Dollar Voting

The fact that prices carry not only information but also incentives for economic agents to act means that prices are important in deciding what goods are produced, or, in the jargon of economists, they help allocate resources. Consumer preferences, the relative availability of resources, and technology determine how much of each good and service will be produced in a market system.

Economists sometimes make an analogy to politics to explain how a price system decides what should be produced. A political election offers citizens a variety of candidates, each of whom tries to convince the citizens that his policies are best. In the process of voting, the electorate keeps some candidates and retires others to private life. Because political leaders must keep coming before the citizens for election, the actions they can take are limited. The electorate has ultimate control over the policies that a democracy adopts.

Citizens, as consumers, also vote in the marketplace. The marketplace offers consumers a variety of products, and each producer tries to convince consumers that his product is best. Consumers vote for products by spending their dollars. Products receiving a lot of dollar votes will be profitable and will continue being produced. Products that do not receive enough dollar votes will die. Dollar voting provides feedback to producers. It tells them whether their performance is acceptable or not. Dollar voting implies that consumers, not producers, ultimately decide what will be produced in a market economy. This power of consumers is often called "consumer sovereignty."

People who like the market system tend to stress its responsiveness to consumer desires. Compared to systems of central planning, markets usually perform well on this basis, though there are conditions under which markets falter and consumer sovereignty is weakened. Also, there are times in which a society may not want the consumer to be sovereign. It may decide that there is some social goal more important than individual goals. When nations are at war, for example, they usually want to lessen consumer sovereignty. As a result, most nations reduce the importance of market decisions and increase the importance of allocation by government direction and regulation in times of war.

Next we see how the concept of feedback helps one understand a market system.

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Copyright Robert Schenk