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The Other Side of the Transaction

Mises Daily: Monday, November 12, 2007 by


The cashier overlooked the milk in my shopping cart, so there had to be a separate transaction to process it. I paid for it with American Express, and it suddenly occurred to me to apologize.

"I'm so sorry for that. Your fees on that card will probably exceed your profit."

She looked at me as if I were speaking an unintelligible language.

"My fees?" she asked.

"Yes, American Express is the most expensive card on the market. You guys have to pay per charge and also a percentage of the transaction. This was only a couple of bucks spent here, so these fees can really eat into your profit margin."

"I don't pay any fees," she said.

It was at this point that I realized that we were on two different planets. She works for the company as a worker. The store makes a contract with her to show up and do certain things. She does them. She gets paid for this. That's the beginning and end of her economic role in the matrix of exchange. She is unaware that she is a consumer too, of the employment services offered by the store; these services must be paid for out of revenue generated by sales.

From this revenue, the business pays the clerk. The business pays the credit card company. The business pays tax. The business pays rent. The business pays for shelving and machinery. The business must acquire — usually purchase — the goods it sells before it sells them. In doing all of this, it is taking a risk because the profit is that last stage of the transaction; the expenses are paid earlier in the production process.

Here is the other side of the coin that the worker doesn't have to think about at all. Neither does the consumer. We walk into stores and think, "Wow, great stuff." Or, "What a bunch of junk." We examine the place to see if there is anything that would be valuable enough for us to acquire in exchange for the marked amount of money that the store wants from us. The deal is there for the taking. It is up to us to decide if we want to take it. No one forces us. If we walk away, there is no penalty for us.

We don't have to think about the strange reality that these retail and grocery stores carry millions in inventory. Tens of millions, all of it gathered together in one spot in the hope that we will like it and be willing to give our money in exchange for it.

I was in a sporting goods store the other day that seemed to have everything one can imagine. How much inventory? $10 million? $100 million? It was all beyond belief, and trying to run the numbers in my head boggled my mind. And here I was buying a $2 pair of socks. That's a tiny chink out of the inventory. They might clear 25 cents on that transaction after all the expenses are paid. And yet they did it all for me and others like me: consumers who are free to buy or not buy.

And then what does the store do with its profit after wages, expenses, and inventory? Why, it has to replace those socks that I just bought so that someone else can buy another pair. It has to expand more to compete with the new sporting-goods store that just opened up down the street, so it has to acquire ever more great stuff and sell it at the lowest price possible. There is no final victory in this battle. All profits are yesterday. All losses could be tomorrow.

To call enterprise a risk is really to understate the problem. Entrepreneurs have a special capacity to discern the uncertain future but they possess no power to actually create that future. It could be that tomorrow morning, no one will show up at the grocery store. That could persist through the afternoon, and so on through the evening. The same could happen the next day and the next, until the company goes bankrupt. And how long will that take? It depends on how much money the owners are willing to lose in the course of betting on a profitable future.

This crazy uncertainty of the future — a factor which we cannot overcome, no matter how much data we accumulate or how many fortune tellers we call upon — is a universal condition, always maddening and infuriating but completely unsolvable. It doesn't change for rich or poor. The largest corporation and the smallest lemonade stand face this trial in precisely the same way. Neither knows what the future truly does hold. The difference between the rich and the poor is how much money a person can afford to lose when he turns out to be wrong.

To posses a consciousness about the two sides of enterprise is a burden in some ways. It destabilizes you, and actually makes you wonder how the system can work at all.

How can a store hold on to millions in inventory and pay for it 25 cents at a time while being required by competitive pressure to expand evermore?

More questions:

How can a business employ hundreds, thousands, tens of thousands of people to produce goods long before they know with certainty that anyone will buy them?

Why are there such people as entrepreneurs who are willing to take all this on?

Why are they so unlike the masses of people who would rather act solely as consumers of all the glories that the free enterprise system dishes out?

Garet Garrett: The Collection

These thoughts are the ones economic understanding gives rise to, and they are not exactly comforting. The old-style classical liberals reveled in the fact that all these "impersonal forces" worked without anyone really being aware of them, or having to understand them. The checkout lady at the store just shows up, pushes buttons, gets paid, and stays or leaves based on her assessment of her own well-being. Everyone else does the same. The pursuit of self-interest generates this amazing global matrix that benefits everyone.

The old liberals reveled in the fact that no one had to understand it, but then the system itself came under attack, and needed defense. It had to be understood to be explained, and explained in order to be preserved.

This is why Ludwig von Mises set out to revise liberal doctrine. It is not enough that people participate unknowingly in the market economy. They must understand it, and see how, and precisely how, their smallest and selfish contribution leads to the general good, and, moreover, they must desire that general good.

All of which is to say that in an enlightened world, it would be a good thing for that cashier to understand economics from the point of view of those who pay her. It would be good for striking workers to understand how they are harming not only their bosses but also themselves. It would be good for voters to see how supporting government benefits for themselves harms society at large.

An economically literate public is the foundation for keeping that amazing and wild machine called the market working and functioning for the benefit of the whole of humanity.

Jeffrey Tucker is editor of Mises.org. See his archive. Send him mail. Comment on the blog.