I have described the importance of consumers in the operation of free markets. All production and distribution exist to serve consumers. Consumers ultimately determine all market pricing. But, from where do these all-important consumers come? How do consumers get “created?”
According to common usage, we call people who spend money in the economy “consumers.” Consumers, however, play a much more complex role in the market. For this discussion, I will divide consumers into two groups based on how they acquire their money. I called one group real consumers and the other group artificial consumers. I will explain the difference between these two types of consumers. Then I will return to Joe’s restaurant to describe the impact these different types of consumers have on prices.
To explain what I mean by a real consumer, I will first refer to Say’s Law, which briefly says that production creates its own demand. This “law” describes the creation of real consumers in a free market. Real consumers use what I earlier referred to as market money — money acquired by selling something they own. In other words, workers employed in the production process get paid with market money, and using that money, they become consumers.
For real consumers to consume more stuff, the economic system must produce more stuff. Real consumers must make a sacrifice to acquire their market money. Having to make sacrifices to acquire their money influences the preferences of the real consumer.
Artificial consumers use non-market money — acquired by government spending (redistribution) or by exchanging promissory notes for bank-created money. No one needs to sell something they own for the artificial consumers to acquire their non-market money. Making no sacrifice to acquire their money also influences the preferences of artificial consumers — but in a very different way.
Return to Joe’s Restaurant
My earlier description of price determination in Joe’s restaurant applied to real consumers using market money. Introducing artificial consumers with non-market money into the economic system sends false signals to Joe and other suppliers in the market.
When artificial consumers receive money for which they make no sacrifice, they may prefer to eat at Joe’s rather than preparing a cheaper meal at home. In response to this artificial demand, Joe does not lower prices that he would otherwise, and he may raise some prices that he otherwise might lower or maintain. Joe might even expand his restaurant based on what he reads as strong demand.
Having these artificial consumers might seem like a bonanza for Joe. Still, the increased sales do not reflect the realistic preferences of these customers — nor the availability of additional goods in the economy. Having made no sacrifice for their non-market money causes them to make changes in their scale of preferences. And the impact does not stop with Joe.
Because of the artificial shift in preferences, grocery stores sell fewer goods than usual, and they may, based on this flawed information, lower some prices. The grocery stores might even contract their operations. These contractions will probably result in job losses.
Although very simple, I hope this example shows how artificial consumers‘ non-market money distorts the information transmitted to the market by prices.
I have labeled elements of the market that we normally cannot identify. Money does not come with markings designating market money and non-market money. Consumers do not wear tags designating them real consumers or artificial consumers. Joe and the grocery store interpret consumers’ spending as signals of the amount of stuff produced in the past in the amount of stuff they (Joe and the grocery) need to produce in the future.
With the introduction of non-market money by artificial consumers, these signals, however, contain false information.
At this stage, we only know that the current trend in prices misleads both producers and consumers.