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American Economic Association

The Economics and Politics of Consumer Sovereignty

Author(s): Abba P. Lerner
Reviewed work(s):
Source: The American Economic Review, Vol. 62, No. 1/2 (Mar. 1, 1972), pp. 258-266
Published by: American Economic Association
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The Economics and Politics of

Consumer Sovereignty

The basic idea of consumer sovereignty This view I find very close to the idea
is really very simple: arrange for every- of democracy or freedom-the idea of nor-
body to have what he prefers whenever mally letting each member of society de-
this does not involve any extra sacrifice for cide what is good for himself, rather than
anybody else. It might seem that the only have someone else play a paternal role. It
issue could be about the possibilities of is also very closely related to the idea of
achieving this most desirable objective. eiciency-efficiency in the use of re-
But there are other objections. One of the sources for the greatest possible satisfac-
deepest scars of my early youth was etched tion of the needs and desires of people. It
when my teacher told me, "You do not is understandable why the full achieve-
want that," after I had told her that I did. ment of consumer sovereignty has been
I would not have been so upset if she had called "ideal output."
said that I could not have it, whatever it One imaginary achievement of a golden
was, or that it was very wicked of me to age of consumer sovereignty has been de-
want it. What rankled was the denial of scribed in Belloc and Chesterton's distrib-
my personality-a kind of rape of my utist society. Every family had its own
integrity. I confess I still find a similar house and garden where it produced every-
rising of my hackles when I hear people's thing it needed. It alone decided what to
preferences dismissed as not genuine, be- grow or to make and how to divide its
cause influenced or even created by ad- time between work and play. No other
vertising, and somebody else telling them family was concerned with how it made its
what they "really want." choices, and it was not concerned with how
In a rich society like ours, only a very other families made their choices. Each
tiny part of what people want is deter- family could mind its own business, both
mined by their physical and chemical in the sense of not meddling with the busi-
makeup. Almost all needs and desires are ness of others, and in the sense of not
built on observation and imitation. As a having any others meddling in its business.
social critic, I may try to change some Independence was complete.
desires to others of which I approve more, An approximation to the ideals of the
but as an economist I must be concerned distributist state in combination with
with the mechanisms for getting people modern technology is achieved by the ap-
what they want, no matter how these proximation to one of the results of perfect
wants were acquired. competition, namely, the equality of price
* Professor of Economics, Queens College, City Uni- to marginal cost. Other devices can also
versity of New York. bring about this approximation, but a

