Consumer sovereignty

Consumer sovereignty is an economic concept with two different meanings.

One meaning refers to the controlling power of consumers, versus the holders of scarce resources, in what final products should be produced from these resources. It is sometimes used as a hypothesis that the production of goods and services is determined by the consumers' demand (rather than, say, by capital owners).

A second meaning refers to the idea that the consumer is the best judge of his/her own welfare (rather than, say, politicians). It is used to claim that, for example, the government should help the poor by giving them monetary transfers, rather than by giving them products that are deemed "essential" by the politicians.

Definitions

Consumer sovereignty, in its first meaning, 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.

In its second meaning, consumer sovereignty is defined as:

The idea that the consumer is the best judge of his or her own welfare. This assumption underlies the theory of consumer behaviour and through it the bulk of economic analysis including the most widely accepted optimum in welfare economics, the Pareto optimum. The notion is, however, challenged in that governments do provide Merit goods, while advertising is held, especially by J. K. Galbraith, to distort consumers' preferences.

Examples

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 switched to these companies and eventually, Eastman Kodak cameras went under.

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.

Origins

The concept was first 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:

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.

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, for example, in healthcare.

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.

Consumers versus suppliers

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.

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.

See also

• Dollar voting - the impact of consumer choice on producers' actions through the flow of consumer payments to producers for their goods and services.
• 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.