Total Welfare and Consumers’ Sovereignty: Comments on Professor Vanberg’s Papers (3/4)

Summary

This third article comments several papers by Professor Viktor Vanberg. In the first part, it attempts to demonstrate that the consumers’ welfare standard does constitute a sectional divide. Such a standard favors the consumers of the relevant market at the expense of all the other consumers, as Professor Alan Meese convincingly argued. The key here is that the economist must go beyond a partial equilibrium analysis and must look at the other markets where productive factors are freed up when a restriction of production occurs somewhere else. In the second part, the article contends that the concept of consumers’ sovereignty is at best a metaphor and that, in a private law society, it should not be considered as legally binding.

***

Professor Viktor Vanberg is the author of many studies about constitutional economics, competition law, and the thought of Friedrich Hayek and James Buchanan.

In a series of articles, I am going to analyze Professor Vanberg’s work regarding competition.

Most of my comments will pertain to a paper entitled “Consumer Welfare, Total Welfare and Economic Freedom – On the Normative Foundations of Competition Policy.”[1] I invite any visitor to read this paper, freely available on the internet, before reading my article.

However, I will also refer to two more general books, namely Rules & Choice in Economics (1994)[2] and The Constitution of Markets (2001).[3] These books are collections of papers written by Professor Vanberg.

In the first article, I have enquired whether competition law could rightly be considered to amount to a private law order, as Professor Vanberg (following Franz Böhm) argued. My finding was negative: competition law is public law par excellence unless one takes Böhm’s programme seriously, which nobody does except libertarians.

In the second article, I discussed, approved, and tried to supplement Professor Vanberg’s case against the resort to economics at the “sub-constitutional” level. I also criticized the lack of congruence that I perceived between Professor Vanberg’s theoretical criticisms and his practical judgments and recommendations.

In the present article, I am going to challenge Professor Vanberg’s statements as to the most appropriate “welfare standard” for antitrust and as to the claim that the total welfare standard deals with “sectional interests.” I will also argue that “consumers’ sovereignty” may be used as a metaphor to explain the workings of the market but cannot be given any legal force in a private law order.

For the sake of clarity, let us specify once more that a “constitutional economist” as Professor Vanberg distinguishes between the constitutional level, i.e., the level at which the rules of the games are drafted (be it in a “constitution” in the traditional legal sense of the word or in an ordinary “law”), and the sub-constitutional level, that is, the level at which rules are enforced.

1° The Relevant Market as a Sectional Divide: Favoring Some Consumers at the Expenses of The Consumers.

1.1° The controversy: Total welfare or Consumers’ Welfare.

The starting point for antitrust, as argued in previous articles, is that the property rights of the producers must be neutralized if there is a theoretical possibility that it permits improving the general welfare even slightly through the prevention of pecuniary externalities.

This is a conspicuous departure from the philosophy of Adam Smith. Indeed, as discussed below, the latter criticized the laws against “engrossing” and “forestalling” very strongly because he considered they were contrary to the “ordinary laws of justice.”

However, for the time being, I am going to assume that antitrust law is unavoidable and consequently I am going to to focus on the question of what its goal(s) should be.

One of the controversies nowadays is to determine whether competition law should aim at promoting “total welfare” or “consumers’ welfare.”

Total welfare is defined as the sum of the welfares of the supplier and of the buyers, while “consumers’ welfare” only includes the welfare of the buyers.[4]

Authors generally argue that this debate has few practical consequences. I agree with this statement in the limited sense that competition agencies are unable anyhow to assess the welfare effects of any commercial practice. Nevertheless, in another sense, this debate is very important.

Here are the three main issues the solution of which depends on the choice between the two aforementioned goals of antitrust:

  • Must price discrimination policies[5] which decrease buyers’ surplus without reducing the quantity produced be illegal?
  • Must article 101(3) grant an exemption for “economic progress” only when the efficiency gains are transmitted to the consumers?
  • Under an optimal deterrence model, what amount of investment in antitrust is justified?[6] Considering all the costs and benefits, is it even judicious to have competition law at all?

What does Professor Vanberg have to say regarding this debate?

1.2° Professor Vanberg’s Stance: Only Consumers’ Welfare Matters.

