Consumer sovereignty
Consumer sovereignty is the principle that in an unhampered market economy it is consumers, not producers, who ultimately determine what is produced, in what quantities, and by whom. The term was coined by W. H. Hutt and became central to Ludwig von Mises's account of capitalism.
The mechanism
Producers do not decide what will be made in any final sense. They forecast what buyers will pay for, bid factors of production away from competing uses on the strength of that forecast, and then discover whether they were right. Those who judged well earn profit and command more resources next time; those who judged badly take losses and command fewer. Ownership of capital is therefore not a settled position but a continually renewed appointment, and the electorate is the buying public.
Mises put the point as a metaphor of voting: the market is a democracy in which every penny gives a right to cast a ballot, and the outcome is a daily plebiscite in which the consumers decide who shall own what and run which business.[1]
On this account the entrepreneur is not a ruler of the productive apparatus but a servant of the consumers, and his authority over his employees and his suppliers is derivative: he can pay them only what consumers have made it worth paying.
What the doctrine does not claim
The principle is frequently read as a claim that consumers get what they deserve, or that whatever the market produces is thereby good. It asserts neither.
- It is about causation, not merit. Consumer sovereignty says that consumer valuations govern production, not that those valuations are wise. Mises was explicit that the market gives people what they want rather than what a critic thinks they ought to want, and treated complaints about vulgar output as complaints about the public rather than about the mechanism.
- It is not a claim of consumer omnipotence. Consumers cannot conjure goods that are technically impossible or make scarce things abundant. Sovereignty is exercised over the direction of production, within the limits scarcity sets.
- It presupposes the absence of privilege. Where the state confers monopoly, licence, subsidy or tariff, producers are shielded from the verdict, and to that extent sovereignty passes from the consumer to whoever grants the privilege. Austrians therefore treat the entrenched, unresponsive firm as evidence of interventionism rather than of markets working normally.
Relation to the calculation argument
Consumer sovereignty is what economic calculation serves. Money prices allow producers to compare the countless possible ways of satisfying consumer demand and to identify which of them wastes least. Where those prices are absent, as under socialism, the mechanism transmitting consumer valuations back into production decisions is broken, and the direction of production passes to the planners whether or not they intend to override anyone's preferences.