November 29, 2013
John Kenneth Galbraith
I am halfway through Steven P. Dunn’s book, The Economics of John Kenneth Galbraith: Introduction, Persuasion and Rehabilitation (Cambridge; Cambridge University Press, 2011). It is an excellent book on this much maligned economist, whose books like The Industrial State, The Affluent Society, American Capitalism:The Concept of Countervaling Power, The Great Crash, 1929, Economics and The Public Purpose, among others, are classics.
I recommend Dunn’s book to those who seek to understand Economics as a social science and JKG’s criticism of “imitative science” (economics is not physics!). And here is why.–Din Merican
The Economics of John Kenneth Galbraith
Cambridge University Press
9780521518765 – The Economics of John Kenneth Galbraith – Introduction, Persuasion, and Rehabilitation – By Stephen P. Dunn
Though economic analysis and general reasoning are of wide application … every change in social conditions is likely to require a new development of economic doctrines.
Alfred Marshall (1920: 37)
If there were justice in the world, John Kenneth Galbraith would rank as the twentieth century’s most influential American economist. He has published several books that are among the best analyses of modern US history, played a key role in midcentury policymaking, and advised more presidents and senators than would seem possible in three lifetimes. Yet today, Galbraith’s influence on economics is small, and his influence on US politics is receding by the year.
J. Bradford DeLong (2005: 126)
In the tributes and obituaries that followed John Kenneth (Ken) Galbraith’s death on April 29, 2006, much was made of his long and varied career, as well as his closeness to power. John Kenneth Galbraith was a distinguished Harvard economist, an accomplished diplomat, a political activist, a confidant and adviser to presidents, a memoirist and novelist, and one of the best-selling economic writers of his time. The conventional reflection noted his colorful life, celebrated his mordant wit and prose, yet generally castigated his theorizing as being obsolete. This is a major travesty. Galbraith was one of the leading progressive intellectuals of the post-World War II period who, though part of the establishment, was happy to point out its self-serving interests and convenient myths.1 But he was more than just a gadfly. He was an original theorist whose contributions are now so widely assimilated that their lasting force is easily overlooked.
Indeed, in the days and months that followed his death, and for a long time before, little serious reflection has been given to Galbraith’s enduring contributions to economic theorizing. Nobel prize-winner Paul Krugman’s (1994: 13–14) comments in Peddling Prosperity perhaps capture the standard mainstream assessment of Galbraith:
Although Galbraith is a Harvard economics professor … he has never been taken seriously by his academic colleagues, who regard him as more of a “media personality”. The contrast between public and professional perception became particularly acute in 1967, when Galbraith made a grand statement of his ideas about economics in The New Industrial State, a book that he hoped would come to be regarded as being in the same league as John Maynard Keynes’s General Theory or even Adam Smith’s Wealth of Nations. The book was rapturously reviewed in the popular press, but it met with indifference from the academics. Galbraith’s book wasn’t what they considered real economic theory. Not incidentally, the academics were right in believing that The New Industrial State could be safely ignored.
What is remarkable about such comments, however, is that Krugman himself seems to be evolving into a Galbraithian. Over the last twenty years, Krugman has increasingly moved into the space once occupied by Galbraith.2 In Peddling Prosperity, for example, Krugman (1994) attacked “supply siders” and “strategic traders.” In The Return of Depression Economics, Krugman (2008c) heralded the return of Keynesianism. In The Conscience of a Liberal, Krugman (2007) argued that “movement conservatism” has defended and driven inequality, exploiting cultural and racial divisions to its advantage. And throughout he has attacked the misleading fictions promulgated by textbook economics.
