WEBVTT NOTE 10.01. Monopoly and Competition; The Concept of Consumers’ Sovereignty 1 00:00:00.000 --> 00:00:05.000 Chapter 10, Monopoly and Competition 2 00:00:05.000 --> 00:00:10.000 1. The Concept of Consumer Sovereignty 3 00:00:10.000 --> 00:00:16.000 a. Consumer Sovereignty vs. Individual Sovereignty 4 00:00:16.000 --> 00:00:25.000 We have seen that in the free market economy, people will tend to produce those goods most demanded by the consumers. 5 00:00:25.000 --> 00:00:38.000 This applies not only to specific types of goods, but also to the allocation between present and future goods, in accordance with the time preferences of the consumers. 6 00:00:38.000 --> 00:00:46.500 Some economists have termed this system, consumer's sovereignty. Yet there is no compulsion about this. 7 00:00:46.500 --> 00:00:51.000 The choice is purely an independent one by the producer. 8 00:00:51.000 --> 00:00:58.600 His dependence on the consumer is purely voluntary, the result of his own choice for the maximization 9 00:00:58.600 --> 00:01:04.520 of utility, and it is a choice that he is free to revoke at any time. 10 00:01:04.520 --> 00:01:11.020 We have stressed many times that the pursuit of monetary return, the consequence of consumer 11 00:01:11.020 --> 00:01:19.800 demand, is engaged in by each individual only to the extent that other things are equal. 12 00:01:19.800 --> 00:01:26.680 These other things are the individual producer's psychic valuations, and they may counteract 13 00:01:26.680 --> 00:01:29.120 monetary influences. 14 00:01:29.120 --> 00:01:35.860 An example is a laborer or other factor owner engaged in a certain line of work at less 15 00:01:35.860 --> 00:01:38.980 monetary return than elsewhere. 16 00:01:38.980 --> 00:01:46.020 He does this because of his enjoyment of the particular line of work and product, and or 17 00:01:46.020 --> 00:01:49.600 his distaste for other alternatives. 18 00:01:49.600 --> 00:01:55.240 Rather than consumer's sovereignty, it would be more accurate to state that in the free 19 00:01:55.240 --> 00:01:59.480 market there is sovereignty of the individual. 20 00:01:59.480 --> 00:02:06.940 The individual is sovereign over his own person and actions, and over his own property. 21 00:02:06.940 --> 00:02:13.600 Of course, we may formally salvage the concept of consumer's sovereignty by asserting that 22 00:02:13.600 --> 00:02:20.800 all these psychic elements and evaluations constitute consumption, and that the concept 23 00:02:20.800 --> 00:02:23.120 therefore still has validity. 24 00:02:23.120 --> 00:02:29.440 However, it would seem to be more appropriate in the catalactic context of the market, which 25 00:02:29.440 --> 00:02:37.360 is the area here under discussion, to reserve consumption to mean the enjoyment of exchangeable 26 00:02:37.360 --> 00:02:38.360 goods. 27 00:02:38.360 --> 00:02:47.360 Naturally, in the final sense, everyone is an ultimate consumer, both of exchangeable and of non-exchangeable goods. 28 00:02:47.360 --> 00:02:58.360 However, the market deals only in exchangeable goods, by definition, and when we separate the consumer and the producer in terms of the market, 29 00:02:58.360 --> 00:03:05.360 we distinguish the demanding, as compared to the supplying, of exchangeable goods. 30 00:03:05.360 --> 00:03:15.360 It is more appropriate, then, not to consider a non-exchangeable good as an object of consumption in this particular context. 31 00:03:15.360 --> 00:03:27.360 This is important in order to discuss the contention that individual producers are somehow subject to the sovereign rule of other individuals, the consumers. 32 00:03:27.360 --> 00:03:32.360 This may be termed individual self-sovereignty. 33 00:03:32.360 --> 00:03:40.100 To earn a monetary return, the individual producer must satisfy consumer demand, but the extent 34 00:03:40.100 --> 00:03:48.640 to which he obeys this expected monetary return, and the extent to which he pursues other non-monetary 35 00:03:48.640 --> 00:03:54.240 factors, is entirely a matter of his own free choice. 36 00:03:54.240 --> 00:04:01.200 The term consumer's sovereignty is a typical example of the abuse in economics of a term 37 00:04:01.200 --> 00:04:13.200 Sovereignty Appropriate only to the political realm, and is thus an illustration of the dangers of the application of metaphors taken from other disciplines. 