Economist With a Public Purpose: Essays in Honour of John Kenneth Galbraith 0203461169, 0203769406, 0415212928, 9780415212922

Table of contents :
Book Cover......Page 1
Title......Page 4
Copyright......Page 5
Contents......Page 6

Citation preview

Economist with a Public Purpose

John Kenneth Galbraith is one of the most prominent economists of the twentieth century. His best-selling works on the changing nature of the United States political economy have challenged the conventional wisdom and his unique perspective has had a significant impact on the way people all over the world think about economics. The contributing economists to this book discuss the continuing relevance of Galbraith’s arguments to current controversies and problems. The issues explored range from globalisation and the role of the state to redistributive economic policies. Also addressed are historical concerns such as the legacy of Franklin Roosevelt’s New Deal and Adam Smith’s views on British and American economic power. Each contributor has developed a Galbraithian theme in line with contemporary concerns and the result is a collection that pays tribute to this great economist. Michael Keaney is a Lecturer in Economics at Mercuria Business school, Vantaa, Finland. He has published various articles and reviews in the field of political economy.

Routledge Frontiers of Political Economy 1 Equilibrium Versus Understanding Towards the rehumanization of economics within social theory Mark Addleson 2 Evolution, Order and Complexity Edited by Elias L.Khalil and Kenneth E.Boulding 3 Interactions in Political Economy Malvern after ten years Edited by Steven Pressman 4 The End of Economics Michael Perelman 5 Probability in Economics Omar F.Hamouda and Robin Rowley 6 Capital Controversy, Post Keynesian Economics and the History of Economics Essays in honour of Geoff Harcourt, volume one Edited by Philip Arestis, Gabriel Palma and Malcolm Sawyer 7 Markets, Unemployment and Economic Policy Essays in honour of Geoff Harcourt, volume two Edited by Philip Arestis, Gabriel Palma and Malcolm Sawyer 8 Social Economy The logic of capitalist development Clark Everling 9 New Keynesian Economics/Post Keynesian Alternatives Edited by Roy J.Rotheim 10 The Representative Agent in Macroeconomics James E.Hartley 11 Borderlands of Economics Essays in honour of Daniel R.Fusfeld Edited by Nahid Aslanbeigui and Young Back Choi 12 Value, Distribution and Capital Essays in Honour of Pierangelo Garegnani Edited by Gary Mongiovi and Fabio Petri 13 The Economics of Science Methodology and Epistemology as if Economics Really Mattered James R.Wible 14 Competitiveness, Localised Learning and Regional Development Specialisation and prosperity in small open economies Filter Maskell, Heikki Eskelinen, Ingjaldur Hannibalsson, Anders Malmberg and Eirik Vatne 15 Labour Market Theory A constructive reassessment Ben J.Fine

16 Women and European Employment Jill Rubery, Mark Smith, Colette Pagan, Damian Grimshaw 17 Explorations in Economic Methodology From Lakatos to empirical philosophy of science Roger Backhouse 18 Subjectivity in Political Economy Essays on wanting and choosing David P.Levine 19 The Political Economy of Middle East Peace The impact of competing trade agendas Edited by J.W.Wright, Jr 20 The Active Consumer Novelty and surprise in consumer choice Edited by Marina Bianchi 21 Subjectivism and Economic Analysis Essays in Memory of Ludwig Lachmann Edited by Roger Koppl and Gary Mongiovi 22 Themes in Post-Keynesian Economics Essays in honour of Geoff Harcourt, volume three Edited by Peter Kriesler and Claudio Sardoni 23 The Dynamics of Technological Knowledge Cristiano Antonelli 24 The Political Economy of Diet, Health and Food Policy Ben J.Fine 25 The End of Finance Capital market inflation, financial derivatives and pension fund capitalism Jan Toporowski 26 Political Economy and the New Capitalism Edited by Jan Toporowski 27 Growth Theory A philosophical perspective Patricia Northover 28 The Political Economy of the Small Firm Edited by Charlie Dannreuther 29 Hahn and Economic Methodology Edited by Thomas Boylan and Paschal F O’Gorman 30 Gender, Growth and Trade The miracle economies of the postwar years David Kucera 31 Normative Political Economy Subjective freedom, the market and the state David Levine 32 Economist with a Public Purpose Essays in honour of John Kenneth Galbraith Edited by Michael Keaney

Economist with a Public Purpose Essays in honour of John Kenneth Galbraith

Edited by

Michael Keaney

London and New York

First published 2001 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2003. © 2001 Michael Keaney, selection and editorial matter; individual chapters, the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Economist with a public purpose: essays in honour of John Kenneth Galbraith/edited by Michael Keaney. p. cm. Includes bibliographical references and index. 1. Galbraith, John Kenneth, 1908–2. Economists—United States—Biography. 3. Economics. I. Galbraith, John Kenneth, 1908– II. Keaney, Michael, 1968– HB119.G33 E25 330´.092–dc21

2001

ISBN 0-203-46116-9 Master e-book ISBN

ISBN 0-203-76940-6 (Adobe eReader Format) ISBN 0 415 21292 8 (Print Edition)

00–042216

Contents

1

2

3

4

5

6

7

8

List of contributors

vii

Acknowledgements

xi

John Kenneth Galbraith: economist with a public purpose Michael Keaney

1

The useful economist James Ronald Stanfield

7

The making of a heterodox economist: the impact of Henry S.Dennison on the economic thought of John Kenneth Galbraith Kyle Bruce