This is a conscience that Galbraith would have applauded. Over the course of his major trilogy – The Affluent Society (1958a), The New Industrial State (1967a), and Economics and the Public Purpose (1973a) – Galbraith developed a system of thought that attempted to shed light on many contemporary concerns such as: the overproduction of private goods and the underproduction of public goods; the increasingly superfluous nature of much technical innovation directed at socially irrelevant commodities; the failure of economic growth to ameliorate enduring social problems; the uneven distribution of government expenditure, reflected in excessive spending on the military and other forms of social infrastructure, e.g. roads, to the relative neglect of others, e.g. parks, cultural activities, environmental protection, mass transit, and public housing, which are all public goods whose very legitimacy is hotly disputed; the increasingly skewed income distribution between different sectors and personnel; the enduring distinction between the high-wage and low-wage industries; the unresponsiveness of the modern corporation, governments and international institutions to public pressure and opinion; the problems of economy-wide coordination; and the continuing fear of inflation as opposed to deflation. Many of these concerns remain pressing today.
Indeed Krugman’s discussion of contemporary issues in his New York Times column increasingly echoes Galbraith’s analysis of the new industrial state (Duhs, 2008). Krugman’s analysis of contemporary events is increasingly Galbraithian in orientation, concentrating on the major anxieties of our time. Krugman, like Galbraith before him, increasingly focuses on the divergence between the interests of the conservative and corporate elite and the wider public interest in his analysis of: the soaring wealth of the rich and rise of inequality; the bias of the tax system toward the affluent; the rise in obesity and the role of the large food corporation in promoting the consumption of high-fat, energy-dense foods; the need for the good society to deliver a universal health insurance model; the manipulation by oil and automobile companies of governments and popular opinion, obfuscating understanding and limiting global response to the threat of climate change; Enron and their fabrication of the 2001 Californian energy crisis; Iraq, Halliburton, and the cozy relationship between the military industrial complex; the obsession with increased growth at the expense of happiness; and the cronyism of the Bush administration. All are anxieties similar to ones that Galbraith analyzed. What is more all can be explained by Galbraith’s theoretical framework.
Stigler, Friedman and JKG
Nevertheless, in the conventional wisdom, the assessment continues to be that Galbraith’s analysis, as exemplified by The New Industrial State, has not come to pass. It was either wrong in its time (Solow, 1967; Gordon, 1968, 1969; Demsetz, 1974; Friedman, 1977) or it is wrong for our times (Krugman, 1994, 2008c; McCloskey, 2007). Either way, The New Industrial State has been eclipsed and Galbraith must therefore be unceremoniously consigned to the dustbin of history.
A journey through economic time
The standard view is that Galbraith painted a picture of an autonomous bureaucracy that manipulated consumers and society, unfettered by either competition or shareholders. This view has since been eclipsed by the return of the market. Paul Krugman, for example, has suggested that the academics who rejected The New Industrial State were right, arguing that:
History has not treated the book kindly. Galbraith began it in self-conscious imitation of Adam Smith’s memorable description of a pin factory, with an account of the 1964 launch of the Ford Mustang. Starting from that example, he argued that technology was pushing us inevitably into an age of ever greater dominance by giant corporations. These corporations would be able, through market research and advertising, to predict and indeed control demand for their products; they would be run by technocratic managers who would be increasingly independent of the stockholders who nominally owned the companies. And like the automobile companies, they would be virtually immune to the vagaries of market forces.
Need it be pointed out that none of this was remotely on target? The role of giant corporations in the US Economy has been shrinking, not rising, for the past two decades, with the great bulk of the job growth among smaller firms. Many of our biggest companies – from Sears to IBM – have been spectacularly unable to get consumers to buy their wares. Those supposedly autonomous managers, far from being able to ignore stockholders, now live in terror of buyouts from investors willing to promise stockholders a higher return. And nobody, least of all the auto companies, has been insulated from the market. (Krugman, 1994: 13)3
Galbraith’s economist son, James Galbraith (right) (2008a: 115), also appears to agree with this assessment: “When my father published The New Industrial State in 1967, the great industrial enterprise seemed a stable, even permanent, and largely self-stabilizing element of the postwar American scene … But the system of large organizations as my father described it was far less stable than it seemed. Already in the 1970s, it began to suffer the intrusion, on its home markets, of a competing system: the rising industrial colossus of Japan.” In one sense both Krugman and James Galbraith are right. The unchanging dominance of the large firm projected in The New Industrial State does appear to have been challenged by the information revolution and the emergence of new large and growing firms such as Wal-Mart, Samsung, Toyota, Honda, Nissan, Sony, Google, Vodafone, Apple, and Microsoft, to name but a few.4
This assessment also appears to have been accepted by Galbraith himself. In the fourth edition of The New Industrial State, he conceded that he “did not see the development of the foreign, most notably the Japanese, competition to which [the corporation] would be subject … No one can doubt that in our older industries this competition has substantially impaired the certainty and effectiveness of the planning process” (Galbraith, 1967a: xxxi–xxxii). Similarly, in an important symposium in the American Economic Review on “The New Industrial State after twenty years,” Galbraith (1988: 375) remarked that: “There have also been some important microeconomic developments that I did not foresee. In 1967, my view was, in some measure, of a closed American-dominated corporate structure extending its reach internationally by way of American multinational or transnational enterprises. I did not foresee the invasive thrust into this structure by Japan and other countries. This, to put it mildly, has introduced a new element, substantially beyond the influence and control of the firms of the corporate or planning system.”
