International Area Review

Volume 4, Number 1, Spring 2001

Consumer Sovereignty versus Consumer Protection in

Transition Countries

Jari Sepp and Ralph Michael Wmbel

University of Tartu, Estonia

Conventional economics assumes the existence of important limits to the operation

of markets. Even economists who generally prefer the market system to solve
economic problems point to the significance of market failure - for example
asymmetric information. Then these economists demand government policies
suspending or modifying the operation of the market, e.g. consumer protection
(Khmer, 1994, p. 101). Our thesis in this paper is that there exists no market
failure because a failure can only be defined in relation to the “nirvana-approach”
of static Pareto-optimum (Demsetz, 1969, p. 1).In contrast competition on markets
must be seen as discovery procedure, which helps to find better solutions (Hayek,
1969, p. 249-265). A static optimum never and nowhere exists - only in the
neoclassical theory. Therefore economically justified government interventions
into the market process will be called into question by the following
argumentation. Only policies, which are supporting market operation, will be
advocated. Contrary, we will show that there exists a danger in state interventions
to protect consumers. A growing state activity may lead to destruction of producer
freedom and consumen’ sovereignty and at last of the market economy itself.
As example we will analyse consumer protection policy in Estonia.

1. The Conception of Perfect Information and Its Critiques

Mainstream neo-classical economics compare the situation on real

markets with an ideal market with cost-free and perfect information of
actors and scientific observers. This comparison leads to the assumption
that the level of real market actor information is imperfect! (Tietzel,
1985, p. 17) Also the model constructs a position of the scientific
observer, who owns perfect information and - as result of the
argumentation - is able to diagnose imperfect information of market
actors. These market actors can only try to reduce their information
deficits - for example by finding an optimal level of information1 But
they are not able to become a scientific observer themselves. In that

See the approach of optimal information by Stigler (1961) and Arrow (1962).

- 101 -
102 International Area Review 2001, Vol. 4(1)

case there would be no more reference information, which can be used

to diagnose imperfect information (Streit/Wegner, 1989, p. 183-184).
Such a paradox insight of information (or knowledge) cannot be basis
of the theory of economic policy.
In contrast to mainstream economics Austrian Theory of Economics
allows a subjective view on knowledge and the information problem
on markets. Subjectivism means market information must be interpreted
by each actor himself - the market actors and the scientific observer.
Information has to be transformed by subjective and creative activity
of each actor. As logical result scientific observers are not able to collect
and understand all information delivered by the markets. Therefore they
don’t have better knowledge of market processes as the market actors
themselves! And - of course - also they are not perfectly informed.
In contrast to mainstream economics Austrian economists analyse also
innovations as endogenous variable in the market process. In their
opinion, innovations lead to technical progress, but it doesn’t fall down
from heaven as e.g. Solow assumed in his neo-classical theory of growth
(Solow, 1957). Innovations are the result of mans subjective creativity!
Innovation and technical progress change the situation on markets at
each time. Therefore the future at all is not only unknown - it doesn’t
exist at the moment a decision is done. (Buchanan/Vanberg, 1991, p.
175) What is the result? Also because of innovations a scientific
observer is not able to produce a perfect knowledge.
Therefore perfect knowledge or information cannot be our reference
to criticise real knowledge of market actors and scientific observers.
The knowledge in a society is - in contrast to the neo-classical approach
- divided and cannot be summed up by one person or institution - also
the state. Therefore we need competition as a discovery procedure. A
state activity suspending or modifying the operation of the market must
fail. A market economy can be characterised as a “spontaneous order”
(Hayek, 1969). Such a spontaneous order is not orientated to special
targets. In contrast to a centrally planned economy the market economy
as a whole cannot pretend to maximise social welfare or to minimise
social costs. A market economy allows only each economic actor to
use his abilities for his personal targets. (Hayek, 1969, p. 112) But this
view of a market economy has several consequences for economic
policy.
A state activity, which supports competition as discovery procedure
and accepts its results, may be helpful - especially in a society without
well operating markets like transformation countries. But this state
activity must be characterised by formal, abstract and purpose-
independent rules of behaviour (“rule of law”!). These abstract rules
 Sepp and Wrobel: Consumer Sovereignty versus Consumer protection 103

of behaviour shouldn’t enforce concrete activities, what’s only possible

if a concrete target exists. But they must forbid hurting the sphere of
individuals, concrete determined by those rules. Therefore the power
of state has to be limited only to enforce these abstract rules. (Hayek,
1969, p. 113) Therefore our theoretical model to criticise state activity
- e.g. consumer protection policy in Estonia - will be freedom of
competition and consumers sovereignty. In contrast target-orientation of
consumer protection will be rejected as it’s delimiting and destroying
them.