38 00:04:13.200 --> 00:04:21.200 Sovereignty is the quality of ultimate political power. It is the power resting on the use of violence. 39 00:04:21.200 --> 00:04:29.200 In a purely free society, each individual is sovereign over his own person and property, 40 00:04:29.200 --> 00:04:34.880 and it is therefore this self-sovereignty which obtains on the free market. 41 00:04:34.880 --> 00:04:41.200 No one is sovereign over anyone else's actions or exchanges. 42 00:04:41.200 --> 00:04:48.480 Since the consumers do not have the power to coerce producers into various occupations and work, 43 00:04:48.480 --> 00:04:53.120 the former are not sovereign over the latter. 44 00:04:53.120 --> 00:04:59.120 B. Professor Hutt and Consumer Sovereignty 45 00:04:59.120 --> 00:05:06.120 The metaphorical shibboleth of consumer sovereignty has misled even the best economists. 46 00:05:06.120 --> 00:05:14.120 Many writers have used it as an ideal with which to contrast the allegedly imperfect free market system. 47 00:05:14.120 --> 00:05:19.120 An example is Professor W. H. Hutt of the University of Cape Town 48 00:05:19.120 --> 00:05:24.320 Who Has Made the Most Careful Defense of the Concept of Consumer Sovereignty 49 00:05:24.320 --> 00:05:30.120 Since he is the originator of this concept and his use of the term is widespread in the 50 00:05:30.120 --> 00:05:33.840 literature, his article is worth particular attention. 51 00:05:33.840 --> 00:05:39.700 It will be used as the basis for a critique of the concept of consumer sovereignty and 52 00:05:39.700 --> 00:05:45.280 its implications for the problems of competition and monopoly. 53 00:05:45.280 --> 00:05:51.320 In the first part of the article, Hutte defends his concept of consumer sovereignty against 54 00:05:51.320 --> 00:05:56.240 the criticism that he has neglected the desires of producers. 55 00:05:56.240 --> 00:06:03.920 He does this by asserting that if a producer desires a means as an end in itself, then 56 00:06:03.920 --> 00:06:06.460 he is consuming. 57 00:06:06.460 --> 00:06:14.160 In this formal sense, as we have seen, consumer sovereignty, by definition, always obtains. 58 00:06:14.160 --> 00:06:19.560 Formally, there is nothing wrong with such a definition, for we have stressed throughout 59 00:06:19.560 --> 00:06:27.200 this book that an individual evaluates ends, consumption, on his value scale, and that 60 00:06:27.200 --> 00:06:33.520 his valuation of means for production is dependent upon the former. 61 00:06:33.520 --> 00:06:39.300 In this sense, then, consumption always rules production. 62 00:06:39.300 --> 00:06:45.900 But this formal sense is not very useful for analyzing the situation on the market, and 63 00:06:45.900 --> 00:06:50.860 it is precisely the latter sense that Hutt and others employ. 64 00:06:50.860 --> 00:06:58.700 Thus, suppose producer A withholds his labor or land or capital service from the market. 65 00:06:58.700 --> 00:07:05.420 For whatever reason, he is exercising his sovereignty over his person and property. 66 00:07:05.420 --> 00:07:11.440 On the other hand, if he supplies them to the market, he is, to the extent that he aims 67 00:07:11.440 --> 00:07:17.900 at monetary return, submitting himself to the demands of the consumers. 68 00:07:17.900 --> 00:07:23.840 In the aforementioned general sense, consumption rules in any case. 69 00:07:23.840 --> 00:07:28.080 But the critical question is, which consumer? 70 00:07:28.080 --> 00:07:33.740 The market consumer of exchangeable goods who buys these goods with money? 71 00:07:33.740 --> 00:07:39.860 For the market producer of exchangeable goods, who sells these goods for money? 72 00:07:39.860 --> 00:07:46.100 To answer this question, it is necessary to distinguish between the producer of exchangeable 73 00:07:46.100 --> 00:07:53.940 goods and the consumer of exchangeable goods, since the market by definition can deal only 74 00:07:53.940 --> 00:07:55.980 in such goods. 