This seems to suggest that Galbraith must be appraised in his time and that his analysis is irrelevant for our times. Indeed James Galbraith argues that his father’s analysis represents an analysis of the postwar world of that time and should be considered on those terms:
my father’s vision of an economy dominated by large national corporations as of 1967 was not an error. The mid-century was as he said it was. Nor was it a glance at an interlude between two eras when free markets actually prevailed. It was instead the portrait of a way-station, a stage in the evolution of the world business system. The postwar dominance of the large American industrial corporation counterbalanced by government and organized labor was a fact … It was simply not a permanent fact … What some interpreted as showing up the failings of a book is more fairly seen as a process of fundamental change, of evolution and of decay, and especially the redistribution of the power in the industrial system itself. (James Galbraith, 2008a: 117)5
The facts, however, are not as clear-cut as Krugman and others would lead us to believe. Technology, the coping stone of The New Industrial State, is even more important today than in the midcentury. It is one of the decisive factors in national success. This is why another famous Harvard professor, Michael Porter (1990: 638), acknowledges that: “The quality of human resources must be steadily rising if a nation’s economy is to upgrade.” And it is clear that the large firms that are largely responsible for the research and development that drives technological development no longer dominate national economies, but instead now straddle the global economy (Porter, 1990; James Galbraith, 1998).
John Kenneth Galbraith and Kitty
General Electric, BP, Toyota, Shell, Exxon Mobil, Ford, Volkswagen, Chevron, Siemens, Nestlé, BMW, IBM, Pfizer, Johnson & Johnson, and Proctor and Gamble continue to dominate the world stage. Large firms that continue to dominate the motor, oil, food, pharmaceutical, electrical, and telecommunications industries, controlling major flows in trade and production – something we discuss below in chapters 7, 8, and 11 below. Similarly those industries that have delivered strong economic performance and investment over time – the computer, chemical, aircraft, missile, pharmaceutical, photo, and electronics industries – are also the most technologically advanced and invariably supported by state spending (James Galbraith, 1998: 117–32). Of course the wider financial turbulence of the world economy makes the position of large firms more precarious. But there is no doubt that the dominance of large firms continues to characterize modern economies. This at least deserves further reflection.
As we shall see, the emergence of what is referred to as “global competition,” can also be reinterpreted through the lens of American Capitalism, The New Industrial State, and Economics and the Public Purpose. Although many commentators and economists argue that the massive increase in global merger and acquisition activity reaffirms the ascendancy of the market, it also exemplifies the changed nature and dynamics of competition in modern economy that Galbraith identified. Competition in the modern economy has been transformed from price competition into other forms of competition such as advertising, mergers and acquisitions, product innovation, as well as the development of new sources of countervailing power. For Galbraith the competition which characterizes the modern economy is markedly distinct from the “perfect” competition depicted and predicted by the conventional wisdom.