Professor Vanberg announces he has a firm answer to give:

There has been, and continues to be, controversy about whether or not total welfare, i.e. the sum of consumer and producer surplus, is a more adequate measure of economic efficiency than consumer welfare alone. From a constitutional economics perspective there is a clear answer to the question of how this dispute ought to be decided. Interpreted as alternative hypothetical imperatives the opposing views on what should be the guiding principle in framing market processes should be judged in terms of how well they can be supported by arguments that appeal to the common interests of their ultimate addressees in a democratic polity, the citizens.[7]

Now, which of the two welfare standards better appeal to the common interests of the citizens?

[The case of the proponents of a consumers’ welfare standard] must [sic] rest on the claim that, considering their encompassing interests and notwithstanding their double affectedness, citizens can expect to be better off overall by adopting an economic constitution of Leistungswettbewerb, even if being exposed to such competition as producers may be an unwelcome burden. The essential, if rarely explicitly stated argument supporting this claim is that citizens’ interests as producers in escaping the burden of competition do not qualify as common interests that they share across different producer groups, but are sectional interests that are in conflict between different groups. Producers in industry A who are on the demand side for products of industry B are harmed by restraints of competition in the latter, and vice versa. By contrast, in their capacity as consumers citizens are not separated by sectional divides but share a common interest in a regime of Leistungswettbewerb.[8]

And Professor Vanberg concludes that it can be recommended to citizens to adopt consumers’ sovereignty (that is, in this context, consumers’ welfare)

because they can expect to be compensated for the disadvantages they suffer as producers from their exposure to competition by the far greater advantages they will realize as consumers because other producer are exposed to the discipline of Leistungswettbewerb as well.[9]

The first thing to be noticed is that, although Professor Vanberg announces that he has a “clear answer” to that issue and describes the argument that should be made in order to prove that the “consumers’ welfare standard” should be adopted––namely that, in the long run, this standard would be in the advantage of both producers and consumers––he does not actually try to demonstrate that the standard he advocates for serves this goal better than the other standard.

Indeed, he contents himself with saying that “Their case [this of the proponents a consumers’ welfare standard] must rest on the claim that” and does not busy himself presenting this case.

Moreover, the proponents of “total welfare standard” make the very same claim in favor of the standard they advocate. They too argue that citizens can be better off overall by adopting a total welfare standard and that the opposite standard cares only about sectional interests.

Indeed, neoclassical economists generally state, with the Marshall-Harberger graph, that a society’s welfare results from the sum of both supplier’s and consumer’s surplus, so that people should only object to the “deadweight” (i.e., the “surplus loss”) and not to the “surplus transfer.”

Who is right?

1.3° “Consumers’ Welfare” Does Correspond to “Sectional Interests.”

Let us a examine the case of a merger which enables the firms both to reduce production costs by 10 and to generate a deadweight of 8 through an increase in prices resulting in a misallocation of resources.

According to the “total welfare school,” that is to ordinary neoclassical economics, the merger should be allowed because the efficiency gains (+10) do more than balancing the allocative loss (-8), which results in a net gain for society.

According to the “consumers’ welfare school,” however, the merger should be blocked unless the cost reductions are passed down to consumers through a reduction in prices. The reasoning is that, if the difference is just “pocketed” by the producers, there is no compensation for the consumers.

A neoclassical economist would object that producers (notably monopolists) are also consumers, so that one must include the gains they “pocket” into consumers’ welfare.

I do not disagree with this last objection, but I think that it could be better framed.

Instead of pointing out that producers are also consumers, it seems more adequate to focus on the volume of production and to emphasize that the “cost reductions” enable “society” to save productive factors and to re-deploy them in other fields of the economy, where production will consequently increase.

As Hayek wrote,

A person who possesses the exclusive knowledge or skill which enables him to reduce the cost of production of a commodity by 50 per cent still renders an enormous service to society if he enters its production and reduces its price by only 25 per cent — not only through that price reduction but also through his additional saving of cost.[10]

Thus, efficiency gains which are not directly transmitted to the consumers of the same market through a reduction in price are not just “pocketed” by the producers. They are “more than just pecuniary accounting constructs that influence firm profits.[11] They benefit society by making it possible to increase production in some other market(s).

