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Mises on the consumer as the “captain” of the economic ship (1944)

The Austrian economist Ludwig von Mises (1881-1973) noted the importance of the consumer in determining what gets produced and at what price. In other words, in a capitalist economy the consumer is the captain of the economic ship:

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.

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.

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.

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.

What does it mean when we say that the production of a certain commodity A does not pay? It is indicative of the fact that the consumers are not willing to pay the producers of A enough to cover the prices of the required factors of production, while at the same time other producers will find their incomes exceeding their costs of production. The demand of the consumers is instrumental in the allocation of various factors of production to the various branches of manufacturing consumers’ goods. The consumers thus decide how much raw material and labor should be used for the manufacturing of A and how much for some other merchandise. It is therefore nonsensical to contrast production for profit and production for use. With the profit motive the enterpriser is compelled to supply the consumers with those goods which they are asking for most urgently. If the enterpriser were not forced to take the profit motive as his guide, he could produce more of A, in spite of the fact that the consumers prefer to get something else. The profit motive is precisely the factor that forces the businessman to provide in the most efficient way those commodities the consumers want to use.

About this Quotation:

Mises wrote these words at a crucial time in the evolution of “capitalism”. In 1944 the “democratic” and “capitalist” west was fighting fascist Germany and had as its main ally communist Russia. Mises noted that there are only two ways in which a society can organise itself economically, either by means of free pricing in a free market system or by means of bureaucratic regulation and control in a statist system. As a result of the demands of fighting in WW2 the west was becoming increasingly “bureaucratised” and was approaching the more fully bureaucratised fascist and communist systems. It seemed at the time time that the entire world was heading down the path to fully fledged Bureaucracy" (which was the name he gave to his book) with dire consequences for prosperity and individual freedom. In the course of this analysis Mises has some very interesting things to say about the role of consumers in driving what gets produced, how it gets produced, and at what price, in the “capitalist” system. He contrasts the “consumer captains” in the free market system with the political bosses and “captains of heavy industry” in the communist and fascist system of economic organisation. His conclusion is that “The real bosses, in the capitalist system of market economy, are the consumers.”

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