Consumer sovereignty theory claims that consumers drive manufacturing and consumption, and rational behavior will resolve inequalities. Critics argue that advertising creates artificial desires, leading to excessive consumption and negative effects. John Kenneth Galbraith disagreed with the theory, stating that interactions involve cultural elements and require government influence. The theory has roots in neoclassical economic theory and classical economic theory.
Consumer sovereignty is one of several economic theories that attempt to explain the dynamics that drive the relationship between buyer and seller. Economists who defend the theory of consumer sovereignty claim that the element that drives manufacturing and consumption is the consumer. A cornerstone of this theory is the belief that consumers will consistently act rationally.
Adherents of this theory generally believe that rational consumer behavior will collectively resolve inequalities in the system. As a result, these advocates say there is a rising tide. Over time, this tide will lift the population as a whole to a higher standard of living. This theory argues that, collectively, a population will produce a positive macroeconomic outcome through individual consumption decisions.
On the other side of the argument are those who say there is an inherent weakness in this theory. These critics point to advertising and marketing efforts that artificially manufacture consumer desires. This is called manufactured demand.
As a result of manufactured demand, critics say, the system does not produce rational decisions among consumers. Critics claim that the idea of the rational consumer merely reflects the desires of producers to sell more goods. Some defenders of the environment claim that this economic system produces destructive effects by encouraging excessive consumption.
Proponents of this theory say that a consumer-driven economy will eventually resolve inequalities, lifting all citizens on a rising tide. Others disagree that consumers are consistently rational. These people say that suppliers have the power to create desires through marketing. In this view, these artificial desires leave the consumer with an artificially created need. The influence of advertising on consumer sovereignty theory is a point of debate among economists.
John Kenneth Galbraith, an advocate of Keynesian economics, took issue with a central tenet of consumer sovereignty theory. This principle stated that economics could be distilled into economic laws. Galbraith disagreed, saying that interactions between consumers and suppliers involve beliefs and cultural elements. He argued against claims that consumer sovereignty functioned equitably without governmental influence. As a result, some advocates of Keynesian theory say that consumer sovereignty, in practice, creates undesirable macroeconomic effects.
Consumer sovereignty has its roots in neoclassical economic theory, which emerged in the late 19th century. Prior to the development of neoclassical economic theory was classical economic theory in the 18th century. Adam Smith was an advocate of this theory, which argues that the driver of the economy is the value of the goods produced as they relate to underlying costs.
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