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home | Tea Party Economist | On Escaping the Mercantilist Mindset
 

On Escaping the Mercantilist Mindset

Gary North - May 22, 2013
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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' 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.

American corporations decide what their customers will purchase. They make their decisions in terms of expected purchases by their specific group of customers. They do not care about customers in general. They should not care about customers in general. That is because the customers in general do not care about customers in general. Customers care about themselves. It is not their responsibility to make decisions on behalf of all the other customers in America, or in North America, or in the world. They have knowledge about what they want to buy. They have money. They decide what to buy based on what they want to buy and the money they have to buy it. It is silly to expect individual customers to make decisions based on the supposed effects of their individual decision on all other customers. They do not have this information, and even if they did have it, they would ignore it. They are looking out for themselves, not for all other customers. They are responsible for themselves.

This means that corporate America makes these production decisions, not based on the decisions of their effects on the economy in general, but in terms of their effects on their particular clientele. Their clientele does not care a whit about the effects of their purchases on all of the firm's customers or potential customers. American corporate directors act primarily on behalf of the only people who make any difference to the outcome of their decisions, namely, specific customers.

The people who make or break the decisions of corporate America are not Americans in general, or North Americans in general, or world customers generally. The only people that the corporation cares about are the corporation's customers or possible new customers. That is what their customers pay them to care about. Any corporation that starts acting on behalf of customers other than their own customers will soon find that they do not have many customers any more.

Because so many Americans are mercantilists in theory, they do not understand their own motivation. They do not go to a big box store, or order on Amazon, based on the effects of their purchases on everybody else. They go to Amazon to buy a book, and they look at the cheapest book they can find that meets their specifications. The seller evaluates the book: acceptable, good, like new, or new. Then the seller puts a price on it. The customer buys the book, not based on where it was produced, or who got paid to produce it, but only in terms of the cheapest price delivered to his home, given the level of quality he is willing to pay for. Why should he care about anything else except this? So, Amazon does not care where a book was published. That is because the book buyers do not care where a book was published. Why should publishers care about anything except producing books that specific customers are willing to pay for? It is not the book publisher's responsibility to guess what a handful of customers care about with respect to where a book was manufactured. The book publisher cares only about generating revenues from the book.

The free market produces the best outcome through price competition. Best outcome for whom? The customers. Customers are served by producers who want their money. Customers hold the carrot: money. Money is the most marketable commodity, Mises said. No one has to advertise to persuade sellers to take his money. Individual decision-makers spend their money, or refuse to spend their money, and out of this multiplicity of decisions on the part of customers arise an array of prices and an array of profit margins. Individual decision-makers are in authority, not manufactures. Manufacturers must do what customers say, or else they will go out of business.

It is the mark of the mercantilist mindset that people blame corporations for their hiring and firing decisions, when the decision-makers in the corporations are simply acting as economic agents of their customers. Blame the customers; do not blame the manufacturers.

We have met the enemy, and he is us.


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