Consumers' Freedom of Choice
Profits and losses, then, are due mainly to uncertainties that are inherent in the nature of business. Chief among these uncertainties are those that are inherent in human nature. For, since the end of business enterprise is consumption, production is regulated by distribution; and distribution in turn is regulated by the flow of money through consumers' markets. But this flow of money is directed and conditioned solely by the daily exercise of freedom of choice on the part of millions of consumers. What will these consumers want? How much will they buy at a given price? When will they buy? Where will they buy? Nobody can answer these questions in advance, partly because nobody can forecast the vagaries of human nature. This uncertainty concerning the ways in which buyers will make use of their freedom of choice is the chief risk of business. It is, therefore, chief among the causes of profit and loss.
Three Options go with Money
This uncertainty is due largely to three options enjoyed by the holder of money. He can decide when he will buy, what he will buy, and where he will buy.
He has freedom of choice concerning the time of spending his money. He may withhold it from circulation as long as he pleases; at least he may withhold whatever he does not need to pay taxes and to keep him alive. Under a system of barter, on the other hand, purchasing power can be withheld only in the form of commodities -- sugar, wool, eggs, lumber, raspberries, and the like. The possibilities of profitably keeping this kind of purchasing power out of the market are rigidly limited. It is mainly on account of a medium of exchange, therefore, that buyers now have a wide range of choice with respect to the time of using stored-up purchasing power. This timefactor, which money has introduced into business, must be measured and reckoned with.
The owner of money also has freedom with regard to the goods he will buy. The owner of wheat may sell wherever there is a buyer of wheat, and the buyer may buy wherever there is a seller of wheat. In this respect, the buyer and the seller have ranges of choice which would be balanced in the long run, were it not for the further fact that the buyer, by virtue of holding money, has the additional choice of not buying wheat at all, but of buying a substitute; whereas the seller must sell wheat to somebody, sometime. The holder of diamonds, phonographs, furs, or other commodities which the buyer may classify as non-essentials, is at a further disadvantage, since the holder of money need not even seek a substitute. He may refrain from buying non-essentials of any kind.
This freedom of choice is being extended constantly by the widening ranges of available markets. today the planter in Porto Rico, without leaving his home, may sell his bananas and exchange the proceeds for tea grown in India, toys made in Germany, and a thousand other commodities that a mail-order house in Chicago will collect for him from distant producers who never heard of him or even of Porto Rico. He may spend his money locally, nationally, or internationally, by mail, telegraph, or cable, wherever a system of money exchange is in working order. This geographical range of choice, while reducing some of the risks of business, gives rise to others.
Because of these three choices, as to time and goods and place, which go with money, the buyer is almost always in a strategic position. Ordinarily, therefore, the seller is the chief risk-bearer, for he has but one choice; namely, to sell for whatever price the buyer decides to pay for his goods, or to keep the goods. And to keep the goods very long is usually to court bankruptcy. There are fluctuations in the advantage of the buyer over the seller, but the advantage persists; and it persists by virtue of the 'three choices that go with the buyer's money. The chief risks of business, therefore, arise from consumers' freedom of choice in a money economy.
It is of the utmost consequence in what directions holders of money exercise this freedom of choice; for a marked change in total expenditures, or in the relative amounts of purchasing power spent at home and abroad, or in the relative amounts spent for new capital goods and for new consumers' goods, may cause changes in prices, in wages, in profits, and in volume of production which lead to business depression.
The Freedom of the Buyer is Wide
Consumers have virtually unlimited freedom of choice. Though that is merely a truism, its crucial place in economics is seldom understood by the people generally, and never by the advocates of Government price-control. Let us, therefore, consider at some length what this free rein of the buyer's fancy means to business. Every day, in the United States, at least sixty million people, exercising this freedom, spend at least one hundred million dollars. Every day they buy the commodities and services of their choice, and no others. Do they choose to spend one seventh of their income on motor-cars and motor-car supplies? Very well, no one can stop them. Do they refuse to buy certain magazines and certain styles of shoes?
