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Recognize that consumers ultimately determine what is produced in a market economy (consumer sovereignty).

consumersovereignty.gifConsumer sovereignty is a term which is used in economics to refer to the rule or sovereignty of purchasers in markets as to production of goods.
  • The term can be used as either a norm (as to what consumers should be permitted) or a description (as to what consumers are permitted).
  • In unrestricted markets, those with income or wealth are able to use their purchasing power to motivate producers as to what to produce (and how much).
    • Customers do not necessarily have to buy and, if dissatisfied, can take their business elsewhere, while the profit-seeking sellers find that they can make the greatest profit by trying to provide the best possible products for the price (or the lowest possible price for a given product).
    • In the language of cliché, "he who pays the piper calls the tune."

The online Business Dictionary defines consumer sovereignty as:
"The power of consumers to determine what goods and services are produced. The theory suggests that consumers, not producers, are the best judge of what products benefit them the most. Due to the fact that consumer markets depend so heavily on demand, producers must monitor the needs of these individuals if they want their products to have any chance at success."

Click here to watch a short video from Youtube, providing an example of how consumer sovereignty works.

Ludwig Von Mises (1881-1973)
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Economist, Ludwig Von Mises

  • Ludwig Von Mises was a theoretical Austrian School economist. Click here to view a full biography of Mises' life from The Mises Institute.
  • He focused on Praxeology (study of human choice and action).
  • Mises came to the U.S. in 1940, and his work significantly influenced the libertarian movement, specifically the maximization of autonomy and freedom of choice.
  • Mises wrote extensively about the crucial role of consumers in production. He believed that every person has a personal and subjective value, and everyone acts in response to their own respective values. These actions are what influence production and ultimately represent consumer sovereignty.
  • Mises helps to explain this point by referencing the steering of the ship. He states that entrepreneurs "are at the helm and steer of the ship, 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."
  • To read more on Ludwig's work with consumer sovereignty click here.

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The image to the left is a picture describing the U.S. Free Enterprise System. In this system (just as in this picture), capitalism rests on the pillars of Private Enterprise, Competition, Private Property, Profit Motive, and Consumer Sovereignty.

Standard Oil cartoon with octopus, 1904
Standard Oil cartoon with octopus, 1904

Image to the right is a Political cartoon showing a Standard Oil tank as an octopus with many tentacles wrapped around the steel, copper, and shipping industries, as well as a state house, the U.S. Capitol, and one tentacle reaching for the White House.

Critiques of Consumer Sovereignty

To most neoclassical economists, complete consumer sovereignty is an ideal rather than a reality because of the existence -- or even the ubiquity -- of market failure.
  • Some economists of the Chicago school and the Austrian school see consumer sovereignty as a reality in a free market economy without interference from government or other non-market institutions, or anti-market institutions such as monopolies or cartels.
  • That is, alleged market failures are seen as being a result of non-market forces. However, it has also been argued (e.g., by Goutam U. Jois) that even a "pure" market system violates the consumer sovereignty norm.
  • Click here to read a critique of Mises' endorsement of consumer sovereignty.

  • This Seinfeld clip brilliantly explains the concept of Consumer Sovereignty in a little over 30 seconds.

  • Here is a student video from an economics class talking about Consumer Sovereignty

  • Here is a Prezi presentation on Consumer Sovereignty

Click here for a JSTOR article that goes over the basic concepts of consumer sovereignty.