Reference no: EM1327026

Galbraith undermines assumptions of consumer demand

How did Galbraith undermine the two assumptions of consumer demand.

Neoclassical theories of consumer choice do not question the origin of wants,wheras Galbraith tries to analyze on how consumers go about formulating those wants in the first place. He stresses the fact that wants must be created through advertising and based on his view production cannot be seen as satisfying if wants need to be created artificially. The neoclassical theory of consumer demand, with its emphasis on consumer sovereignty, implies that the market dictates the optimal composition of output and allocation of resources. But this perspective makes no sense to Galbraith: "One cannot defend production as satisfying wants if that production creates the wants."

Galbraith's theory of consumer demand has an important policy implication in terms of underallocation of resources to public goods. This circumstance is called "social imbalance." Since advertising focuses on selling private goods and not on public goods, this orientation leads to shifting resources away from public goods that have greater inherent value. For example, automobiles are seen as being more important than new roads; vacuum cleaners in the home are perceived as more valuable than street cleaners. Household items, and entertainment products take on a greater aggregate importance than schools, courts, or public playgrounds. According to Galbraith, one way to cure this imbalance would be "to impose sales taxes on consumer goods and services, using the proceeds to increase the availability of public sector goods and services.