Ignore Consumers at Your Own Risk

By Veronique de Rugy.

"Part of the new right’s schtick is to insist that we market fundamentalists — that is, those of us with a principled commitment to free markets — give too much attention to consumers while discounting the interests of workers and producers. Workers and producers, they believe, should be the center of policy attention, hence the call for subsidies, industrial policy, protectionism, and such.

I have always found the claim that producers are more important than consumers weird, considering that workers and producers are also consumers. Also, while it is true that you can’t consume what hasn’t been produced, we as a people do not enrich ourselves by producing things that consumers don’t want to buy at the prices that would make the production of these things profitable.

I was just reminded of this fact while reading this piece in the WSJ:

As recently as a year ago, automakers were struggling to meet the hot demand for electric vehicles. In a span of months, though, the dynamic flipped, leaving them hitting the brakes on what for many had been an all-out push toward an electric transformation.

A confluence of factors had led many auto executives to see the potential for a dramatic societal shift to electric cars: government regulations, corporate climate goals, the rise of Chinese EV makers, and Tesla’s stock valuation, which, at roughly $600 billion, still towers over the legacy car companies.

But the push overlooked an important constituency: the consumer.

Economists, starting with Adam Smith, have argued that the ultimate goal of production is consumption. Far from being a counsel of sybaritic pleasure-seeking, this observation simply recognizes that production should be driven by consumer demands rather than the preferences of producers. Production that doesn’t satisfy as many consumer demands as possible isn’t really production; it’s waste. And wasteful production doesn’t do much for either producers or workers.

It isn’t to say that production and work aren’t super important or meaningful. They are. But again there is no production that enriches the nation unless it fulfills a human desire (i.e., satisfies consumers). You can produce an abundance of anchovy-and-marshmallow cupcakes, and doing so might provide you with a great sense of accomplishment. But your efforts won’t yield much income if consumers don’t like your concoction. By baking such cupcakes, you will waste your time, as well as perfectly good anchovies and marshmallows.

That’s true even if the government decides to subsidize said cupcakes because it believes they are better for us than chocolate or vanilla ones. It remains true if the subsidies drive a few bakers to give the anchovy-and-marshmallow cupcakes a try.

This is why subsidy-driven production rarely succeeds over the long run. We simply cannot identify what is productive or unproductive independently of choices made by consumers spending their own money.

The WSJ piece is here."