by G. Stolyarov II

Created on: January 05, 2007   Last Updated: May 08, 2007

The great Austrian economist Ludwig von Mises formulated the idea of "consumer sovereignty," using a term originally coined by William Hutt in a critique of Keynesianism, to describe the role of consumers and producers in the market process. Mises's analogy has its limits, as his student Murray Rothbard would recognize, but it remains nonetheless an eloquent defense of the free market. When the limits of the analogy are recognized, one will find the free market to be even superior to what a full application of the analogy might suggest.

By "consumer sovereignty" Mises meant that, in a free market, the consumers ultimately dictate what is to be produced. While the capitalists and entrepreneurs might steer the economy, they ultimately take orders from the consumers by responding to demand for certain goods and lack of demand for others. Provided that they wish to remain in business and generate a positive net income, they need to satisfy the preferences of consumers, who are the sources of said income. Their personal profit, hence, is inextricably linked to furnishing the goods and services their customers desire. If an entrepreneur consistently refuses to do this, he will simply lose money until he is no longer able to sustain his entrepreneurial function. According to Mises, every dollar spent by consumers on the free market is like a ballot cast in favor of the producers manufacturing a certain product. The more consumers demand a given product and "vote" for it through their expenditure decisions, the more producers will furnish that product.

In reality, one might find apparent "exceptions" to the successful producers' tendency to make decisions maximizing monetary profit. An employer might hire his less productive family member instead of another worker who would bestow greater revenue upon the firm. This does not, however, deny the universality of consumer sovereignty, according to Mises. Instead, the employer is acting partly as a consumer in his decision to hire the family member. He consumes the opportunity cost of hiring his relative, which is the additional income he would have gotten by hiring the more productive worker. In his capacity as a consumer, the employer is, too, sovereign: he is willing to pay the opportunity cost and expects to get in return the satisfaction of hiring his relative. On a free market, he will receive that satisfaction. To the extent that he and his newly hired relative are working to satisfy the demand of other consumers on

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