25

Social capital and political economy: Galbraith on states and groups David A.Reisman

51

The role of the state in the good society Michael Keaney

67

From Veblen to Galbraith: what is the essence of institutional economics? Geoffrey M.Hodgson

95

The virtues of their defects and the defects of their virtues: reflections on John Kenneth Galbraith and Thorstein Veblen Douglas F.Dowd

115

The economist and business David R.F.Simpson

143

v

vi

9

Contents

Galbraith, uncertainty and the modern corporation Stephen P.Dunn

157

10 Progress denied: the unravelling of the New Industrial State William M.Dugger

183

11 Galbraith, globalism and the good life: making the best of the capitalist predicament David Donald and Alan Hutton

199

12 The New Deal and ‘domesticated Keynesianism’ in America Roger J.Sandilands

219

13 Adam Smith on the mercantile system: the unnecessary loss of America? Andrew S.Skinner

247

Index

267

Contributors

Kyle Bruce is a Lecturer in Economics at the University of Queensland. He is interested in the relationship between U.S. businessmen and economists in the twentieth century, and the relationship between the economics and management disciplines in general. David Donald is Senior Lecturer in Political Science at Glasgow Caledonian University. He has special interests in the possibilities of a political economy of citizenship and in the roles of private firms in democratic polities. He has published in the Journal of Economic Issues, Economic Journal and Business Studies. Douglas F.Dowd was Professor of Economics at Cornell University and California State University. Among his most recent publications are U.S. Capitalist Development Since 1776: Of, By and For Which People? (M.E.Sharpe, 1993), Against the Conventional Wisdom (Westview, 1997), and Blues for America (Monthly Review Press, 1997). He continues to conduct informal classes in economics in the San Francisco Bay Area. William M.Dugger has been President of the Association for Social Economics, Association for Institutional Thought, and Association for Evolutionary Economics. He has published six books on economic institutions and radical institutionalism. His articles appear in the Journal of Economic Issues, Review of Social Economy, Review of Radical Political Economics, Social Science Quarterly, and others. His Ph.D. is from the University of Texas. He is a Professor of Economics at the University of Tulsa and a dedicated fisher of bass. Stephen P.Dunn is an Economic Advisor within the Department of Health and a researcher in the Department of Economics at Leeds University. He has published several articles on post-Keynesian economics and the theory of the firm in leading international journals such as The Manchester School, the Journal of Post Keynesian Economics, the Scottish Journal of Political Economy and the Review of Political Economy. Geoffrey M.Hodgson is a Research Professor at the University of Hertfordshire Business School. He was formerly Reader in Institutional and Evolutionary Economics at the University of Cambridge. He is the author of books such as vii

viii

Contributors

The Democratic Economy (1984), Economics and Institutions (1988), Economics and Evolution (1993), Economics and Utopia (1999) and Evolution and Institutions (1999). He has also published over one hundred scholarly articles. Alan Hutton is a Senior Lecturer in Economics at Glasgow Caledonian University. His recent research relates to issues in the regulation of utilities in the UK, private firms and the public interest more generally, and the Scottish political economy tradition in the twentieth century. He has published articles in the Journal of Economic Issues, New Political Economy and the Scottish Journal of Political Economy, Michael Keaney is presently a Lecturer in Economics at Mercuria Business School, Vantaa, Finland. He has published articles and reviews in the Journal of Economic Issues, Review of Radical Political Economics, International Journal of Social Economics, History of the Human Sciences, Health Care Analysis, International Journal of Health Care Quality Assurance, Millennium: Journal of International Studies, Cultural Dynamics, and the Scottish Journal of Political Economy. He also contributed an introductory essay to the re-issue of Douglas F.Dowd’s Thorstein Veblen (Transaction Publishers, 2000). David A.Reisman is Professor of Economics in the University of Surrey. His books include Galbraith and Market Capitalism; State and Welfare: Tawney, Galbraith and Adam Smith; Anthony Crosland: The Mixed Economy; Richard Titmuss: Welfare and Society and Conservative Capitalism: The Social Economy. Roger J.Sandilands is a Reader in Economics at the University of Strathclyde, Glasgow. A graduate of Strathclyde and Simon Fraser Universities, he has held university posts in Canada, the United Kingdom, Singapore, Malaysia and Sweden and has worked as an economic consultant for the United Nations, the Colombian Agricultural Research Institute, and the Colombian National Planning Office. He has published books on Monetary Correction and Housing Finance in Latin America (Gower, 1980), a biography of Lauchlin Currie, a leading New Deal economist (Duke University Press, 1990), and the collected works of Allyn Abbott Young (Routledge, 1999). He is associate editor of the Journal of Economic Studies. David R.F.Simpson was educated at the Universities of Edinburgh and Harvard, and then worked for the Statistical Office of the United Nations in New york. From 1975 to 1988 he was a Professor of Economics at the University of Strathclyde. He is currently Economic Adviser to the Standard Life Assurance Company, an Honorary Professor at Heriot-Watt University, and a member of the academic advisory council of the Institute of Economic Affairs. He has published several books, including Problems of Input—Output Tables and Analysis (1966), General Equilibrium Analysis (1975), The Political Economy of Growth (1983), The End of Macroeconomics? (1994), and Re-Thinking Economic Behaviour (2000).

