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10. Monopoly and Competition > 1. The Concept of Consumers' Sovereignty

B. Professor Hutt and Consumers' Sovereignty

The metaphorical shibboleth of “consumers’ sovereignty” has misled even the best economists. Many writers have used it as an ideal with which to contrast the allegedly imperfect free-market system. An example is Professor W.H. Hutt of the University of Cape Town, who has made the most careful defense of the concept of consumers’ sovereignty.3 Since he is the originator of this concept and his use of the term is widespread in the literature, his article is worth particular attention. It will be used as the basis for a critique of the concept of consumers’ sovereignty and its implications for the problems of competition and monopoly.

In the first part of his article, Hutt defends his concept of consumers’ sovereignty against the criticism that he has neglected the desires of producers. He does this by asserting that if a producer desires a means as an end in itself, then he is “consuming.” In this formal sense, as we have seen, consumers’ sovereignty, by definition, always obtains. Formally, there is nothing wrong with such a definition, for we have stressed throughout this book that an individual evaluates ends (consumption) on his value scale and that his valuation of means (for production) is dependent upon the former. In this sense, then, consumption always rules production.

But this formal sense is not very useful for analyzing the situation on the market. And it is precisely the latter sense that Hutt and others employ. Thus, suppose producer A withholds his labor or land or capital service from the market. For whatever reason, he is exercising his sovereignty over his person and property. On the other hand, if he supplies them to the market, he is, to the extent that he aims at monetary return, submitting himself to the demands of the consumers. In the aforementioned general sense, “consumption” rules in any case. But the critical question is: which “consumer”? The market consumer of exchangeable goods who buys these goods with money, or the market producer of exchangeable goods who sells these goods for money? To answer this question, it is necessary to distinguish between the “producer of exchangeable goods” and the “consumer of exchangeable goods,” since the market, by definition, can deal only in such goods. In short, we can designate people as “producers” and as “consumers,” even though every man must act as a consumer, and every man must also act, in another context, as a producer (or as the receiver of a gift from a producer).

Making this distinction, we find that, contrary to Hutt, each individual has self-sovereignty over his person and property on the free market. The producer, and the producer alone, decides whether or not he will keep his property (including his own person) idle or sell it on the market for money, the results of his production then going to the consumers in exchange for their money. This decision—concerning how much to allocate to the market and how much to withhold—is the decision of the individual producer and of him alone.

Hutt implicitly recognizes this, however, since he soon shifts his argument and begins inconsistently to hold up “consumers’ sovereignty” as an ethical ideal against which the activities of the free market are to be judged. Consumers’ sovereignty becomes almost an Absolute Good, and any action by producers to thwart this ideal is considered as little less than moral treason. Wavering between consumers’ sovereignty as a necessary fact and the contradictory concept of consumers’ sovereignty as an ideal that can be violated, Hutt attempts to establish various criteria to determine when this sovereignty is being violated. For example, he asserts that when a producer withholds his person or property out of a desire to use it for enjoyment as a consumers’ good, then this is a legitimate act, in keeping with rule by the consumer. On the other hand, when the producer acts to withhold his property in order to attain more monetary income than otherwise (presumably, although Hutt does not state this, by taking advantage of an inelastic demand curve for his product), then he is engaging in a vicious infringement on the consumers’ will. He may do so by acting to restrict production of his own personal product, or, if he makes the same product as other producers, by acting in concert with them to restrict production in order to raise the price. This is the doctrine of monopoly price, and it is this monopoly price that is allegedly the instrument by which producers pervert their rightful function.

Hutt recognizes the enormous difficulty of distinguishing among the producer's motives in any concrete case. The individual who withholds his own labor may be doing so in order to obtain leisure; and even the owner of land or capital may be withholding it in order to derive, say, an aesthetic enjoyment from the contemplation of his unused property. Suppose, indeed, that there is a mixture of motives in both cases. Hutt is definitely inclined to solve these difficulties by not giving the producer the benefit of the doubt, particularly in the case of property.

But the difficulty is far greater than Hutt imagines. Every individual producer is always engaged in an attempt to maximize his “psychic income,” to arrive at the highest place on his value scale. To do so, he balances on this scale monetary income and various nonmonetary factors, in accordance with his particular valuations. Let us take the producer first as a seller of labor. In judging how much of his labor to sell and at what price, the producer will take into consideration the monetary income to be gained, the psychic return from the type of work and the “working conditions,” and the leisure forgone, balancing them in accordance with the operation of his various marginal utilities. Certainly, if he can earn a higher income by working less, he will do so, since he also gains leisure thereby. And the question arises: Why is this immoral?

