10.01. Monopoly and Competition; The Concept of Consumers’ Sovereignty

0:00Chapter 10, Monopoly and Competition 1. The Concept of Consumer Sovereignty a. Consumer Sovereignty vs. Individual Sovereignty We have seen that in the free market economy, people will tend to produce those goods most demanded by the consumers. This applies not only to specific types of goods, but also to the allocation between present and future goods, in accordance with the time preferences of the consumers. Some economists have termed this system, consumer's sovereignty. Yet there is no compulsion about this.

0:46The choice is purely an independent one by the producer. His dependence on the consumer is purely voluntary, the result of his own choice for the maximization of utility, and it is a choice that he is free to revoke at any time. We have stressed many times that the pursuit of monetary return, the consequence of consumer demand, is engaged in by each individual only to the extent that other things are equal. These other things are the individual producer's psychic valuations, and they may counteract monetary influences. An example is a laborer or other factor owner engaged in a certain line of work at less monetary return than elsewhere.

1:38He does this because of his enjoyment of the particular line of work and product, and or his distaste for other alternatives. Rather than consumer's sovereignty, it would be more accurate to state that in the free market there is sovereignty of the individual. The individual is sovereign over his own person and actions, and over his own property. Of course, we may formally salvage the concept of consumer's sovereignty by asserting that all these psychic elements and evaluations constitute consumption, and that the concept therefore still has validity. However, it would seem to be more appropriate in the catalactic context of the market, which is the area here under discussion, to reserve consumption to mean the enjoyment of exchangeable goods.

2:38Naturally, in the final sense, everyone is an ultimate consumer, both of exchangeable and of non-exchangeable goods. However, the market deals only in exchangeable goods, by definition, and when we separate the consumer and the producer in terms of the market, we distinguish the demanding, as compared to the supplying, of exchangeable goods. It is more appropriate, then, not to consider a non-exchangeable good as an object of consumption in this particular context. This is important in order to discuss the contention that individual producers are somehow subject to the sovereign rule of other individuals, the consumers.

3:27This may be termed individual self-sovereignty. To earn a monetary return, the individual producer must satisfy consumer demand, but the extent to which he obeys this expected monetary return, and the extent to which he pursues other non-monetary factors, is entirely a matter of his own free choice. The term consumer's sovereignty is a typical example of the abuse in economics of a term Sovereignty Appropriate only to the political realm, and is thus an illustration of the dangers of the application of metaphors taken from other disciplines.

4:13Sovereignty is the quality of ultimate political power. It is the power resting on the use of violence. In a purely free society, each individual is sovereign over his own person and property, and it is therefore this self-sovereignty which obtains on the free market. No one is sovereign over anyone else's actions or exchanges. Since the consumers do not have the power to coerce producers into various occupations and work, the former are not sovereign over the latter. B. Professor Hutt and Consumer Sovereignty The metaphorical shibboleth of consumer sovereignty has misled even the best economists.

5:06Many 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 Consumer Sovereignty 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 consumer sovereignty and its implications for the problems of competition and monopoly. In the first part of the article, Hutte defends his concept of consumer sovereignty against the criticism that he has neglected the desires of producers.

5:56He 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, consumer 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.

6:50Thus, 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? For the market producer of exchangeable goods, who sells these goods for money?

7:39To 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 Each individual 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 Hut, each individual has self-sovereignty over his person and property on the free market.

8:26The 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. Hut implicitly recognizes this, however, since he soon shifts his argument and begins inconsistently to hold up consumer sovereignty as an ethical ideal against which the activities of the free market are to be judged.

9:17Consumer 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 consumer's sovereignty as a necessary fact and the contradictory concept of consumer's 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 consumer's good, then this is a legitimate act, in keeping with rule by the consumer.

10:08On 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 The Theory of Money and Credit

10:51This 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, and 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.

11:43But 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 non-monetary 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 foregone, balancing them in accordance with the operation of his various marginal utilities.

12:38Certainly, 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, one, 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. Two, 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?

13:28is purely 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. That 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 elastic by boycotting the producer, and or by increasing their demands at the competitive production level.

14:17The 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. Capital 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.

15:03Once 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 cooperating together in a cartel is possible only if the demand, directly or indirectly, of the consumers is inelastic, and this inelasticity is the resultant of the purely voluntary choices 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.

16:17If 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 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?

17:13The 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 producer's sacrifice to consumer's 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.

18:03This 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.

18:50Such 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.

19:36The 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 and 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. To be consistent, currently fashionable theory would have to accuse Crusoe and Friday of of Being Vicious Bilateral Monopolists, busily charging each other monopoly prices and therefore ripe for state intervention.