What is consumer sovereignty?

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Consumer sovereignty is an economic concept developed by the noted Austrian economist Ludwig von Mises. Born in Lemberg, Von Mises moved in his youth to Austria and Hungary and as a young adult attended University of Vienna. There he was influenced by the economist Carl Menger. Later he immigrated to the United States and was a professor at New York University, where he taught until the age of 87.

His theory states that the consumer is the sovereign, the ruler, in the economic system. This theory is based on the fact that it is the consumer who decides what will be made and what services will be offered. While these decisions seem to be made directly by managers, owners, manufacturers or service providers, according to von Mises, they are not. It is the consumer that the managers are trying to please; it is to his wants and needs that industry is catering. Those producers who do not anticipate accurately the desires of the consumer will not be able to sell and will sooner or later go out of business. Thus, the consumer is sovereign.

This is similar to most modern democracies where the citizen is the sovereign as he chooses the policies of his leaders by casting his ballot. In fact, consumer sovereignty is even stronger than political sovereignty as people vote perhaps only once every few years and may vote for a leader with whose policies they agree only in part, yet they prefer him or her to other politicians in the running. The consumer, however, votes every day by choosing what products he will buy and what products he won’t buy.

Furthermore, in a democracy, one is obligated to accept the decision of the majority, even if the party or candidate chosen is not the preferred one. A consumer, however, is frequently less bound by the choices of his peers. For example, even if most people prefer to eat at McDonald’s, anyone can still choose to eat at Burger King – or at gourmet restaurants.

What about a business owner who makes decisions that are not in tune with consumer sovereignty? Is this possible? For example, if a factory owner hires his young son to work in a factory instead of a skilled worker, this decision will result in less production. Surely the consumer would not have wanted this, so perhaps consumers are not sovereign? Economists argue that this does not disprove consumer sovereignty. Rather, the factory owner is acting as a consumer himself and choosing to “consume” the difference between the number of units he could have produced had he employed the skilled worker and the number of units produced by employing his young son.

A caveat to the theory is that consumers must have accurate and complete information about the various products available in the market. For example, if a consumer buys a car that is advertised as being reliable, but it really is prone to breakdowns, his will as a consumer is being subverted because of the lack of accurate information about the product. Had he known, he would perhaps have bought a different vehicle from a different manufacturer.

The theory of consumer sovereignty has important political implications as well. According to von Mises, socialist or communist economies are doomed to fail as they are not consumer- based economies. Without consumers to determine which goods and services to produce, the products will end up poorly assigned to the needs of the consumers. Resources will be wasted in producing goods that are not desired by consumers. Thus, the final years of the communist system in the Soviet Union were noted for long lines where Russian citizens had to stand, waiting for basic necessities that were in short supply, while other goods – such as soap were sometimes completely unavailable.

Von Mises was a staunch supporter of free market economies. His theories about the importance of consumer sovereignty and the unsustainable nature of centrally planned economies have been proven correct.

Resource by T.Price

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