Again, they do exactly as they please. They flock to 'Abie's Irish Rose' after all the theatrical managers have decided that they will not. They buy Main Street eagerly until April; then -- presto! -- they stop buying Main Street. Women wear furs all summer or refuse to wear them at all, as suits their fancy. They suddenly decide to bob their hair and dispense with veils. The helpless makers of hairpins and veils would junk their machinery were it not for the hope, the not unreasonable hope, that before very long women will just as suddenly decide that they cannot possibly get along without hairpins and veils. All consumers, men as well as women, are free today to choose as illogically, as unwisely, as capriciously, as extravagantly, as they please. And to-morrow is a new day: what they will demand to-morrow, nobody knows.
But, it is said, the freedom of the consumer to choose is restricted on every hand by advertising, special inducements, fashion decrees, and all the other beguiling arts of salesmanship. This objection, a very common one, obscures the issue. It is true that in a thousand ways the choice of the consumer is influenced; but his freedom to choose among all the products that are offered to him is not thereby restricted. He is as free to cast his vote in the markets, regardless of the claims of rival products, as he is free to cast his vote at the polls, regardless of the pleas of rival candidates. No matter how many times he is urged to eat an apple a day to keep the doctor away, he is free to eat something else; no matter how many billboards point their arrows at him, he is not obliged to chew gum.
'Have you had your iron today?' cries the advertiser.
'No,' answers the consumer, if he happens to feel that way about it, 'and I don't want any.'
That settles the matter; and so the history of advertising is strewn with wrecks.
The producer does his best -- of course he does -- to change the tastes of the consumer. So does the church, the school, and the press; so does the gang, for that matter, and the union, and the club. In fact, society is an intricate combination of influences that together largely determine the tastes and the conduct of every one of its members. The producer is only one among innumerable factors.
All this, however, is beside the point. Essential as it is for a complete understanding of what goes on in the markets, it in no way invalidates our main contention that the consumer, not the producer, has the whip-hand. Whether the consumer refuses to comply with the wishes of the maker, or the maker refuses to comply with the wishes of the consumer, in either case, it is the maker who suffers; it is 'Heads you win, tails I lose.' In short, all the maker can do is to beg the consumer to buy what he makes; the consumer can force the maker to make what he buys, or go out of business.
This Freedom results inevitably in Profits and Losses
Consider what this means to business. It means that in growing potatoes, producing plays, building railroads, organizing banks, stocking shops, and the rest, men must advance money with no assurance that consumers will do their part in enabling them to get their money back. When a man starts to make a straw hat in January, he does not know whether any one will pay enough for that hat before June to cover the costs; but somebody must run that risk in January if everybody is to be free in June to buy straw hats or not to buy, and to choose what kind of hats he will buy. Similarly, it is only because men have risked their money all the way from the ranch to the meat market that there are chops to be had this morning. Every day Armour and Company pays for live stock more than a million dollars in spot cash, with no guarantee that receipts will cover the cost of the animals and the cost of converting them into meat and by-products.
Sometimes consumers reimburse the packers; sometimes they do not. The tire manufacturer borrows money, builds a factory, installs machinery, hires laborers, buys rubber and fabrics, organizes a sales force, lets advertising contracts -- all on the chance that, when the tires are ready for use, somebody will pay enough for them to take care of all these advance payments. But will that somebody come forward at just the right time and do what is expected of him? Nobody in the world is wise enough to say. The production of tires must go forward, if at all, on mere estimates of future demand. What these estimates are, what stocks are produced, what they cost, the buyer does not know or care.
The retail dealer, too, must take his chances. As a rule, he must put his own money or borrowed money into stocks -- fur coats, for example. Then, along with other risks, he must run the risk of a general slump in prices, or a relatively weak market for fur coats, or both. But, if he has paid for the coats, it does not matter to the coatmakers how mistaken his judgment of the market turns out to be. The risk, except in so far as it has been transferred by insurance, is assumed by the dealer who advances money and holds the coats; and the risk is due to the fact that consumers are at all times at perfect liberty not to buy.
Now nobody will run these risks of loss unless there are chances of profit. This brings us to a fact that will figure largely in our subsequent discussions -- another fundamental fact that is overlooked or blurred in our current indictments of the prevailing profit economy: since the individual's option to buy or not to buy is the chief cause of profit and loss, there is no possibility of eliminating profit and loss without depriving the individual consumer of freedom of choice.