Freeman

ARTICLE

Consumer Sovereignty

JUNE 01, 1990 by BETTINA BIEN GREAVES

Mrs. Greaves is a member of the senior staff of The Foundation for Economic Education. From 1951 to 1969 she was a regular participant in Ludwig von Mises’ graduate seminar in economic theory at New York University.

From time to time, insightful economists have described the operations of a market economy. Many have noted that no central planner is needed to tell producers what to produce, when to produce, how much to produce, and what quality to produce. Adam Smith, often called the “first economist,” pointed out in 1776 that the butcher, the baker, and the brewer are guided as if by “an invisible hand.” Frederic Bastiat remarked in 1845 that Parisians need not fear starving the next day, but could sleep peacefully in their beds, confident that the city would be provisioned during the night.

However, it was only with the development of the subjective, marginal utility theory of value by the Austrian school that economists explained why the market needed no central planner, why no one needed to direct the butcher, the baker, the brewer, or to plan the provisioning of Paris. It was Ludwig von Mises (1881-1973), leading spokesman for decades of the Austrian school, who clearly demonstrated the consumer’s crucial role in production.

Every one of us has personal, subjective values, the Austrian economists point out. Each of us acts in response to our respective values. When as consumers we buy, or refuse to buy, we send a message to the entrepreneurs who guide production. Entrepreneurs “are at the helm and steer the ship,” Professor Mises noted. “But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.” Let’s see how Captain Consumer directs production.

Recent accounts of economic conditions in the U.S.S.R. tell of serious shortages—of soap, for instance. Why? It is said there are bottlenecks in the production of paraffin needed for producing sulphanol, an ingredient used in making soap; hence the production of soap is held up. It is charged that the responsibility for soap-making is dispersed among several governmental departments, each with other more urgent responsibilities; hence soap production is neglected. But the real reason for the shortage of soap is the lack of opportunity for entrepreneurs to respond to the wants and wishes of consumers.

A widespread shortage of soap would never exist in a country with freedom of opportunity and respect for private property. At the first sign of demand for soap over and above available supplies, some entrepreneur, hoping for profit, would try to fill the gap, by starting a small soap-making operation of his own, or by shipping soap from where it was more abundant. The demands of consumers would guide him.

Given the lack of soap in Russian stores, why doesn’t someone there start to make soap at home? Soap isn’t very difficult to make and the ingredients aren’t expensive. Many of our grandmothers and great-grandmothers used to make soap. Old cookbooks give recipes. It can be made from readily available raw materials: wood ashes, fat, lye, and salt.

Let’s assume for a moment that an enterprising Russian housewife and her children weren’t deterred by the threat of government regulation and decided to make soap on their own. Wood ashes they would have aplenty. Also fats left over from cooking. By pouring water over the ashes and letting it stand, they could leach out a form of lye. This they would then mix with the fats, add salt, and heat until a crude kind of soap began to form. Not a very fancy soap, to be sure, but a usable soap, which in view of the shortage in Russia, consumers would undoubtedly welcome.

Each Russian consumer who chose to spend money for this new soap, instead of something else such as cigarettes, would vote his personal values, transferring rubles to these enterprising soap-makers while, at the same time, sending fewer rubles to the producers of cigarettes. As consumers purchased soap in preference to cigarettes, they would be giving the venturesome soap-makers more and more rubles, providing them with a profit, and encouraging them to continue production.

Freedom to Choose

Consumer sovereignty is consumers making choices one by one, consumers buying one thing and not another, consumers transferring their money to some producers and not to others. The process isn’t invisible; it isn’t miraculous; it only seems miraculous in that it directs production without a central authority having to plan or give orders.

If consumers still clamored for more soap after the first batch was gone, the enterprising soap-makers would expand production, in response to consumer sovereignty. As more and more consumers bought their soap, the soap-makers would profit. And their success would induce others to start producing soap, perhaps an improved variety, this too in response to consumer sovereignty. As sales grew, the soap-makers would have to look farther afield for supplies of wood ashes and leftover cooking fats. Consumer sovereignty would soon impact on suppliers of these raw materials too, affecting the prices they asked and could receive for raw materials, persuading them to sell to the soap-makers, and perhaps even to expand their production. In short order, as consumers assumed control, the production of soap in Russia would rise and the shortage would disappear.

Consumer sovereignty is manifested by consumer purchases and refusals to purchase. As long as customers continued to buy soap, they would keep on transferring money from other segments of the market to pay for their purchases. In the process, they would help to make those soap-producers who responded to their wishes richer. In the final analysis, it is the consumers, as Mises has written, who “make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities.”

Russian consumers lack soap and many other goods because potential entrepreneurs have little freedom to go into business, to invest, to experiment, and to try to respond to the wishes of consumers. In Russia, there is a shortage of soap because consumers aren’t free to make some entrepreneurs richer by buying their products and others poorer by refusing to buy theirs. In Russia, there is a shortage of soap bemuse the consumer is prevented from expressing his sovereignty on the market. In Russia, central planners, not consumers, are sovereign.

ASSOCIATED ISSUE

June 1990

ABOUT

BETTINA BIEN GREAVES

Contributing editor Bettina Bien Greaves was a longtime FEE staff member, resident scholar, and trustee. She attended Ludwig von Mises’s New York University seminar for many years and is a translator, editor, and bibliographer of his works.

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