Contributors

ix

Andrew S.Skinner was formerly Clerk of Senate and Vice-Principal of the University of Glasgow. He is currently Adam Smith Professor (Emeritus) in the Department of Economics. The author of numerous articles on eighteenth century studies, he has edited Sir James Steuart’s Principles of Political Oeconomy (1966, 1998), and co-edited Adam Smith’s The Wealth of Nations for the Glasgow edition (Oxford University Press, 1976–1983). His papers on Smith and his Scottish predecessors are collected in A System of Social Science (Oxford University Press, 1979, 1996). James Ronald Stanfield is Professor of Economics at Colorado State University, USA. He is the author of John Kenneth Galbraith; Economics, Power, and Culture: Essays in the Development of Radical Institutionalism; The Economic Thought of Karl Polanyi: Lives and Livelihood; Economic Thought and Social Change; and The Economic Surplus and Neo-Marxism, as well as over one hundred articles, reviews, and book chapters. He is past president of the Association for Evolutionary Economics, the Association for Social Economics, and the Association for Institutional Thought

Acknowledgements

My thanks are due, first and foremost, to all who have contributed to this volume. I want to thank especially Andrew Skinner for the initial suggestion that inspired this project. For their generous encouragement in this and other matters, I am grateful to Doug Dowd, Marc Tool, David Donald, Alan Hutton, Irving Louis Horowitz, David Simpson, Neil Kay, and Alistair and Sheila Dow. To Päivi, for her patience and understanding, my sincere gratitude.

xi

1

John Kenneth Galbraith Economist with a public purpose Michael Keaney

To have combined longevity with work of lasting significance occasions greater opportunity for tribute than might otherwise be the case. There have been scholars who have produced influential, valuable work and who did not live long enough to enjoy merited recognition—C.Wright Mills and David M.Gordon are only two such examples. Then there are others whose long life is still no guarantee of contemporaneous reward—Thorstein Veblen is notable in this regard. By the time he was offered the presidency of the American Economic Association in 1924 on condition that he join it and deliver an address, he had endured so much professional difficulty and opprobrium in a fraught career that he took pleasure in rejecting it (Dorfman, 1972:492). But there is another, intriguing phenomenon of intellectual history, whereby the long-lived who have enjoyed both recognition and influence during their lives suffer a curious decline in reputation following their deaths. The work of the major philosophers Benedetto Croce and John Dewey, who towered over their peers in life, became strangely passé following their deaths. This is not to say that the verdict of history is infallible. The inconvenience of certain arguments can be more easily elided when these are treated as among the time-bound idiosyncrasies of their late authors. The existence of disciples to build upon a legacy is also crucial. These need not be identified with any individual person, as with, say, Adam Smith or Karl Marx. As the adherents of the Chicago School of Economics have long demonstrated, personal anonymity is no barrier to the furtherance and entrenchment of a particular set of views. John Kenneth Galbraith’s position among economists is most unique, in that he is one of the most widely-read and recognisable of the profession, and yet within the discipline his work is most often viewed with suspicion. His apparent detachment from his academic peers contrasts with the ease with which he has participated in political life, and the obvious warmth of the friendships he has enjoyed with politicians. But there are those designated as economists who are similarly frowned upon by their professional peers for acting upon their dissatisfaction with what conventionally passes for economic wisdom. Like Galbraith, they have made explicit their rejection of orthodoxy, whether in writing, teaching or discussion, and have endured similar opprobrium. Many such economists have formed their own societies, in an effort to preserve and 1

2

Michael Keaney

develop traditions of inquiry that would otherwise fall victim to the hegemony of neoclassical thought Galbraith has never aligned himself with any one such group; rather, individuals within heterodox associations have identified elements of Galbraith’s work as overlapping or complementary to their own efforts. The Association for Evolutionary Economics (AFEE) was established in 1965. Based in the United States, it has become a leading international association of its kind, similar in many respects to the more recently formed European Association for Evolutionary Political Economy (EAEPE). AFEE’s periodical, the Journal of Economic Issues, has established itself as the primary source of scholarship in the tradition of institutional and evolutionary economics in the varied traditions of Veblen, Wesley C.Mitchell and John R.Commons. The association’s eclectic approach to the furtherance of heterodox alternatives has brought with it certain problems in the past, as those identifying most closely with theVeblenian tradition have clashed with others who do not accept much, if any, of Veblen’s contribution. To its credit it has retained a pluralistic ethos, allowing many different approaches room to nourish under its umbrella. The association confers annually its prestigious Veblen-Commons Award to the economist regarded as significantly advancing the cause of evolutionary economics. Adolph Lowe, himself a recipient, referred to it as the ‘bad boy’ award because of its recognition of those otherwise disregarded by a snooty profession (Carroll, 1998:11). Galbraith received this award in 1976. Those working in the tradition of institutionalism continue to claim Galbraith as one of their own: Ron Stanfield describes him as ‘a leading scholar of the American institutionalist school’ (Stanfield, 1996:1), while Marc Tool sees Galbraith as a leading contributor to an institutionalist theory of discretionary pricing together with Veblen, Walton H.Hamilton and Gardiner C.Means (Tool, 1995:54). The Union for Radical Political Economics (URPE) was launched in 1968, and has a similarly pluralistic approach to the nurturance of heterodox thought. Its founding conference, held at the Massachusetts Institute of Technology, featured three presentations on a radical theme: (1) a presentation of Marxian economic theory, (2) a radical critique of neoclassical economics, and (3) ‘a friendly critique of Marxism and an unfriendly critique of conventional economics from the vantage point of Thorstein Veblen’ (Dowd, 1982:23). Its journal, the Review of Radical Political Economics, ‘has served students and teachers of economics with radical inclinations and has increased their numbers, whether as a serious publication that can be studied or, also of great importance, as one that can be written for’ (1982:24). Among the various radical traditions of economic inquiry in the United States, two stand out The first of these is the Monopoly Capital school, building upon the work of Paul M.Sweezy and Paul A.Baran. As others have shown, this research programme shares marked similarities to work in the institutionalist tradition (Stanfield and Carroll, 1997). Not the least of these is the integrated micro-macro analysis of the economy of the 1960s United States as comprising dominant monopolistic and subservient competitive sectors by Galbraith in The New Industrial State and Baran and Sweezy in Monopoly Capital. The second school of radical political economics draws much