widespread belief that only the capitalist electronic invention made it technically
system can do this has made some en- possible to buy for twenty-five cents the
thusiasts for consumer sovereignty root right to see a particular television program.
for capitalism and made some haters of The laws that will make this right prac-
capitalism run down or deny the impor- tically operable have not yet been agreed
tance of consumer sovereignty. on.
Simplified accounts of how the market The development of such sets of rights
mechanism works, of which I have just enables us to deal with the "things" whose
provided an extreme example, seem to marginal costs and prices are to be brought
have le(l to the notion that a free market is into equality. Each set of rights begins as
a natural state of affairs. Indeed, the ex- a conflict about what somebody is doing
pression laissez-faire, which was intended or wants to do which affects others. Some
as an admonition against deliberate re- of the others are pleased and some object.
strictions on production and trade, has With or without a fight, there is a settle-
given rise to the idea that a working mar- ment or compromise in which the rights
ket mechanism will automatically arise are defined. Those who benefit from the
like weeds in the garden or the fish in the activity gain the approval of those who
sea, if only there is no human, and particu- object by giving them something to get
larly no governmental, intervention. them to agree. XVhat I want particularly
Tlhere can be no greater misunderstand- to stress is that the solution is essentially
ing of the origin of market economies. the transformation of the conflict from a
Thousands of habits of behavior and of political problem to an economic transac-
enforced laws had to be developed over tion. An economic transaction is a solved
millennia to establish the nature and the political problem. Economics has gained
minutiae of property rights before we the title of queen of the social sciences by
could have buying and selling, instead of choosing solved political problems as its
each man just taking what he wanted if domain.
only he was strong enough. Basically, what Consumer sovereignty is, of course, far
needed to be donie was to disentangle sets from completely achieved even where
of rights from the buzzing chaos of the appropriate institutions have been fully
universe and designate each such set of developed. Where the approximation to
rights as a commodity that an individual consumer sovereignty is left to perfect
(or a group) could exchange for another competition, we do not reach it if the com-
set of rights. We have got so used to such petition is not perfect.
groups of rights that we tend to think of Consumer sovereignty is not served
them as simple "things," but every where knowledge of better or cheaper ways
"thing" is a set of rights. There are acts of production is suppressed or where there
one has the right to perform with the is insufficient investment in the production
"thing" and acts which one does not have of such knowledge. It suffers on account of
the right to perform. When I buy a bottle ignorance and is damaged by fraud. These
of Coke I have the right to drink it or to and other faults and corruptions call for
pour it down the sink, but not the right to efforts to change the laws or the manner
pour it over my neighbor or to throw it of enforcement of the laws. As time goes
through his window. Soon, I hope, I will on we may hope that improved under-
not have the right to put it in my garbage standing will lead to corrections. The hope
can. E1very day (levices are invented that lies in the nature of the case. There is al-
require new sets of rights. Recently an ways enough to be gained from a move-

ment toward ideal output to give full com- ciety speak almost as if monopoly was
pensation to all who would be harmed by wasting the greater part of our potential
the correction, even if it is felt that they output. Similar exaggerations of the de-
(lo not deserve it, and still leave some gain gree to which the wants of consumers are
to be shared by all. Perhaps the greatest being manipulated by advertising charge
h-andicap here is a very powerful reluctance that instead of industry producing what
to pay compensation. the consumers want to buy, consumers
Closer approximation to consumer sov- are being duped, manipulated, and brain-
ereignty may be expected from further washed into buying what industry wants
developmnent of devices, like the scram- to sell.
bling technique for pay television, which A third element in the pooh-poohing of
would make it possible to apply the market consumer sovereignty consists of denials
mechanism to parts of the economy where that it really works. This has two roots.
it was not possible before. T'he expanding The first is a sentimental antagonism to
application of the principle of equating money and prices and all its works as of
price and marginal cost appears in the the devil: materialistic, encouraging self-
socialist countries' increasing the use of ishness and greed, and destructive of man-
market prices for improving efficiency of kind's natural or original virtue. Although
production and distribution and in the this view should logically be against mar-
current interest in imposing charges per ginalism more strongly the better it
unit of pollution emitted. I'his hopeful works, the passions involved seem to cause
outlook goes against a current pessimistic its protagonists to seize with glee any
tren(l. 'T'he importance, the significance, arguments that claim that the hated ma-
the prospects, and even the meaningful- chine does not even work right.
ness of consumer sovereignty, are all The second root is nourished by taking
caught in a bear market which to me seems simplified illustrations of the benefits from
quite unjustified. price equal to marginal cost as descriptions
'I'he most legitimate reason for playing of the mechanism for getting the equal-
(lown the importance of consumer sover- ity. Each producer is seen as directly ad-
eignty is to be found in the actual devia- justing the output of his factory or work-
tions of prices from marginal costs where, shop so as to equate his marginal cost to a
for political, sentimental, or bureaucratic price which he accepts as beyond his con-
reasons, the market mechanism is not trol.
being applied, or where appropriate tech- The critics are right in saying that this
nology or legal arrangements have not is true only in a small part of the economy.
been worked out. Here the motto must be Most prices are determined by bargaining
to try and try again to correct the distor- between representatives of groups, as in
tions and to develop the technical and the setting of wage rates, or by the de-
legal mechanisms required. liberate setting of a price by a manufac-
A second element in the current den- turer at the level which he considers best-
igration of consumer sovereignty is an generally that which will yield the greatest
unreasonable exaggeration of the actual probable profit.
troubles. Some studies of the degree of But this does not invalidate the under-
damage done by monopolistic restrictions lying tendency for the price to approxi-
estimate it at less than one percent of the mate marginal cost (with the deviations
national income. 'I'hese may well be under- considered above). Unless there is restric-
estimates, but vociferous critics of our so- tion of entry into the industry, the price