In a paper entitled “Reframing the (False?) Choice Between Purchaser Welfare and Total Welfare,” Professor Alan Meese recently discussed this issue. This is how the author sums up his findings:

This Article critiques the role that the partial equilibrium trade-off paradigm plays in the debate over the definition of “consumer welfare” that courts should employ when developing and applying antitrust doctrine. The Article contends that common reliance on the paradigm distorts the debate between those who would equate “consumer welfare” with “total welfare” and those who equate consumer welfare with “purchaser welfare.” In particular, the model excludes, by fiat, the fact that new efficiencies free up resources that flow to other markets, increasing output and thus the welfare of purchasers in those markets. […] For instance, recognition that efficiencies generated in one market cause resource flows to other markets and higher output in such markets undermines claims that producers “pocket” efficiencies whenever a practice results in higher prices. Thus, instead of involving a conflict between “producers” and “purchasers” in a single market, transactions that both raise prices and create efficiencies require antitrust policy to resolve a conflict between purchasers in the original market, on the one hand, and those in other markets, on the other.[12]

He also comments that “It bears repeating that a preference for a purchaser welfare standard over a total welfare standard will destroy wealth as economists and others conventionally define it.”[13]

Consequently, contrary to Professor Vanberg’s claim, not only does the “total welfare” standard not amount to promoting a sectional interest, but the standard he advocates for, the so-called “consumers’ welfare,” does constitute a sectional divide.

Indeed, one may say that “considering their encompassing interests” and “their double affectedness” (consumer-in-the-relevant-market and consumer-outside-the-relevant-market), “citizens can expect to be better off overall” by adopting “total welfare standard.

If, as Professor Vanberg argues, the interests of the citizens are to be the criterion of desirability of a standard, then as a consequence the ill-named “consumers’ welfare standard” should be discarded.

Moreover, it may be shown that the consequences of a correct framing of the debate are even more radical. Indeed, it leads to questioning the desirability of antitrust itself.

The principle explained above––namely that cost reductions benefit consumers even when they do not lead to price reduction in the relevant market––actually has a wider field of application than exposed so far.

In particular it can be applied to a so-called “hard-core” restriction, for instance a cartel.

Indeed, when a cartel restricts production in order to increase prices, it saves means of production which will be subsequently re-deployed in other sectors of the economy, where production will then increase and consequently where prices will decrease, exactly as in the previous case.

As Ludwig von Mises wrote,

In examining the economic effect of monopoly, we must limit investigation to the type which restricts the production of its commodity. Now the result of this restriction is not that less is produced quantitatively. Capital and labour, set free by the restriction of production, must find employment in other production. For in the long run in the free economy there is neither unemployed capital nor unemployed labour. Thus against the smaller production of the monopolized goods one must set the increased production of other goods. But these, of course, are less important goods, which would not have been produced and consumed if the more pressing demands for a larger quantity of the monopolized commodity could have been satisfied. The difference between the value of these goods and the higher value of the quantity of the monopolized commodity not produced represents the loss of welfare which the monopoly has inflicted on the national economy.[14]

The value differential corresponds to the “deadweight” (or “surplus loss”) that both the total welfare standard and the consumers’ welfare standard oppose.[15] And it is very largely admitted that this deadweight is so tiny that it is deprived of any practical significance.

Indeed, although it is theoretically the most serious harm caused by monopolies, it plays no role whatsoever in the daily work of competition agencies. The latter do not even try to assess its magnitude.

As a result, even the smallest efficiency gain generated by the cartel (e.g., saving on advertisement, additional incentives to invest in high fixed-costs industries, higher predictability, etc.),[16] or any impoverishment of the firms’ decisional processes caused by competition laws, or the slightest hostility to the granting of discretionary powers to the state, are enough to balance the “harms” caused by the cartel.

Very curiously, the European Commission, in its 2004 guidelines on article 81§3 (now article 101§3), mentioned the savings generated by the monopolistic restrictions of production, but discarded them out of hand for an obscure reason:

Cost savings that arise from the mere exercise of market power by the parties cannot be taken into account. For instance, when companies agree to fix prices or share markets they reduce output and thereby production costs. Reduced competition may also lead to lower sales and marketing expenditures. Such cost reductions are a direct consequence of a reduction in output and value. The cost reductions in question do not produce any pro-competitive effects on the market. In particular, they do not lead to the creation of value through an integration of assets and activities. They merely allow the undertakings concerned to increase their profits and are therefore irrelevant from the point of view of Article 81(3).[17]