John Kenneth Galbraith

3

of its inspiration from the pioneering work of David M.Gordon. His interest in long wave theory, married to a rigorously empirical research programme, led him to formulate the concept of a social structure of accumulation (see Kotz et al., 1994). As Gordon’s colleagues, Samuel Bowles and Richard Edwards, put it, the intention and result of this line of inquiry have been to promote a return to the theoretically informed but concrete study of institutions as they are, motivated by the quest not for the highest level of generality but for historically contingent answers to questions concerning what might be done to design an economy more conducive to fairness, well-being, and freedom. Though by no means an example of this specific theoretical approach, one particular contribution is thoroughly consonant with its stated ethos: If economists do take up this more relevant, more useful, and hardly modest task, they will find Galbraith’s work an exemplary guide. Bowles and Edwards (1989:50) Given Galbraith’s long life and public prominence, it should not be surprising that there are many who have already paid tribute to his work. There have been two Festschriften published prior to this one. The first, Unconventional Wisdom (Bowles et at., 1989), was published to coincide with his eightieth birthday. The second, Between Friends (Sasson, 1999), appeared exactly ten years later. The latter volume comprises mostly anecdotal and reflective contributions (although mention should be made of Stephen Marglin’s (1999) scholarly appraisal of Galbraith’s political economy), while the former features more scholarly chapters among mostly reflective pieces. The rationale for this collection of essays is the accomplishment of three related tasks. Firstly, and most important, is to assess the continuing relevance of Galbraith’s work in economic inquiry. Galbraith’s position as a standard bearer for the dissenting (and large) minority of economists has been of crucial importance. His advocacy of increasingly unfashionable causes both within the profession and in the political yonder deserves continuing support, not least for the preservation and nurturance of diversity within economics. As well as stifling internal pluralism, collaborative inquiry crossing the artificial boundaries of the social science disciplines is difficult for ‘economists’ to undertake unless it conforms to certain conditions. Neoclassical practitioners generally recognise interdisciplinarity only when their rational choice modelling techniques are replicated in the other social sciences. As a result of their powerful grip upon the professional discipline, those practising truly interdisciplinary research and teaching are increasingly often to be found in departments of political science, public administration and management studies, among others. Secondly, Galbraith’s global prominence, despite his avowedly American orientation, is indicative of the influence his thought has exercised throughout the world. Most

4

Michael Keaney

of the contributors to this volume are from the United Kingdom, where Galbraith’s influence was, for a time, regarded as of such significance that key figures in the New Right resurgence of the 1970s targeted him as a dangerous heretic. Leading Conservative and mentor of Margaret Thatcher, Sir Keith Joseph, objected to the British Broadcasting Corporation spending television licence payers’ money—ostensibly on the series The Age of Uncertainty—so that Galbraith could propagate his subversive views. Such was the alarm at the blatant Left propaganda Galbraith was being given free rein to disseminate, that ‘a high convocation of British conservatives imported Professor Milton Friedman all the way from the University of Chicago to lecture adversely on my economic views’ (Galbraith, 1981:533–4). Unfortunately for Friedman, however, awaiting him and his views was the not inconsiderable figure of Nicholas Kaldor (see Targetti, 1992:260–87). The third goal of this Festschrift is to provide an explicitly Veblenian appraisal of Galbraith’s work. The contributions of James Ronald Stanfield, William M.Dugger, Douglas F.Dowd and Geoffrey M.Hodgson do just that. Stanfield, like another contributor, David A.Reisman, has already published a book on the subject of Galbraith’s political economy. His is an appreciative retrospective appraisal of Galbraith’s work that begins the collection. Like the chapters by Stephen Dunn and David Donald and Alan Hutton, Dugger focuses on the legacy of The New Industrial State, a book Galbraith himself regards as his ‘principal effort in economic argument’ (Galbraith, 1983:xiii). While Donald and Hutton develop their inquiry into the social functions of private corporations in the context of globalisation (see Donald and Hutton, 1998), Dugger charts the decline and fall of Galbraith’s originally bright prospect in the context of the Great Capitalist Restoration of the 1970s and 1980s. Dunn, on the other hand, argues for a reconsideration of Galbraith’s theory of the firm as the departure point for those seeking to develop microeconomic theory in the post-Keynesian tradition. Dowd and Hodgson compare Galbraith’s work to that of Veblen. While Hodgson demonstrates both continuities between each in their method of inquiry as part of a larger concern to delineate the older, original, American brand of institutionalism from its unrelated neo-classical offspring namesake, Dowd suggests that both Veblen and Galbraith would have accomplished more had they emulated the conscientious and committed scholarly activism exemplified by Robert A.Brady. Kyle Bruce and Roger J.Sandilands present two interpretive studies of events pertaining to Galbraith that took place during the 1930s. Bruce examines Galbraith’s relationship with businessman Henry Dennison and the influence this had on his subsequent intellectual development Sandilands, meanwhile, discusses the role of Franklin Roosevelt’s New Deal in facilitating the formulation and implementation of Keynesian policies. Usefully complementing Bruce’s chapter on Dennison’s pragmatic view of economic theory and policy is David R.F.Simpson’s argument that much of what passes for economics today in universities is, despite its supposed business orientation (and well-documented use as justification for our present economic system) wholly inappropriate as a preparation for business life. The misguided faith in sophisticated quantitative