will be pushed into equality with average P

cost; and unless there is "fair trade" price
maintenance, or an extreme product dif-
ferentiation establishing local monopolies,
the rate of markup and the resulting price
will be lowered, in pursuit of profitable ex-
pansion of sales, until the price is near the
marginal cost. Subject, of course, to the
uncertainties involved, price will tend to a
reasonable approximation to equality with
the marginal cost of the factors employed 0 Q
by the firm plus the marginal cost of the FIGURE 1
capital at the current rate of return.
A fourth element in the current down- value of the marginal product is based,
grading of consumer sovereignty comes not on "justice," but on concern for con-
from a refusal to separate this issue from sumer soVereignty. Against this must be
the problem of inequality of income. Joan considered whether it results in more in-
Robinson, for example, scolds economists equality of income than is justified by the
for concerning themselves with "why a benefit.
cup of tea costs more than an egg" instead Figure 1 shows how the division of in-
of concerning themselves with the division come is affected by paying the owners of a
of the national income between profits and factor its marginal product. The rectangle
wages, loosely identified with the division is drawn with its upper right-hand corner
between rich and poor. The claim that the at the intersection of the demand curve
market guides production to what is pre- for the factor (for use in the production of
ferred by consumers is ridiculed on the a particular product) and the factor-
ground that relatively unimportant de- owner's supply curve. At this point, the
sires by the rich have priority over much price of the factor is equal to the value of
more urgent needs of the poor. But the its marginal product. This is what is re-
separation of problems increases the prob- quired for consumer sovereignty. The
ability of the human brain being able to height of the rectangle represents the price
understand them. per unit of factor;. its length, the quantity
The rejection of marginal analysis on of the factor supplied; and its area (price
this count implies that marginalism is times quantity), the total amount paid to
somehow responsible for the extreme in- the owner.
equalities of income. There have been one The area of that part of the rectangle
or two economists who claimed the pay- which lies below the supply curve mea-
ment of factors in accordance with mar- sures the "necessary" payment-what has
ginal productivity was "just" in that it to be paid (to the owner) to keep the factor
gave them "what they produced." It is from going elsewhere. The (shaded) area
now almost universally agreed that there above the curve represents "unnecessary"
is no content to such an argument since payment, the excess of what is actually
"what they produce" is defined as the mar- paid over the "necessary" payment.
ginal product. The proposition is an empty It is possible to avoid making these "un-
one from which no moral or any other necessary" payments because ideal output
conclusion can be drawn. The argument requires not that the price of all the units
for paying (the owners of) the factors the of the product be equal to the marginal

