Helping the invisible hand: Consumers have more clout than we think

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Journalists and economists have emphasized the role of consumers, especially in recessions, as being – well, mere consumers, whose task is to consume the flow of goods which leads to overall economic activity. Fine.

But there is another role that consumers, acting in their own best interests, perform. It should be recognized, encouraged and enhanced because it to leads, surprisingly, to added benefits for all members of society, whether we are in recession or not.

LONG FAMILIAR TO students of economics is the theory that if producers and consumers act in their own self-interests, competition tends to yield the lowest prices of products, as if an “invisible hand” were guiding the process to do the greatest social good.

First set forth by the Scottish economist Adam Smith in the 18th century, although it has its critics it has become the crown jewel of basic economic wisdom, recognized even by some collectivist societies. Economists have conventionally emphasized producers as being the primary heroes in this process, rarely drawing attention to the consumer. This misplaced emphasis is a mistake.

Not well-recognized is that Smith’s hand is at work among consumers. While conscious that productive efficiencies tend to lower product prices, you may not be aware of the importance of improved consumer skills in the production-distribution process.

Shoppers, acting in their own, yes, “greedy” self-interest, markedly reinforce the work of the hand in bringing lower prices, better services, and improved care for all. Any improvement in shopping skills can be of enhanced benefit to society. This activity enables the most efficient suppliers to remain in business, reminding us again that greed may be good.

Efficient suppliers benefit in two ways: From being productive, but also by being consumers. Since the invisible hand is diligently at work in consumer activities, we should be thankful for greedy consumers.

Defining competition is a tough task. At its foundations, however, is the notion that the buyer recognizes a “need” and searches for alternative ways to satisfy it. If there is more than one alternative (other products, other sellers), the buyer faces competition among vendors. If the seller is confronted by more than one buyer, there is competition among buyers.

SEARCHING FOR THE best alternatives to the product one wants is one of the foundations of competition. They are not naturally available, but must be discovered, their costs identified, and then, as we well know, the products evaluated. These activities involve shopping skills.

Society actually benefits if consumers were to take their self-interest more seriously, realizing that it is not morally wrong to act in furtherance of such interests. Society and consumers both benefit when the latter acquire more knowledge and skills, and obtain “more for their money.”

Social benefits are available even if only a few people are so inspired. Not only do benefits of increased competition spread to all consumers, but there are other perks. Among these is a lessening of the need for government regulation, thus potentially reducing public expenditures.

Another benefit from sharper skills is a decreased likelihood of seller-buyer misunderstandings, and fewer opportunities for fraud and deceptive sales practices.

Shopping can be more gratifying by extending the well-known practice of “couponing” and by adopting “organized couponing” – methods that enable the consumer to use coupons more efficiently. Shoppers can learn to use digital information sources for both price information (e.g., priceline.com) and for the availability of coupons, skills that are only beginning to be widely developed. When consumers demand more shopping aids, entrepreneurs provide them.

In terms of market impact, the consumer’s most important function usually is choosing the product’s vendor, because it is time consuming for the busy shopper to compare prices. The greater the success in finding satisfactory products, in driving good bargains, and keeping competitive vendors on their toes, the greater will be the intensity of competition among those vendors, and the more benefits members of society can share.

Economists can study and identify these specific benefits, but thinking of ways and means to improve consumer skills above and beyond those taught in elementary and secondary schools are a challenge for educators, economists and visionaries.

IF THE POPULAR TV personality Suze Orman, for example, would televise a message on developing shopping skills to elementary school students, even for an hour per semester, it would be of immense benefit to children and, ultimately, to society. For example, introducing children to the grossly neglected subject of evaluating financial contracts, including home mortgages, is a must.

But this is only the tip of the iceberg. There is much to be done in providing Smith’s invisible hand a real helping hand.

(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)

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Jane18
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Jane18 11/27/11 - 06:18 pm
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Gosh! I read the title of the

Gosh! I read the title of the article, and thought it would be interesting and enlightening. After trying to read, and stay interested, I have finally reached the end(in so many ways!). I'm guessing, but I believe the columnist may have thought up the wording and written for: the IRS, insurance companies, law books, and congress. I need some aspirin for this headache I've gotten......................

burninater
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burninater 11/28/11 - 09:40 am
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"competition tends to yield

"competition tends to yield the lowest prices of products, as if an “invisible hand” were guiding the process to do the greatest social good"
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The good doctor is being a bit deceitful here. Adam Smith himself stated repeatedly that the invisible hand would yield the lowest prices, but that the result would decidedly NOT be the production of the greatest social good. He specifically warned that it was an amoral mechanism, and that it would need to be augmented and/or replaced by an economic mechanism that could address the social ills resulting from a system that specifically could NOT assign value to the moral requirements of a healthy society.

Carleton Duvall
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Carleton Duvall 11/29/11 - 02:55 pm
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Before retiring, I was in the

Before retiring, I was in the business sector for 42 years and was involved in setting prices, first in my own business and then later working for a manufacturing firm. In all those years I do not recall an invisible hand helping me. It was usually a panic stricken salesman saying "if we don't meet so and so's price we are going to lose this order."
LOL

LOL

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