In the market economy every specialist—and there are no other people than specialists—depends on all other specialists. The mutuality is the characteristic feature of interpersonal relations under capitalism. The socialists ignore the fact of mutuality and speak of economic power. For example, as they see it, “the capacity to determine product” is one of the powers of the entrepreneur. One can hardly misconstrue more radically the essential features of the market economy. It is not business, but the consumers who ultimately determine what should be produced. (25-26)
--Ludwig von Mises, The Elite under Capitalism in Economic Freedom and Interventionism: An Anthology of Articles and Essays, Liberty Fund, Indianapolis.
One of the most important contributions to economic thought was Dr. Ludwig von Mises’s insistence that consumers—the masses of people not a handful of capitalists—ultimately run the market economy. The masses of people—the ‘labor class’ are also the consumers. From The Economic Foundations of Freedom, p.6, he wrote: “The same people who are employed by the big corporations are the main consumers of the goods turned out.”
Actually, this opening quote is fairly tame because it understates the full extend of the power placed by the free market economy in the hands of the masses. It does so by restricting the discussion to production of consumer goods. A full treatment of this issue would delve into how the consumers, control the distribution of income, how the time preferences of consumers control the supply of loanable funds thus influencing the rate of interest, how the consumers form the prices of all goods both producer (i.e., material factors of production, human or labor) and consumer, how the consumers decide what gets produced in what quality and in what quantity, and how the consumers ultimately regulate profit and loss. The study of government interventionism in economic affairs can always be reduced down to the one common denominator of substituting government control for consumer control.
A central bank means that a handful of central bank governors have replaced the consumers in setting the interest rate. By unilaterally imposing an interest rate, the central bankers can distort the time preferences of the consumers. (“Time preferences” refers to how ‘future oriented’ versus how ‘present oriented’ people are, so it asks do they want to have more goods today or more goods in the future.) Redistribution of income through transfer payments means that legislators not consumers get to decide what the income distribution will be. Government bailouts of businesses are the overriding of the consumers’ decision to impose losses on companies and the overriding of the consumers’ decision to shift the control of factors of production away from inefficient producers and toward more efficient ones. Trade barriers are a way to override the consumers’ purchasing decisions by replacing them with the decisions of trade negotiators. Labor union contracts substitute the union’s wage demands for those of the consumers. State funded health care and education substitute the plans of social engineers for those of the consumers. In sum, government interventionism always means the substitution of the government’s unilateral plan for the personal plans of the masses of consumers.
Consumer sovereignty means decentralized control. It means that individuals can form their own plans in life and endeavor to make them a reality. It means that individuals get to decide what is produced, when it is produced, who produces it (i.e., who controls the factors of production), how much of income should be invested or saved and how much of it should be consumed, and a whole host of other decisions. This is a perfect recipe for stopping tyranny in government because power has been distributed into millions of hands. Moreover, notice that everybody wins in this scenario—both the producers and the consumers. By obeying the orders of the consumers, the producers become rich. Therefore, a harmony of interests has been achieved; everybody wants to keep the system going because everybody is winning under it. Everybody wants to keep working together. Everybody wants to cooperate. The owners of the firm want to keep satisfying the consumers so that they can keep earning profits. The consumers want to keep lending funds to this firm so that it can expand and grow and satisfy even more of the consumers’ needs.
Now, contrast consumer sovereignty with government interventionism, which is basically just producer sovereignty. Producer sovereignty means that the producers of goods get to dictate terms to the consumers. The best illustration is trade protectionism where the producers, through trade barriers, get to dictate to the consumers what they will be allowed to buy. All government interventionist measures lead to social disharmony because they inherently create winners and losers. In the examples above one group wins at the expense of another. The losing group is always the masses, the consumers. You cannot run a society where some groups are winning at the expense of other groups. This just breeds hatred, hostility, frustration, resentment, and maybe even revolution.
Mises goes even further and argues in Planned Chaos (the Epilogue to his treatise on Socialism called Socialism: An Economic and Sociological Analysis) that government regulations of business sow the seeds of socialism of the German pattern through a gradual step-by-step process of regulation, failure, more regulation, more failure and so on. This process is reminiscent of the Theory of Bureaucratic Displacement, mentioned in my earlier blog pertaining to the continual ‘dumbing down’ problem in public education. This ‘socialism of the German pattern’ goes by the name Zwangswirtschaft (compulsory economy) and was used by the Nazis. Conceptually, this process is like a cancer that slowly spread to infect all stages of production. Once the government has the power to regulate and restrict activities at all stages of production, it can easily control the entire economy, meaning, it can override all the wishes of the masses of consumers.
In conclusion, the choice is ultimately between consumer sovereignty and producer or government sovereignty. Consumer sovereignty places the power to make decisions in the hands of individuals. Because power is now so widely dispersed, tyranny in government becomes a relic of history. The government will return to its limited role as servant of the people, meaning that the government will be restricted to doing only those things delegated to it by the people. Producer sovereignty or government sovereignty means that the masses will be placed in a subordinate role. They will no longer be making decisions; instead, they will be taking orders from their superiors. In this world, the consumers, the masses, have no way of controlling the behavior of the government. No ‘checks and balances’ exist under such a scenario. This in turn, creates the distinct possibility of the arbitrary use of power and hence the creation of tyranny. The choice then, is between individual liberty and slavery.