p at the marginal product rate. A sufficient

incentive would be the unshaded area in
the rectangle to the left of the zero line.
The shaded area represents "unnecessary
Mc payments" -resources that are available
for improving the division of income with-
out interfering with consumer sovereignty.
Economists will recognize in this a way
of formulating the propositions on mar-
ginal cost pricing developed by Ronald
D~~~~~~~~ Q
0 Coase and James Buchanan. This may not
FIGURE 2 be so obvious at first because they were
more concerned with the symmetrical phe-
cost, but only the marginal price, the price nomenon relating to the demand curve
paid for the marginal unit; and similarly, rather than to the supply or marginal cost
not that the pay for all the units of a factor curve. They were dealing with the un-
be equal to (the value of) the marginal necessary benefit to the buyer of the
product, but only the marginal pay, the product, rather than with the unnecessary
pay for the marginal unit. payment to the supplier of the factor.
Paying for all the units of the factor at In Figure 3, the zero line is moved over
the same marginal product rate may seem all the way to the point of intersection.
necessary because it is natural to start This illustrates the limiting (and therefore
counting from zero. But this is quite ar- completely impractical) case of complete
bitrary. A count could begin at any other elimination of all inequality as described
point established by convention. If the in my Economics of Control. This would call
owner of the factor is providing eight for estimating how much each individual
hours of labor, it would be possible to start in the society would be able and willing to
the count at five hours and pay at the mar- earn, given his special skills and abilities,
ginal product rate only for the three ad- and imposing on him a lump sum tax equal
ditional hours' work. What, if anything, to the excess of this over the average in-
is paid on top of this is arbitrary. It could come of the whole economy. If this could
be either more or less than five times the be done, he would earn the estimated in-
marginal product (which is what he would come, and after paying the lump sum tax
be getting if the count started from zero).
Whether he is paid more than this or less
could depend upon whether he is con- P

sidered to be too poor or too rich.

What is necessary in addition to paying
the marginal rate from the arbitrary start- MC
ing point, is that he be given sufficient in-
centive to come and do the five hours'
work and then get the marginal product
for the additional three hours.
Such a procedure is illustrated in Figure
2, which consists of Figure 1 with a ver-
tical line put in to show the chosen zero 0 Q

point for counting the units to be paid for FIGURE 3


he would be left with the same as every- ability of scholars recognizing and con-
body else-the average income-and taining their prejudices, into a demand
there would then be no inequality at all. that they limit themselves to propositions
This, of course, is only an exercise in eco- completely free from any moral or ethical
nomic analysis. To the degree that the content and from any interpersonal wel-
zero line cannot be moved over all the way, fare comparisons. This essentially amounts
we are left with necessary orfunctional in- to a refusal to consider any significant
come inequalities. welfare problems since it is very hard to
Extreme inequalities of income or think of any policy to benefit some people
wealth are thus not essential accompani- which would not also bring some damage
ments of marginal price mechanisms and to others.
therefore do not provide a valid reason for Finally, among the current deprecations
giving up their use. Furthermore, the of concern with consumer sovereignty is
poorer people are, the more important is it its rejection on the grounds that it con-
that what they do have should be used in centrates on the individual instead of con-
the most efficient way to satisfy their sidering society as an organic whole with
needs; and this calls for consumer sover- its higher purposes to which the narrow
eignty. interests of the individual should be sub-
If there is extreme inequality it may servient. Sometimes this is adduced in the
very well be more important to do some- name of all humanity, sometimes in the
thing about the inequality than about im- name of an even wider world spirit or col-
proving the efficiency in the use of what lective mind. More often it is found in the
resources are left for serving the poor, even narrower context of the interests of a
though such a redistribution of income race or class or nation.
could not be eased by the payment of These are, of course, matters of philos-
compensation. However, if one is con- ophy or religion-matters of faith on
cerned about raising the level of the poor, which the economist as such has no special
rather than with reducing the wealth of professional competence. Most economists,
the rich, a far more promising approach is however, have conducted their studies on
to concentrate on growth of productivity the assumption that individual human be-
and on full employment. Redistribution ings (and other animals) but no races,
from the rich to the poor, even if it is done classes, nations or other social groups have
with the greatest skill in protecting func- the sense organs, the nerves and the brain
tional inequalities, can only transfer, at mechanisms which are capable of feeling
the most, some 10 or 20 percent of the na- pain and pleasure or gratification and
tional income from the richer to the poorer, frustration-that races, classes, nations,
and this only once and for all. Growth of and other social groups are only collections
productivity has, during this century, or combinations of individuals for par-
more than quadrupled (i.e., increased by ticular purposes. These may be of the
more than 300 percent) the income of the highest importance for the individuals in-
poor as well as of the rich. volved, but it is only the individuals who
A fifth attack on consumer sovereignty can experience welfare or the lack of it.
comes from critics at the opposite pole Economists, therefore, generally disregard
from those who find it too difficult to ab- such philosophical downplaying of the im-
stract even momentarily from the evils of portance of consumer sovereignty.
income inequality. This is from a cult of There is, however, a much more serious
"objectivity" that exaggerates the desir- problem currently facing those concerned

