Austrian Economics and Consumer Sovereignty
G. Stolyarov II
A Journal for Western Man-- Issue XLIII-- November 2, 2005
The great Austrian economist Ludwig von Mises formulated the idea of “consumer sovereignty”—using a term originally coined by William Hutt in a critique of Keynesianism—to describe the role of consumers and producers in the market process. Mises’s analogy has its limits, as his student Murray Rothbard would recognize, but it remains nonetheless an eloquent defense of the free market. When the limits of the analogy are recognized, one will find the free market to be even superior to what a full application of the analogy might suggest.
By “consumer sovereignty” Mises meant that, in a free market, the consumers ultimately dictate what is to be produced. While the capitalists and entrepreneurs might steer the economy, they ultimately take orders from the consumers by responding to demand for certain goods and lack of demand for others. Provided that they wish to remain in business and generate a positive net income, they need to satisfy the preferences of consumers, who are the sources of said income. Their personal profit, hence, is inextricably linked to furnishing the goods and services their customers desire. If an entrepreneur consistently refuses to do this, he will simply lose money until he is no longer able to sustain his entrepreneurial function. According to Mises, every dollar spent by consumers on the free market is like a ballot cast in favor of the producers manufacturing a certain product. The more consumers demand a given product and “vote” for it through their expenditure decisions, the more producers will furnish that product.
In reality, one might find apparent “exceptions” to the successful producers’ tendency to make decisions maximizing monetary profit. An employer might hire his less productive family member instead of another worker who would bestow greater revenue upon the firm. This does not, however, deny the universality of consumer sovereignty, according to Mises. Instead, the employer is acting partly as a consumer in his decision to hire the family member. He consumes the opportunity cost of hiring his relative, which is the additional income he would have gotten by hiring the more productive worker. In his capacity as a consumer, the employer is, too, sovereign: he is willing to pay the opportunity cost and expects to get in return the satisfaction of hiring his relative. On a free market, he will receive that satisfaction. To the extent that he and his newly hired relative are working to satisfy the demand of other consumers on the market, they are subject to the sovereignty of the latter. A capitalist or entrepreneur who acts strictly as a consumer and ignores market demand altogether will cease to be a capitalist or entrepreneur.
Economist Murray Rothbard, a student of Mises, raised objections to the Misesian idea of consumer sovereignty. According to Rothbard, “sovereignty” is necessarily a political term, describing the exertion of compulsory force by one party against another. On a free market, nobody has the power to coerce anybody else; all are barred from initiating force. The consumers thus cannot dictate what any producer will make with that producer’s own property. Rather, the consumers can only indirectly influence the producer by indicating their demand to that him. If the producer wishes to earn a profit, he would do well to respond to the signals the consumers give him. However, both consumers and producers are always sovereign; they maintain an individual self-sovereignty. The producer is always entitled to exercise his property rights and reject the fulfillment of a certain consumer demand. He might thereby lose monetarily, but that is his prerogative. He might, on the other hand, get away with acting partly as a consumer himself—as in the case of the employer who hires his less productive relative—provided that he earns enough revenue to stay in business.
Furthermore, Rothbard thought that Mises’s comparison of the market to a democratic process was unfair to the free market. Compared to the free market, democracy entails immense constraints on individual choice. The individual is entitled to only select between a small number of options decided upon by someone else (the political parties, the legislators, or the voters in primaries). Furthermore, in a democracy, the majority decision is binding on all, even those who did not personally support it. The candidate elected by 51% of the people will be the officeholder for 100% of the people. The market, on the other hand, offers neither a dearth of choices nor any compulsion to accept the will of the majority. I, as a consumer, might loathe rap music even though the majority of other consumers in my vicinity might demand it highly. Instead, I seek to obtain immense quantities of classical recordings for my consumption. Producers will take into account both my tastes and the tastes of the majority in creating their products: they will cater to both the market niche that demands rap music and the smaller market niche that demands classical music. Thus, in a free market, the majority decision is not binding on all, and minority preferences of all sorts will be satisfied by entrepreneurs desiring to profit from them. While democracy severely limits individual self-sovereignty, the free market guarantees it absolutely.
While the Misesian concept of consumer sovereignty is a fine analogy for describing the functions of a free market and the role of consumers therein, Rothbard correctly pinpointed the areas in which the analogy breaks down. Fortunately, with respect to those areas, the free market is even better than a universal application of the analogy would suggest.
Opponents of the fully free market might raise the following worst-case scenario to challenge it. The producer of a certain good has mistakenly underrated the market demand for that good. In the efforts to keep the price of the good high enough to maximize monetary returns, he destroys what he believes to be the “excess” stockpile of his good—a stockpile that consumers actually demand. Consumers thereby suffer by not getting enough of a product which they highly value. Yet even here Rothbard came to the defense of the free market.
Rothbard’s first response to such a scenario would be: It will not likely happen again. The producer has made a mistake and has recognized it after the fact. He can only maximize his profits by correctly estimating consumer demand and selling precisely the quantity of goods his customers desire. He can best eliminate waste only by producing what he plans on selling—and nothing more. Surely, producing something only to destroy it in the future would be doubly wasteful, and the prudent businessman will rationally seek to avoid this in the future. Cutting costs to the optimal level will free up resources for the businessman to either personally consume or to devote to another line of production advantageous to consumers. If he wants to remain in business and prosper, he will adjust his operations to prevent future underestimations of consumer demand.
Furthermore, Rothbard would defend the producer who makes the decision to destroy a part of his stockpile by claiming that we cannot condemn him without entering his head and learning his motives. For example, if a producer grew one million bushels of grain and consumed 100,000 of them in a massive feast that he created for himself, his family, friends, and employees—nobody who supports individual liberty would suggest that the producer did anything evil that government ought to curtail. He was simply acting in his capacity as a consumer, a capacity in which his individual self-sovereignty ought to be recognized. If a producer of fireworks destroyed 100,000 units of his good by igniting them, he, too, would be immune from blame. He only wanted to enjoy a spectacular pyrotechnic display. To extrapolate this reasoning, if a producer of coffee burned 100,000 tons of his product, why would he deserve condemnation where the fireworks producer did not? Can an external observer truly know that the producer desired to burn the coffee specifically to keep prices artificially high? It might be that the businessman simply wished to enjoy the burning as a consumer satisfaction. As the igniter of fireworks might receive pleasure from the result, so might the burner of coffee obtain a similar subjective value. While his tastes may be unusual, and few others would personally exhibit them, they are not coercive in any way. They do not interfere with the sovereignty of any other consumer and constitute an exercise of property rights that a truly free market will tolerate.
The idea of consumer sovereignty, within the proper bounds, provides a firm justification for why the free market works to satisfy the preferences of every consumer. Recognizing those bounds, as Rothbard did, will additionally suggest why the absolute free market is superior to democracy or to any coercive initiation of force by one party against another. Indeed, the free market can be defended even against the worst-case scenario of the producer destroying a part of his own stockpile. When full economic liberty exists, so does full individual self-sovereignty—a condition that benefits all market participants.
Note: This essay was approved as an accurate representation of Austrian School economic ideas by Dr. Robert P. Murphy of Hillsdale College, one of the leading contemporary scholars of Austrian Economics.
G. Stolyarov II is a science fiction novelist, independent filosofical essayist, poet, amateur mathematician and composer, contributor to organizations such as Le Quebecois Libre, Enter Stage Right, and the Autonomist. Mr. Stolyarov is the Editor-in-Chief of The Rational Argumentator and a Senior Writer for the Liberal Institute (http://www.liberalinstitute.com). He can be contacted at email@example.com.
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