Monday, November 10, 2014

The Customer Isn't King, Nor Should He Be

Why Howard Roark Is Right and Supposed Libertarian Economists Are Wrong

Stuart K. Hayashi

In attempt to wipe away the smear that capitalists are dirty monopolists who exploit their customers, some libertarian economists wipe all the way to the other extreme end. They say that it is the customers who have all the power, and that vendors are mere subordinates who must always cater to the customers.  They therefore take issue with Howard Roark saying, "I don't build in order to have clients.  I have clients in order to build."  When Roark issues that statement, he is denying that the client -- the customer -- is more important to the transaction than is the vendor.

Ayn Rand the Anti-Capitalist? 😶
The right-wing economist Mark Skousen, who founded Freedom Fest and is popular in libertarian circles, proclaims that Roark's statement proves inconsistent with free-market economics.
...Roark denies a basic tenet of sound economics -- the principle of consumer sovereignty. When the dean of the architectural school tells Roark, "Your only purpose is to serve him [the client]," Roark objects. "I don’t intend to build in order to serve or help anyone. I don’t intend to build in order to have clients. I intend to have clients in order to build." (1994:14) . . .

But the goal of all rational entrepreneurship must be to satisfy the needs of consumers, not to ignore them! Discovering and fulfilling the needs of customers is the essence of market capitalism. Imagine how far a TV manufacturer would get if he decides to build TVs that only tune into his five favorite channels, the consumer be damned. It wouldn’t be long before he would be on the road to bankruptcy.

The Religious Right think-tank known as the Acton Institute agrees with Skousen:  "While such egotistical bluster may make for an interesting fictional character, this attitude can hardly be considered a solid foundation for capitalism."

I shall explain how Roark's position is not inconsistent with capitalism.  It is Mark Skousen and the Acton Institute who misunderstand capitalism and Say's Law of Markets itself when they proclaim that the consumer is more important to the transaction than is the vendor or producer.  An actual understanding of Say's Law of Markets recognizes that both sides of a voluntary trade are equally important to the trade, and that both sides of the trade are consumer and producer simultaneously.

Money Is a Product; Using Non-Monetary Items As Payment, You Purchase Money
Consider the barter economy. Suppose I have a paperback book you want, and you have a flash light I want. We trade one for the other. In that bartering, who was the producer and who was the consumer? The truth is that each party was both the producer and consumer. That relationship does not change when we introduce money into trading.

Money is itself a product that people purchase, and it is a tool that we use primarily for the purpose of trading. An automobile is a tool we use for transportation. A computer is a tool we use for storing information and disseminating it. And money is a tool for trading. And we pay for money by trading for it.

We can think of it this way. Normally, if I work for a business, I can be thought of as someone selling my time and labor to that business. That business is purchasing my time and labor from me, and pays me in the form of wages or salaries. But there is another way to view it: I am actually purchasing money from that business. My payment to that business -- in exchange for the money the business sells me -- comes in the form of my performing labor on behalf of that business.

In a country with a fiat currency, we can think of the treasury that prints the cash, and the central bank that has the ultimate power to extend credit backed by that fiat currency, as having a cartelish monopoly when it comes to the manufacturing of money. However, anyone who uses money can be thought of as a "cash retailer" -- someone who sells cash at the retail level.

Suppose you want to sell me a paperback book in exchange for seven U.S. dollars. There is another way we can look at it: you are trying to purchase seven U.S. dollars from me, and your payment to me for that seven U.S. dollar is the paperback book.  That is the proper understanding of Jean-Baptiste Say's Law of Markets:  because consumption is predicated upon production, it follows that, insofar as trades are peaceful, you are a consumer no more than the extent to which you are a producer.  That is, in a purely consensual economy, you are both the producer and consumer in every transaction.

Insofar as Our Economy Is Peaceful, You Are Consumer and Vendor in the Same Trade
It is true that when two parties agree to trade, one party can have more bargaining power than the other. If I go to a bank for a loan, I feel that the bank has an easier time than I do when it comes to specifying what will be the terms of our agreement. Sometimes when it comes to forging a trade agreement, one side has more sway than the other. However, that is a consequence of demand and supply. The principle holds: even if one side of a trade accord possesses more bargaining power than the other, both sides are equally important when it comes to determining whether the trade will happen. If both sides do not judge that they yield a net gain from the trade accord, the trade accord will not be executed.

Mark Skousen and other putative free-market economists say that Howard Roark is being a poor representative of capitalism when he turns down some clients based on his own preferences. Such economists say that a "true capitalist" would be like Peter Keating and prioritize the maximization of financial profit above being able to abide by his own standards consistently. But that is a misunderstanding -- libertarian economists, of all people, should remember that money is just one proxy for measuring wealth, and the true endgame for economics is that one maximizes his or her utility (Aristotelian "eudemonia" or "human flourishing").

Therefore, we can look at it this way. Howard Roark is not necessarily the subordinate to his client, Austen Heller. Rather, Howard Roark is a customer who is purchasing money from Austen Heller. Roark's payment to Heller is that Roark be able to design Heller's house in the manner that Roark prefers. If Heller considers that to be an unworthy form of payment, Heller does not have to accept it.

Therefore, contrary to Mark Skousen and economists who agree with him, Roark is not being a poor practitioner ofcapitalism when he points out that he has clients in order to build.  Roark is simply practicing consensualist economics in his own unique fashion -- a fashion that in no manner conflicts with the principles of voluntaryism.

You are both vendor and client in the very same trade.  When you purchase a paperback book and use seven U.S. dollars as payment, you are also selling the seven U.S. dollars and accepting the paperback book as payment for them.  You are therefore customer and vendor simultaneously.  To say that the customer has more power than the vendor, then, is to say that the customer is more powerful than himself.

On June 21, 2018, I updated the links and added a thumbnail.