THE CONSUMER AND MARKET DEMAND

In our economic system the businessman is in business to make profits—maybe not exclusively, but surely as one of his major objectives. By and large, he can make profits only by producing goods and services that people want to buy—autos, radios, dry cleaning services, movies, lamp shades, and thousands of others. If there is no consumer who is willing and able to “lay cash on the barrelhead,” the businessman is pretty much out of luck. Maybe the government will temporarily come to his rescue with a subsidy, or maybe he can keep going by using up his own invested capital. But over the long pull, it is the customer who is willing and able to buy who directs production in a private-enterprise economy.

He directs it by the way he spends his money —the way he allocates his income among different goods and services. If consumers want yellow electric refrigerators, the chances are good that yellow electric refrigerators will be produced. If consumers want Bibles engraved on the heads of pins, it will not be long before some enterprising individual is turning out Bibles on pinheads.

Consumer demand is the mainspring of economic activity. But never forget—it is the consumer with money to spend who counts! Many of us would like to have a Cadillac, and T-bone steak for dinner. But unless we have the money and are willing to spend it on these objects, our desires have little significance for General Motors or the corner meat market.

Thus, your “vote” on what gets produced in a private-enterprise economy is largely determined by your income, unless you have acccumulated funds to supplement your income. The mill hand has a lot less influence than the rich man, even though the former may be a virtuous, hardworking father of five needy children and the latter a ne’erdo-well who has inherited his money through no effort of his own. This is not to imply that virtue resides in poor rather than rich souls, but merely to emphasize that the private-enterprise economy responds to what people have to spend, not to who they are.

Figure 20-1 shows who had the buying power in 1966. It emphasizes again the huge buying power of the “middle class” in America. Nearly two-thirds of all families fell in the $5,000—$15,000 income group in 1966, and the average income of this group is steadily moving up.

But Figure 20-1 points up the extremes too. Ten million families, one family out of five, had an income below $3,500. These families received only 5 per cent of total personal income—far less thhln their proportionate say over what gets produced for the market. At the other extreme, about 1 million families (2 per cent of the total) received incomes over $22,000 and about 10 per cent of all income, giving them a huge leverage over what the system produces.

FIG. 20-1 In 1966, three-fifths of all families fell ri the $3,500—$1 1,600 income range and they received 54 per cent of the national income. But the one-fifth receiving over $11,600 hod a big chunk of total consumer spending power. (Source~ U.S. Bureau of the Census.)

The consumer is a powerful, and sometimes capricious, monarch. Table 20-1 shows what he spends on some major categories in the American economy. He still spends the biggest chunk of his income on food, housing, and clothing. But the proportion spent on food and clothing has dropped sharply since 1929. Spending on services (medicine, transportation, recreation, and the like) has grown rapidly as we have become richer and able to devote more of our incomes to nonessentials.

TABLE 20-1

You may have heard of “the economic man” —a mythical individual who carefully calculates just what he should buy before he spends each dollar, comparing the satisfactions obtainable from every conceivable expenditure before he parts with his cash. Most of us don’t operate this way, and everyone knows it. A lot of our spending is based on habit, some on impulse, and so on.

Still, most of us face a real problem of how to allocate our incomes among far more goods and services than we are able to pay for. Perhaps the Aga Khan buys everything he wants without concern for what it costs. But most of us have to calculate how to divide up our incomes among the things we want to buy. You may devote most of your income to nourishing foods, college tuition, and durable clothes; I may spend most of mine on books, phonograph records, and airplane trips; our neighbor may prefer a dissolute life of wine, women, and song. Probably none of us is the human calculating machine envisaged in “the economic man,” though the less money we have the greater is the pressure to act in a careful, calculating way.

The economist does not pass judgment on which pattern of expenditure is the proper one. Nor does he pretend to tell you how you should spend your income to lead a happier, healthier, more learned, or other kind of life. ‘~Vhat he does do is assume that normally you spend your money on the things you want most. Thus, if you spent a dollar on the movies this afternoon, he takes that as evidence that you preferred going to the movies over going to a prize fight at the same admission or over buying a new dollar necktie. If you stop and think about it, any other assumption leads to very strange results, as long as we assume freedom of individual action in spending incomes.

These rather obvious observations become important later on when we try to evaluate how well the economic system works, since one of the main tests we will apply is: How well does the system respond to consumer wants? Unless we can assume that consumers’ expenditures generallv reflect what they want most, we will be at a loss for any measure of how well the system does in fact allocate its scarce productive resources to satisfying consumer wants.