuals act in concert with one another in a spontaneous way to reach their goals in any given market. As the author of the cited article proposes, the concept of customer retention is somewhat misguided, because retention relates to competitors' actions and their substitutable products. The question should be, how many substitutable products exist in my ecosystem? Are other entrepreneurs doing something that I am not doing?

First, the customer is the holder of the perception of value. Secondly, the customer making future choices is the cornerstone of the basic axiom of action. While taste preferences change over time, so do the market actions of your customers and your competitors. The first axiom of praxeology is that people act; they act to pursue a better situation based on the choices they are presented with. Mises reminds us of this in his work Human Action. What the customer says and the action the customer takes are two different things, because it is the customer's action that provides market signals to the entrepreneur. As long as you satisfy the customer's needs and wants, profits will ensue, and losses decrease.

You strive to get rewarded for the risks involved with bringing new products to the market. Your competitors are seeking the same market reward.

Some do not understand that competition works as a signal of incongruities, leading to profits or losses. Indeed, competition exists so long as customers have market choices and can exercise them. The reality is that customers vote with their dollars and feet. They may voice their liking of your products, but at the same time be enthralled with a competitor's quality, service, and prices. Competition, therefore, acts as the entrepreneur's light post, guiding them toward market opportunities that may go unrealized or deterring them from those that are unfit.

Competition, in the Austrian view, is aimed at who can serve the customer best. Providing the best quality and product to the customer is the leading role of entrepreneurial competition. Competition is not and should not be insidious—rather, it should be productive and dynamic. If entrepreneur A wants to enter a market with capital to prove he or she can do things better than entrepreneur B, that should be his or her choice. Entrepreneur B will come to realize they missed many market opportunities only because that knowledge appears as a result of the competitiveness of entrepreneur A. For example, customers may choose the products of entrepreneur A one day and B the next.

It is not what customers say, but what they do. Entrepreneurial insight about the market and the changes that will occur should be the guiding light for entrepreneurs. Entrepreneurs have to ascertain how people will respond to changes. Customer purchases, retention, a likeness of products or services, and loyalty are results of entrepreneurial market observation, and not causes.

• 1. Carl Menger, Principles of Economics, trans. James Dingwall and Bert F. Hoselitz (Auburn, AL: Ludwig von Mises Institute, 2007)
• 2. Ludwig von Mises, Human Action: A Treatise on Economics, scholar’s ed. (Auburn, AL: Ludwig von Mises Institute, 1998).
• 3. Gene Callahan, Economics for Real People: An Introduction to the Austrian School, 2d ed. (Auburn, AL: Ludwig von Mises Institute, 2004).

On Tuesday Reuters reported comments made by Republican senator John Thune:

Judy Shelton, U.S. President Donald Trump’s controversial pick to serve on the Federal Reserve’s interest-rate-setting panel, does not currently have the votes to win confirmation in the U.S. Senate.

Hope still remains as Senator Thune’s role as majority whip requires him to track votes made by Republicans; the official vote has not yet happened. In the senator’s words:

She’s a priority for the White House. It’s the Federal Reserve. It’s important. So, obviously, we want to get it done. But we’re not going to bring it up until we have the votes to confirm her.

The story is troubling because Republican’s have a 53–47 senate majority, but still not enough votes to approve the nomination. This raises questions for the Grand Old Party; mainly, what is the hesitation?

The Wall Street Journal echoed the “controversial selection” narrative:

Ms. Shelton has been a longtime proponent of a return to the gold standard, which would limit the Fed’s ability to influence inflation and employment, and concedes that her views are outside the mainstream of economics.

Of course, limiting the Fed’s ability to influence the free market, including inflation and employment is the purpose of the gold standard. The controversy centers around members of Congress and the Fed who may not want to concede the power to influence the market. It’s dangerous to those at upper levels of government and the Fed, as their control rests in the ability to manipulate interest rates and create US dollars in order to buy assets and run perpetual budget deficits.

A month ago a group known as “Fed Alumni,” comprised of various former Federal Reserve employees, as well as several presidents, published an open letter to the Senate with thirty-eight signatures asking them to reject the nomination. The number now stands at seventy-seven signatures.

Upon reading the letter, the problem with mainstream economics is revealed:

She has advocated for a return to the gold standard; she has questioned the need for federal deposit insurance; she has even questioned the need for a central bank at all.

The dogma is followed by hubris:

The Fed has serious work ahead of it. While we applaud the Board having a diversity of viewpoints represented at its table, Ms. Shelton’s views are so extreme and ill-considered as to be an unnecessary distraction from the tasks at hand.

If there is a controversy, it should be about the “serious work” the Fed has ahead of it. With the new goal of aiming to “achieve inflation moderately above 2 percent for some time,” it appears very few are asking the purpose behind this. Especially since the Fed is moving away from the belief in there being a tradeoff between inflation and unemployment, there seems little reason to push for higher price inflation any longer.

Contrast this sentiment with those in science, math, or physics, where questions and the ability to refute or prove theories allows these fields to advance. Yet economics is devoid of this advancement; as we can see, when someone offers ideas such as a return to the gold standard, the result is contempt. But it’s one thing to petition congress claiming lack of qualifications, yet quite another to offer coherent arguments, articulating where exactly the problem lies. So far, we’re still looking for a critique which goes beyond being discredited for brainstorming economic solutions.

This somewhat explains why economics is divided into “orthodoxy” and “heterodoxy,” which normally refer to religious doctrine—heterodoxy for beliefs falling outside the mainstream. Perhaps it’s time for the Fed to stop treating economics like a religion and start searching for the truth, where someone like Judy Shelton is praised instead of punished for questioning economic tradition.

