Monday, November 26, 2012

Review: Economics and the Public Purpose, by John Kenneth Galbraith

Boston: Houghton Mifflin, 1973, pp. 334.

In his 1967 book The New Industrial State John Kenneth Galbraith argued that, far from being the market-disciplined firms of neoclassical economics, the large, industrial corporations in crucial sectors like aerospace, defense, computers, chemicals and oil essentially operated like units within a planned economy.1 In Economics and the Public Purpose he put this "planning system" into the context of the larger economy, which also includes smaller, less complex enterprises that can be fairly described as still operating in a market system.2

As might be expected given the disparity in size and power between the economic units involved, the relationship between the enterprises of the "planning system," and those in the market system, is highly unequal. The large companies of the former are able to exercise considerable control over such crucial matters as the prices at which they buy inputs (through practices like vertical integration, or raising needed capital internally without turning to creditors) and sell their output (for instance, being able to tacitly avoid the more disruptive forms of competition, and pass cost increases along to customers when these are unavoidable). By contrast, companies in the market system cannot, leaving them subject to the vicissitudes of competition, and consistently derive smaller and less secure financial returns. (This is evident not just in the differing returns among the heads of these firms - the difference between the income of a Fortune 500 CEO and a small business owner, for instance - but their workers, as a comparison of the lot of a unionized autoworker with that of a fruit-picker makes clear.)

The planning system also comes in ahead of the market system where public policy and public support are concerned (as seen when one compares, for instance, the aerospace sector and the construction industry). However, both these systems still come in ahead of the broader public interest. One result is that the United States is richest in those things supplied by the planning system (like cars and consumer electronics), less well-supplied with the products of the market system (like housing), and least well-supplied by those goods which the private sector does not supply and does not value (like public transport options), making for the mix of private affluence and public squalor that he first addressed in 1958's The Affluent Society, and which he revisits here.

After presenting this comprehensive picture of the economy Galbraith devotes the last third of his book to laying out a "theory of reform." This begins with the correction of the conventional wisdom on economics (dominated by neoclassical pieties which defend the status quo rather than explaining how things actually work) and reform of the workings of the legislature (with the elimination of Congress's seniority system, a vehicle of the planning system's influence on policy, particularly important).3 However, he also considers an ambitious range of specific economic measures to the end of redressing the imbalance in development and power between the planning and market systems (Galbraith terms this "the new socialism"), and between both of these and the public sector more generally.

The market system would be aided by the encouragement of small business (and its employees) to organize, the extension and increase of the minimum wage, and the conclusion of international agreements to protect their prices and income, while government would make greater efforts to support their "educational, capital and technological" needs - in the interest of equity as well as the improvement of output in these comparatively neglected areas. Where the planning system is concerned, differentials in compensation inside companies would become an issue in collective bargaining, while the tax system would be rendered more progressive, in part through the closure of loopholes, but also the abandonment of the distinction made among types of income (as between salary and capital gains, for instance).4 Affirmative action and a guaranteed minimum income scheme would be crucial to the extension of the effort to eliminate inequality to all; environmental regulation would implement the principle of what might today be called sustainable development; and the government would assume responsibility for services the private sector does not perform well or at all (like health care, urban housing and local transport).

The program is rounded out by a number of additional measures, including the nationalization of certain corporations - those in the defense sector (given their relationship to the Federal government, in many respects already public, but in need of being reined in, especially given the arms race to which they contribute), and even large corporations where shareholder power has disappeared due to the diffusion of stock (the case for the superiority of private to public enterprise, after all, depending on the control of a self-interested owner within a free market, now vanished as a practical matter).5 There would also be a national authority charged with coordinating the planning in different industries, which in turn would coordinate the management of the international economy with its counterparts abroad. The achievement of price stability would rely less on the monetary policy he has found to be ineffectual, and much more on the use of fiscal policy (increasing and reducing not just spending but taxes as necessary), and selective price and wage controls (also an instrument for reducing inequality by limiting the divergence of wages within firms, and between economic sectors).6

Radical as some of the prescriptions seemed even at the time of writing (nationalizations, central planning, etc.), Galbraith believed that the country was already headed in this direction. Of course, the reality proved to be quite the opposite. The economic crises which had just begun at the time he was writing the book - American problems with the balance of payments, the energy crisis - proved an opportunity not for those seeking the reforms he described, but for partisans of neoclassical ideas (like Thatcher and Reagan) to reverse the movement toward more activist, egalitarian direction underway since the war.

