It is sometimes used as a hypothesis that the production of goods and services is determined by the consumers' demand (rather than, say, by capital owners or producers).
The term "consumer sovereignty" was first coined by William Harold Hutt in his book Economists and the Public: A Study of Competition and Opinion (1936).
Since then the term seems to have been fairly widely employed.Although Hutt did not mean to establish any theory based on this concept,[5] some economists argue that consumer sovereignty does not hold in some cases, for example, in healthcare.
When ends are being sought, we are concerned with demand; when means are being chosen, we are concerned with an aspect of supply—entrepreneurship.As Hutt also described, the concept therefore does not neglect suppliers:[5] This does not involve any "startling neglect," as Professor Fraser describes it, "of the producers' side of the picture."
Although Hutt may be blamed for the misunderstanding of the critics, they have missed the point of the concept: Recognizing that in some situations a producer might choose a less remunerative activity which that producer finds more personally satisfying, Hutt defined such a decision as one of consumption, not production.
[4] Even if consumers are approached traditionally[clarification needed], they are largely sovereign under the assumption that in the role of producers, people maximize their income.
[citation needed] Views on the primacy of consumption can become matters of ideological debate in socialist economies - as happened in Poland in the 1940s.
A more detailed definition was given by Abba P. Lerner:[8]The basic idea of consumer sovereignty is really very simple: arrange for everybody to have what he prefers whenever this does not involve any extra sacrifice for anybody else.… One of the deepest scars of my early youth was etched when my teacher told me, “You do not want that,” after I had told her that I did.
I confess I still find a similar rising of my hackles when I hear people's preferences dismissed as not genuine, because influenced or even created by advertising, and somebody else telling them what they “really want.” A possible way to test the consumer sovereignty assumption is to compare consumers' valuations of items they purchase on their own, to their valuations of items they receive as gifts from friends and family.
Lester Thurow claims that many consumers (e.g. children and drug-addicts) are not competent to know what is good for them.
Various studies show that consumers' preferences are irrational and inconsistent, and so they cannot represent what is actually good for them.
[9] A practical implication of such criticisms is that governments should provide merit goods rather than lump-sum transfers.