John Kenneth Galbraith Biography, Economist Galbraith Economics

John Kenneth Galbraith (1908- ) represents the first American economist
since Veblen to be widely read by intellectuals among the general public. Born in Canada, he did graduate work at Berkeley and majored in agricultural economics. His experiences have been varied: he has been a government official during World War II, an editor of Fortune magazine, an adviser to Democratic politicians on the state and national levels, ambassador to India, professor of economics at Harvard, and president of the American Economic Association. An unusually gifted writer, he has published a number of books on subjects outside the scope of economics as well as many in that field. His writings in economics have been addressed to a large audience; several, in fact, have been bestsellers on the nonfiction lists. Annoyed by his criticism of orthodox economic theory and by his popularity, some of his academic colleagues have tended to regard him as a fuzzy-thinking social critic rather than an economist. But with his usual wit and charm, he has replied to these charges by admitting his guilt in writing in clear English so that he can be understood rather than following the lead of fellow economists and being incomprehensible.

Like many other heterodox writers, Galbraith has offered a criticism of accepted economic theory without providing a well-defined and logically con­sistent alternative. He long ago gave up trying to change the profession; he does not seem to care whether or not any new theoretical structure emerges to conform to his vague, tentative formulations. Similarly, his analysis of the American economy is more concerned with explaining its present operation than speculating about its future course: "On the whole, I am less interested in telling where the industrial system is going than in providing materials for consideration of where it has arrived."

To give an idea of Galbraith's approach, let us briefly consider three of Galbraith's major economics books, American Capitalism (1952), The Affluent Society (1958), and The New Industrial State (1967), and then attempt to discover unifying themes within them.

Countervailing power. American Capitalism begins with a long criticism of orthodox economic theory. The major deficiencies of conventional theory, Galbraith contends, are that (1) it is too narrow in its conception of the scope of economics—it does not address issues of economic and political power—and (2) it draws incorrect conclusions concerning the working of the American economy. One of the major conclusions of theory is that any deviation from competition in markets will result in a less than optimal allocation of resources. Yet an examination of the American economy reveals that monopoly and oligopoly are not mere aberrations from some normal or usual market structure; rather, they are the essence of the economy. Applying orthodox theory to the prevailing economy, we would have to conclude that resources are not efficiently allocated. But Galbraith asserts that the economy has performed rather well and that resources are not being inefficiently allocated. Thus, he points to a para­doxical situation: "In principle the economy pleases no one; in practice in the last ten years it has satisfied most."

Galbraith then offers a new analysis of American capitalism to explain why the economy continues to work when (according to orthodox theory) it is seriously out of kilter. He contends that when competition began to decline and the economic power came to be concentrated more and more in the hands of large corporations, new forces arose to restrain or "countervail" against the power of the corporations:

In fact, new restraints on private power did appear to replace competition. They were returned by the same process of concentration which impaired or destroyed competition. But they appeared not on the same side of the market but on the opposite side, not with competitors but with customers or suppliers. It will be convenient to have a name for this counterpart of competition and I shall call it countervailing power.

Competition as the regulatory mechanism of the economy, then, has been superseded by countervailing power, says Galbraith. Like competition, counter­vailing power is a self-generating regulatory force: power arising at one point in the economy begets a countervailing power. Galbraith then proceeds to give examples of this hypothesis: the growth of large corporations led to the growth of powerful unions in the same industry; the power of the large manufacturer was countervailed by the power of the large retailer; and the continuing government policy has facilitated the growth of countervailing power. Although he identifies areas of the economy in which countervailing forces do not effectively subdue the exercise of economic power, Galbraith contends that it is a singularly important factor in most of the economy. American Capitalism leaves anyone who accepts Galbraith's argument feeling generally optimistic about the workings of the economy.

The orthodox theo
ry that equates monopoly power with illfare, Galbraith says, is wrong. The self-generating character of countervailing power results in an economy shot through with monopoly power, but one that nevertheless produces welfare for its society. Galbraith's invisible hand has replaced Adam Smith's invisible hand. He does note one significant case in which countervailing power does not operate: "It does not function at all as a restraint on market power when there is inflation or inflationary pressure on markets."9 During these periods, the powerful unions and corporations find that "it is to their mutual advantage to effect a coalition and pass the costs of their agreement along in higher prices."10 We will return to the concept of countervailing power after reviewing two other works by Galbraith.