John Kenneth Galbraith

5

forecasting serves only to delude rather than to clarify and guide. In a manner reminiscent of Galbraith, Simpson takes management scientists to task for not being able to deliver on their promises. Reisman’s paper charts the evolution of Galbraith’s position vis à vis the role of the state, and interprets Galbraith as essentially technocratic in orientation, if of an enlightened, progressive variety. My own chapter by contrast uses Galbraith’s insights regarding the state in conjunction with those of Veblen, James O’Connor and other authors to suggest possible means of democratising the state in the context of globalisation. Finally, Andrew S.Skinner returns to comments made by Galbraith in 1973 with respect to Adam Smith and the eventual independence of the United States. Skinner argues that Smith desired not only a continued union between Britain and its American colonies, but envisaged the eventual transfer of power from the former to the latter, given the sheer growth potential of the colonies. This sounds not unlike the position recently articulated by media mogul Conrad Black (1999) in his advocacy of British withdrawal from the European Union and entrance into the North American Free Trade Agreement. As with the members of the professional associations described above, the contributors to this volume represent an eclectic range of interests. Nevertheless, all share two characteristics. Firstly, as practising social scientists in academia and/or business, they are wholly dissatisfied with the discipline of economics, as it is taught to students, and as it is employed to ‘explain’ reality. As has been succinctly stated elsewhere, ‘formal theory can be, and is, an escape from truth’ (Galbraith, 1987:415). Secondly, each is bound by a deep appreciation for the singular contribution of Galbraith to economic understanding. This does not render them uncritical. Some would argue that Galbraith has not gone far enough in his criticisms of the status quo and its conventional wisdom. But all recognise the importance of Galbraith’s work as an alternative to the stagnating orthodoxy of the neoclassical model. For it has been in the act of providing ‘historically contingent answers to questions concerning what might be done to design an economy more conducive to fairness, well-being, and freedom’ that his work has in no small measure transcended its time and place.

References Black, Conrad (1999) ‘Britain’s Atlantic option and America’s stake’, The National Interest 55: 15–24. Bowles, Samuel, and Richard Edwards (1989) ‘Varieties of dissent Galbraith and radical political economy’, in Samuel Bowles et al., eds, Unconventional Wisdom: Essays on Economics in Honor of John Kenneth Galbraith, pp. 39–52. Bowles, Samuel, Richard C.Edwards, and William G.Shepherd, eds (1989) Unconventional Wisdom: Essays on Economics in Honor of John Kenneth Galbraith, Boston: Houghton Mifflin. Carroll, Michael C. (1998) A Future of Capitalism: The Economic Vision of Robert Heilbroner, New York: St. Martin’s Press. Donald, David, and Alan Hutton (1998) ‘Public purpose and private ownership: some implications of the “Great Capitalist Restoration” for the politicization of private sector firms in Britain’, Journal of Economic Issues 32, 2:457–464.

6

Michael Keaney

Dorfman, Joseph (1972) Thorstein Veblen and his America, 7th ed. Clifton, NJ: Augustus M. Kelley. Dowd, Doug (1982) ‘Marxism for the few, or, let ‘em eat theory’, Monthly Review 33:14–28. Galbraith, John Kenneth (1981) A Life in Our Times, Boston: Houghton Mifflin. —(1983) The Anatomy of Power, Boston: Houghton Mifflin. —(1987) ‘A look back: affirmation and error’, Journal of Economic Issues 23, 2:413–416. Kotz, David M., Terrence McDonough, and Michael Reich, eds (1994) Social Structures of Accumulation: The Political Economy of Growth and Crisis, Cambridge: Cambridge University Press. Marglin, Stephen (1999) ‘John Kenneth Galbraith and the myths of economics’, in Helen Sasson , ed. Between Friends: Perspectives on John Kenneth Galbraith, pp. 114–138. Sasson, Helen, ed. (1999) Between Friends: Perspectives on John Kenneth Galbraith, Boston: Houghton Mifflin. Stanfield, James Ronald (1996) John Kenneth Galbraith, Basingstoke: Macmillan. Stanfield, James Ronald, and Michael Carroll (1997) ‘The Monopoly Capital School and Original Institutionalist Economics’, Journal of Economic Issues 31, 2:481–489. Targetti, Ferdinando (1992) Nicholas Kaldor: The Economics and Politics of Capitalism as a Dynamic System, Oxford: Oxford University Press. Tool, Marc R. (1995) Pricing, Valuation and Systems: Essays in Neoinstitutional Economics, Aldershot: Edward Elgar.

