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Consumer Sovereignty Is a Problem For Government "Stimulus" Plans

Tags The EntrepreneurInterventionism


It’s a new year and that means we are in for another year of the same rehashed political partisanship disguised as sound economic analysis. The latest rehash is that the US economy is still experiencing the worst post-recession recovery in the nation’s history (a story that’s rehashed year after year) and, as usual, the old saws are dusted off and trucked out as explanations. The usual explanations come in the form of the “savings glut” and the “demand deficit” and the answer is usually increasing spending somewhere and that somewhere is entirely dependent on the policy pronouncement’s partisan leanings. In other words, it’s the job of the government to rush to the rescue, stimulate the economy and make up for the lack of aggregate demand, or the Keynesian policy pronouncement that government should go into debt to make up for the lack of consumption by the consumers on the market.

Of course, if any of this actually worked, the US would be on a rather stable path already since, despite the arguments, government spending and debt has soared significantly in the wake of the 2007 financial crash. To put it into context, the increase in annual US Federal (not to mention State level) government spending since the end of the recession is roughly equal to the entire annual output of Canada and is greater than the economic output of all but nine nations. And that’s just the spending increase. The total spending puts US government entities, if calculated as its own country, #4 on the GDP list, a DoD budget increase away from surpassing Japan.

Given this immense level of spending, how come the recovery is still considered to be relatively poor? The problem is that the entire philosophy of government stimulus; be it interest rate manipulations or direct subsidy and spending, runs into a harsh truth. And that harsh truth is what Mises referred to as consumer sovereignty.

As Mises noted:

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.

In other words, the notions of demand deficit or savings glut are entirely fictitious and it is not the government’s job to try and fix this.

What does this mean? For a demand deficit to be a real issue, it would imply that the consumer, or the demand end of the supply-demand mechanic, is obligated to purchase what is supplied. This is exactly the opposite of what the relationship is. While it is true that, per the common misinterpretation of Say’s Law, it is difficult for demand to manifest without the supply first being brought to market, this by no means implies that the demand is now under any obligation to purchase that supply. If this were true, the road to riches is as simple as hanging up a sign in a store front and presenting whatever junk you find lying around in the window.

What is seen as a savings glut or demand deficit is no more than the sovereign consumer saying, “I have no interest in what is available on the marketplace right now.” That disinterest can either be in what is being offered or at the price which it is offered.

The onus, then, is on the producer, or the supply, to alter or adjust to meet the demand. This is where the entrepreneurial process is so important as the demand frequently does not know what it wants until someone takes a risk and offers up a product or service to the marketplace. It’s not the fault of the buyer that the corner store went out of business but the fault of the operator of that corner store for not offering what the consumer wanted or not organizing his capital in a way that allowed him to deliver that offering to the consumer at a reasonable price. It is up to him to reorganize, either the offering or how it is offered, or go out of business and liquidate that capital to someone else who may have a better insight on the desires of the market.

Where the prolonged recession recovery comes is not because of this mythical insufficient demand but by the very policies the government is engaging in to fight this mythical problem. By boiling down economic activity from innumerable granular transactions between a near infinitely varied mixes of interests into simple aggregates, the government creates the misconception that it can fix things by boosting the “gross” in “gross domestic product.” The only way it can do so is by boosting the consumption of pre-existing goods and services. The very same goods and services the sovereign consumer has rejected.

Doing this overrides the desire of the consumer and forcibly directs their resources to purchase those very same goods and services they previously did not want and, by the basis of the taxation system, don’t even receive even the modicum of benefit they may otherwise have obtained if they were forcibly marched into the store to buy a product. Since the government can’t tell the difference between a pet rock and an iPhone, it will just assume the product or services it purchases or subsidizes are part of this demand deficit and not the market losing interest in what is being offered with attempts to bail out failing entities leading to future supply gluts, is again manifesting in automobiles when the market was not permitted to liquidate to match the new demand requirements.

Government then expects the market to just magically start working again and the demand just start buying again without ever concerning itself about the what and for how much and uses the reinvigoration of old marketplace product sales as a benchmark to cease intervention; which is a situation that will never manifest. Even fully subsidized to the point of “free” won’t necessarily manifest demand, as the Soviets have long proven with multiple supply gluts under their planned economy.

By trying to fight this illusionary problem, government has essentially ensured that the problem will persist near indefinitely and require even greater luck and chance to find those products and services the market desires. Those taxes, subsidies, and competition for debt in the credit markets does little more than ensure the entrepreneurs who have the ideas are now cut off from the necessary capital and labor required since it is tied up in subsidized and artificially supported entities. Even if an entrepreneur can find a way to obtain the capital and personnel required to start-up his new business, those sovereign consumers are being taxed to support industries they no longer desire and lack the resources necessary to complete the transaction.

If government was really concerned with a sustained, strong, economic recovery, it would first begin by ceasing support of non-performing entities. While it would be painful, given the length of time non-valuable companies have been allowed to persist or even propagate, those lost jobs and closed businesses will now have a clear path to be reallocated to more valuable uses. The government can do this by cutting spending and eliminating the immense regulatory burden placed on the economy as a whole.

The economy can’t recover when the government is interfering with the ability of suppliers to reorganize, reallocate, and reinvest. Because the demand side of the equation will not suddenly decide it will start buying the products and services it has already rejected. If a brutal totalitarian society like the former Soviet Union couldn’t force people to consume products in the exact quantities and mix it dictated, the United States can’t, either and won’t see any serious economic recovery or sustained growth until it ceases with the expectation that consumers will fall in line with expectations. You can lead consumers to the store, but you can’t make them buy.


Justin Murray

Justin Murray received his MBA in 2014 from the University of St. Gallen in Switzerland.

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