John Kenneth Galbraith The Affluent Society. Whereas the tone of American Capitalism is optimistic, the tone of The Affluent Society is mixed. In this book, Galbraith extends some of the material only briefly outlined in the earlier work and concludes that a fundamental misallocation of resources is occurring in the economy. Whereas American Capitalism focuses on the efficiency of resource allocation in the private sector, The Affluent Society is concerned with the division of total output between the public and private sectors. Galbraith begins with another attack on orthodox theory and, phrasemaker that he is, coins a term to apply to theories he rejects: the conventional wisdom. Because the conventional wisdom of orthodox price theory was formulated at a time when societies were concerned about providing basic necessities, the theory focuses on scarcity. Observation of the American economy reveals, however, that for the most part we have solved the problem of scarcity and are now providing, in the private sector of the market, goods of a low order of urgency. Galbraith finds it interesting that as our production of goods has increased, our concern for producing even more goods has increased as well. Part of the reason for our fixation on production, for our GDP cult, is that the problems of unequal distribution of income, individual insecurity, and depression are relieved or solved by an ever-growing output. But the primary reason is that consumer wants are manipulated by the producers so that consumers feel a deep need for the products of an affluent society. Orthodox price theory assumes that individual consumer wants are given; they come from within the individual. It is the sovereign consumer that directs the allocation of resources to meet his or her needs. Galbraith maintains that this theory is not applicable to the modern affluent society, in which producers create the desire for their products. The process by which "wants are increasingly created by the process by which they are satisfied"11 Galbraith terms the dependence effect.

The proposition that consumer wants are for the most part created by producers through the dependence effect does serious damage to orthodox price theory. It demands, in fact, that the entire theory of consumer behavior be rewritten and that the notion of consumer sovereignty be completely exploded. Concern for production and economic growth is seen to be misguided. "One cannot defend production as satisfying wants if that production creates wants."12 Welfare economics becomes a shambles. But the main purpose of the concept of the dependence effect in the Galbraithian system is to cast light on problems concerning the proper size of the public and private sectors of the economy. Even though consumers are constantly being reminded of their immediate needs for a new automobile, an electric toothbrush, or a deodorant that will improve all aspects of their lives, there is no comparable dependence effect for public goods. This leads to a social imbalance, in that we produce and consume large volumes of high-quality consumer goods and low amounts of inferior public goods. Galbraith graces this point with some of his best satirical writing:

The contrast was and remains evident not alone to those who read. The family which takes its mauve and cerise, air-conditioned, power-steered, and power-braked automobile out for a tour passes through cities that are badly paved, made hideous by litter, blighted buildings, billboards, and posts for wires that should long since have been put underground. They pass on into a countryside that has been rendered largely invisible by commercial art. (The goods which the latter advertise have an absolute priority in our value system. Such aesthetic considerations as a view of the countryside accordingly come second. On such matters we are consis­tent.) They picnic on exquisitely packaged food from a portable ice box by a polluted stream and go on to spend the night at a park which is a menace to public health and morals. Just before dozing off on an air mattress, beneath a nylon tent, amid the stench of decaying refuse, they may reflect vaguely on the curious unevenness of their blessings. Is this indeed, the American genius?

Orthodox theorists, quick to recognize the damage that the concept of the dependence effect does to price theory, have not accepted this Galbtaithian thesis. But he anticipates rejection of his ideas by the keepers of the conventional wisdom and envisions them saying, "It is a far, far better thing to have a firm anchor in nonsense than to put out on the troubled sea of thought."

