John K. Galbraith Economist Economics

John Kenneth Galbraith Economics; Countervailing Power?

American Capitalism first appeared in 1952 when Galbraith was already 44 years of age. In it he argued that the powerless perfect competitor of textbook economic theory has in sector after sector of economic life been displaced by the powerful organisation (the giant producer, the nation-wide retailing chain, the huge trade union), but that, because power inevitably develops in pairs (because the original power of a corporation, to take an example, inevitably begets the countervailing power of a union, anxious both to defend the interests of the weak and to tap the profits of the strong), the position of the consuming public remains attractive even without the use of restrictive practices legislation to break up large organisations into small. The check on the abuse of economic power, in other words, is no longer to be expected on the same side of the market (for large size of firm, and the associated market concentration, is unavoidable if the producer is to be capable of supporting the risks and costs of technological progress) but rather from organisations on the opposite side of the market; and the State, recognising that one self-stabilising mechanism has now been replaced by another, should confine its intervention beyond the law and order minimum to reinforce­ment of positions of weakness where countervailing power appears slow to develop unaided.

The concept of checks and balances in economic life reflects an interesting attempt to apply a political model to an economic problem (a model, moreover, which remains implicit in all of Galbraith's later work, even though he made no further mention by name of countervailing power), and is significant for its stress on the importance of power in economic life (since it is truly misleading to assume, as many introductory textbooks tend to do, that economic actors are powerless automatons). At the same time, however, the specific formulation of the theory of counter­vailing power is such as to leave it open to a certain number of criticisms. These include the following.

First, Galbraith seems to argue in places as if the primary function of countervailing power is the promotion of consumer welfare (as where he asserts that retailing chains challenge the dominance of oligopolistic producers by means of the threat to duplicate via own-brands, and then pass the resultant gains on to the shopper), but then declares categorically that the principal service performed is in reality 'the minimization of social tension' (even at the cost of consumer welfare); and the confusion as to the relationship between these two objectives is heightened by doubts as to whether any balance of power (assuming it could in practice be identified as 'correct' or 'optimal' in some objective sense, and is not merely the balance born of stalemate and inertia) will ever be capable of reducing general (in contrast to highly specific) social tensions.

Secondly, Galbraith does not make clear how the consumer interest is to be defended (for if a powerful union confronts a powerful producer, it is to be frank much more likely that it will seek to redistribute existing super-normal profits towards its members than that it will press for their elimination through an expansion in sales and a reduction in prices). In 1952 he suggested that retailing chains would exercise countervailing power on behalf of powerless shoppers; in 1954 he explained that the chains would do this (would, in other words, pass on to the consumer whatever gains they were able to wrest from the producer) because of intensive competition among themselves and on the same side of the market; and in 1973 he recommended that the consumer interest should itself directly acquire power (an argu­ment in favour of Ralph Nader and the consumerist move­ment).

Thirdly, Galbraith argues as if original power typically gene­rates countervailing power; whereas the case of the consumer reminds us that power, historically speaking, simply does not always develop in pairs, and the case of the National Health Service illustrates the proposition that giant organisations often develop for reasons (the desire to acquire genuine economies of large scale, for example, or to attain broadly-defined social and philosophical objectives) totally unconnected with the pre-existence of lucrative bastions to storm. Regarding State support to positions of weakness, moreover, Galbraith himself recognises that the weak must first have some power if they are ever to win the ear of legislators: even political intervention is evidently not automatic, and the social mechanism clearly not therefore self-stabilising.

Fourthly, Galbraith states that whereas unions in a stagnant economy exercise their power against their employers, they in a buoyant economy join their power to that of their bosses, since the corporation does not then resist wage-claims but merely passes the burden of cost-push inflation on to the consumer (in the form of higher prices) or back to the shareholder (in the form of lower dividends). Apart from the controversial diagnosis of cost-push inflation in that sector of the economy dominated by powerful unions and giant firms (Galbraith indeed has next to no policies for the control of demand-pull inflation since he totally rejects monetary policy and, as for fiscal policy, insists that taxation may be increased but that government expenditure must never be cut) and the assertion that the shareholder is powerless (the owners of a low-dividend firm might at the very least sell out, leaving the shares undervalued and the organisation ripe for a take-over bid; and the fact that large blocs of shares are concentrated in the hands of founding families and institutional investors suggests that capitalists may after all be able to influence managers), Galbraith's insistence that countervailing power in the labour market no longer serves the public interest in a period of steadily rising prices paved the way for one of the most controversial of all his conclusions: there is a need in inflationary times for the institution of a permanent and fully-comprehensive prices and incomes policy to plan factor-rewards for all economic actors able to exercise power in the economy.