Entrepreneurs drive the economy; so what is the role of consumers?  Put simply, they are judge, jury … and executioner.

Consumers represent the ultimate democracy of the marketplace.  They decide who succeeds (and by how much) and who fails.  They determine what products are most urgently needed and what goods are either unwanted at the moment or unwanted at a price that can be provided at any given time.  The sovereign consumers decide whether or not the actions of entrepreneurs result in profit or loss.

In an odd paradox, there is a common misconception in modern liberal thought that, at the same time, both embraces and denies this simple truth.  On the one hand, it is believed that consumers drive the economy and that interfering in the economy to place ever more resources into the hands of the consumer can solve all economic ills.  On the other, modern liberalism embraces any number of interventions that pretend that the consumer simply cannot be trusted with this power.

The entrepreneur acts first, but he must do so with an eye toward meeting the demands of the consumer.  If he undertakes any action that fails to meet consumer needs to the greatest extent and at the lowest possible price, the consumers will exercise their power to penalize him.  They will seek out the products of a competitor, attempt to locate substitute goods that will meet their most urgent needs in another way or they will ignore the producers’ goods to an extent that will put such enterprises out of business.

In such an environment, the entrepreneur who wishes to survive the judgment of consumers cannot engage in “price gouging” because, in a marketplace unrestricted by government, there will always be another means of meeting those customer demands.  In such an environment, the entrepreneur cannot incur costs that make his products less competitive with those of other producers.  Taken to its logical conclusion, it is the consumer that imposes restrictions upon producers that prevent them from paying above market prices for any resource – capital, material resources … or labor.  In that sense, it is the sovereign consumer that determines not only the level of wages that can be paid in the marketplace, but even whether or not the producer must consider seeking labor from (foreign) markets where the costs are materially lower.

The mandate of the consumer is ultimately inviolable and yet it is contradictorily believed that unpopular actions – primarily with regard to the employment of labor – are undertaken arbitrarily and either maliciously or without care for the consequences.

The same sort of disconnect takes place when someone demands intervention in the marketplace to manipulate prices.  In each and every case, the consumer is deemed incapable of setting the “correct” price and, as a result, the state must artificially manipulate prices to achieve some “better” result.  Part of this disconnect comes from the misguided belief that producers set prices in a vacuum, but, again, in the rare exception of monopoly – which I’ll touch upon in a moment, consumers will not permit such “gouging” to take place.  In reality, the justification for manipulating prices, is that the state (or, in the case of debate, the individual demanding such intervention) has asserted that their wisdom is superior to that of the free choices of individual consumers.  It makes no difference whether the intervention is to keep prices higher, to keep them lower or even, as was disastrously demonstrated during the Roosevelt years, both at the same time.

Interestingly, the former case is the most prevalent.  Consumers, we are told, should simply pay more for some products than they would in a truly free market.  If we let consumers do what they wish, they might not want to pay enough to support the least efficient producers in the agricultural sector, putting farmers out of work.  They might purchase items from abroad rather than patronizing domestic business to a significantly greater extent.  They may even – hold onto yourself – choose to buy alcoholic beverages, cigarettes or gasoline in greater quantities than our benevolent leaders would like.

It must be remembered that the manipulation of prices invariably harms everyone.  Protecting the least efficient farmers, for example, not only forces the consumer to pay more for produce, making those resources unavailable for use elsewhere, but it subsidizes inefficiency preventing the marketplace from allocating those resources to more useful endeavors that generate more products and more jobs.  When the Bush administration intervened to “protect” steel workers in the US, prices were artificially inflated.  This not only prevented the steel industry from adapting more quickly to market forces – again, subsidizing inefficiency and destroying capital – but it was a devastating blow to those industries that use finished steel.  The net result was that even more jobs were lost in those industries than were “saved” – however, briefly – by the manipulation of steel prices even for a relatively short period.  The deleterious consequences of efforts to inflate prices invariably cause more harm than any perceived benefit from their implementation, often yielding the exact opposite of the stated objective.

In the latter case, it is asserted that consumers should not be required to pay market prices for “necessary” commodities.  In such circumstances, the state either intervenes by imposing price ceilings or by substituting state control for the function of producers.  [Note: The choice not to use the word “entrepreneur” here is deliberate.  The entrepreneurial function that drives the economy requires responsiveness to the market.  State control of production renders such responsiveness impossible.]

But in the case of price ceilings we know the inevitable result is shortages, often in unexpected ways.  Rent control, for example, has simultaneously reduced the availability of rental units – affordable or otherwise – and created slumlords: property owners whose revenue stream has been curtailed by rent control so, rather than responding to the needs of consumers, fail to maintain minimum standards in their buildings.  Government run enterprises have, without exception, proven to be vastly inferior to private sector enterprises, typically running losses that must be covered by taxpayers while providing less than optimal service.  The postal service is just one such example.

Along these lines is the intervention to attack market monopolies.  The vast majority of monopolies arise out of governmental regulation: legal barriers to entry or preferential treatment but, occasionally, monopolies or near-monopolies arise in the marketplace because one provider of goods or services better meets consumer needs better than any other provider.  Classic examples include Standard Oil and Microsoft.  The chief complaint about monopolists is that they can charge consumers higher prices, but that happened in neither case.  Through Standard Oil’s greater efficiency and better refining techniques, the price of oil and kerosene fell significantly for consumers.  Likewise, Microsoft’s decision to bundle certain software items resulted in lower prices for consumers.  The intervention by the state in each case harmed consumers.

Consumers always do a better job of allocating resources than any central authority ever could.  This is why those economies engaging in such socialistic measures to a greater extent lag economically behind those that embrace free market capitalism.  When the government says it must do something about prices, overruling the power of consumers, it is consumers who must ultimately pay the price.