75 00:07:55.980 --> 00:08:03.720 In short, we can designate people as producers and as consumers, even though every man must 76 00:08:03.720 --> 00:08:15.720 Each individual must act as a consumer, and every man must also act, in another context, as a producer, or as the receiver of a gift from a producer. 77 00:08:15.720 --> 00:08:26.720 Making this distinction, we find that, contrary to Hut, each individual has self-sovereignty over his person and property on the free market. 78 00:08:26.720 --> 00:08:45.720 The producer and the producer alone decides whether or not he will keep his property, including his own person, idle, or sell it on the market for money, the results of his production then going to the consumers in exchange for their money. 79 00:08:45.720 --> 00:08:58.720 This decision, concerning how much to allocate to the market and how much to withhold, is the decision of the individual producer, and of him alone. 80 00:08:58.720 --> 00:09:06.920 Hut implicitly recognizes this, however, since he soon shifts his argument and begins inconsistently 81 00:09:06.920 --> 00:09:14.720 to hold up consumer sovereignty as an ethical ideal against which the activities of the 82 00:09:14.720 --> 00:09:17.920 free market are to be judged. 83 00:09:17.920 --> 00:09:24.920 Consumer sovereignty becomes almost an absolute good, and any action by producers to thwart 84 00:09:24.920 --> 00:09:29.800 This ideal is considered as little less than moral treason. 85 00:09:29.800 --> 00:09:37.440 Wavering between consumer's sovereignty as a necessary fact and the contradictory concept 86 00:09:37.440 --> 00:09:44.560 of consumer's sovereignty as an ideal that can be violated, Hutt attempts to establish 87 00:09:44.560 --> 00:09:51.360 various criteria to determine when this sovereignty is being violated. 88 00:09:51.360 --> 00:09:57.360 For example, he asserts that when a producer withholds his person or property out of a 89 00:09:57.360 --> 00:10:05.360 desire to use it for enjoyment as a consumer's good, then this is a legitimate act, in keeping 90 00:10:05.360 --> 00:10:08.020 with rule by the consumer. 91 00:10:08.020 --> 00:10:13.700 On the other hand, when the producer acts to withhold his property in order to attain 92 00:10:13.700 --> 00:10:21.080 more monetary income than otherwise, presumably, although Hutt does not state this, by taking 93 00:10:21.080 --> 00:10:23.080 The Theory of Money and Credit 94 00:10:51.080 --> 00:10:57.580 This Monopoly Price that is allegedly the instrument by which producers pervert their 95 00:10:57.580 --> 00:11:00.020 rightful function. 96 00:11:00.020 --> 00:11:05.500 Hutt recognizes the enormous difficulty of distinguishing among the producer's motives 97 00:11:05.500 --> 00:11:07.920 in any concrete case. 98 00:11:07.920 --> 00:11:14.340 The individual who withholds his own labor may be doing so in order to obtain leisure, 99 00:11:14.340 --> 00:11:20.440 and even the owner of land or capital may be withholding it in order to derive, say, 100 00:11:20.440 --> 00:11:26.200 and Aesthetic Enjoyment from the Contemplation of His Unused Property. 101 00:11:26.200 --> 00:11:31.440 Suppose indeed that there is a mixture of motives in both cases. 102 00:11:31.440 --> 00:11:37.760 Hutt is definitely inclined to solve these difficulties by not giving the producer the 103 00:11:37.760 --> 00:11:43.040 benefit of the doubt, particularly in the case of property. 104 00:11:43.040 --> 00:11:46.980 But the difficulty is far greater than Hutt imagines. 105 00:11:46.980 --> 00:11:54.580 Every individual producer is always engaged in an attempt to maximize his psychic income 106 00:11:54.580 --> 00:11:59.060 to arrive at the highest place on his value scale. 107 00:11:59.060 --> 00:12:07.060 To do so, he balances on this scale monetary income and various non-monetary factors in 108 00:12:07.060 --> 00:12:10.820 accordance with his particular valuations. 109 00:12:10.820 --> 00:12:14.980 Let us take the producer first as a seller of labor. 110 00:12:14.980 --> 00:12:21.180 In judging how much of his labor to sell and at what price, the producer will take into 111 00:12:21.180 --> 00:12:28.220 consideration the monetary income to be gained, the psychic return from the type of work and 112 00:12:28.220 --> 00:12:35.100 the working conditions, and the leisure foregone, balancing them in accordance with the operation 113 00:12:35.100 --> 00:12:38.060 of his various marginal utilities. 