Consumer sovereignty

Consumer sovereignty is an economic concept which refers to the controlling power of consumers, over the custodians of scarce resources, in what final products should be produced. Sometimes the term consumer sovereignty is also used as a hypothesis that the production of goods and services is determined by the consumers' demand.

The concept was described by William Harold Hutt in his book Economists and the Public: A Study of Competition and Opinion (1936). However, Hutt himself was always cautious of claiming credit for the term. Although Hutt did not mean to establish any theory based on this concept, it is argued by some economists that the consumer sovereignty does not hold in some cases.

Definition

Consumer sovereignty is defined by Hutt as follows:

The consumer is sovereign when, in his role of citizen, he has not delegated to political institutions for authoritarian use the power which he can exercise socially through his power to demand (or refrain from demanding).

The double use of the word "power" in this definition makes it clear that the power of the consumers was the most important topic in the whole concept. Hutt later reformulated the definition in a similar sense:

...it simply refers to the controlling power exercised by free individuals, in choosing between ends, over the custodians of the community's resources, when the resources by which those ends can be served are scarce.

Origin

William Harrold Hutt is usually given the credit for coining the term,though Hutt himself was always cautious of this claim.

I am not sure whether I coined the term myself. Marketing literature contains phrases like " the customer is always right," and I am told that a proverbial expression in High Dutch is "De klant is koning" (the customer is king). I first used the term in its present sense in an unpublished article which I circulated in 1931. It first appeared in print, I believe, in an article which I published in March 1934. In 1935 Dr. W. Röpke used the phrase "democracy of the consumers"; and in the same year Professor F. A. Hayek used the phrase "sovereignty of the consumer" in a section heading in Collectivist Economic Planning. Since then the term seems to have been fairly widely employed.

When the term was used for the first time by Hutt, it was written as "consumers' sovereignty". In the book's review by Jacob Viner, he used it as "consumer's sovereignty". Later, the use of the term "consumer sovereignty" became generally used.

The consumers and their demand

For the consumer sovereignty it is very important how the consumers and their demand is understood. In this concept, everyone is a consumer and has their demand not only for products such as food, or commodities as oil or gas, but also for production factors such as time, and all other possible things. When a worker wants to have more leisure time, his demand for leisure is confronted with the demand of the society for his work. Only after the worker outbids the society for his leisure, he can consume it as he wishes. According to Hutt, the poor understanding of the consumers and their demand has led to some of the early criticisms of this concept.

It seems to me that one basic misunderstanding is mainly responsible for all Professor Fraser's criticisms. He says that the "doctrine of consumers' sovereignty implies, perhaps even entails, that preferences on the side of demand are fundamentally and in principle more important than those on the side of supply." But all I have done is to make the concept correspond with the distinction between ends and means. As I have used the term, it covers the expression of all human preferences in respect of ends, in so far as those ends are confronted with scarce means. When ends are being sought, we are concerned with demand; when means are being chosen, we are concerned with an aspect of supply- entrepreneurship.

As Hutt also described, the concept therefore does not neglect the suppliers.

This does not involve any "startling neglect," as Professor Fraser describes it, "of the producers' side of the picture." Every owner of resources (including his own physical powers) may be regarded as bidding, with the rest of the consumers, for the services of his own resources. We may regard him as normally offering part of those services for exchange, actual or anticipated bidding as a whole. He is, so to speak, outbid for such services by other consumers.

Criticism

The concept has been criticized since it has been published in Economists and the Public: A Study of Competition and Opinion (1936), often the essence was the understanding of the concept in which Hutt did not manage to respect the symmetry between freedom to demand and freedom to supply. Although Hutt may be blamed for the misunderstanding of the critics, they have missed the point of the concept.

Recognizing that in some situations a producer might choose a less remunerative activity which that producer finds more personally satisfying, Hutt defined such a decision as one of consumption, not production. In doing so, he attempted to force the distinction between consumption and production to run exactly parallel to the distinction between ends and means.

The effort to make distinction between consumption and production parallel to the distinction between ends and means was viewed as unfortunate wordplay exercise by some economists.

Even if consumers are approached traditionally, they are largely sovereign under the assumption that in the role of producers, people maximize their income. This hypothesis has been discussed by economists often and is also addressed as consumer sovereignty.

for production factors such as time, and all other possible things. This element supports society because consumers have the power to decide how a store is going to function and go up or down in sales, simply by buying things, they are deciding what goods are produced and how it will sell, and if it brings consumers back to the market and if new consumers will visit. It also brings competition between other markets because other markets might need to change the price on their goods in order to bring consumers back. Sometimes a business will go down because they can’t provide the products nessecary to make consumers happy, Blockbuster, for example, went down because consumers started to adapt to video on demand, like netflix, shaw on demand, and telus on demand. Blockbuster still had DVD’s and VHS’s in which comsumers lost interest in, sending blockbuster down. Dell took off and competitors got whiplash trying to keep up with its skyrocketing sales. But a decade later, Dell faltered as mobile devices began to displace PCs, cheap Asian machines cut into profitability, and big customers began to demand end-to-end service, not just hardware. Dell has countered with mini-laptops, smartphones, and other trendy products, but it's now following the pack. Kodak Cameras is also a great example of how a business can fail because it doesn’t meet the needs of consumers. When other companies (such as Nikon and Canon) started making cameras that took digital photos unlike the printout cameras from kodak, consumers obviously switched to the better companies with better cameras and eventually, Eastman Kodak cameras went under. Sending the business to plumet and fail. Consumer sovereignty has had a postive and negative impact on society because its helped business’s increase their profit and market value, but has also led to the shut down of various companies (previously mentioned) who couldn;t provide the consumers with the goods that they demanded.

See also

• Dollar voting
• Ethical consumerism
• Resource dependence theory

Further reading

• Joel Waldfogel - Does Consumer Irrationality Trump Consumer Sovereignty? 2004
• Campbell R. McConnell and Stanley L. Brue (1999, 14th ed.), Economics. McGraw-Hill
• Persky, Joseph (1993). "Retrospectives: Consumer Sovereignty". Journal of Economic Perspectives. 7: 183–191. doi:10.1257/jep.7.1.183.