The Commission also deliberately decided under a frivolous pretext to ignore the welfare of consumers which do not belong to the relevant market:

The assessment under Article 81(3) of benefits flowing from restrictive agreements is in principle made within the confines of each relevant market to which the agreement relates. The Community competition rules have as their objective the protection of competition on the market[18] and cannot be detached from this objective. Moreover, the condition that consumers must receive a fair share of the benefits implies in general that efficiencies generated by the restrictive agreement within a relevant market must be sufficient to outweigh the anti-competitive effects produced by the agreement within that same relevant market. Negative effects on consumers in one geographic market or product market cannot normally be balanced against and compensated by positive effects for consumers in another unrelated geographic market or product market.[19]

As one can see, the Commission admits that the welfare standard it resorts to deals with a sectional divide and still clings to it.

Such a stance is impossible to support from a sincere ordoliberal perspective.

2° Consumers’ Sovereignty: An Apt Metaphor to Describe the Free-Market which Turns Dangerous When it is Given Legal Force.

Professor Vanberg sees as an essential component of the ordoliberal agenda the promotion of “consumers’ sovereignty.” For instance, he writes that

To establish an order of Leistungswettbewerb means to adopt rules for the market game that make consumer preferences the ultimate controlling force in the process of production. As a constitutional ideal for framing market processes the concept of Leistungswettbewerb has apparent affinity to the principle of consumer sovereignty that – even if not under this name – has been cherished by economists, since Adam Smith argued that, because we only produce in order to consume, we should give priority to consumer rather than to producer interests when choosing the rules of the economic game.[20]

In this part, I intend to show that this concept would not be an acceptable goal of any private law order even if it focused on maximizing total welfare, as it does in Hutt’s theory. I will also discuss whether it can be derived from the works of some free-market authors.

2.1° Consumers’ Sovereignty in a Private Law Order: A Mere Metaphor.

It is obviously admissible to say metaphorically that the free-market is governed by “consumers’ sovereignty.”

For example, Ludwig von Mises vividly wrote that

The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that.[21]

However, it is important to note that, in a genuine private law order, this sovereignty of consumers over producers is economic, not legal. Only the sovereignty of each individual over his own property is guaranteed by a legal right.

In an economy characterized by the social division of labor, each individual is to a very large extent economically dependent on the other members of society; but this dependence is not legally enforced. An individual can reject it and even choose to live in autarky, provided he is ready to accept the economic consequences of his choice.

Consumers have no legal claim on the prices set by producers.

Thus, as Mises put it,

The market does no directly prevent anybody from arbitrarily inflicting harm on his fellow citizens; it only puts a penalty upon such conduct. The shopkeeper is free to be rude to his customers provided he is ready to bear the consequences. The consumers are free to boycott a purveyor provided they are ready to pay the costs. What impels every man to the utmost exertion in the service of his fellow men and curbs innate tendencies toward arbitrariness and malice is, in the market, not compulsion and coercion on the part of gendarmes, hangmen, and penal courts [or competition agencies]; it is self-interest.[22]

Moreover, Murray Rothbard, Mises’ student, clarified his teacher’s thought by stating that

[I]n the free market economy people will tend to produce those goods most demanded by the consumers. Some economists have termed this system “consumers’ sovereignty.” Yet there is no compulsion about this. The choice is purely an independent one by the producer; his dependence on the consumer is purely voluntary, the result of his own choice for the “maximization” of utility, and it is a choice that he is free to revoke at any time. […].

Rather than “consumers’ sovereignty,” it would be more accurate to state that in the free market there is sovereignty of the individual: the individual is sovereign over his own person and actions and over his own property. This may be termed individual self-sovereignty. To earn a monetary return, the individual producer must satisfy consumer demand, but the extent to which he obeys this expected monetary return, and the extent to which he pursues other, nonmonetary factors, is entirely a matter of his own free choice.[23]

Consumers’ sovereignty is only a metaphor. It should never become a legal right.

From an economic and descriptive perspective, it can surely be useful to distinguish the producer from the consumer and to describe the former as being subjected to the sovereignty of the latter; but, from a libertarian and prescriptive viewpoint, one needs to have in mind that each individual or owner is self-sovereign.

2.2° A Quick Examination of Two Free-Market Authors.

2.2.1° Adam Smith: Consumers’ Sovereignty Would Be in Conflict with the “Laws of Justice.”