114 00:12:38.060 --> 00:12:47.060 Certainly, if he can earn a higher income by working less, he will do so, since he also gains leisure thereby. 115 00:12:47.060 --> 00:12:52.060 And the question arises, why is this immoral? 116 00:12:52.060 --> 00:13:02.060 Moreover, one, it is impossible, not simply impracticable, to separate the leisure from monetary considerations here, 117 00:13:02.060 --> 00:13:07.900 Since both elements are involved, and only the person himself will know the intricate 118 00:13:07.900 --> 00:13:10.900 balancing of his own valuations. 119 00:13:10.900 --> 00:13:19.420 Two, more important, this act does not contravene the truth that the producer can earn money 120 00:13:19.420 --> 00:13:22.260 only by serving the consumers. 121 00:13:22.260 --> 00:13:28.880 Why has he been able to extract a monopoly price through restricting his production? 122 00:13:28.880 --> 00:13:35.080 is purely because the demand for his services, either directly by consumers or indirectly 123 00:13:35.080 --> 00:13:42.560 from them through lower order producers, is inelastic, so that a decreased production 124 00:13:42.560 --> 00:13:50.080 of the good and a higher price will lead to increased expenditure on his product and therefore 125 00:13:50.080 --> 00:13:53.020 increased income for him. 126 00:13:53.020 --> 00:14:00.540 That this inelastic demand schedule is purely the result of the voluntary demands of the 127 00:14:00.540 --> 00:14:01.540 consumers. 128 00:14:01.540 --> 00:14:07.380 If the consumers were really angry at this monopolistic action, they could easily make 129 00:14:07.380 --> 00:14:15.180 their demand elastic by boycotting the producer, and or by increasing their demands at the 130 00:14:15.180 --> 00:14:17.680 competitive production level. 131 00:14:17.680 --> 00:14:24.160 The fact that they do not do so signifies their satisfaction with the existing state of affairs 132 00:14:24.160 --> 00:14:31.240 and demonstrates that they, as well as the producer, benefit from the resulting voluntary 133 00:14:31.240 --> 00:14:32.640 exchanges. 134 00:14:32.640 --> 00:14:38.920 What about the producer in his capacity as a seller of property, the main target of the 135 00:14:38.920 --> 00:14:42.200 anti-monopoly price school? 136 00:14:42.200 --> 00:14:46.320 The principle, first of all, is virtually the same. 137 00:14:46.320 --> 00:14:52.920 Capital producers may restrict the production and sale of their land or capital goods, either 138 00:14:52.920 --> 00:14:59.960 individually or in concert, by means of a cartel, in order to increase their expected 139 00:14:59.960 --> 00:15:03.160 monetary incomes from the sale. 140 00:15:03.160 --> 00:15:08.080 Once again, there is nothing distinctively immoral about such action. 141 00:15:08.080 --> 00:15:14.320 The producers, other things being equal, are attempting to maximize the monetary income 142 00:15:14.320 --> 00:15:34.320 from their factors of production. This is no more immoral than any other attempt to maximize monetary income. Furthermore, they can do so only by serving the consumers, since, once again, the sale is voluntary on the part of both producers and consumers. 143 00:15:34.320 --> 00:15:42.260 Again, such a monopoly price to be established either by one individual or by individuals 144 00:15:42.260 --> 00:15:50.920 cooperating together in a cartel is possible only if the demand, directly or indirectly, 145 00:15:50.920 --> 00:16:00.080 of the consumers is inelastic, and this inelasticity is the resultant of the purely voluntary choices 146 00:16:00.080 --> 00:16:14.000 Inelasticity is simply a label for a situation in which consumers spend more money on a good 147 00:16:14.000 --> 00:16:17.520 at a higher than at a lower price. 148 00:16:17.520 --> 00:16:23.860 If the consumers were really opposed to the cartel action, and if the resulting exchanges 149 00:16:23.860 --> 00:16:29.020 really hurt them, they would boycott the monopolistic firm or firms. 150 00:16:29.020 --> 00:16:34.860 They would lower their purchasing so that the demand became elastic and the firm would 151 00:16:34.860 --> 00:16:40.140 be forced to increase its production and reduce its price again. 