THE BEAR'S LAIR Who drives the economy?
By Martin Hutchinson
In an essay "Nietzsche's marginal children" in The Nation this month, Corey Robin takes the Austrian economist Friedrich Hayek to task, claiming that he replaced the ordinary consumer as driver of the economy by the ultra-rich, so that we are all subjected to the whims of financial Nietzschean supermen.
I've always found Friedrich Nietzsche's philosophy both incomprehensible and unconvincing, and much of Robin's thoughtful piece mirrors Nietzsche in both respects, but he does
raise the very interesting question: who drives a modern economy; where is the force that determines its health and its direction?
Conventional free-market economics says that it is consumers; that the amorphous desires of a myriad of "low-information" economic voters together form an optimal mechanism by which producers are forced to conform to their desires and human wants are optimized. However in a sense this begs the question: since consumers generally have little knowledge of the products they are buying, what forces determine whether they buy one product or another - or save the money?
Certainly the consumer-driven paradigm works better than the socialist alternative, whereby superior bureaucrats determine what ought to be produced and issue edicts to producers, often owned by the state. The failure of the Soviet Gosplan and similar systems has more or less exploded this alternative intellectually, but it still meets support among Keynesians, who imagine themselves as the all-powerful, all-wise planners.
Nevertheless, Hayek was right to suggest that all consumers are not created equal. According to Robin, he believed that the owners of capital and perhaps the aristocracy create an avant-garde of taste that is more important in determining the shape of the economy than the amorphous wishes of consumers as a whole. Robin criticizes this as a Nietzschean economy dictated by "the 1%" and suggests that it is profoundly undemocratic and has replaced the government- and labor-driven mid-20th century economy he prefers.
Hayek was not alone among free-marketers in doubting the supremacy of consumers as a whole. Ayn Rand took the Nietzschean concept to an extreme, and suggested that the large producers were supreme, deciding to bring economic benefits to the masses through their capital and superior intellect. Hank Reardon labors long hours, overcoming gigantic obstacles to produce his superior product Rearden Metal, while consumers merely accept his product or not, playing no active part in the innovation.
Rand's approach has a certain amount of validity, especially for a product such as Rearden Metal that is primarily used by businesses that are themselves able to judge its superior quality. Taggart Transcontinental, in using it for the John Galt Line, is able to carry out whatever tests are necessary and determine its superiority.
Rand is certainly right in decrying the interference of the media and various regulatory agencies, which attempt to prevent Taggart from using the Metal on safety grounds. Since their safety objections have no merit, their resistance to the use of Rearden Metal is properly no part of a true free-market system, although in the real world any such innovation would be subject to considerable delay from both regulators and the PR campaigns of its competitors.
Nevertheless for consumer products, in which the fog of ignorance stretches in both directions - manufacturers don't know what consumers want and consumers don't know objectively which products are superior - the Rand paradigm leaves something to be desired.
Microsoft's introduction of Windows 8, for example, was a bet by the company - presumably including Bill Gates and Steve Ballmer, among the world's richest men and its greatest experts on the products concerned - that consumers would accept a tablet-style interface, without a "Start" button, even if they were using the operating system on a PC or a laptop. Consumers sensibly decided they didn't want a computer interface without a "Start" button and Microsoft was forced to redesign the product, at who knows what cost.
The Windows 8 saga puts a big dent in both the Rand and Hayek theories of consumer choice. The innovating company was unable to persuade the consumers to like its product. So were two of the world's richest men, with a combined net worth of US$82 billion, according to Forbes.
Other theories were dented too - "tastemakers" were generally favorable to Windows 8, since they bought the hype that the world was moving towards doing its computing on its cellphone - impossible for most users without genetic engineering to produce a smaller human hand with 24 fingers!
Of course, the ultra-rich have enormous influence on some products, those for which the ultra-rich are the primary buyers. Private yachts above a certain size are designed with a level of bling that Marie Antoinette would have considered impossibly vulgar, because their principal buyers are Russian oligarchs and Arab potentates with infinite dubiously acquired wealth and no taste. Likewise, the Hamptons crowd has enormous influence over the type of real estate advertised through display ads in the New York Times, and the Great Gatsby in his day no doubt exerted great influence over the design of party favors.
Nevertheless, the total global sales of products for the ultra-rich is limited, and in fields such as corporate jets, in which most of the decision makers are CEOs rather than oligarchs, the design divergence from what a normal person might want to buy is less marked.
There are however three groups of people who have an outsize influence on the shape and size of the economy; these are advertising and marketing specialists, "opinion formers" and government policymakers. Far more than ordinary consumers, the ultra-rich or even producers, they determine almost all of the production and purchases that make up the US economy.
The influence of the world's Mad Men is probably now as underrated as it was overrated in the 1960s heyday of Don Draper. Clearly, if a product is truly revolutionary, its marketing package will make only a modest difference to how well it sells. But for anything less than paradigm-shifting items, the sizzle is at least as important as the steak.
Apple's product development people are not infinitely better than Samsung's, yet Apple has in the last decade been able to command vastly superior profit margins on its products. That is largely the work of the late Steve Jobs, who was not a superb engineer or product designer (Steve Wozniak was that, but he left Apple decades ago) but was a truly epically good marketer. Since Jobs' death, the management and engineering skills at Apple are just as good as they always were, but the company is suffering both market share and profit margin erosion in favor of Samsung. Without Steve Jobs, there is little doubt that our smartphones and tablets would already have been designed as well as made in Asia. The failure of Apple's 1993 Newton tablet, which had the involvement of the company's superb designers but not of Jobs himself (in corporate exile at that time), is evidence of that.
Opinion formers have influence far beyond their actual purchasing power. Book reviewers sell books, tech reviewers create a buzz around their favored gizmos, car reviewers sell cars and Lena Dunham last autumn sold Barack Obama. Opinion formers' influence can be narrow or broad, but certainly doesn't extend universally - if I attempted to comment on popular music, for example, my incompetence in that field would quickly become obvious and I would influence nobody. Indeed, even to the extent that I influence people in areas I know about, it's doubtful if much purchasing is driven thereby (maybe the odd book). On the other hand, even a local disk jockey, famous to nobody beyond the attendees at his club, can influence quite a lot of purchases in music and very likely clothing.
Finally, policymakers influence purchases both indirectly, through the political and ethical climate they encourage and directly, through the policies they implement. Federal Reserve chairman Ben Bernanke, for example, has influenced a huge number of purchases, most of them misguided, by his monetary policies. Similarly Obamacare has reorganized 17% of gross domestic product in the healthcare market, Obama's green energy subsidies and investments have distorted the energy markets, and his shilly-shallying on the Keystone pipeline project is costing Canadian oil companies over $20 billion a year, based on the differential between Canadian and US oil prices.
Thus consumers as a whole consume, but their consumption decisions are influenced by a host of factors outside their control. Contrary to Hayek's theory, the rich do not have an especial influence over consumption, because few of us follow the fashion sense of oligarchs and oil sheikhs. Even the aristocracy has lost the influence as opinion formers they may have had in Hayek's day.
However, producers themselves are also, contrary to Rand's theory, only moderately influential on what gets produced except perhaps at the very cutting edge of our technological capability. The real power belongs to marketers, opinion formers (who are mostly not especially rich, but include film stars as well as journalists) and politicians.
Looked at that way, capitalism appears pretty flawed and it's not surprising the market's decision-making is eccentric. But looked at another way, the pluralism of the free market's decision-making mechanism is its principal virtue since it guides the market towards optimality in a way mere consumers alone could not.
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com. Copyright 2005-13 David W Tice & Associates.)