Still, it would be simplistic to dismiss Galbraith's ideas on these grounds. Galbraith's examination of the large corporation and the small business together provides an impressively comprehensive picture of the American economy which remains useful in its broad outlines, and most of its details as well. The most significant changes in the American and world economies since his time have lain in the increased pervasiveness and density of transnational operations, and the expansion and intensification of speculative finance, which do not alter the fundamentals of the picture. Indeed, the ways in which his image has dated have in their way validated Galbraith's diagnosis of the American economy's problems (inequality, deindustrialization, balance of payments problems, environmental degradation), which have sharply worsened - in large part because those orthodoxies he so incisively attacked have predominated, and remain dominant in spite of their consistent and at times spectacular failure to deliver the promised goods.

Of course, even those who will grant his insight on that score can still take issue with his suggested solutions, which are virtually impossible to present within mainstream discussion today, and some of which he was less prone to advance in later works.7 Yet, whatever their deficiencies, regarding either their practical effectiveness or their political plausibility, the scope and ambition of Galbraith's program stands as a reminder of how timid, tepid and narrow what passes for public "debate" has become - to our great cost.

1. The presentation of the theory of the planning system is here somewhat refined over what appeared in the 1967 book. In discussing the driving imperatives of "technostructure"-dominated companies he does not write of company "social goals," or the role of "identification" and "adaptation" in the executive's attitude toward his firm. Rather he emphasizes the drive for expansion of the company, and the material enjoyments of high-ranking company officials served by such growth. He also considers the transnational development of that system through the advent of the multinational corporation.
2. The continued existence of these is a function of the small size and lower level of organization of the businesses operating in this area, because the activity they perform is unstandardized and geographically dispersed, the service rendered entails a personal element, or the actors involved are connected with the arts. (In cases this has also been bolstered by legal and political obtsacles, as in construction.) One result has been that organization and technology in these areas lags well behind that of the corporate-dominated high-tech sectors, which has kept them small (a result of these smaller, poorer, less secure firms being less able to invest in such things as technical R & D).
3. Galbraith points to such matters as the wall neoclassical economics puts up between microeconomics and macroeconomics, its preference for sticking with the small business version of the firm to addressing the reality of the large corporation, its failure to come to grips with the way in which technological innovation actually occurs, its advocacy of monetary policy as the sole respectable tool of economic regulation, and in general, "the way it rationalizes and conceals the disadvantages of the weak."
4. This is in line with Galbraith's theory of the use of organization to counter the market-upsetting advantages of large corporations in his 1954 American Capitalism: The Theory of Countervailing Power.
5. The stock of the companies would not be expropriated, but purchased with interest-bearing securities.
6. Criticism of the claims made for monetary policy is a long-running theme in Galbraith's work. In The Culture of Contentment he compares the attempt to encourage growth with lower interest rates to "pushing an object along on the floor with a string." It is also not much more effective at taming inflation by restraining demand. In the chapter on the subject in The Affluent Society he contends that higher interest rates have little effect on firms in the planning system because they can use internal savings to fund investments, and when they do borrow, pass costs along to their customers; while consumers are less inhibited by higher interest rates than might be expected because their schedule of payments obscures interest charges.
7. In 1996's The Good Society, for instance, he left aside the matter of price controls, apparently on grounds of political feasibility rather than practical effect, and made no mention of public ownership as a response to the failure of shareholder power.

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