Professor Vanberg maintains that the idea of “consumers’ sovereignty” had been adopted by Adam Smith. He grounds this claim in the following famous quote by Adam Smith:

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.[24]

However, interpreting this statement as an endorsement of the modern concept of “consumers’ sovereignty” raises serious difficulties.

First, this quote is extracted from a discussion of the wrongdoings caused by mercantilist policies, which violated what Adam Smith called the “laws of justice” in order to benefit some producers.

Indeed, after the aforementioned sentence, Adam Smith goes on to write that

But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. In the restraints upon the importation of all foreign commodities which can come into competition with those of our own growth or manufacture, the interest of the home consumer is evidently sacrificed to that of the producer.[25]

It shows that Adam Smith is criticizing violations of property rights made in order to favor the interests of the producers. It does not imply that Smith objects protecting producers’ rights for their own sake.

Smith is not absolutely opposed to laws which violate property rights when the goal is to favor the interests of the consumers, but these violations are exceptions which must be justified by a serious interest:

To hinder, besides, the farmer from sending his goods at all times to the best market, is evidently to sacrifice the ordinary laws of justice to an idea of public utility, to a sort of reasons of state; an act or legislative authority which ought to be exercised only, which can be pardoned only, in cases of the most urgent necessity.[26]

It is very doubtful that preventing the loss of a Marshallian triangle qualifies as an “urgent necessity.

Surely there is another passage, quoted in virtually every competition law book, where Smith famously says that

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.[27]

However, immediately after these words, the Scottish philosopher made clear that

It is impossible, indeed, to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.[28]

This tends to show that Adam Smith would not have agreed with the legal submission of producers to consumers’ sovereignty.

2.2° William Hutt: Irrelevant and Inconsistent.

William Hutt is considered as the originator of the concept of consumers’ sovereignty. The problem with his theory is twofold. First, it does not seem to promote what is nowadays known as “consumers’ sovereignty”; second, it relies on “distinctions without any reality.”

2.2.1° Hutt’s Concept of Consumers’ Sovereignty Does Not Deal with a “Consumers’ Welfare” Standard.

The first problem with Hutt’s concept is that it does not set a “consumers’ welfare” standard. Indeed, Hutt does take into account the producers welfare.

Although he analyzes the producers as “the custodians of the community’s resources,”[29] he reckons with the fact that they are themselves consumers.

For instance, he writes that

Every owner of resources (including his own physical powers) may be regarded as bidding, with the rest of the consumers, for the services of his own resources. […] Hence, in so far as individuals whom popular language would describe as producers are in fact choosing between ends, they are consumers in the most general sense of the term […]. [I]n so far as the conditions of health and happiness in work are costly (i.e., to the extent to which they involve scarcity), they are products.[30]

As a consequence,

That all owners of property have the power to withhold their personal services and the services of their resources is obvious.[31]

The fact that the producer’s ends are taken into account suffices to show that Hutt’s concept does not fit with the notion of “consumers’ sovereignty,” because it means that the producer welfare is not totally sacrificed to the needs of the rest of society.

2.2.2° Hutt’s Concept of Consumers’ Sovereignty Is Inconsistent.

As reported above, Hutt’s theory includes a distinction between means and ends. As far as producers are choosing between ends, they are considered as consumers and are not subject to the sovereignty of other consumers; insofar as they are choosing between means, they are considered as producers and are submitted to consumers’ sovereignty.

This distinction raises two main difficulties: it is both too narrow and too wide. Moreover, even in Hutt’s theory, the notion of “sovereignty” is at least partially metaphorical.

  • Even in Hutt’s Theory, the Notion of “Sovereignty” Is at least Partially Metaphorical.

Let us state something obvious. The “sovereignty” that Hutt had in mind is to a large extent metaphorical. Indeed, it is far less powerful than political sovereignty.