152 00:16:40.140 --> 00:16:46.140 If the monopolistic price action had been taken by a cartel of firms and the cartel 153 00:16:46.140 --> 00:16:53.180 had no other advantages for rendering production more efficient, it would then have to disband 154 00:16:53.180 --> 00:16:58.380 because of the now demonstrated elasticity of the demand schedule. 155 00:16:58.380 --> 00:17:05.860 But, it may be asked, is it not true that the consumers would prefer a lower price and 156 00:17:05.860 --> 00:17:13.540 that therefore achievement of a monopoly price constitutes a frustration of consumers' sovereignty? 157 00:17:13.540 --> 00:17:18.140 The answer is, of course, consumers would prefer lower prices. 158 00:17:18.140 --> 00:17:19.700 They always would. 159 00:17:19.700 --> 00:17:23.700 In fact, the lower the price, the more they would like it. 160 00:17:23.700 --> 00:17:30.060 Does this mean that the ideal price is zero or close to zero for all goods, because this 161 00:17:30.060 --> 00:17:36.820 would represent the greatest degree of producer's sacrifice to consumer's wishes? 162 00:17:36.820 --> 00:17:43.700 In their role as consumers, men would always like lower prices for their purchases. 163 00:17:43.700 --> 00:17:50.140 In their capacity as producers, men always like higher prices for their wares. 164 00:17:50.140 --> 00:17:56.680 If nature had originally provided a material utopia, then all exchangeable goods would 165 00:17:56.680 --> 00:18:03.180 be free for the taking, and there would be no need for any labor to earn a money return. 166 00:18:03.180 --> 00:18:10.860 This utopia would also be preferred, but it too is a purely imaginary condition. 167 00:18:10.860 --> 00:18:20.220 Man must necessarily work within a given real environment of inherited land and durable capital. 168 00:18:20.220 --> 00:18:28.180 In this world there are two and only two ways to settle what the prices of goods will be. 169 00:18:28.180 --> 00:18:34.540 One is the way of the free market, where prices are set voluntarily by each of the participating 170 00:18:34.540 --> 00:18:35.960 individuals. 171 00:18:35.960 --> 00:18:42.260 In this situation, exchanges are made on terms benefiting all the exchangers. 172 00:18:42.260 --> 00:18:48.800 The other way is by violent intervention in the market, the way of hegemony as against 173 00:18:48.800 --> 00:18:50.060 contract. 174 00:18:50.060 --> 00:18:57.140 Such hegemonic establishment of prices means the outlawing of free exchanges and the institution 175 00:18:57.140 --> 00:19:00.780 of exploitation of man by man. 176 00:19:00.780 --> 00:19:06.080 For exploitation occurs whenever a coerced exchange is made. 177 00:19:06.080 --> 00:19:11.880 If the free market route, the route of mutual benefit, is adopted, then there can be no 178 00:19:11.880 --> 00:19:19.060 other criterion of justice than the free market price, and this includes alleged competitive 179 00:19:19.060 --> 00:19:24.380 and monopoly prices, as well as the actions of cartels. 180 00:19:24.380 --> 00:19:33.160 In the free market, consumers and producers adjust their actions in voluntary cooperation. 181 00:19:33.160 --> 00:19:36.540 In the case of barter, this conclusion is evident. 182 00:19:36.540 --> 00:19:42.900 The various producer-consumers either determine their mutual exchange rates voluntarily in 183 00:19:42.900 --> 00:19:47.500 the free market, or else the ratios are set by violence. 184 00:19:47.500 --> 00:19:53.860 There seems to be no reason why it should be more or less moral on any grounds for the 185 00:19:53.860 --> 00:20:00.100 and the Horse Price of Fish to be higher or lower than it is on the free market, or in 186 00:20:00.100 --> 00:20:06.700 other words, why the fish price of horses should be lower or higher, yet it is no more 187 00:20:06.700 --> 00:20:13.180 evident why any money price should be lower or higher than it is on the market. 188 00:20:13.180 --> 00:20:19.460 To be consistent, currently fashionable theory would have to accuse Crusoe and Friday of 189 00:20:19.460 --> 00:20:26.700 of Being Vicious Bilateral Monopolists, busily charging each other monopoly prices and therefore 190 00:20:26.700 --> 00:20:28.820 ripe for state intervention.