In my latest column for AIER I defend the consumer-welfare standard. To reject this standard – or to propose that it is only one of several competing standards for assessing the performance of markets – reflects deep misunderstanding of the nature of economic activity. Two slices:
The consumer-welfare standard has guided antitrust jurisprudence since the mid-1970s. Under it, antitrust has one goal and one goal only, namely, to ensure that markets satisfy as fully as possible the demands of consumers. Antitrust under this standard is not concerned with promoting as an end in itself the welfare of individuals as entrepreneurs, as investors, or as business owners. The consumer-welfare standard recognizes the important roles that each of us plays in our capacities as producers, but what is here recognized as important is the capacity of each of us to satisfy the desires of consumers.
Production is a means; consumption is the end. The consumer-welfare standard is nothing more, or less, than an understanding and acceptance of this fundamental economic reality. But because this reality is easily misunderstood, spending time exploring it is productive.
This relationship between production and consumption isn’t a matter of choice or ideology. Nor is it a relationship unique to capitalism. It is, instead, a relationship that inheres in the nature of all economic activity. The very meaning of “to produce” is to transform inputs into outputs that are more valuable than are the sum of those individual inputs. The inputs, and productive efforts, are means; the end is the output that will be consumed.
To judge whether any particular output is worth the inputs and effort spent to create it, some reliable method of assessing each output’s value is required. In an economy, that assessment is done by consumers spending their incomes as they choose. Producers who earn profits have actually produced value; producers who suffer losses have not. Activities that are ‘proven’ profitable are continued and perhaps expanded, while activities that generate losses are halted.
Joe can spend eight hours building a chair, or – using exactly the same wood, nails, glue, paint, and tools – nine hours building a table. After weighing his options, Joe chooses to build a chair. But just before Joe starts work, Joe’s neighbor, Sam, shows up, loaded pistol in hand, and announces: “Joe! I know what’s best for you. I order you instead to build a table. The extra time that you’ll spend building the table is more time producing! So build a table.” Not wishing to lose his life, Joe builds a table.
Similar to the above case of the mistakenly built table, we might here say that Joe “produced a table.” Also as in the above case, once the table is built, Joe might decide to keep it. But none of us, and certainly not Joe, would describe Sam’s intervention as having increased Joe’s production. Quite the opposite. Because the output (the table) that Joe winds up with gives Joe less satisfaction than is the satisfaction that he would have gotten from having a new chair, Joe’s production is decreased by Sam’s intervention. It decreased Joe’s production because it decreased the amount of consumption desires that were satisfied by Joe’s work effort.
Sam here did cause Joe to work longer, and the extra hour Joe spent working to build the table was indeed necessary for the construction of that table. But to describe as “productive” this extra hour that Joe spends constructing a table is mistaken. Such a description ignores the value that Joe would have gotten from whatever else he would have produced, including possibly leisure, with that hour. Because the satisfaction that Joe would have produced for himself by producing a chair in eight hours would have been greater than is the satisfaction that he gets by having built a table in nine, the extra hour Joe spent working to produce the table was wasteful, not productive.
Left unmolested by Sam, Joe would have built a chair, and in doing so made himself better off. Importantly, Joe judges the outcome of his efforts exclusively by the results: is or is not the chair worth the cost that Joe incurred to build it? If so, Joe was productive; if not, Joe was unproductive. In other words, an action is productive only if, and only to the extent that, the result of that action is a net increase in the ability to consume. Another way of stating this conclusion is that Joe judges his efforts to produce by the consumer-welfare standard.
Nothing essential changes if Joe works at producing outputs for sale to other people, and then uses the income that he earns to acquire, from still other people, the goods and services that he consumes. If the value to Joe of the goods and services that he acquires for his consumption exceeds the costs that he incurred to earn the income used to purchase these goods and services, Joe has acted productively. In short, even in an exchange economy, Joe judges the results of his economic efforts according to the consumer-welfare standard.