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

Focus Question: Do consumers ultimately determine what is produced in a market economy

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.

Here is an example of consumer sovereignty in the form of a Coca Cola launching a rebranded product that consumers decided they would not support.

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.

Click here to learn more about the limits of Consumer Sovereignty in our society.

Consumer Sovereignty and the "Paradox of Choice"

WATCH: Barry Schwartz | TEDGlobal 2005 The paradox of choice
Psychologist Barry Schwarz explains that offering too many choices has paralyzed our society rather than liberating us. In our modern capitalist society, consumers are forced to decide between an array of options of one product. Whether it is ice cream flavors, coffee flavors, or jeans, we are given so many choices. Schwartz says so many choices leads to high expectations; if there are so many options, at least one of them has to be perfect. When we finally chose which option we want, we are easily disappointed when the product does not reach our expectations, no matter the actual quality the product. Before this world of options, if you did not like the product you purchased, it was because of insufficient quality, in which case the provider is to blame. Today, with so many choices, it is our fault if we make the wrong decision. Schwartz believes this is partially to blame for higher rates of anxiety and depression in a consumer society.

What does this mean for economics?

Should we offer more choices? Is choice hurting business?

It all comes down to consumer sovereignty. According to a study performed by Stanford GSB marketing professor Itamar Simonson, having a variety of options is intriguing to consumers. However, it depends on whether or not the consumer was going to buy that specific product in the first place. In
"Are Consumers Turned Off by Too Many Choices? Not Yet." in Insights by Stanford Business, Edmond L. Andrews writes,

"If a person begins the process by weighing whether to buy at all, a large selection is likely to be attractive and make him or her more likely to decide in favor of buying. If, however, a person begins by picking a favorite from an assortment of options, and only then deciding whether to buy, a large selection makes the task harder and lowers the likelihood of buying."

In terms of consumer sovereignty, if the barrage of options is not hurting business, but intriguing the consumer to learn more, then companies will continue. As long as the consumer likes options.

  • 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.