2. State Activity in a Market Economy: Consumer Protection in

Estonia as Example

According to these insights in the market as a discovery procedure

and in the market economy as a spontaneous order, determined by rule
of law, consumer protection in the Republic of Estonia can be criticised.
There are a lot of laws concerning consumer information and protection,
which must be analysed. The prohibition of opportunistic abuse of
information is directly or indirectly basis of the prohibition of misleading
information in the Estonian Competition Law 1998 (Art.29), of the
Law of Consumer Protection 1994 and of competing laws, Law of Food
1995 and Law of Advertising 1997.2 An improvement of market
transparency in contrast has been basis of the Law of Consumer
Protection and Packing 1995 and its following prescriptions (Hasse/
Sepp, 1999, p. 24).
For our analysis at first the Law of Consumer Protection is
interesting. It enumerates the basic rights of consumers in Estonia, for
example the right to be protected from goods and services, which are
dangerous for health, or the right of representation of consumer interests
by interests groups. Also the right to get compensation payments from
suppliers of goods and services for damages caused by these goods or
services is named. But even common standards of goods and services
are fixed in the law. For example product information and directions
for use have to include minimal information also in Estonian language
(Reiljan, 1997, p. 35). The Law of Consumers Protection has been
enlarged in the last years by several prescriptions. Since November 1994

See Toiduseadus (Law of Food), in: Riigi Teataja I, 21/1995, 324,

Tarbijakaitsewdus (Lawof Consumer protection), in: Riigi Teataja I, 2/1994, 13,
Konkurentsiseadus (Law of Competition), in: Riigi Teataja I, 30/1998, 410 and
Reklaamiseadus (Law of Advertking), in: Riigi Teataja I, 52/1997, 853.
104 International Area Review 2001, Vol. 4(1)

for example it is necessary to print on each cigarette box the sentence:

“Smoking damages your health” in Estonian. (Fritsche/Losch, 1998, p.
45-49)
Consumer protection policy in Estonia is also characterised by public
and private organisations, e.g. the Office of Consumer Protection, which
is part of the Ministry of Economics in Estonia. The office supports
branches in each district and in the city of Tallinn., where consumers
are advised or have possibilities to complain. Also the regional branches
offer a lot of information for consumers. Additionally beside the Office
of Consumer Protection in Estonia exist some Offices of Standardisation
and of Health Protection, which are all part of Consumer Protection
system. These Offices have the same authorities like the Office of
Consumer Protection. Supplementary in Estonia we can fiid private
offices, which are similar to the German “Verbraucherschutzzentralen”
and advocate for consumers’ rights (Eesti Euroopa-Integratimni Buroo,
1996, p. 46). So there are a lot of institutions and laws in Estonia,
working for consumers’ protection.
Since Estonia is integrating with the European Union policy of
consumer protection is growing contineously. Models are the
“developed” welfare states in Western Europe. Thereby not only a
system of consumer information, supporting consumers’ knowledge, has
been established but also a system of consumer protection by licences,
permissions and prohibitions comes into being. In 1995 the European
Union declared the Estonian laws not as sufficient and compatible
with the European “standards”. (Kommission der Europaischen
Gemeinschaften, 1995, p. 425-438) For example the Commission of the
European Union demanded in its report about Estonian integration into
the Union that the regulations about common standards of goods and
services have to be declared more clearly. Also the competencies of
the Office of Consumer Protection have had to be completed, the
Commission notes. (Kommission der Europaischen Gemeinschaften,
1997, p. 98-99) As result e.g. the Estonian banking regulation is
continuously growing according to the requirements of the European
Union. Additionally in 1998 a Law of Product Liability has been
introduced.3
Also a bill to restrict several professions is discussed since 1998
in Estonia. Beside an obligation to notify the profession the bill provides
two kinds of restrictions of professions: (1.) It demands a reference
~

