Writes Ludwig von Mises:
With every penny spent the consumers determine the direction of all production processes and the details of the organization of all business activities. This state of affairs has been described by calling the market a democracy in which every penny gives a right to cast a ballot. It would be more correct to say that a democratic constitution is a scheme to assign to the citizens in the conduct of government the same supremacy the market economy gives them in their capacity as consumers. However, the comparison is imperfect. In the political democracy only the votes cast for the majority candidate or the majority plan are effective in shaping the course of affairs. The votes polled by the minority do not directly influence policies. But on the market no vote is cast in vain. Every penny spent has the power to work upon the production processes. [My emphasis, G.T.]
This argument is completely fallacious in that it implies a commensurability between markets and democratic elections that does not exist. Among libertarians much disdain for democracy is built on this fallacy.
A market transaction presupposes that there is no conflict between the transacting parties, and that both have recognised a mutually advantageous trading opportunity. A market transaction does not create concordance between the trading parties, rather it presupposes the compatibility of their respective interests. Market transactions are not a means to overcoming conflict, instead they are engaged in to take advantage of mutually complementary benefits already present.
By contrast, elections, though in principle they may register (not create) unanimity, i.e. complete concordance, are preponderantly a procedure resorted to in the face of conflict and disagreement, and are intended to serve as a means of mitigating rivalry.
The phrase "every penny gives a right to cast a ballot" is misleading. A reciprocal transaction of the market type is a manifestation of agreement. A ballot is a provision for registering disagreement and establishing among competing proposals a dominant outcome. There is no such competition going on when I consent to pay € 1 in return for a bread roll, to a person consenting to give me the bread roll in exchange for € 1. In fact, it is awkward to refer to a consensual bilateral transaction as a ballot. Is my counterparty voting with her penny to agree with me, while I vote by selling my product to agree with her?
Say, a substantial part of the population favour prohibition, while the rest support the right to freely produce, sell and consume alcoholic beverages. There is no way in which market transactions per se can make the fundamental discord vanish. What you have here is a case of political scarcity, which markets cannot resolve.
Political scarcity occurs when concordance (over a political issue) is scarce. Elections are one of the means tried to attenuate the inconvenience, nuisance, or blatant danger of unresolved disagreement in a group of people.
He who insinuates or suggests outright that markets are a superior alternative to elective attempts at conflict-reduction fails to grasp that bilateral transactions are not a mechanism capable of removing incompatible desires.
When we are faced with political scarcity we cannot help but apply non-market procedures. These might be rather imperfect, but comparing them to a spurious ideal is unacceptable.
Politics is about managing rivalry and compromise. Markets are about bringing together perfectly fitting interests.
In a previous blog entry, Liberalism - A Manifesto, I noted the irony that liberals are blind to the very field where they can make the biggest impact: the institutional design of the political order. This neglect may be largely due to a fallacy-based euphoria regarding the extendability of markets into fundamentally political, i.e. non-market areas.
Addendum, concerning the above von Mises quote:
"With every penny spent the consumers determine the direction of all production processes and the details of the organization of all business activities."
This is clearly not true. While consumers in aggregate provide entrepreneurs with the means to do business, and decide their commercial success and survival, they do not as individuals consciously exert influence on the decision-making process that is taking place in a firm. It is surprising that someone like von Mises who so stresses the pivotal role of the entrepreneur would make such a claim.
In a ballot, I may be asked to decide whether my country should change its currency or give up the status of a sovereign national state and become a federal state in a larger political structure, exceedingly momentous issues. As a consumer, I am practically never invited to contribute to strategic corporate issues of comparable moment. Even if I had bought 10 Citroen 2 CV, I am not likely to have moved the management of Citroen to continue the production of this model.
Actually, as consumer I am apt to suffer the same kind of defeat that the minority voter suffers when politicians let themselves be guided by the preponderant opinion: a firm's management might decide to give up a fringe product (my product) in order to fully dedicate production to the core product favoured by the majority of clients. The notion that free markets are some kind of consumers' democracy (in the sense of direct rule by the consumers) is just as preposterous as the idea that socialism will bring about a producers' democracy (direct rule by producers.)
It is the welcome talent of the entrepreneur to surprise the consumer, while surprising the voter is the dreaded vice of the politician.
"In the political democracy only the votes cast for the majority candidate or the majority plan are effective in shaping the course of affairs. The votes polled by the minority do not directly influence policies."
Again, this clearly is not true. Small parties can have significant effects concerning pre-election positioning and agenda choice, election results, post-election coalitions and their actual policies.
See also Political Scarcity.