As Murray Rothbard remarked,

“Sovereignty” is the quality of ultimate political power; it is the power resting on the use of violence. In a purely free society, each individual is sovereign over his own person and property, and it is therefore this self-sovereignty which obtains on the free market. No one is “sovereign” over anyone else’s actions or exchanges. Since the consumers do not have the power to coerce producers into various occupations and work, the former are not “sovereign” over the latter.[32]

One might rightly say that a soldier is submitted to the sovereignty of his hierarchical superiors, because they are able to coerce him “into various occupations and work”; however, as Rothbard mentioned, consumers do not have the same power toward a producer. This makes a first difference with the political concept of sovereignty.[33]

The second difference is that producers retain the (discretionary) right to interpret and anticipate the desires of the consumers. As Hutt put it,

The “producer’s” offer of services for exchange is, of course, seldom a passive response to bidding. He is normally an entrepreneur, seeking to obtain the most productive utilisation of his resources. This involves discretion, judgment and decisions in respect of means.[34]

Supply factors […] are a result of producers’ discretion in the interpretation and anticipation of consumers’ will. And that discretion, which is concerned with choice of means, must not be confused with a preference, which is concerned with choice of ends.[35]

If property is to serve the end of consumers’ sovereignty, it must simply confer the right to interpret and obey [sic: the right to obey] the community’s very complex wishes and must not include the right to disobey.[36]

The right to interpret and anticipate very complex wishes, but not that of disobeying: this a first example of “distinction without (almost) any reality.”

Moreover, it is necessary, even for the consumers qua consumers, to grant producers the right to disobey. Henry Ford is quoted as saying that “If I’d asked people what they wanted, they would have asked for a better horse.” This authenticity of this quote is disputed, but I think it still aptly illustrates the problem with denying producers the right to disobey the wishes/orders of the consumers.

  • Hutt’s concept is too narrow: Any Action Can be explained as a Choice Between Ends.

If Hutt’s scheme were to be taken seriously, it would be necessary to determine at the sub-constitutional level whether a restriction of production is motivated by the pursuit of a special end or as a means to increase prices.

As Hutt writes it,

I have to face the difficulty that, without introducing this notion of the power of substitution, I cannot distinguish between (1) the “withholding of capacity” (which involves the frustration of consumers’ sovereignty), and (2) the consumption by an individual of satisfactions from his own property. Consider the case in which the owner of a mineral-water spring is allowing part of the flow to run to waste, as a means of maximising the value of his contribution to the supply of wanted things (and so the value of his power to demand from the product of others). He may plead that he is purchasing and “consuming” the withheld flow because, for instance, it provides his estate with a beautiful cascade. If the institutions of property happen to allow him that discretion, no one can prove that his plea is false. His personal valuations are a purely subjective matter.[37]

To solve this issue, Hutt suggests to enquire whether, if the owner of the spring had rented the source to the state, he would buy back some units of water in order to let them flow for his personal enjoyment. This a very ingenious reasoning. However, it is clearly impossible to implement. It would in particular require to know the personal valuations of the owner.

  • Hutt’s Concept is Too Wide: Not All Means Can Reasonably Be Submitted to the Sovereignty of other Consumers.

It seems to make no sense at all to allow an individual to choose freely between ends but to submit him to the controlling power of other consumers when he has to choose, among the things he rightly owns, the means enabling him to achieve his ends.

Freedom in the choice of ends is annihilated if freedom in the choice of means is denied. In the same way as any choice of means can be disguised as a choice of ends, any choice of end can be analysed a choice of means.

In order to illustrate this difficulty, let us slightly alter the example given by Professor Hutt. Hayek supplies it:

it would seem […] absurd to allow somebody to use for his private swimming pool a spring of water which would provide unique advantages for a brewery or whisky distillery, and then, once he turns it to such purpose, insist that he must not make a monopoly profit from it.[38]

Let us assume that the owner’s preference for having a swimming pool is authentic. In this case, the water or the withholding thereof is used a means for the owner personal end (swimming), and consequently should have been submitted to consumers’ sovereignty. However, I doubt that Hutt would have recommended to do so.

It seems very inconsistent to allow the owner to use water as a means for his personal enjoyment when the ends/means relations is direct, but to forbid it when the means work through the earning of money, for instance when the water is sold and the owner uses this money for his personal enjoyment.

Despite Professor Hutt’s claim that “all I have done is to make the concept correspond with the distinction between ends and means,”[39] the end-means distinction is confused and does not actually explain anything.

Moreover, I consider that Hayek was perfectly right to claim that freedom implied not only the free choice of ends, but also the freedom to use one’s means to pursue one’s ends. To separate the two is inconsistent.

