In his 1980 book Knowledge and Decisions, Thomas Sowell emphasizes the importance of social validation and validation processes. Does this work? Is it a good idea? If it works, you can survive. If not, then it’s not. Over time, we accumulate rules, norms, and practices that make it easier to get things done. Some of it may resemble non-functional or “junk” DNA, or “DNA sequences with no known biological function.” But from what I’ve heard, all social systems become rigid because at some point they solved a problem.
The market is a remarkable institution because it makes signals and solutions particularly clear. P&L takes people’s ideas from the world of speculation to the world of verification. A hunch becomes more than a hunch; it can either qualify as a good idea or be rejected as a bad idea. Suppose that a new toaster of a certain type is profitable. In that case, if you tally up all the “votes” people cast by spending and saving money, you’ll have more votes to build a toaster than to spend the necessary resources on something else.
In a free market, the question arises: “Who decides?” There’s a simple answer. Each of us does, and in doing so, we all do.
In the 1930s, economist W. H. Hutt popularized the term “consumer sovereignty” to describe market processes. Hutt argued that consumers are sovereign if they have not delegated to a centralized, coercive authority the powers they exercise by purchasing or withholding. In his classic book, Economists and the Public: A Study of Competition and Opinion, he wrote:
“Consumers are sovereign when, in their role as citizens, they do not delegate to political institutions for authoritarian use powers that can only be exercised by the power they demand (or refrain from demanding).”
Hat sometimes uses the singular form, but the possessive plural form “consumer sovereignty” is important. As he explains, markets are truly social processes. What emerges, the pricing structure, was not designed or intended by anyone, but it takes everyone’s voice into account.
This is cold comfort to those who worry about inequality because the voices of some individuals are louder than those of others. Someone who earns 10 times more than me can “speak” 10 times more loudly in a free market. But there are far more people with relatively modest incomes than very high incomes. Collectively, they control more purchasing power and speak like a louder chorus.
One of the great ironies of elite humanitarianism is that people ignore the “voice of the people” who shout out things the elites don’t like, like Wal-Mart Supercenters, action movies, and professional wrestling. But what people loudly demand, as measured by money speaking, is what the market dutifully provides. When elites claim that the market won’t give people what they want, their complaint is actually that the market is all too happy to force the wrong things on the unwashed masses who want them.
Hutt argued this showed the importance of tolerating bad taste. I have equated it with religious tolerance. We may disagree with people’s opinions and consider them vile and despicable. But they have a voice that we should listen to carefully. That’s precisely because they are human beings, and because their voices have important things to say about how the world is, or should be, run. In a society of free and equal peoples, consumer sovereignty means that those with refined tastes must accept much of what might be considered chaff, along with the cultural and commercial wheat.
Money matters at every level. More precisely, people “talk” with money. Money and prices transform people’s ideas of choice and preferences into meaningful “social will”, or at least something resembling it.
In Les Misérables, you are asked, “Can you hear the people singing?” Profit-driven entrepreneurs can answer “yes.” Relying on prices, profits, and losses in deciding what and how to produce sends the message of “the people,” the sovereign consumers, loud and clear.
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