Market Dynamism vs. State Inefficiency: Theory and Practice

The other day I was with a friend at McDonald’s, and as soon as we entered we saw a big queue of people (not the one in the picture). We both immediately sighed knowing we had to wait before we could spend our precious money in the famous junk food. The irritating fact was that McDonald’s had only employed two workers behind the 4-slot counter. Another one was dearly needed. Seeing this, probably out of bad hunger, my friend took a swipe at me challenging my free market views. He said, “If the government had managed McDonald’s, it wouldn’t be the profit motive that would motivate the firm’s actions [assuming McDonald’s weren’t employing another worker due to higher costs] but rather the needs of the consumers, which in our case, costly to McDonald’s or not, would be fulfilled by the introduction of another employer behind the counter.”

This took me into those visual journeys I make in my mind in attempt to see how the State could properly manage things. Like the previous dreams, this one ended in disaster for the Leviathan too. Here’s my explanation.

Profits equal consumer satisfaction

People need to understand this once and for all. Firms can’t make a profit if they don’t serve customers. No firm can come to your home and take your money; only the State can do that. In order for firms to lure you into their products or services, they have to provide something you subjectively identify as desirable at an affordable price. Profits, therefore, can only come from the satisfaction of the customers. If profits equal consumer satisfaction, then why the hell do people have such hatred toward the profit motive? To hate the profit motive is to hate the propensity of firms to serve people. If my friend understood this, he wouldn’t curse it. Without the profit mechanism, we would end up with shortages as the question of producing what would be decided by bureaucratic rather than consumer elements (remember Soviet Union?). Why then, my friend asked, doesn’t McDonald’s serve consumers in this case if it’s profit-motivated? Read further.

Human action, not wishes, shape the customer service

People often think that customer service provided by the firms reacts to their wishes. This is an illusion. Firms in offering you their service can’t read your mind and know what you’re thinking about. The only way firms can understand consumers is through the feedback mechanism. That feedback mechanism consists of consumer’s expression of choices through buying or abstention from buying. It’s therefore human action, in the marketplace, that guides the producers. Not your wishes and thoughts.

A lot of people are surprised why firms don’t respond to their desires of seeing more bars in which smoking is prohibited. The reason for this is that these people mind smoking, but not so much so as not to patronize these bars. Firms will only react if you stop patronizing their bar because you don’t like the smoke. If you mind it but nevertheless go, your inner thoughts won’t be translated into concrete action. The action is for you to take.

It’s the same in our case. If people don’t leave McDonald’s because of the big lines, it means that the cost of leaving McDonald’s is higher than the cost of waiting in line. By deciding to wait, they send signals to McDonald’s through the profit (feedback) mechanism and tell them they’re doing well. So while the profit mechanism exists and works perfectly well, we shouldn’t expect it to solve all our wishes if we’re not ready to take concrete action to toward the attainment of those wishes.

One benefit, a hundred costs

But my friend said, “the State doesn’t need you to take action, it knows what you want and will offer it.” This is a fallacy. First of all, there’s absolutely no mechanism through which the State can know what consumers want–simply because it works outside profit-and-loss feedback system. Second, it’s easy to think that the State wouldn’t want us to wait in line. It’s something (relatively) nobody wants to do. But what about other million, specific, detailed wishes which we don’t have but others do? It’s easy to know a punch in a face is not what somebody would enjoy, but it’s pretty hard to know what they ice cream flavor is. McDonald’s can tell this, the State can’t.

But even if the State somehow knew what consumers want, for the sake of the argument, there would be other things at which it would miserably fail. Even if the State provided us that additional worker that speeded the queues, the other areas at which it would lag behind with comparison to privately owned McDonald’s would make the entire service undesirable. However, for the discussion of public vs. private service we would have to go into another completely different, long topic. In short: State management of McDonald’s might lead to quicker service, but it would lead to higher cost, worse food quality, lack of creativity in offering new products and everything else related to the State attempts to manage business. At least in the “private goods” area, I believe every economist agrees.

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