The New Industrial State. Nine years aftet the publication of The Affluent Soci­ety, Galbtaith again set sail on the troubled sea of thought in The New Industrial State. Chatactetistically, he provokes orthodox theorists with biting comments. "The problem of economics ... is not one of original error but of obsoles­cence."15 As an example of the conventional wisdom, Galbraith selects Nobel Prize-winning Paul Samuelson's elementary textbook, which dominated the market for elementary textbooks in economics from 1947 until the 1970s. Those purveying the conventional wisdom say, "Better orderly error than complex truth."16 In The New Industrial State Galbraith raises new questions and comes to new conclusions about American capitalism. In his previous work he suggested in his discussion of the dependence effect that the orthodox theory of demand was incorrect. In The New Industrial State, he completes his criticism of orthodox price theory by criticizing the theory of firm behavior and supply. He then ties it all together to reveal that the orthodox description of the market process is largely wrong.

The utilization of modern technology requires large-scale firms. With the growth of these firms has come a separation of ownership and control; those who control firms are paid managers who form part of the technostructute of the society. In order to avoid risk and eliminate uncertainty, the firms encourage the government to stabilize the economy; they cooperate with unions; they invest out of retained earnings as much as possible; but above all they manage the preferences of consumers. Although this involves planning, firms do not plan in order to maximize profits, as is assumed by orthodox price theory; their primary goal is continuity of operation or survival of the firm. Once the firm achieves this security, it begins to think about growth in sales. Thus, Galbraith extends and amplifies his concept of the dependence effect—that wants are created by the process by which they are satisfied—to show (1) that the growth of technol­ogy and large-scale firms has created a necessity for order in the economy with a minimum of risk and uncertainty; and (2) that planning, which includes the management of consumer preferences, is now an essential part of the economy. Orthodox theory states that the market works through sovereign consumers, who give instructions to profit-maximizing firms by means of market prices. Galbraith calls this myth "the accepted sequence." He suggests that in markets in which the corporation is large and powerful, "the producing firm reaches forward to control its markets and on beyond to manage the market behavior and shape the social attitudes of those, ostensibly, that it serves." He calls this more accurate description "the revised sequence."

Let us now state the thrust of Galbtaith's criticism of orthodox price theory. He maintains that its theories of consumer and firm behaviors are incorrect and that its view of the firm's responding to the direction of the household is wholly inaccurate when the firm is large and powerful. If he is correct, then it follows that the policy recommendations of orthodox theory are without foundation, especially the view that with laissez faire there will be an optimum allocation of tesoutces:

Once it is agreed that the individual is subject to management in any case—once the revised sequence is allowed—the case for having him free from (say) govern­ment interference evaporates. It is not the individual's right to buy that is being protected. Rather, it is the seller's right to manage the individual.

One of the undesirable consequences flowing from the new industrial state, Galbraith further contends, is that our social attitudes are shaped by the technostructure. The technostructure produces goods and identifies social wel­fare with output, thereby rationalizing its role in society and providing a national purpose for itself. The state supports the technostructure in promoting social attitudes that extol the quantity of goods produced by the economy as opposed to the quality of life in the society. Our educational system has already to some extent joined in this cult of GDP although there is still a possibility that the uneasiness educators and others feel with regard to the country's obsession with production will manifest itself in a critical reappraisal of the direction of our economy and society. "The danger to liberty lies in the subordination of belief to the needs of the industrial system."

An overview of Galbraith's evolving thought reveals some contradictions. American Capitalism projects a basically optimistic outlook about the future of capitalism, because countervailing power can be expected to lead to reasonable efficiency in the economy. The power of the large corporation is not necessarily undesirable if it is countervailed. Although we cannot see the future with certainty, the picture sketched by Galbraith in The Affluent Society and The New Industrial State is dark and gloomy. He is suggesting in these works that even though technological development has made it possible to solve our problems of production and scarcity, we now stand in great danger of becoming servants of the industrial system rather than its masters. Some hope exists if the intellec­tuals will reflect on these questions and become a force to redirect our society away from its concern for more production and toward a better quality of life. But what will happen remains to be seen:

If the educational system serves generally the beliefs of the industrial system, the influence and monolithic character of the latter will be enhanced. By the same token, should it be superior to and independent of the industrial system, it can be the necessary force for skepticism, emancipation, and pluralism.