John Kenneth Galbraith was the most widely read economist of the 20th century but he never won the Nobel Prize. This article, that I pulled out of the archives, provides an explanation. It argues that Galbraith was right about the economy for the wrong reasons. Its easier to win an economic prize if one is wrong for the right reasons. Galbraith was critical of the doctrine of consumer sovereignty which holds that consumer preferences determine the best allocation of resources. They maximize their utility when they purchase products and services. The market responds to their preferences by producing the products and services that consumers request from them. Consumer utility is thus maximized and the resources of the society are being used to maximize social welfare.
Galbraith believed otherwise. He argued that producers determine what is most convenient and profitable to produce and they depend upon marketing to develop consumer demand. It would be difficult to operate a mass production economy by any other means. Huge investments must be made to produce new products and they can't be sold in the necessary volume without marketing campaigns that stimulate the necessary demand. Of course, some heavily marketed products are not successful, but there are few examples of successful products that have not been supported by huge expenditures on marketing which determines consumer preferences. Consequently, according to Galbraith, consumers spend more money than they should on products without much intrinsic value, and they are less willing to spend money on improving their environment which would provide more intrinsic value than the luxury products that they have been sold by marketers.
Galbraith's attack on the doctrine of consumer sovereignty, and its role in maximizing social welfare, was directed right at the heart of free market economic theory. They argued that if consumers were purchasing products that did not maximize their utility, competitors would be attracted to the market by the economic profits that were being earned by the producer. They would provide alternative products that did a better job of maximizing consumer utility. Competitive markets make it impossible for producers to survive by producing products that do not maximize consumer utility.
Galbraith may have been right, but he was right for the wrong reason, according to free market doctrine. He might have done a better job of defending his position if he had been aware of research in behavioral economics today which could have been used against his critics. Individuals make consumer decisions that are heavily influenced by what other consumers are purchasing. Budweiser did not capture 50% of the US beer market by selling a product that maximized utility more than competing products. They sell their product by showing consumers enjoying their product together. Other producers do the same thing. Bud's market share gives it a huge advantage in the beer market. Its advertising costs per barrel of beer are much lower that its competitors because it sells more barrels of beer. This enables Bud to spend more dollars on advertising than its competitors that shows its target consumer group having the right kind of fun with others drinking the same product. Herd behavior has an important effect on individual behavior.
Behavioral economics also provides an answer to Galbraith's concern about consumer expenditure on luxury products that do not maximize utility. There has been an escalation of how luxury is defined by consumers. Consumers are constantly exposed to other consumers enjoying the latest essential luxury good. It is not possible to remain content with products that used to satisfy the consumer. There is always something desirable that we don't have which other people are enjoying. Galbraith would be right for the right reasons today. We do a poor job of allocating resources to maximize individual or social well being.
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