2

The useful economist James Ronald Stanfield

Ken Galbraith, like ThorsteinVeblen, will be remembered and read when most of us Nobel Laureates will be buried in footnotes down in dusty library stacks. P.A.Samuelson (1991)

The persistence of a way of thinking which somehow fails to take account of what are proving to be the basic realities of modern economic life is itself one of the great economic mysteries of our civilization. C.E.Ayres (1944)

My title alludes to the title of Galbraith’s (1973a) presidential address to the AEA: ‘Power and the Useful Economist’. I find the label very apropos to an economist whose prose entertains sufficiently that his books are freely purchased by significant numbers of consumers. Usefulness is also apparent in Galbraith’s lifelong partisan service to the Democratic Party as well as his occupation of several government posts including a tour as U.S. Ambassador to India. Even some who disagree with Galbraith’s analysis may admire him as a paradigm of an involved economist who participates in the political advocacy process. Galbraith’s usefulness is not simply a matter of individual idiosyncracy. It reflects the intellectual tradition which he represents—pragmatic American institutional economics, which insists upon an economics that is useful and that is accessible to the literate citizen so that it can be applied in the democratic process (Stanfield, 1999). Galbraith’s success in this regard is apparent from his lucrative sales figures. One may reasonably aspire to capture the thrust of Galbraith’s work sufficiently to convey the essential Galbraithian Model of advanced capitalism to one’s readers. But it would be folly to attempt to represent the legendary prose style and mordant wit in any but Galbraith’s own words. Hence I shall begin by sharing a bit of the celebrated Galbraithian wit in his own words with only minimal explanation of context Thereafter, I examine the essential features of the Galbraithian Model of advanced capitalism: his insistence upon a central analytic focus on power and his criticism of his more conventional colleagues for its neglect. I shall then examine the ‘test of anxiety’ by which he proposes to assay the usefulness of economic analysis. I conclude with a brief comment on the 7

8

James Ronald Stanfield

continuing significance of his work: the Galbraithian Challenge and Prospect for political economy and social reform.

The Galbraithian wit Galbraith is ever a critic of the conservative, business ideology of American popular culture. ‘The American business psyche is an acutely vulnerable thing; it associates all change with perverse ideological intent’ (1979:24). On the reluctance to expand the range of options available to individuals in balancing their financial need to work with their self-realisation needs for leisure, Galbraith observed that those ‘who speak much of liberty should allow and even encourage it’ (1967:373). Nor has Galbraith ever suffered agreeably the views of those who would blame the victims of the industrial disease of unemployment: ‘When jobs are unavailable, no useful distinction can be made between those who are voluntarily and those who are involuntarily unemployed. Neither can find work’ (1958:299). Galbraith is also critical of conservative American views on military and strategic matters. On the conservative propensity to blame communist rabblerousers for unrest in poor nations, he observed: ‘It is the Communists. There is a fine, simple, hard-boiled quality about this explanation which economises thought and for this and other reasons appeals to the American conservative.’ That this economy of thought led to a related propensity for the US to supply arms even to overtly reactionary regimes so long as they were perceived to be anti-communist was not lost on Galbraith. He puzzled over the thinking of ‘those who believe that wherever there is a soldier he should be given an American gun’ (1971:250). Galbraith referred to Congressman John Taber of New york as ‘an articulate fossil’ (1979:161). Taber was a critic of the wartime effort to control prices which Galbraith directed. Galbraith (1981:182) later reminisced that Taber ‘strongly opposed all of our activities, as he opposed all of the twentieth century’ During the 1972 party conventions Galbraith appeared on television along with William Buckley to share their views upon the events that had unfolded the evening before. Galbraith later reminisced that ‘Bill Buckley is the ideal opponent—pleasant, quick in response, invulnerable to insult and invariably wrong’ (1973c:7). While directing the post-war bombing survey Galbraith employed Paul Baran, or rather was entrusted with his ‘care and management’. Baran ‘was…ever in pursuit of the most unpopular political position available’. Having witnessed the comportment of another friend and Baran, Galbraith commented that although they shared similarly socialist views, because ‘neither could brook agreement, they clashed bitterly’ (1981:327). About the same time, in England, Galbraith arranged American military transportation for Piero Sraffa to return to his native Italy. Sraffa was convinced a revolution was imminent and, having convictions favouring such political action, he did not want to miss it Had such a revolution occurred and Sraffa’s