Galbraith’s analysis of the firms’ focus on growth more than ever characterizes the competitive process and the modern economy, as exemplified by the exponential rise in the numbers of mergers and acquisitions (see chapters 7, 8, and 11 below). And much of the talk of global competition also reflects the emergence of new corporate sources of countervailing power. Much of global competition has been driven by the consolidation of the “buy-side” of various global markets, as exemplified by the rise and rise of the retail power of Wal-Mart (see Reich, 2009). This reflects Galbraith’s (1952a: 119) thesis in American Capitalism that “in the typical modern market of a few sellers, the active restraint is provided not by competitors but from the other side of the market by strong buyers.”
What is more, although we have undoubtedly witnessed a rise in the number of small firms over the 1980s and 1990s, this should not be interpreted uncritically as reflecting the increased intensity of global competition. The outsourcing of production, which has reinforced the dominance and position of the large firms that span the global economy, has driven much of this trend. As I highlight below, one of the implications of Galbraith’s approach to the firm is that it encompasses subcontracting and market relationships, as well as internal operations that are more clearly under the control of the large corporation (Cowling and Sugden, 1998a, 1998b, 1999; Dunn, 2001a, 2001c, 2008a). Consistent with Galbraith’s (1973a) bimodal view of the modern economy, the planning system continues to dominate and exploit the market system, at home and abroad (see chapters 5, 7 and 8 below).
This means that focusing on the traditional boundaries of the firm, relying on conventional measures of concentration, results in an under-appreciation of the power and influence of the modern technostructure. By narrowly focusing on the rise in the number of small firms, we overlook the actual increase in scope of the large firm’s influence and power. We underestimate both the extent of its control of production and the subsequent degree of concentration and influence of the multinational enterprise (Cowling and Sugden, 1998b; Cowling, Yusof, and Vernon, 2000; Cowling and Tomlinson, 2005; Granovetter, 1998; Klein, 1999). As Reich (2009: 216) remarks, this “is especially true under supercapitalism, when companies are quickly morphing into global supply chains.” Domestic and overseas outsourcing, which in the conventional wisdom is interpreted as a response to global competition, that is reducing the scope and influence of the firm, can instead be viewed as consolidating the power of the technostructure. The subcontracting relationships of the large, brand-managing firm consolidate its global power and reach (cf. Klein, 1999).
Similarly the rise of Japanese and Asian competition, of the rise of Toyota, Honda, Nissan, Mitsui, Mitsubishi, Sony, and Hitachi, can be also viewed as consistent with Galbraith’s (1967a) thesis in The New Industrial State, even if this was something that he did not himself recognize.6 Cowling and Tomlinson (2000), for example, note that the entrance of large Japanese firms onto the Global Stage reflected their productive and technological virtuosity, as well as the state support provided to them by the Ministry of International Trade and Industry (MITI).7 The modern Japanese corporation led to the emergence of a new affluent Japanese society which, towards the end of the postwar period, was approaching saturation point for its products in its domestic economy. It therefore required new outlets to buy its products (cf. Galbraith, 1973a: 180–91). As Cowling and Tomlinson (2000: F367) record: “Initially, surplus production could be satisfied through exporting to Western markets, a policy that resulted in consistently large trade surpluses. However, the threat of retaliatory trade barriers, especially from the United-States, threatened future export growth and, in response, the larger Japanese firms considered the transnational option.”8 This is consistent with Galbraith’s (1973a) analysis of the transnational firm, considered in Economics and the Public Purpose – something we explore in chapter 8 below. What is more, it is important to note that such a Galbraithian analysis of the emergence of Japanese competition does not rest on the view that Japanese capitalism was a new and superior brand, but rather argues that it reflects the dynamics of the modern firm predicted by the New Industrial State.9
The large firms that characterize the planning sector of the economy also continue to spend vast sums on advertising and lobbying, which has become increasingly sophisticated and targeted at eliciting the required consumer and legislative response (Packard, 1957; Gunter and Furnham, 1992; Hawkins, Best, and Coney, 1998; Heath, 1995, 1996; Weinstein, 1994; Dawson, 2003). This process has never been perfect, nor is it determinate, as Galbraith himself acknowledged. But, notwithstanding such imprecision, there is now an increasing recognition that the tobacco, pharmaceutical, oil, automobile, and food industries seek to manipulate public policy and the consumer in a manner that is consistent with Galbraith’s hypothesis (Anderson and Dunn, 2006; David, 2006; Monbiot, 2000, 2006, 2007; Krugman, 2005a, 2005c; Sample, 2007; Stiglitz, 2006; Klein, 1999; Glantz et al. 1996; Shamasunder and Bero, 2002; Moynihan, 2003a; Moynihan et al., 2002; Angell, 2004; Avorn, 2004; Goozner, 2004; Greider, 2003; Abramson, 2004; Moynihan and Cassells, 2005; Petersen, 2008; Lang and Heasman, 2004; Patel, 2008; Mayo and Nairn, 2009). Similarly there have been renewed attempts at testing Galbraith’s thesis. Lamdin (2008), for example, presents an important econometric analysis that shows that, consistent with the Galbraithian thesis, advertising and credit both have economically and statistically significant positive influences on consumption. I explore these issues below in chapters 7, 8, 9, and 11.
