Profits are Social Authentication – Econlib

In his 1980 book, Knowledge and Decisions, Thomas Sowell highlights the importance of social authentication and verification processes. Does this work? Is that a good idea? If it works, it survives. If not, it doesn’t. Over time, we accumulate rules, norms, and practices that make it easier for us to get things done. Some of it might be analogous to non-functional or “junk” DNA, which is “a DNA sequence that has no known biological function.” As I’ve heard it put, however, any social institution has endured because, at some point, it solved a problem.

Markets are notable institutions because they make the signals and the solutions especially clear. Profits and losses take people’s ideas out of the world of speculation and into the world of verification. A hunch becomes more than a hunch: either it is authenticated as a good idea or rejected as a bad idea. Suppose a particular type of new toaster is profitable. In that case, it means that after we tally up all the “votes” people cast by spending or saving dollars, there are more votes for making the toaster than for using the necessary resources for something else.

In a free market, the question, “Who decides?” has a simple answer. We each do, and in so doing, we all do. 

In the 1930s, the economist W.H. Hutt popularized the term “consumers’ sovereignty” to describe the market process. Consumers are sovereign, Hutt argued, when they do not delegate to a centralized, coercive authority the power they exercise by buying or abstaining. He put it this way in his classic book Economists and the Public: A Study of Competition and Opinion:

“The consumer is sovereign when, in his role of citizen, he has not delegated to political institutions for authoritarian use the power which he can exercise solely through his power to demand (or to refrain from demanding).”

Hutt sometimes uses the singular, but the plural possessive “consumers’ sovereignty” is important. As he explains, the market is a genuinely social process. What emerges—a structure of prices—is something no one designed or intended, but that takes account of everyone’s voice.

That’s cold comfort to people worried about inequality because some individual voices speak louder than others. Someone with ten times my income can “speak” ten times as loudly in a free market. However, there are far, far more people of relatively modest means than there are people of very high incomes. In aggregate, they command more purchasing power and speak as a louder chorus. 

One of the great ironies of elite humanitarianism is the way people dismiss the “voice of the people” when it cries out loudly for things the elites don’t like, like Walmart Supercenters, action movies, and professional wrestling. What the people demand loudly, as measured by letting their money talk, however, is what the market will supply dutifully. When elites claim that the market doesn’t give the people what they want, their complaint is really that the market is all too happy to oblige unwashed masses who want the wrong things.

Hutt argued that this illustrates the importance of tolerating bad taste. He equated it with religious tolerance. We might disagree with people and think them vulgar and base. But they have voices to which we should listen carefully, precisely because they are human and because those voices have important things to say about how the world operates—or should operate. In a society of free and equal people, consumers’ sovereignty means that people with refined tastes have to accept a lot of what they might consider chaff along with their cultural and commercial wheat.

Money talks in all walks of life, or more accurately, people “talk” with their money. Money and prices translate people’s inchoate ideas and preferences into a meaningful “social will,” or at least something akin to it. 

In the stage production of Les Misérables, we’re asked, “Do You Hear the People Sing?” Profit-seeking entrepreneurs can answer “yes.” When we rely on prices, profits, and losses to help us figure out what to produce and how, “the people’s”—i.e., the sovereign consumers’— messages come through loud and clear.

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