The useful economist

9

role been prominent, Galbraith no doubt would have had some explaining to do. But knowing Sraffa, he concluded there was no cause to worry, for ‘[Sraffa] was one of the most leisured men who ever lived; a Communist revolution led by him would have shown no perceptible movement’ (1981:74). Economists of the Austrian School have been the most tenacious adherents to the precepts of classical liberalism. One such economist was Gottfried Haberler, who was for a time Galbraith’s departmental senior at Harvard. Haberler, like so many others, had migrated to the US in flight from fascism in the inter-war period. Galbraith gleefully juxtaposed the prominent expatriates to the success of economic policy in their birthplace. ‘In the decades following World War II, Austrian economic policy has been a model of successful, undogmatic pragmatism. None can doubt that it benefited greatly from the emigration of these distinguished scholars to the United States…’ (1981:273). The most prominent modern member of the Austrian School was the Nobel laureate Friedrich A. Hayek, to whom Galbraith refers as ‘a gentle man of comprehensively archaic views’ (1981:78). Galbraith was even less inclined towards kindness to another Nobel laureate, George Stigler. Stigler, David McCord Wright, and others had scathingly reviewed American Capitalism at the 1953 gathering of the American Economic Association clan. Of Stigler and Wright, Galbraith later remarked that ‘neither approved new thought, however plausible’ (1981:283). Stigler later expressed ‘shock’ that so many more Americans read Galbraith’s The Affluent Society than Adam Smith’s classic The Wealth of Nations. Galbraith ruthlessly retorted that perhaps ‘the deeper cause of Stigler’s sorrow [is] not that so many read Galbraith and so few read Smith but that almost no one reads Stigler at all’ (1971:12n). One should not come away from this discussion with the image that Galbraith is haughty and self-satisfied. He is unreservedly partisan to be sure and he delighted in needling those with whom he differed. But much of his superciliously contemptuous mien is carefully cultivated self-posturing. His infamous arrogance is often the object of self-deprecatory humour. He once recalled that he had experienced a problem in personal relations with his colleagues at all five of the universities with which he had been affiliated. He did not think that the problem was envy for his being more diligent and more able. Rather, the problem arose ‘from my fear…that my superiority would not be recognized’ (1981:18). In 1946 Galbraith was given the State Department assignment of advising the occupation administration on economic affairs in Germany, Japan, and elsewhere. General Lucius Clay was head of operations in Germany and General Douglas MacArthur in Japan. Concerning reactions of the generals to his advice, Galbraith commented that ‘Clay…was not impressed with my guidance on economic affairs and…MacArthur may not have been aware of it’ (1979:161). Galbraith took advantage of the Freedom of Information Act to access the file compiled about him by the FBI. The content of the file ‘was not agreeable, but it must have been a grave disappointment’ to the politicians who had asked the FBI to conduct it The principal revelation was ‘Investigation favorable except conceited, egotistical and snobbish’ (1981:311–12).

10

James Ronald Stanfield

Galbraith frequently adverted to his vanity about the sales of his books and about his literate prose. Noting that The Age of Uncertainty sold rather well in Japan, he noted also that his ‘admiration for Japanese literary taste was unbounded’ (1981:534). The Great Crash was cited for its literate style. Any writer who says that he is negligent of such praise is almost certainly lying’ (1981:312). High praise was accorded to The Affluent Society, prompting Galbraith to recall that ‘only a strong character can resist such praise. I made no attempt’ (1981:354).

The Galbraithian model of advanced capitalism A persistent theme of Galbraith’s work has been the need to view the economy as a system of instituted power. This emphasis stems from the basic nature of American Institutionalism, in which an institution is a cluster of moral precepts that configures power or authority. The economy, or the instituted process of provisioning by sustaining the integration of the division of labour, is in this view inseparable from power. This focus on power led Galbraith to emphasise the dualised nature of the modern economy. He acknowledges that a significant portion of the modern economy continues to operate in a fashion similar to the textbook theory of competition. But alongside this market sector there is an oligopolistic or administered sector which needs to be understood in terms of the exercise of discretion by powerful corporate agents. In his 1940s essays on price control, later assembled into A Theory of Price Control, Galbraith emphasises this dual economic structure and its significance in controlling inflation. If private organisations possess the ability, in some degree, to administer prices, then to this degree, the state in its efforts to stabilise the macro-economy must have the ability to impose restraint upon the wage-price spiral. It is startling, that even at this early juncture, Galbraith very explicitly regarded inflation and not unemployment as the most serious threat to democratic industrial society. The concern for the inflationary implications of the dual economy and the challenge thus posed for effective control of inflation continues throughout Galbraith’s later works. Galbraith later came to the view that wage-price controls are not politically feasible. This recantation is problematic, however, since it leaves the dilemma of inflation versus recession unresolved in his political economic model. Another major concern of Galbraith, that also emerges from his focus on power, is the structure of output and its implications for the quality of life. In The Affluent Society Galbraith sets out the theory of social (im) balance. The principle of social balance states that for a given level of private consumption there is an optimal size public sector, that is, that public and private consumption are complementary goods. The increased utilisation of automobiles must go hand in hand with increased collective provision of roads and traffic control. Suburbanisation in the wake of the automobile age requires a far-flung government apparatus to service and protect dispersed neighbourhoods. The