JKG and Medal of Freedom
Finally it is far from clear that the modern firm is now effectively policed by investors and stockholders alike (Stiglitz, 2003; Bebchuk and Fried, 2004). The widely acknowledged explosion in chief executives pay – something we examine below – raises urgent questions regarding the ability of financial markets and their associated institutions to provide effective governance and oversight of the modern firm – be they banks, energy companies, or large motor companies. This is part of what Galbraith (2004: 27) referred to as “innocent” fraud:
This fraud has accepted ceremonial aspects: one is a board of directors selected by management, fully subordinate to management but heard as the voice of the shareholders. It includes men and the necessary presence of one or two women who need only a passing knowledge of the enterprise; with rare exceptions, they are reliably acquiescent. Given a fee and some food, the directors are routinely informed by management on what has been decided or is already known. Approval is assumed, including for management compensation – compensation set by management for itself. This, not surprisingly, can be munificent … Legal self-enrichment in the millions of dollars is a common feature of modern corporate government. This is not surprising; managers set their own compensation.
What is more, the accepted practice of linking CEO pay to stock market valuations as opposed to underlying corporate cash flow – to the strength of the underlying business – can drive more serious failures in corporate governance (Bebchuk and Fried, 2004). Stock prices, which are driven by sentiment, convention, and “irrational exuberance,” can be inflated and manipulated by “serious” fraud (Forelle and Bandler, 2006). The collapse of Enron and the wrongdoing of WorldCom, Qwest, Tyco, and Xerox provide prima facie evidence of the inability of modern financial systems to police effectively large and complex corporations. As James Galbraith (2008a: 124) highlights:
What they exposed was the complete incapacity of the financial markets to oversee from the outside the inner workings of a complex financial structure. In every case – Enron, Tyco, WorldCom, and the others – financial market pressures encouraged fraud … Each such collapse was initially rewarded, not punished, by the financial markets. In no case did the financial markets detect the fraud. Quite to the contrary, the markets converted the fraudulent enterprise into a performance standard by which other corporations in the same field were to be judged. Nor did any large accounting or auditing firm blow the whistle; again to the contrary, all the major frauds had their books cleared by reputable accountants. Nor did the ratings agencies, then or later, intervene.
Such “serious” frauds raise important questions about shareholders’ ability to prevent managers in “their” corporation from pursuing dubious and illegal strategies. And although recent moves have been taken to improve accounting honesty, increase surveillance and strengthen regulation, the recent sub-prime meltdown and global economic crisis point to the continuing difficulties in effectively policing the modern corporation.10 The technostructure of the financial services industry appears to have run amok with little effective oversight from boards, banks, regulators, or governments alike. Such considerations reinforce Galbraith’s insight that the complexities of modern technologies and firms make it extremely difficult to monitor the activities of the modern army of managers, technical specialists, lawyers, accountants, public relations professionals, and marketing managers, as long as an acceptable level of earnings is posted and projected to the wider financial community (cf. Williamson, 2008).11 Modern management is not insulated from the wider financial system. But it not effectively policed by it either. This much is clear. And it must be acknowledged as such.12
© Cambridge University Press