with consumer sovereignty than the exag- cars were insufficiently privatized. They
gerations of the imperfections and che did not go to those who needed them more
ideologically fueled attacks I have just than the alternatives they bought-which
considered. This is the case of public goods. were no easier to produce. There is, how-
Public goods are goods which cannot be ever, a shortage of space on the roads for
provided for some without being provided the automobilies because we have not yet
for others. The normal market mechanism arranged to make people pay for the road
for achieving consumer sovereignty is space in the way they have to pay for the
therefore inapplicable. Those who would gasoline. Road use has not yet been
benefit from the provision of such goods privatized. There is no shortage of refrig-
will not pay for the benefits because they erators (in countries where the price is
can enjoy them without paying if they are free to be set by the market), but there is a
provided for anybody else. Everybody will shortage of houses into which to put them
wait for somebody else to buy them and because we have partially deprivatized
hope to enjoy a free ride. housing into a semipublic good by pre-
This is not a new problem. Indeed, in venting the market price from operating
the beginning, before the invention of to induce builders to provide enough more
property rights, all goods were public. It houses and users to economize in their use.
did not pay anyone to improve on tradi- We also suffer from faulty ways in which
tional procedures because any resulting in- the price mechanism is used, as when the
crease in output would be free to everyone telephone and electric power companies,
in the tribe. It did not pay anyone to build who are not able to keep up with the de-
a house if he could instead find someone mand, follow habits developed when there
who had built one and then move in with was excess capacity and continue to en-
him (or kick him out). Only with the es- courage a greater use of the overstrained
tablishment of privatization, or property, facilities by charging lower rates for larger
was the decentralization of decisions neces- users. This, too, is in large part in response
sary for efficient production made possible. to the popular prejudice against marginal
Our problem now is that the invention and cost pricing, in cases of this kind presum-
application of the special devices needed ably because the marginal cost is very
to privatize the public goods have lagged high.
behind the great increase in production of There is, at present, a surge in the im-
goods of all kinds. Privatizing is nothing portance of public goods that perhaps
more than establishing the institutional qualifies as a critical transformation of
arrangements by which the individual or quantity into quality. It arises from the
group who pays for the benefit gets it and current concern with ecology and the pol-
the one who does not pay for it does not lution of the environment. We have all
get it. suddenly been made aware of the finite
Among the reasons for such lagging in nature of our planet-so beautifully ex-
the art of privatizing public goods have pressed in Boulding's phrase "spaceship
been the philosophical and sentimental earth. "
hangtups against marginalism and markets. A similar crisis can be supposed to have
Thus there is no shortage of automobiles occurred when Adam was expelled from
because we have to pay for them. They Eden. Labor, which had not been needed
have been privatized. There was a shortage before, became a scarce and economic
when the price was held clown during and good. This is the meaning of "by the
after World XVarII and the (new) motor sweat of thy brow shalt thou eat bread."

