In his 1944 little masterpiece, Bureaucracy, Ludwig von Mises identified the supreme agent in the free market economy: the consumer.
The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.
Mises never deviated from this argument. He showed how customers’ bids in the free market provide profits to some capitalists, and losses to others.
Neither the capitalists nor the entrepreneurs nor the farmers determine what has to be produced. The consumers do that. The producers do not produce for their own consumption but for the market. They are intent on selling their products. If the consumers do not buy the goods offered to them, the businessman cannot recover the outlays made. He loses his money. If he fails to adjust his procedure to the wishes of the consumers he will very soon be removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.
This is the system of cause and effect in the free market. The consumers are in charge. And they are ruthless.
The real bosses, in the capitalist system of market economy, 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 that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy.
This insight is not understood by many people. The collectivist mindset is the default setting for most people. It takes an act of will to internalize Mises’s analysis. This is as true among self-professed defenders of capitalism as it is for the critics.
THE MERCANTILIST MINDSET
The Keynesian worldview is an extension of the mercantilist worldview. Adam Smith attempted in 1776 to refute mercantilist ideas, but on the whole he was unsuccessful. Today, most people are mercantilists, just as they were in 1776.
Let me provide an example. American corporations set up manufacturing plants in China. They do so because they can buy some kinds of Chinese labor cheaper than they can buy comparable American labor.
This raises a question. How do American corporations expect Americans to be able to buy the output of these Chinese laborers, when American corporations do not hire American workers at high wages?
The senior managers of American corporations do not make decisions in terms of the effects of these decisions on Americans in general. They do not make their decisions in terms of their effects on the employees of corporate America. They make their decisions based on only one market: the market for their particular manufactured goods. They do not care about America in general.
Let me tell you who else does not care about America in general: individual Americans. How do I know this? Because they do not “buy American.” They never have. When the federal government lets them buy whatever they want, they buy the cheapest good that will give them the value they expect. They do not care who makes it. They do not care if it is imported. They do not care if Walmart buys it from an American manufacturer in China or an American manufacturer in Chicago. All they care about is price and quality.