Moreover, (1) it is impossible, not simply impracticable, to separate the leisure from monetary considerations here, since both elements are involved, and only the person himself will know the intricate balancing of his own valuations. (2) More important, this act does not contravene the truth that the producer can earn money only by serving the consumers. Why has he been able to extract a “monopoly price” through restricting his production? Only because the demand for his services (either directly by consumers or indirectly from them through lower-order producers) is inelastic, so that a decreased production of the good and a higher price will lead to increased expenditure on his product and therefore increased income for him. Yet this inelastic demand schedule is purely the result of the voluntary demands of the consumers. If the consumers were really angry at this “monopolistic action,” they could easily make their demand curves elastic by boycotting the producer and/or by increasing their demands at the “competitive” production level. The fact that they do not do so signifies their satisfaction with the existing state of affairs and demonstrates that they, as well as the producer, benefit from the resulting voluntary exchanges.

What about the producer in his capacity as a seller of property—the main target of the “anti-monopoly-price” school? The principle, first of all, is virtually the same. Individual producers may restrict the production and sale of their land or capital goods, either individually or in concert (by means of a “cartel”) in order to increase their expected monetary incomes from the sale. Once again, there is nothing distinctively immoral about such action. The producers, other things being equal, are attempting to maximize the monetary income from their factors of production. This is no more immoral than any other attempt to maximize monetary income. Furthermore, they can do so only by serving the consumers, since, once again, the sale is voluntary on the part of both producers and consumers. Again, such a “monopoly price,” to be established either by one individual or by individuals co-operating together in a cartel, is possible only if the demand curve (directly or indirectly of the consumers) is inelastic, and this inelasticity is the resultant of the purely voluntary choices of consumers in their maximization of satisfaction. For this “inelasticity” is simply a label for a situation in which consumers spend more money on a good at a higher than at a lower price. If the consumers were really opposed to the cartel action, and if the resulting exchanges really hurt them, they would boycott the “monopolistic” firm or firms, they would lower their purchasing so that the demand curve became elastic, and the firm would be forced to increase its production and reduce its price again. If the “monopolistic price” action had been taken by a cartel of firms, and the cartel had no other advantages for rendering production more efficient, it would then have to disband, because of the now demonstrated elasticity of the demand schedule.

But, it may be asked, is it not true that the consumers would prefer a lower price and that therefore achievement of a “monopoly price” constitutes a “frustration of consumers’ sovereignty”? The answer is: Of course, consumers would prefer lower prices; they always would. In fact, the lower the price, the more they would like it. Does this mean that the ideal price is zero, or close to zero, for all goods, because this would represent the greatest degree of producers’ sacrifice to consumers’ wishes?

In their role as consumers, men would always like lower prices for their purchases; in their capacity as producers, men always like higher prices for their wares. If Nature had originally provided a material Utopia, then all exchangeable goods would be free for the taking, and there would be no need for any labor to earn a money return. This Utopia would also be “preferred,” but it too is a purely imaginary condition. Man must necessarily work within a given real environment of inherited land and durable capital.

In this world, there are two, and only two, ways to settle what the prices of goods will be. One is the way of the free market, where prices are set voluntarily by each of the participating individuals. In this situation, exchanges are made on terms benefiting all the exchangers. The other way is by violent intervention in the market, the way of hegemony as against contract. Such hegemonic establishment of prices means the outlawing of free exchanges and the institution of exploitation of man by man—for exploitation occurs whenever a coerced exchange is made. If the free-market route—the route of mutual benefit—is adopted, then there can be no other criterion of justice than the free-market price, and this includes alleged “competitive” and “monopoly” prices, as well as the actions of cartels. In the free market, consumers and producers adjust their actions in voluntary cooperation.

In the case of barter, this conclusion is evident; the various producer-consumers either determine their mutual exchange rates voluntarily in the free market, or else the ratios are set by violence. There seems to be no reason why it should be more or less “moral,” on any grounds, for the horse-price of fish to be higher or lower than it is on the free market, or, in other words, why the fish-price of horses should be lower or higher. Yet it is no more evident why any money price should be lower or higher than it is on the market.4

  • 3. W.H. Hutt, “The Concept of Consumers’ Sovereignty,” Economic Journal, March, 1940, pp. 66–77. Hutt originated the term in an article in 1934. For an interesting use of a similar concept, cf. Charles Coquelin, “Political Economy” in Lalor's Cyclopedia, III, 222–23.
  • 4. To be consistent, currently fashionable theory would have to accuse Crusoe and Friday of being vicious “bilateral monopolists,” busily charging each other “monopoly prices” and therefore ripe for State intervention!