Jerry Ellig is a senior majoring in economics and history at Xavier University in Cincinnati, Ohio.
“One, two, three, pull!” “Unghh!” “Y’all on that side aren’t pulling hard enough. Ready? One, two, three, pull!” “Unghh!” Was this the sound of galley slaves in the glory days of the Roman Empire? Or of medieval serfs straining to pull a nobleman’s barge upstream? No, it was the summer of 1983. The grunts and groans came from about a dozen salespeople on their hands and knees, straining to maneuver a 15-foot long counter full of soap and shampoo into its final position. The store at which I work part-time while attending college was being remodeled. Though known to countless neighborhood customers simply as “the dime store,” our store is part of a national chain and had been selected as the first in the city to be remodeled. The changes were drastic indeed: new counters, new tile, new paint and yes, even new merchandise. There simply had to be a method to this madness. No company as old as ours would spend so much money on blueprints and diagrams, and so much of its employees’ time, for absolutely no reason. The reason, of course, was quite simple: profit. Those folks in the regional office who created so much work for us did not do so merely to frustrate us, much as we might have thought that was their intention. On the contrary, their goal was the company’s goal: to seek profits and to avoid losses. In a store such as ours, profitability comes through selling more at a lower cost per sale. Every aspect of the remodeling, therefore, was at least theoretically directed toward increasing sales and reducing costs by providing customers with a more attractive environment in which to shop. For weeks, confusion reigned supreme. No employee could ever be 100 percent certain where in the store a given item could be found on any given day. The manager was reputed to have quipped to a long-time customer looking for notebook paper, “Just stand still long enough and you’ll probably see it go by.” It was against this background that a customer approached me one day (as I was using a hammer to pound nails into the wall) and asked a pretty logical question: “Why are you going to all this trouble when you’ll just re-do it again in another 25 years?” I told him how much better the store would look, how much more convenient the new arrangement would be for customers, and so forth. But after he left the question remained in my mind and set me to thinking. Why, indeed? The same question must have been on everyone’s mind a month later when merchandise was still being shuffled around for apparently no reason. Goods on one side of a counter switched places with goods on the other side. Merchandise on the left side of counter A moved to the right side of counter B, barely six feet away. “We spent all day yesterday setting up those ten feet of counter space,” one employee complained, “and when I came in this morning, somebody’d moved it again!” A key element in the whole scheme is the arrangement of merchandise in the most convenient and pleasing manner. The constant migration of merchandise until it found a final home was like a giant jigsaw puzzle. Both management and employees were seeking to place each item in its optima] location so as to render total sales as large as possible. The realization of this fact brought home to me the incredible power of the price system. In striving for profit, our store was simply striving to please our customers in some very specific ways. It would not be exaggeration to state that each decision to relocate an item was very much an entrepreneurial decision. Each move was carried out in the hope that the new state of affairs would be more satisfactory than the old one. Though few involved in the effort have even heard of Ludwig von Mises, all were acting as he would predict:
If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm . . .
The consumers . . . determine precisely what should be produced, in what quality, and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable. For them nothing counts other than their own satisfaction.[1]
Within a very few weeks, consumers will begin to tell us with their dollars whether or not they like the new arrangement. One thing is certain: their decision will be based on their own subjective valuations. In their quest for their own satisfaction, consumers will be entirely in different as to how much time, money and effort was put into the remodeling. They are concerned with results. If they do not like the changes, it will do no good to tell them about how much labor and capital was expended.
This is, of course, the Austrian subjective theory of value in action. The company’s efforts will have value only if consumers value the results. Value exists only in the human mind, not in any object or collection of objects.
Unbelievable as it may first sound, then, the experience of one store corroborates a host of fundamental economic principles. The firm is merely the middle man between the owners of resources and consumers. Consumers reward service with purchases if they are pleased, and prof its result if costs are kept down. The subjective valuations of consumers, therefore, determine the uses to which resources will be devoted. The “higgling of the marketplace” ensures that those resources—the petroleum used to make gasoline, the wood in a broom handle, and even the steel of which store fixtures are made—will go to the most highly-valued uses. Moreover, all of this activity takes place voluntarily, requiring neither force nor direction from above.
At last, I’ve arrived at a worthy answer to the customer’s question. Why did we go to all that trouble when the job will be re-done again in another 25 years? Because we believe that’s what our customers want. It is ultimately the wishes of the consumer, not the caprice of the corporate executive, which determine how the store should be decorated, what lines of merchandise should be dropped or added, and even whether brown towels should be displayed next to green ones or blue ones.
If there be anyone who doubts the existence of consumer sovereignty and Adam Smith’s “invisible hand” in modern America, he or she ought to help remodel a dime store! []
1. Ludwig von Mises, Human Action, 3rd. Rev. Ed. (Chicago: Contemporary Books, 1966), p. 270.