A critic writes:
Our entire system is based is based on profits and losses driving decision making and economic activity, but our accounting does not always capture all the costs.
If I open a new factory near a river for 5 million dollars and I make an extra 1 million dollars, but I pollute the river, clear out a bunch of trees, etc… the market says that was a good investment and I should do it again.
What about all the dead animals, loss of entertainment value from the river, costs of eventually cleaning up the mess etc… ?
If 100 profitable companies all find a way to lay people off and make more money, our accounting says they should do it.
What about the impact on hundreds of other companies that got part of their revenue from the people that lost those jobs?
What about the human cost?
Until ALL the costs are evaluated and included in a profit loss statement, it’s impossible to know whether an investment is actually good or bad even if it is profitable by current standards.
With regard to pollution, a market economy, as opposed to what we have now, punishes pollution as a violation of property rights. Polluters could not simply soil other people’s property, or send sludge down river to invade other people’s land. Here’s what Mr. Libertarian, Murray Rothbard, had to say about pollution and the market economy, and it’s something like the opposite of what our critic would probably expect him to say.
“What about the impact on hundreds of other companies that got part of their revenue from the people that lost those jobs?”
There are lots of logical problems with this objection that I think our critic has not stopped to consider. For one thing, could we not blame this critic himself for the job losses brought on by his own changes in taste? Last year he wanted corduroys, and this year he wants loose-fitting jeans. What about the impact on the corduroy companies, and all the companies with which it does business, made by our critic’s self-centered change of fashion? Did he stop to consider the human cost of his frivolous decision?
Everything we do in a division-of-labor economy will have exactly the same ripple effects our critic rails against here. His complaint could be raised against practically all action.
For another thing, why is our critic so sure that exactly the right number of people happen to be employed in every single industry at this particular moment, such that the decision by a firm or group of firms to lay some off can be explained only by sheer wickedness? It would be a veritable miracle if that were the case. If a firm is more prosperous with fewer workers, all we can say about this is that it had previously employed more people than was optimal. How can our critic say, non-arbitrarily, that it is better for a particular firm to have 150 employees than 120? How can he know that? What unique insight does he possess to tell him that?
What if those extra 30 laborers can satisfy the consumer better in some other sector of the economy? What if demand is falling for a firm’s product, such that it is absurdly overproducing with its current level of employment? In a division-of-labor society we cannot be so self-centered that we assume our present jobs are ends in themselves. The point of a job is to do something that serves your fellow man. If you are no longer serving your fellow man in a way that pleases him, are you entitled to stay in that form of employment in defiance of your fellow man? This is deeply anti-social. And what about all the dislocation caused when the automobile replaced the horse and buggy? What about the “human cost” of that? This whole line of argument, in short, would put an end to human progress and human choice.
The very fact that the firm earns higher profits with fewer employees indicates that it had previously been misallocating scarce resources. Profits are an indication from the consumer that a firm is combining factors of production in ways that add value. The process of economic calculation, whereby a firm compares its sales revenues with its input costs, informs the firm of how well it is satisfying consumer demand at the least cost in terms of opportunities foregone (i.e., what the factors of production employed by the firm could have produced had they been in others’ hands). If the firm is losing money by employing more workers, that means the present configuration of factors of production displeases the consumers, who prefer to see them allocated in some other way.
Ludwig von Mises explained in Human Action that such critics should really be directing their complaints at the consumers, not the firms themselves:
The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable. For them nothing counts other than their own satisfaction. They do not care a whit for past merit and vested interests. If something is offered to them that they like better or that is cheaper, they desert their old purveyors. In their capacity as buyers and consumers they are hard-hearted and callous, without consideration for other people.
Only the sellers of goods and services of the first order are in direct contact with the consumers and directly depend on their orders. But they transmit the orders received from the public to all those producing goods and services of the higher orders. For the manufacturers of consumers’ goods, the retailers, the service trades, and the professions are forced to acquire what they need for the conduct of their own business from those purveyors who offer them at the cheapest price. If they were not intent upon buying in the cheapest market and arranging their processing of the factors of production so as to fill the demands of the consumers in the best and cheapest way, they would be forced to go out of business. More efficient men who succeeded better in buying and processing the factors of production would supplant them. The consumer is in a position to give free rein to his caprices and fancies. The entrepreneurs, capitalists, and farmers have their hands tied; they are bound to comply in their operations with the orders of the buying public. Every deviation from the lines prescribed by the demand of the consumers debits their account. The slightest deviation, whether willfully brought about or caused by error, bad judgment, or inefficiency, restricts their profits or makes them disappear. A more serious deviation results in losses and thus impairs or entirely absorbs their wealth. Capitalists, entrepreneurs, and landowners can only preserve and increase their wealth by filling best the orders of the consumers. They are not free to spend money which the consumers are not prepared to refund to them in paying more for the products. In the conduct of their business affairs they must be unfeeling and stony-hearted because the consumers, their bosses, are themselves unfeeling and stony-hearted.
The consumers determine ultimately not only the prices of the consumers’ goods, but no less the prices of all factors of production. They determine the income of every member of the market economy. The consumers, not the entrepreneurs, pay ultimately the wages earned by every worker, the glamorous movie star as well as the charwoman. With every penny spent the consumers determine the direction of all production processes and the details of the organization of all business activities. This state of affairs has been described by calling the market a democracy in which every penny gives a right to cast a ballot. It would be more correct to say that a democratic constitution is a scheme to assign to the citizens in the conduct of government the same supremacy the market economy gives them in their capacity as consumers. However, the comparison is imperfect. In the political democracy only the votes cast for the majority candidate or the majority plan are effective in shaping the course of affairs. The votes polled by the minority do not directly influence policies. But on the market no vote is cast in vain. Every penny spent has the power to work upon the production processes. The publishers cater not only to the majority by publishing detective stories, but also to the minority reading lyrical poetry and philosophical tracts. The bakeries bake bread not only for healthy people, but also for the sick on special diets. The decision of a consumer is carried into effect with the full momentum he gives it through his readiness to spend a definite amount of money.
It is true, in the market the various consumers have not the same voting right. The rich cast more votes than the poorer citizens. But this inequality is itself the outcome of a previous voting process. To be rich, in a pure market economy, is the outcome of success in filling best the demands of the consumers. A wealthy man can preserve his wealth only by continuing to serve the consumers in the most efficient way.
Thus the owners of the material factors of production and the entrepreneurs are virtually mandataries or trustees of the consumers, revocably appointed by an election daily repeated. [Emphasis added.]
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