On the Primacy of the Consumer-Welfare Standard

Ascendant today among antitrust scholars and enforcers are the so-called “neo-Brandeisians.” Named after progressive Associate Supreme Court Justice Louis Brandeis, the neo-Brandeisians’ chief goal with respect to antitrust is to dislodge the consumer-welfare standard from its lofty perch as the guide for determining if and when markets are performing so poorly as to warrant antitrust intervention.

Let’s hope that in this effort the neo-Brandeisians fail.

The consumer-welfare standard has guided antitrust jurisprudence since the mid-1970s. Under it, antitrust has one goal and one goal only, namely, to ensure that markets satisfy as fully as possible the demands of consumers. Antitrust under this standard is not concerned with promoting as an end in itself the welfare of individuals, whether as entrepreneurs, as investors, or as business owners. The consumer-welfare standard recognizes the important roles that each of us plays in our capacities as producers, but recognizes as important the capacity of each of us to satisfy the desires of consumers, as a business person or as a worker.

Production is a means; consumption is the end. The consumer-welfare standard is nothing more, nor less, than an understanding and acceptance of this fundamental economic reality. But because this reality is easily misunderstood, spending time exploring it is productive.

Production is a Means; Consumption is the End

This relationship between production and consumption isn’t a matter of choice or ideology. Nor is it a relationship unique to capitalism. It is, instead, a relationship that inheres in the nature of all economic activity. The very meaning of “to produce” is to transform inputs into outputs that are more valuable than are the sum of those individual inputs. The inputs, and productive efforts, are means; the end is the output that will be consumed.

To judge whether any particular output is worth the inputs and effort spent to create it, some reliable method of assessing each output’s value is required. In an economy, that assessment is done by consumers spending their incomes as they choose. Producers who earn profits have actually produced value; producers who suffer losses have not. Activities that are ‘proven’ profitable are continued and perhaps expanded, while activities that generate losses are halted.

This ‘social’ process for assessing whether production of value has really occurred, and of inciting people to produce value rather than to continue on with wasteful efforts, shares much the same logic as an individual acting alone.

Consider Joe, who plans to build a table for his own use. He knows the value to him of (say) the eight hours that he must spend building a table. He also knows the value to him of the nails, of the wood, and of each of the other inputs that he’ll use to construct the table. For Joe to proceed with his plan to construct the table, he must expect that the value to him of the table will exceed the value to him of the sum of all the inputs used in its production.

Some readers might think that in the previous paragraph I should instead have written: “For Joe to proceed with his plan to construct the table, he must expect that the value to him of the table will be greater than two things – namely, the value to him of the sum of all the inputs used in its construction, and the value to him of whatever else, other than the table, he could construct with those same inputs.” This statement, while correct, is redundant. The value Joe assigns to each input reflects his assessment of what each of these hours and items can be used to produce. If, for Joe, the next-most-valuable use of these inputs is the construction of a chair, then when he ponders whether or not it’s worthwhile for him to use these inputs to build a table, the value of the inputs will include their value in constructing a chair.

If upon completion of the table, the value to Joe of the finished product proves to be at least as high as what he anticipated, then his efforts succeeded. Joe’s inputs were used productively. But, of course, people sometimes err. It’s possible that upon completing the table Joe discovers that it’s less valuable to him than he anticipated. In common language we might still say that “Joe produced a table,” but economically he produced no value. In fact, he destroyed value. Inputs that could have been used to produce an output (a chair) more valuable than the table were in fact used to build something less valuable (the table). Had Joe had better foresight before he embarked upon building the table, he would obviously instead have built a chair. And while he might decide to keep the table, given that it now exists, we – knowing of Joe’s disappointment with the table – wouldn’t be surprised to hear him describe his construction of the table as “wasted time, effort, and inputs.”

If he could travel back in time to redo his efforts, Joe would instead build a chair.

A Misguided Intervention

Let’s change this example in two small ways. First, before choosing which good to produce, Joe now assesses his options correctly. Second, Joe can spend eight hours building a chair, or – using exactly the same wood, nails, glue, paint, and tools – nine hours building a table. After weighing his options, Joe chooses to build a chair. But just before Joe starts work, Joe’s neighbor, Sam, shows up, loaded pistol in hand, and announces: “Joe! I know what’s best for you. I order you instead to build a table. The extra time that you’ll spend building the table is more time producing! So build a table.” Not wishing to lose his life, Joe builds a table.

Similar to the above case of the mistakenly built table, we might here say that Joe “produced a table.” Also as in the above case, once the table is built, Joe might decide to keep it. But none of us, and certainly not Joe, would describe Sam’s intervention as having increased Joe’s production. Quite the opposite. Because the output (the table) that Joe winds up with gives Joe less satisfaction than is the satisfaction that he would have gotten from having a new chair, Joe’s production is decreased by Sam’s intervention. It decreased Joe’s production because it decreased the amount of consumption desires that were satisfied by Joe’s work effort.

Sam here did cause Joe to work longer, and the extra hour Joe spent working to build the table was indeed necessary for the construction of that table. But to describe as “productive” this extra hour that Joe spends constructing a table is mistaken. Such a description ignores the value that Joe would have gotten from whatever else he would have produced, including possibly leisure, with that hour. Because the satisfaction that Joe would have produced for himself by producing a chair in eight hours would have been greater than is the satisfaction that he gets by having built a table in nine, the extra hour Joe spent working to produce the table was wasteful, not productive.

Each Of Us Assesses Our Own Economic Actions According to the Consumer-Welfare Standard

Left unmolested by Sam, Joe would have built a chair, and in doing so made himself better off. Importantly, Joe judges the outcome of his efforts exclusively by the results: is or is not the chair worth the cost that Joe incurred to build it? If so, Joe was productive; if not, Joe was unproductive. In other words, an action is productive only if, and only to the extent that, the result of that action is a net increase in the ability to consume. Another way of stating this conclusion is that Joe judges his efforts to produce by the consumer-welfare standard.

Nothing essential changes if Joe works at producing outputs for sale to other people, and then uses the income that he earns to acquire, from still other people, the goods and services that he consumes. If the value to Joe of the goods and services that he acquires for his consumption exceeds the costs that he incurred to earn the income used to purchase these goods and services, Joe has acted productively. In short, even in an exchange economy, Joe judges the results of his economic efforts according to the consumer-welfare standard.

The economy, of course, is made up of millions of individuals such as Joe. Each of us, like him, judges the outcome of our own individual economic efforts according to the consumer-welfare standard. Antitrust and other government economic policies should be guided by the same standard.

The post On the Primacy of the Consumer-Welfare Standard was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.

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