See Toote ohutuse sadus (Law of Product Liability), in: Riigi Teataja I, 40/1998,
613, and its revised versions from 1999 and 2000 in: Riigi Teataja I, 82/1999, 616
and Riigi Teataja I, 86/2000, 580.
 Sepp and Wrobel Consumer Sovereignty versus Consumer Protection 105

of qualification for 32 professions - not only for physicians but also

for driving teachers or brokers. And (2.) it demands a public licence
for 21 special professions like security services for example. But until
now the bill didn’t pass the parliament. Therefore till today the
organisation of market entry is very liberal as well for Estonians as
for foreign investors. Those e.g. are allowed to build up new enterprises
and to invest in each sector in Estonia. Only for the establishment of
a new enterprise in the branches banking, mining, railroad, harbours,
energy and telecommunication a permit is necessary. The Estonian
obligation to register new enterprises is indeed expending but don’t work
as a barrier to market entry. Also the necessary references of
qualification for a few professions like jurisdiction and medicine are
not prohibitive. (Osteuropa-Institut Munchen, 1997, p. 135)
Although the bill, restricting several professions, has not passed
parliament, the situation is slowly changing in Estonia. Still today a
decree from soviet times is basis of market entry regulation, but it has
been revised and enlarged for a lot of times till today, e.g. by the
introduction of licences for foodstuff importers, alcohol sale or
maintenance of kindergartens.4 Thereby the decree becomes similar to
the regulation in some western welfare states in the European Union.
But it is questionable, whether a public regulation is necessary and
exmency. In many cases a higher level of information would be
sufficient. As an alternative, it would be sufficient to classify suppliers
of services by their own professional association. (Hasse/Sepp, 1999,
p. 25-26)
Such a kind of consumer protection policy includes some risks. The
danger exists that beside the solution of information problems the state
will make decisions instead of the consumers themselves. Then violation
of consumer sovereignty occurs. Even if too many goods are declared
as non-quasi-private-goods,because of “overwhelming negative external
effects”, but only a small part of society (for example children) needs
protection, a danger for consumer sovereignty comes into force. These
regulations often are founded by (1) securing minimal quality standards
for goods and (2) prevention of social or environmental risks.
(Hasse/Sepp, 1999, p. 25) But this kind of information policy is risky
itself. It transforms a market economy into a welfare state, by restricting
freedom of market entry and competition and also consumer sovereignty.
Result is an erosion of efficiency, productivity and innovative
possibilities of the market economy. An overwhelming regulation

See &ti NSV Valituse, in: Riigi Teataja 11/1990, 122, Riigi Teataja I 100/1998,
1621, 81/1999, 739 and 118/2000, 1840.
106 International Area Review 2001, Vol. 4(1)

destroys the economic basis of the welfare state. And it restricts more
and more the freedom of its citizens. (Bernholz, 1995, p. 71-73)

3. Concluding Remarks

The analysis of consumer information and growing consumer

protection policy in Estonia shows us the crucial path to violation and
at last removing of consumer sovereignty. In the beginning exist a wrong
economic model, the static Pareto-optimum. The comparison of real
knowledge with perfect information in an idealised world of mainstream
economics leads to the assumption of imperfect information, which has
to be reduced by state activity. Additionally this assumption leads to
a necessity of consumer protection because the division of knowledge
in the society is assumed as asymmetric. Of come, consumers have
to be protected by a perfectly informed and benevolent state!? Or not?
Big Brother is watching you!
If we assume competition in a market economy as discovery
procedure, which never leads to a static optimum but is an open ended
process of solving problems in a world, which changes in each moment,
than consumer sovereignty will substitute consumer protection as target
of state activity. The Estonian economic policy in the last years has
been a good example for such a policy. The prohibition of opportunistic
abuse of information and the improvement of market transparency have
been main targets of state activity. Such a policy is helpful especially
in a transforming society without well operating markets, because the
people have to learn market behaviour. Such a policy doesn’t hurt
sovereignty of consumers. Only a growing policy of consumer protection
- especially induced by requirements of the European Union - may
destroy the sovereignty of Estonian consumers. Consumer protection
policy should remain as pure information policy to support the operation
of markets. This is the limit of a successful consumer policy.

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