The Review of Austrian Economics has a new special issue devoted to the work of the great economist W.H. Hutt (1899-1988) who, among many other important contributions, in 1936 coined the term “consumers’ sovereignty.” When I was asked to contribute to this special issue, I eagerly accepted, not only because of my life-long deep appreciation of Hutt’s work but also because it gave me an opportunity to explore in some depth the connection between consumption and production. This exploration is important because the relationship between these two concepts is often misunderstood – and this misunderstanding fuels unwise and counterproductive policy proposals (such as, for example, that trade policy should pay less attention to consumer welfare and do more to promote the welfare of producers).
You can read the paper in full here, but pasted below are some slices from it.
Although William Hutt coined the term “consumer sovereignty” in 1936, the concept is rooted in this observation by Adam Smith in 1776:
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it ([1776] 1981, p. 660).
While the first sentence in this passage from Smith’s Inquiry Into the Nature and Causes of the Wealth of Nations is correct, the latter is uncharacteristically mistaken. The reason is that the claim that “consumption is the sole end and purpose of all production” continues to be denied by influential pundits.
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Discounting consumption and elevating production is superficially appealing. Those who do such discounting achieve, in many eyes, an aura of mature sophistication and gravitas that seems unavailable to people who insist that, ultimately, economic activity’s only goal is consumption. Consumption is enjoyable and easy, and we willingly pay to do it. Working, in contrast, is often hard and is never so enjoyable that we willingly do it without being paid. Consumption is an activity that we naturally want to engage in. Unlike laboring, consumption is its own reward and, hence, its own motivation. Because consumption is naturally attractive to humans, we’ll do too much of it if we’re not properly incited to control our urge to consume. In contrast, working – production – is not its own reward; we’ll do too little of it unless we’re properly incited to exert productive effort.
Furthermore, consumption requires neither skill nor self-control. We are consumers from the moment we’re conceived and continue to be only consumers throughout childhood. But to produce we must have at least minimal skill and self-control. While even the most aimless and immature individuals can and do consume, production requires maturity and competence. Not everyone does it. Unsurprisingly, prosperous societies develop norms and attitudes that laud and encourage dispositions toward productive activity as they also temper our natural eagerness to consume. Protesting against Adam Smith’s insistence on the primacy of consumption thus seems to beat least plausibly merited, and perhaps even praiseworthy. Consumption is valued above all and exclusively only by the frivolous, myopic, and childish. People who are serious, prudent, and mature understand that production is no less important – and perhaps even more important – than consumption.
Protestors against Adam Smith’s insistence on the primacy of consumption are mistaken. They commit a category error. They presume that production is in the same category of activities as is consumption. Specifically, these anti-Smithians presume that production and consumption are alternative, competing human ends. It follows from this presumption that prudent societies aim to achieve an optimal mix of production and consumption, while imprudent ones aim for the corner solution of maximum possible consumption. But, as noted, this presumption is mistaken. Aseconomic activities, production and consumption differ from each other categorically. Production is a means toward the fulfillment of human ends (whatever these might be); consumption is the satisfaction of these ends. Production (the means) and consumption (the ends) are not traded off against each other as a consumer trades-off one good against another good.
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Yet much more straightforward evidence exists to prove that production, unlike consumption, is not an end in itself: People are paid to produce; people pay to consume. Any activity that will be performed only if the persons performing it are paid to do so is obviously not an end in itself; that activity is not its own reward or its own motivation. Activities that people pay to engage in are ends. These activities are what Adam Smith meant, and what all sensible economists today mean, by “consumption.” If work in a particular job were an end in itself, the individuals performing that job not only would not have to be paid to do it, they would pay to do it. The need to pay people to work proves that work is not an end in itself. Likewise, the need to pay firm owners to produce the outputs they produce and make available for sale proves that those production activities are not ends in themselves. Work and production are means.
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One upshot of this reality is that if genuine production is to occur in a group of people larger than a few dozen, the only reliable means of getting sufficient information about which uses of resources are productive and which aren’t is the market price system. By responding to market prices, individuals in their capacity as producers combine different resources into outputs for sale to consumers. Outputs bought by consumers in sufficient quantities and at prices sufficiently high to keep the production operations going are more valuable than are the outputs that would have been produced had inputs been used differently. Using inputs to produce outputs sold at prices that cover their costs of production is productive; using inputs to produce outputs sold at prices that do not cover their costs of production is wasteful. Although in both of these cases workers exert effort to transform physical matter from some forms into other forms, only in the former case does maximum production occur.
