Are Markets Democratic?

The pricing mechanism inherent in markets allows each consumer’s choices to influence the success of a product or company. Conservatives and liberals both assert that product boycotts and consumer activism are effective ways to have our voices heard. Liberals boycott companies associated with Trump’s business empire, while conservatives employ the same tactics in support of their own aims. Nobel prize winning economist Milton Friedman asserts that markets, unlike political channels, permit wide diversity through a system of proportional representation – “each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit.”


But just how democratic are markets?


As an example of a democratic system we can consider the Dutch House of Representatives, which has 150 members chosen through proportional representation. Each citizen is eligible to vote and each gets only one vote. Every citizen’s vote has the same value. After the votes are tallied, the seats are allocated to parties in proportion to the number of votes they received using a quota method. This gives a diverse representation of people’s views, from the People’s Party for Freedom and Democracy, supported by 21.3% of people in 2017 for 33 seats (or 22% of the total) right down to the Forum for Democracy, with 1.8% of the vote and 2 seats. The way in which each vote is counted varies between systems (for instance in Australia, where our votes go towards the winner of each geographical seat), but the central principle remains. We are all equal. We all get just one vote, regardless of status.


In the analogy of markets to democracies, each dollar is a vote. A consumer boycott campaign reduces a company’s profits in proportion to the number of dollars which aren’t spent. The simple number of people boycotting the company makes no difference. A support campaign acts similarly, increasing the company’s profits only in proportion to the additional dollar spend of the supporters. We can only continuously spend the money we earn, so both our ability to reward and punish companies in the market is tied directly to our income. A person’s disposable income determine’s the value of their vote and thus their voting power within the market.


In a perfectly equal society then, markets would then be democratic with each consumer having equal voting power. Unfortunately, our society doesn’t come close to this ideal. As a simple example, women in Australia earn 87% of what men do. So when voting in the market, on average a woman’s vote is worth only 0.87 male votes, as they have proportionally less dollars to spend. Consider a company which might take a sexist stance in their advertising. They could gain 1000 male customers and lose 1100 female customers, yet the market vote would deliver them more profits through the higher average incomes of men, even though more people disagree with the stance than support it.


The gender pay gap, though real, is small compared with the discrepancies which exist across other strata of society. Consider the income distribution in the USA: The top 10% of people have 47% of the income, while the bottom 50% of people have only 13%. This means that the average person in the top 10% has 18x the market voting power of their counterpart in the bottom 50%. A boycott by half the population could be cancelled out by the top 10% each increasing their spend by just under a third. Markets don’t care who the dollars come from, just that they keep flowing in. To correct Mr Friedman’s analogy, each man can indeed vote for the colour of tie he wants, but only the wealthy man gets it; the poor man with little market power can only hope that some rich men share his views.


Investments provide an even starker image, as a consumer’s voting power there is determined not by their income but by their wealth. The wealth distribution everywhere is more unequal than income, and again the US data is illustrative. The top 1% have 39% of the wealth, the next 9% (from 90-99% in the distribution) have 34%, while the bottom 50% of people have a combined net worth of zero. So the direction of investment is almost entirely determined by the top 10%, with the poorest 50% able to provide no input whatsoever. Is it any wonder that venture capital continues to demonstrate itself entirely out of touch with real people? Why tech entrepreneurs continue to ignore women, people of colour and the poor? In a society built around markets, those with no money have no say.


We do have a word for this kind of system, where a small elite has all the power. But that word isn’t democracy. It is an oligarchy.