To conclude, Hutt does not appear to set any objective criterion ensuring that the concept of “consumers’ sovereignty” would not be used to prohibit the expression by producers of their own preferences. So, while common sense makes it clear that sovereignty of other consumers must have limits, he does not give any solid justification to the setting of such limits.

As a further consequence, unless Professor Vanberg does not want to authorize producers to express their preferences for leisure, healthy working conditions, etc., he should either abstain from relying of Hutt’s theory or explain adequately how the desirable limits could logically be derived from this paradigm.

Unfortunately, Professor Vanberg, who mentions Murray Rothbard’s criticism of Hutt’s scheme (which is rare enough in the antitrust literature to be noticed), does not address his arguments.

***

[1]     Viktor J. Vanberg, “Consumer Welfare, Total Welfare and Economic Freedom – On the Normative Foundations of Competition Policy,” Walter Eucken Institut, Freiburg Discussion Paper on Constitutional Economic, 9/03 (hereinafter, “Consumer Welfare, Total Welfare and Economic Freedom”).

[2]     Viktor J. Vanberg, Rules & Choice in Economics, Routledge, Taylor & Francis e-Library, Economics as social theory, Series edited by Tony Lawson, University of Cambridge, 2003, first published in 1994 (hereinafter, “Rules & Choice in Economics”).

[3]     Viktor J. Vanberg, The Constitution of Markets – Essays in Political Economy, Routledge, Taylor & Francis e-Library, 2003, first published in 2001 (hereinafter “The Constitution of Markets”).

[4]     According to Professor Hal Varian, “The terms consumers surplus and producers surplus are somewhat misleading, since who is doing the consuming and who is doing the producing really doesn’t matter. It would be better to use the terms “demanders surplus” and “supplier’s surplus,” but we’ll bow to tradition and use the standard terminology” (Hal R. Varian, Intermediate MicroeconomicsW. W. Norton & Company, 2010, p. 263).

[5]     In particular rebates policies. See Hans Zenger, “Loyalty Rebates and The Competitive Process,” Journal of Competition Law & Economics, 00(00), 1–52.

[6]     See Alan J. Meese, « Reframing the (False?) Choice between Purchaser Welfare and Total Welfare », Fordham Law Review, Vol. 81, No. 5, 2013, p. 2212 (“[W]hile both standards would condemn a naked cartel, for instance, the purchaser welfare standard would attribute far more harm to such price fixing than a total welfare approach. As a result, investments in law enforcement that might pay off handsomely under a purchaser welfare standard may actually reduce welfare under a total welfare standard”).

[7]     Viktor J. Vanberg, “Consumer Welfare, Total Welfare and Economic Freedom, “ p. 15.

[8]     Ibid., p. 16.

[9]     Ibid., p. 17.

[10]    Friedrich Hayek, “The Meaning of Competition,” in Individualism and Economic Order, The University of Chicago Press, 1980, p. 101.

[11]    Alan J. Meese, “Reframing the (False?) Choice between Purchaser Welfare and Total Welfare,” aforementioned, p. 2237.

[12]    Ibid., p. 2197.

[13]    Ibid., p. 2212.

[14]    Ludwig von Mises, Socialism – An Economic and Sociological Analysis, New Haven, Yale University Press, 1962, p. 389.

[15]    As Professor Meese notes, “Of course, monopolistic output reduction also frees up resources that can be employed to increase production in other markets, but such reductions “by definition” allocate resources to uses that produce less value than they would produce in the monopolized market, with no offsetting improvement in productive efficiencies” (Alan J. Meese, « Reframing the (False?) Choice between Purchaser Welfare and Total Welfare », aforementioned, p. 2238). He also writes that “[M]arket-power induced output reductions generally occur only “at the margins,” thus freeing up only modest resources for use elsewhere. By contrast, productive efficiencies are, by their nature, inframarginal, that is, apply to every unit of output that a firm or firms continue to produce after the transaction that results in the efficiencies.203 Thus, the realization of such efficiencies will have a larger (necessarily positive) impact than the (ambiguous) impact of anticompetitive output reductions.” (Ibid., p. 2241). He is right to point out that cost reductions resulting from output reductions are comparatively less important than those which result from “productive efficiencies,” but it must be remarked that the former are almost as “modest” as the welfare reduction, which also occurs “at the margin.”

[16]    For a study of the harmful effects of anti-naked cartels prohibitions, see Jack High, “Bork’s Paradox: Static vs. Dynamic Efficiency in Antitrust Analysis,” Contemporary Policy Issues 3, pp. 29-31.

