Consumer Sovereignty Explained: Car Makers Pull Back From Making Cars.

American auto makers are embarking on a historical shift away from passenger cars, as more-profitable sport-utility vehicles and pickup trucks continue to expand their share of the market. According to the Wall Street Journal, small cars have fallen out of favor amid low gasoline prices and efficiency improvements in SUV’s. Now, large sedans are on the chopping block.

General Motors will end production of the Chevrolet Sonic subcompact as early as this year, according to people familiar with the matter. GM is also considering discontinuing the Chevy Impala big sedan in the next few years, these people said. Ford Motor Co., meanwhile, plans to stop building the Fiesta small car for the U.S. market within the next year, and will discontinue the large Taurus sedan, said people briefed on the plans.

At the same time as the Wall Street Journal reporters were writing their story, an article by Bob Murphy was posted on the Mises Institute website explaining Consumer Sovereignty, a core concept of Ludwig von Mises and Austrian Economics. Murphy posts this quote from Mises’ Bureaucracy, in which he contrasts management for profit with bureaucratic management.

The real bosses [under capitalism] are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterprise. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or is cheaper, they desert their old purveyors.

Unaware of the Wall Street Journal reporting (his original article preceded the news quoted above by several years), Murphy used an automotive industry analogy to illustrate his point.

The metaphor of “consumer sovereignty” is carried to its utmost when proponents (such as Mises himself) liken the operation of a market to a daily plebiscite, in which every penny spent is a vote by the consumer indicating those products and services to which society’s resources should be devoted. If the great mass of consumers dislike purple cars with green polka dots, then a society based on private property will not waste resources in the production of such odd cars.

His analogy of purple cars with green polka dots was intended to illustrate, presumably with humor, the possibility of a design mistake on the part of the car maker, and the correction that such a mistake would trigger in the consumer marketplace.

Unfortunately, the design mistakes in the real world case are made by the government and their interventionist bureaucratic departments. Their mistakes are worse than ridiculous; they risk consumer lives, divert productive resources, and squeeze producer profits. The bureaucrats issued regulations to force automobile manufacturers to achieve fuel economy targets that were set at levels dictated by political theater rather than market reality. To comply, auto manufacturers had to balance their sales portfolios, offsetting sales of lower mileage pickup trucks and SUV’s (which consumers like and are buying in increasing numbers) with offerings of high-mileage small sedans. To achieve the high gas mileage the government mandated, these sedans are lightweight, underpowered, under-equipped, flimsy and dangerous.

Consumers are always smarter than government bureaucrats. And, as Mises pointed out, their marketplace power is demonstrated not only by buying, but also by abstaining from buying. In the case of the flimsy high-mileage sedans on offer, they abstained in droves. “They are no easy bosses,” as Mises said.

To reinforce Mises’ point that “as soon as something is offered to (consumers) that they like better or is cheaper, they desert their old purveyors”, the WSJ article tells us that “GM, Ford and Chrysler have suffered when gasoline prices rise and dealers are left with a stale ….selection of fuel-efficient offerings”.

Even if the government fails to recognize consumer sovereignty, the automobile manufacturers do not.

It is a consumer shift “we really haven’t seen before”, Toyota U.S. sales chief Bill Fay said at an industry conference….Another Toyota executive forecast the sale of cars shrinking to 30% of the American market in the near future, and said the Japanese auto maker might need to expand its SUV lineup.

Consumer sovereignty is a concept of Individual Economics. The individual as consumer retains market power, and makes subjective decisions about what purchases will improve his or her personal circumstances. The government can insist that it’s better for us to drive high mileage, lightweight and flimsy cars (or purple cars with green polka dots for that matter). Consumers will follow their own value preferences and will not be dictated to by bureaucrats.

Originally published at Center for Individualism.




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Hunter Hastings

Hunter Hastings

Executive Director at Center For Individualism

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