Products that require labor for their Where this is the case, agreement is
production became valuable, and this en- necessary for combined action. This is
couraged their economic production and what government is for. A citizen will
discouraged their wasteful consumption. agree to be compelled to contribute to the
For this, the sower of the seed had to have cost of a project, provided enough others
security in reaping the crop. also are compelled, so that his benefit ex-
With the use of tools for production, ceeds his contribution (or tax). I see no
these too, like the crops, had to be pro- reason for expecting such nonprivatizable
tected from free use by anyone who saw services such inherently public goods-to
and coveted them. Private (or group) become more important in the future. It
property had to be established in a com- is our failure to privatize where privatiza-
plex system of rights and duties in con- tion is possible, and even our ideological
nection with tools or capital goods. deprivatization where it has already been
Another crisis occurred when the in- achieved, that is responsible for most of
crease in population made productive and these ills.
nearby lands scarce and conflicts arose for TIhere will nevertheless remain public
its use. Abraham and Lot had to agree to services that are not amenable to this type
move off in different directions. The God- of decentralization and the refinements of
given freedom of all men to hunt and pick market adjustment to individual pref-
berries from the land had to be limited by erences just cannot be achieved. Decisions
the privatization of land rights. have to be made in the large by legislative
Wthatis happening now is that we have or administrative bodies and we are back
moved to the ends of the earth-and not in the realm of politics. Majorities will over-
only horizontally. We are discovering ride minorities unless the minorities are
ecology-that the rivers are not infinite able to impose their will on the majorities.
sources of clean w ater, that the ocean itself Attempts will, of course, be made to avoid
is not an infinite receptacle for our garbage, dissatisfactions, especially if they could
and that the air is exhaustible too. But we lead to revolts. But we cannot have the
have not yet developed and applied the nice adjustments by which each can get
techniques recquired for the privatization what he wants without this affecting what
of these limited resources. The develop- others get. We will not have solved the
ment of proper charges for clamage done political problem by converting it into an
by polluting the environment in the same economic problem.
way as proper charges have been developed I may conclude by mentioning the one
for the damage done by using up other situation in which the marginal economic
scarce commodities will turn these public mechanisms are unnecessary. This is where
goods into private goods, with the social everybody has as much of everything as
benefit from the resulting care in their he wants. Such a state of affairs is some-
preservation and use. times called communism (as distinct from
However, not all public goods can be socialism which claims to be the path to
privatized. IThere will still be services communism because it will become much
which, if provided for some, are inevitably more productive than capitalism). Some-
made available for all. Ihe market mech- times it is called anarchism, since there is
anism cannot work. Everybody will re- no need to protect any ownership of prop-
frain from buying them in the hope some- erty, and it is usually discussed by people
one else w ill. And nobodly will be willing to who believe that it is only material de-
pay the total cost of a benefit to all. privation that causes anyone to harm any

fellow man. To avoid an unnecessary be universalized, it might indeed be possi-

quarrel we may call it simply the state of ble to provide fully for the requirements of
plenty. But it is not clear that the so- all. Those political problems that can be
called capitalist countries are less so- solved by appropriate compensations,
cialistic than the so-called socialist coun- namely, those that can be converted into
tries, or that the latter are much less economic problems, would then all be
capitalistic than the former. Furthermore, solved, and we would indeed enjoy the
the so-called capitalistic countries-the euthanasia of economics and of all the cal-
Western democracies-seem to continue culating that many find so hateful.
to be more productive than the so-called There are, however, still some important
socialist countries the Eastern one-party provisos. The Ghandian reduction in the
dictatorships. The West might then reach demand for goods must not be accom-
the state of plenty before the East. Un- panied by a corresponding hippie reduction
fortunately, there are no signs that either in willingness to work at what will still
is getting anywhere near the goal. So far, need to be produced. The market mecha-
demand everywhere has kept pace with nism might still need to be retained to in-
the increasing supply while the limitations dicate to producers what they can produce
of spaceship earth make it questionable and how, and the whole adventure must
whether there will continue to be much not be swamped by a continuing increase
improvement in the overall condition of in population. With these provisos a state
life or whether the level that has already of plenty could be reached and even main-
been reached in the West is even achiev- tained. But this would still leave unsolved
able for the world as a whole. the political conflicts, the truly and in-
Perhaps the only possibility of a state curably public issues, with conflicts whose
of plenty lies not in the increase of goods, spells cannot be broken by translating
but in the reduction of wants. If a culture them into economics.
of simple living on Ghandian lines should