He says that he is making a large batch of units to sell and the representative suggests that he takes pictures of the process to prove he is assembling them himself.

Why is he refusing to comply? At first glance it sounds like Etsy is screwing the little guy, but he is being somewhat unreasonable if he is refusing to provide proof which would only require a couple minutes of his time.

He didn't refuse to comply. He stated he's losing the potential to increase his user base from daily follows due to the lack of his store being open. Also Etsy closed his entire store for one offending item. If he has other items in his store then they are denying him of his income. This could slow down the creation of the new items or halt them completely if he was dependent on the income for this.