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In informal discussions about public policy, I often hear the claim that the government should not intervene in a certain way, because the citizens know what is good for them better than the politicians. As an example, a discussion about a public housing program can proceed like this:

Supporter: The government should help the poor by giving them apartments for a low rent.

Opposer: It is better to help the poor by just giving them cash. For a fixed government expense, giving cash is better than giving apartments, since the poor can use the cash either for renting apartments or for buying other things that are more important for them.

Supporter: But if you give them cash, they might waste all the money on alcohol or gambling and will remain homeless.

Opposer: A citizen knows what's best for him/her better than the politicians. If a citizen decides that the best way to use the money is buying alcohol or gambling, then this provides the highest increase in utility, and thus it is the best way to help him/her.

There are many things to say about this claim, but here I do not ask whether this claim is correct or not - my question is: does such claim appear also in main-stream economic publications? For example, is such claim mentioned in a paper published in a respectable economics journal (in the context of public economics)? If not, is it mentioned in a blog-post by a respectable economist?

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  • $\begingroup$ It is mentioned in several textbooks. $\endgroup$ – BB King Mar 7 at 21:39
  • $\begingroup$ @BBKing This is interesting. Could you give exact references? $\endgroup$ – Erel Segal-Halevi Mar 7 at 21:41
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This idea in the title of your question sometimes falls under the name of consumer sovereignty.†

Macmillan Dictionary of Modern Economics (edited by David W. Pearce, 1992):

consumer sovereignty. The idea that the CONSUMER is the best judge of his or her own welfare. This assumption underlies the theory of consumer behaviour and through it the bulk of economic analysis including the most widely accepted optimum in WELFARE ECONOMICS, the PARETO OPTIMUM. The notion is, however, challenged in that governments do provide MERIT GOODS, while ADVERTISING is held, especially by J.K. GALBRAITH, to distort consumers' preferences.

William Vickrey (Microstatics, 1964, p. 217):

consumers are to be considered the court of final recourse as to the relative satisfactions that they derive from different situations, and that they are capable of predicting accurately the satisfaction which they will derive from the consumption of various contemplated combinations of goods.

Abba Lerner ("The Economics and Politics of Consumer Sovereignty", 1972):

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 would not have been so upset if she had said that I could not have it, whatever it was, or that it was very wicked of me to want it. What rankled was the denial of my personality—a kind of rape of my integrity. 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.”

… as an economist I must be concerned with the mechanisms for getting people what they want, no matter how these wants were acquired.

Joel Waldfogel ("Does Consumer Irrationality Trump Consumer Sovereignty?", 2005):

According to economic theory, individual utility—and social welfare—are maximized when individuals make their own consumption choices. This justifies the doctrine of consumer sovereignty that underlies standard lessons of economics: for example, that lump-sum grants are more efficient than price-changing subsidies or government grants in kind. An obvious corollary is that consumption choices made by others tend to generate less satisfaction than one’s own choices

Lester Thurow ("Cash Versus In-Kind Transfers", 1974):

the received wisdom of economics seems to support transfers in cash (the 'New Federalism') rather than in kind. Governments may modify the market distribution of purchasing power, but then should stand aside and allow consumer sovereignty plus competitive markets to work. Any further intervention lowers consumer utility below what it otherwise could be. In a federal government, presumably an ideal system of cash transfers would consist of unrestricted cash transfers from the federal government to individuals and to state and local governments, who would in turn make unrestricted cash transfers to individuals. The result would be an optimum distribution of income within each area with each individual free to make his own expenditure decisions.


†I avoid the term consumer sovereignty because it is a rather muddled and vague term that has at least two distinct interpretations other than the one given above. Rather than use the term consumer sovereignty at all, to express the ideas discussed here, I would simply say that:

  • "Each individual is the best judge of her own welfare"; and
  • "In general, cash transfers are better than in-kind transfers".
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Free to Choose by the 1976 Nobel Prize winner Milton Friedman.

You can hear the arguments directly from Friedman in this ten part video.

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