Kenneth D. Gartrell

By: Kenneth D. Gartrell

Let me make a bold statement. The most powerful force in the World is the American Consumer. Anyone in business or politics who overlooks this fact is a fool – soon to part ways from their money.

The American consumer is rich (in aggregate and relative terms), rational, informed and competent. The market forces created by the American consumer dictate the possibilities of all the world’s major corporations and, in the end, every form of government – especially the Federal, state and local governments within the United States.

If someone makes a product or provides a service for the American consumer with the slightest advantage in price or value, the profit from this can make them among the wealthiest people in the world in a few short years. Consider such simple examples as the BIC pen, the BIC razor, dental floss, Tylenol, Ivory Soap, gummy bears, shoe strings, electronic calculators – endless. In America, it can still truly be said, “think and grow rich” … especially if you think about how to reliably save millions of Americans just a few cents on anything, without sacrificing value.

Those who fail to account for the power of the American consumer – well, they fail in general. All we have to do is examine the famous history of General Electric in the 1960s and 1970s. In fact, the lesson learned by GE led to a corporate executive motto/mantra that endured for decades. It was simply, “never underestimate the power of the American consumer to substitute.”

The Curse of Politics and Collectivism

An insidious (and politically motivated) misconception exists that certain big, bad companies and a few self-designated powerful politicians can manipulate, defeat and otherwise coerce the American consumer into patterns of consumption and behavior that they do not want – and would not follow unless forced. Abraham Lincoln had this all figured out when he said (paraphrasing): “You can fool some of the people all of the time; you can fool all of the people some of the time, but…”

To test the power of the idea of consumer substitution, all we have to do is consider the abject failure of the political claims that have repeated themselves over the last 30 years concerning forced conservation and “greedy” oil companies. All efforts at legislation to regulate highway speed and promote energy conservation have failed, when all of the costs and benefits are objectively considered. The truth is that, in reality, none of these formulas ever worked well, lasted long, nor achieved the expected benefits – at least not after the costs of fewer freedoms are factored in – as in the constraint imposed by the 55 mph speed limits.

In every case, the American consumer was already there first or found other ways to solve the problem.

The reason American consumers are so powerful is that they have a million and more ways to change their behavior, configure their consumption and control their own destiny. No company or government on Earth can control all, or even a few, of these patterns. Consumers have no need for a set of simple minded government policies to either protect them from oil prices or coerce them to conserve oil at high prices. A clear and unambiguous price signal, which measures the relative value of oil in relation to all other goods, is all the American consumer needs to enter a rational pattern of substitution that will place oil in its proper place as an economic good.

Ask OPEC, circa 1985, when the once-soaring price of oil headed towards $100 per barrel (in 1980 dollars), only to see it later headed below $20 per barrel. This did not happen for any old reason. It certainly did not happen because of an ineffectual “Windfall Profits Tax.” It did not happen because we were forced to give up our freedoms and drive at 55 mph on roads built for 90+ mph, in an age when Formula 1 cars can travel 220 mph in heavy traffic on a winding track and crash routinely with hardly an injury to a driver.

The price collapse in the 1980s happened because many Americans added a Japanese car as a second car; made fewer trips to the mall; drove fewer miles otherwise; added insulation to their homes… on and on. No government had to tell the consumer what to do. The price did it all then and it will again.

Substitution as a Process

Let’s consider again briefly just a few of the ways in which consumers can and will substitute for oil, in the short-run and long run. There is a predictable short-term/long term pattern. First, at undesirable prices, consumers simply drive less. Next, they buy cars that use less gasoline and drive them in a more organized way. After that, they move closer to work.

Given the experiences of the 1970s, we can guarantee that OPEC knows all this and at the first sign of permanent long-term changes in consumer patterns, the price of oil will come down like a punctured balloon. The question is not “if.” The question is how much substitution is now afoot and how long will the horizon be (a function of the degree of the current shock and the current state of technology).

We can guarantee the consumer will solve this problem. The really interesting questions are whether, in the mind of the consumer, the needed substitutions are already in the plans and whether the process can be reversed once unleashed. That is the gamble OPEC faces and the track record for them is not good!

Substitution is the rational thing to do, and no force on Earth does it better than the American consumer. We can spend 100,000 words describing the many and varied combinations of substitution available to Americans at any point in time – because there are no less than millions of ways the consumer can make substitutions.

Substitution is an incredible phenomenon, and any politician or businessman who tells us he or she can solve all our problems with one single policy move is a liar, a fool, a Communist or all of the above. The politicians who are today not heeding the 75% popular mandate of voters, will do well to remember that the American consumer can also (when acting in their truly secondary role as voter) substitute politicians for lower oil prices – AND WILL!

When politicians like Barack Obama get on their high horse and lecture us about the virtues of inflating our tires as a means of conservation, someone should tell such economically-illiterate power-seekers that new BMWs, at the high end, are already shipping with installed electronic tire pressure monitors that will regulate tire inflation levels automatically. Now, of course, not every consumer can afford a new BMW, but it does not take a Presidential candidate or degrees from Columbia and Harvard to know that automotive innovation starts at the top and spreads to all other new models on the basis of demonstrated benefits and consumer requirements.

The economies afforded by electronic tire pressure monitoring are already in the price of oil today, because it is a factor that affects the forecasted demand in the technological horizon, over which the present price of oil and gasoline is agreed to by suppliers and demanders. Tire pressure and the related solutions are old news in the price of oil and in the world of automotives today. As the price of oil rises, and as consumers believe the rise is long-term and not some short-term political disruption, they will demand electronic tire pressure monitors even in their Honda Civics and their Smart Cars. No law will be required and, the good news, no arrogant politicians are required either.

The people, who can be trusted in a democratic society to establish their own social policy and choose their own leaders, are quite capable of making consumer choices that make simple-minded political action to control or direct their behavior wholly and entirely unnecessary. It is not “the economy stupid,” that is the issue; it is the “price” and the freedom to make consumer choices and rational substitutions.

What the politicians can do most to benefit the American public is simple: give us better roads, higher speed limits and more energy choices. We will naturally and systematically take care of the rest.