Much uncertainty remains as we wait for 51 democratically elected senators to give their blessing, allowing Ms. Shelton to ascend to the hallowed halls of the Eccles Building, where she can join the ranks of those select few who have the almost godlike ability to decree paper (or its electronic equivalent) legal tender. Maybe long-standing beliefs like money creation leading to prosperity should be widely questioned: If it holds up to scrutiny then great; if not, then why should we adhere to it?

Inflation targets are part and parcel of central banking policy, the Fed’s mandate centering around the 2 percent inflation target. But when was the last time anyone asked why a 2 percent inflation target?

To address this while avoiding potential "bias," we can look at history through the lens of one of the largest mainstream newspapers in the world, the New York Times. The following article takes us back to 2014 when the paper published "Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel."

It all started in 1989, when Don Brash, managing director of the New Zealand Kiwifruit Authority accepted the position of head of the Central Bank of New Zealand. Appearing to have no understanding of Austrian economics, he and his finance minister devised a plan to combat the surging price inflation of the '70s and '80s.

As fate would have it, Mr. Brash remembered the former finance minister telling the media he was “aiming for inflation of around zero to 1 percent.” Brash recalls that “it was almost a chance remark,” yet it sparked one of the most destructive policy decisions of all time, which has only worsened since. He admitted:

The figure was plucked out of the air to influence the public’s expectations.

Ultimately the bank settled on an "inflation target" between 0 and 2 percent. The announcement was considered a "radical idea" at the time, but lo and behold:

It created a kind of magic of its own. Merely by announcing its goals for inflation…New Zealand made that result a reality.

Of course, no proof has ever been offered of how an "inflation target" can be met simply by stating it as a goal. If it were that easy, the Fed would have met the target decades ago.

Luckily for Brash, inflation in New Zealand was 7.6 percent in 1989 when the target started and only 2 percent by the end of 1991. This bit of providence accelerated the idea as the head of the central bank

did a bit of a global campaigning, describing New Zealand’s success to his fellow central bankers at a conference in Jackson Hole, Wyoming.

Canada, Sweden, and Britain soon followed in New Zealand's footsteps and eventually even the Fed. Our fate was sealed on the whim of policymakers.

It was not without opposition, though, as there were some naysayers who believed that

A dollar today should have the same buying power as a dollar in a decade, or two or three.

However, the "alternate" view was that keeping inflation low could be dangerous. This was championed by an up and coming Fed governor, Janet Yellen, who expressed concern that zero inflation could "paralyze the economy," especially during economic downturns. In a 1996 July Federal Open Market Committee (FOMC) meeting she offered an idea to support targeting:

To my mind the most important argument for some low inflation rate, is the "greasing-the-wheels argument" on the grounds that a little inflation lowers unemployment by facilitating adjustments in relative pay in a world where individuals deeply dislike nominal pay cuts.

Here we see the “Phillips curve” argument that is used to justify inflation by linking it to unemployment. This is move that now, twenty-four years later, the Fed is shying away from by claiming that the “Phillips curve is flat”—in other words, it’s not working as planned. Or, as Fed vice chair Clarida expressed it, models of maximum employment "can be and have been wrong."

Adding to the prophetic quotes, Yellen said in 1996:

A little inflation permits real interest rates to become negative on the rare occasions when required to counter a recession. This could be important.

The rest, as they say, is history. In time, the idea of a 2 percent target became economic orthodoxy—so much so that former Fed vice chair and Princeton economist Alan Blinder declared that

Central bankers have invested a lot and established a great deal of credibility on their 2 percent inflation target, and I think they’re right to be very hesitant to give it up.

By choosing an inflation target of 2 percent, the field of economics spent several decades barely advancing. Instead, academics and planners remained preoccupied with manipulating the data and providing guidance fueled by a narrative that was plucked out of thin air, aided by catchy phrases such as "greasing the wheels," and propagated by outdated economic models like the Phillips curve. Sadly, with 2 percent inflation the conclusion came first, followed by the theory. Economic explanation was only needed to support the theory at all costs.

If 2020 has taught us anything, it’s that police throughout the Western world will not hesitate to forcefully impose arbitrary and absurd government regulations.

Consider just a few examples from this month alone. In Australia a pregnant mother was arrested in front of her family for a Facebook post inviting fellow Aussies to an antilockdown protest. In Spain a fourteen-year-old boy who refused to wear a mask was thrown to the ground by an officer who then kneeled on the boy’s back as he screamed in pain. In the US two policemen removed a mother and her year-old child from an airplane, because the infant’s face was not covered.

Incidents such as these are often reported with indignation by pundits in the right-wing media. Conservative commentators rightfully warn us that government is overstepping its bounds and that we may be the next to get an unwanted visit from the police or even a shove to the ground and a knee to the back.

Yet it’s the same right-wing pundits who are the first to defend the most excessive police brutality whenever someone refuses to comply with an officer’s orders. They faithfully “back the blue” with almost blind loyalty and even support arming the police with military-style weapons and equipment.

Do these conservatives fail to see their own contradictions?

Ask yourself: If full-fledged socialism comes to the Western world, who will be on the front line imposing it? It won’t be the beta male bureaucrats forcing you to comply. It will be the “thin blue line” of the police—equipped with their military-grade weaponry—that will physically force you to obey orders. Don’t think they’ll do it? Just look at the cases I cited.

I am not advocating "defunding" the police. Nor am I suggesting that a security force is antithetical to a free society. We need some form of law enforcement personnel. Rather, I’m asking conservatives to reflect for a moment on their contradictory views. In our current system, government and law enforcement are one and the same organization. You cannot be critical of laws that infringe on our liberties while praising the men and women who dutifully enforce those laws—if necessary with violence.

Our freedom depends on a healthy skepticism toward government. That skepticism should be applied to all facets of the state, especially the police.