Consumer sovereignty is one of several economic theories that attempt to explain the dynamics driving the relationship between buyer and seller. Economists who advocate the theory of consumer sovereignty claim the element driving both manufacturing and consumption is the consumer. A keystone of this theory rests in the belief that consumers will consistently act in a rational manner.
Adherents to this theory typically believe that rational consumer behavior will collectively resolve inequities in the system. As a result, these advocates say a rising tide occurs. 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 a weakness inherent in this theory. These critics point to advertising and marketing efforts that artificially manufacture desires in consumers. This is referred to as manufactured demand.
As a result of manufactured demand, critics say, the system does not produce rational decisions among consumers. Critics claim the idea of the rational consumer merely reflects the desires of producers to sell more goods. Some environmental advocates claim this economic system produces destructive effects by encouraging overconsumption.
Advocates of this theory say a consumer-driven economy will eventually work out inequities, lifting up all citizens in a rising tide. Others disagree that consumers are consistently rational. These people say suppliers have the power to create desires through marketing. In this viewpoint, these artificial desires leave the consumer with an artificially created need. The influence of advertising in the theory of consumer sovereignty is a point of debate among economists.
John Kenneth Galbraith, a proponent of Keynesian economics, took issue with a central tenet of consumer sovereignty theory. This tenet claimed economics could be distilled into economic laws. Galbraith disagreed, saying the interactions between consumers and suppliers involve cultural beliefs and elements. He argued against claims that consumer sovereignty functioned equitably without governmental influence. As a result, some Keynesian theory proponents say consumer sovereignty, in practice, creates undesirable macroeconomic effects.
Consumer sovereignty has its roots in neoclassical economic theory, which arose in the late 19th century. Preceding the development of neoclassical economic theory was classical economic theory in the 18th century. Adam Smith was a proponent of this theory, which argues that the driver of the economy is the value of the produced goods as they relate to underlying costs.