[17]    Communication from the Commission — Notice — Guidelines on the application of Article 81(3) of the Treaty, §49.

[18]    This argument is ludicrous. Article 101 purports to protect competition in the “internal market” (that is, the European market), and not in any “relevant market.”

[19]    Ibid., §43. The Commission makes an exception when “the group of consumers affected by the restriction and benefiting from the efficiency gains are substantially the same.”

[20]    Viktor J. Vanberg, “Consumer Welfare, Total Welfare and Economic Freedom, “ p. 15.

[21]    Ludwig von Mises, Human Action – A Treatise on Economics, Fox & Wilkes, San Francisco, 1963, p. 270. Quoted in Peter Behrens, “The ‘Consumer Choice’ Paradigm in German Ordoliberalism and its Impact Upon EU Competition Law,” July 22, 2014, Europa-Kolleg Hamburg, Discussion Paper No. 1/14, p. 10. Let us note that, according to Mises, “There is in the operation of a market economy only one instance in which the proprietary class is not completely subject to the supremacy of the consumers. Monopoly prices are an infringement of the sway of the consumers” (Ludwig von Mises, Human Action, aforementioned, pp. 271-272).

[22]    Ludwig von Mises, Human Action, aforementioned, p. 283.

[23]    Murray Rothbard, Man, Economy, and State, Ludwig von Mises Institute, 2004, pp. 629-630. Professor Vanberg refers to Rothbard’s criticism in The Constitution of Markets, p. 31. See also Armen Alchian & William Allen, Exchange and Production – Theory in Use, adsworth Publishing Company, 1969, pp. 374 and 599. Evaluating the following statement:“The free-enterprise, capitalist system is a system of consumer sovereignty. Consumer preferences determine what shall be produced and how much shall be produced.”, they answer “Not ‘consumer sovereignty’ but ‘individual sovereignty’ is more accurate. Individuals make choices as consumers (buyers) and as producers (sellers). An individual expresses choices about working conditions as much as about consumption goods. If mining is unpleasant compared to cutting timber, so that individuals are more willing to work at the latter rather than the former, the amount of lumber relative to coal will be larger than if individual preferences as producers were reversed.

[24]    Adam Smith, An Inquiry into the Nature and Causes of the Wealth of the Nations, The Electronic Classics Series, 2005, p. 538. Quoted by Professor Vanberg in “Consumer Welfare, Total Welfare and Economic Freedom,” p. 15.

[25]    Adam Smith, An Inquiry into the Nature and Causes of the Wealth of the Nations, aforementioned, p. 538.

[26]    Ibid., p. 434.

[27]    Ibid., p. 111. Professor Vanberg quotes it in The Constitution of Markets, p. 137, and comments thatWhat Smith (1981:145) has said about the collusive inclination of private business can be assumed to apply to politicians as well.”

[28]    Ibid. Smith adds in the next sentence: “But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.”

[29]    William H. Hutt, “The Concept of Consumers’ Sovereignty,” The Economic Journal, Vol. 50, No. 197 (Mar., 1940), p. 66. My comments will rely only on the article, and not on the book where he first used this concept, namely Economists and the Public. In the paper commented, Hutt undertook to address the objections raised by Professor Fraser in “The Doctrine of « Consumers’ Sovereignty,” The Economic Journal, Vol. 49, No. 195 (Sep., 1939), pp. 544-548.

[30]    William H. Hutt, “The Concept of Consumers’ Sovereignty,” aforementioned, pp. 67 and 69.

[31]    Ibid., p. 69.

[32]    Murray Rothbard, Man, Economy, and State, aforementioned, p. 630.

[33]    Let us note that Hutt admitted that “the term “sovereignty” itself suffers from the connotations which it has acquired in political science.” (William H. Hutt, “The Concept of Consumers’ Sovereignty,” aforementioned, p. 72).

[34]    Ibid., p. 68.

[35]    Ibid.

[36]    Ibid., p. 75.

[37]    Ibid., pp. 73-74.

[38]    Friedrich Hayek, Law, Legislation and Liberty, Routledge Classics, 2013, p. 411.

[39]    William H. Hutt, “The Concept of Consumers’ Sovereignty,” aforementioned, p. 67.

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