The useful economist

11

resort to an ever greater volume of packaged goods and disposable items necessitates more trash removal and solid waste disposal planning. Galbraith even anticipates the trend towards dual-earner households and notes that it too has implications with regard to social balance. Increased participation of both spouses in the paid labour force generates a need for more collectively regulated and publicly provided environments to occupy the time of children. Had the American polity heeded this prescient message then perhaps this aspect of the debilitating Nurturance Gap that has become so evident in the 1990s might have been avoided (Stanfield and Stanfield, 1997). In The Affluent Society, Galbraith maintains that the preoccupation with expanding production, and the process of consumer want creation that sustains it, lead to an underfunded public sector. Added to the traditional anti-government bias of market capitalist ideology, the incessant attention to private consumption obscures the need for collective action in critically important areas. Galbraith’s case is not simply that poor taste in the purchase of goods in the private sector means that public spending would necessarily be better. He cites many examples of the deleterious effects of too little public sector spending, such as insufficient resources devoted to poverty relief, environmental preservation, education, playgrounds, municipal services, and medical care delivery. These incontrovertible limitations on the quality of life are then contrasted with the plethora of gadgets and ostentation in the private sector. This juxtaposition is not presented as prima facie proof of the need to expand collective consumption. It is offered to suggest that the opportunity cost of such an expansion is not as great as is habitually thought. In another way, however, the contrast between private affluence and public squalor does not entirely capture the pivotal forces at work. In twentieth century capitalism, government has a vastly expanded economic presence, notably in the areas of defence, roads and highways, traffic control, and parking (Baran and Sweezy, 1966: Chap. 6). Baran and Sweezy contended that what the government does is constrained and shaped by powerful private interests so that there are definite limits on public spending in certain areas, such as health, education, and housing, in which higher public spending would conflict with the class structure and business hegemony of capitalist society. In his later works, Galbraith refines the analysis of social imbalance, recognising that some public sector spending is favoured because it fits the interests of the powerful corporate system. Other collective wants, and indeed some significant private wants, fare badly because there is no strong voice for them amongst the powers that be. The technostructure, as Galbraith is to anoint his technical elite, promulgates a very distorted set of social priorities as it exercises its undue influence upon both the public and private sectors. So in Galbraith’s mature model, social imbalance is not so much public versus private as that which serves the interests of the corporate elite versus that which does not The public purpose or general interest is not well served by this social imbalance. Nor then is the public well served by the mainstream of economics, which by its neglect of power, fails to address adequately the issue of social imbalance.

12

James Ronald Stanfield

To elaborate his argument, Galbraith introduces the concepts of revised sequence and imagery of choice. The conventional wisdom in economic thought has at its core the competitive market which empowers the sovereign consumer or household. In this original sequence, the flow of causative influence in the production process is from households, as ultimate consumers of commodities and ultimate suppliers of resources, to the productive organisations. With the revised sequence concept, Galbraith (1967) sought to shift the analytical focus to the flow of influence from producers to consumers—though he took pains to emphasise that the reverse flow of influence from the household cannot be ignored. The interest of the administered sector is put forward via advertising and other public relations activities as well as by corporate influence on the political process. The decisive significance of the revised sequence is its relation to the legitimacy of corporate production and distribution of output, its effects on income distribution, and the broader consequences of its various charitable, political, and media activities (Stanfield, 1979; Dugger, 1989). The original sequence conception ‘supports the conclusion that the individual is the ultimate source of power in the economic system’ (Galbraith, 1967:226). This conception has the further implication that a wide range of collective action that would be inconvenient to the corporate elite is held to be contrary to individual rights. In effect the process of corporate production of commodities becomes self-justifying—self-justifying commodity production (Stanfield, 1979: Chap. 3; 1995a: Chap. 4). The revised sequence is no doubt the most controversial concept in the Galbraithian Model of advanced capitalism. And, it must be conceded, his case is in the main an a fortiori one: the corporate elite has an interest in manipulating consumer and public consciousness and it has the apparent means to do so; therefore, the reasoning goes, we can infer that manipulation exists. It is not, however, crystal clear that corporate media efforts successfully manipulate the consciousness of consumers. Schudson (1984) provides a good discussion of the complexity of the evidence in this regard. Galbraith has often been accused of the intent to substitute his or another cultural elite’s aesthetic views for those of the consumer. But this is not his intent. Instead he seeks to lay a basis for systematic inquiry into the process of preference formation and its implications for the quality of life. No such basis is available in the conventional economics view which commences from postulation of the abstract individual whose wants we know to be insatiable. In this view the only analytic interest is examination of the process of decision making and exchange by which this abstract individual pursues maximum satisfaction in applying limited wants towards satisfaction of these given, insatiable preferences. What should be conceded to Galbraith, is that to identify concrete social practice that systematically leads individuals to misconstrue their wants in relation to commodities is not to suggest anyone knows better than the individual the nature of his or her wants. Rather, it is to ask how much confidence can be placed upon the competence of individuals in this regard (Leiss, 1976; Stanfield and Stanfield, 1980; or Stanfield, 1995a: Chap. 6)? And, further to ask, what are the possible social reforms which can increase this confidence?

The useful economist

13

It should be noted that much of Galbraith’s case is at issue even if the revised sequence is overstated. Given the existence of corporate power, well short of anything so dramatic as the revised sequence, many issues remain with regard to the ambiguity of costs and relative prices. If powerful people have to some extent the ability to administer prices and wages, and if they exercise some influence on popular consciousness and the political agenda, then serious questions arise with regard to the significance of existing relative prices to scarcity (Stanfield, 1995b). As Galbraith develops his focus on power, he becomes more and more critical of the methodology and complaisance of orthodox economics. Indeed, he contends that the power exercised by the corporate elite is effectively obscured by conventional economic reasoning: the emphasis on individual choice tends to systematically exclude ‘speculation on the way the large economic organisations shape social attitudes to their ends’ (Galbraith, 1967:77). Galbraith (1971: Chap. 4), in effect, asserts that the conventional economics focus on individual choice is more a matter of belief or faith than a realistic depiction of actual economic behaviour. In the last book of his major trilogy, Galbraith (1973b) refers to this obscurantism as the ‘convenient social virtue’ of conventional economists— convenient that is, to the corporate oligarchy whose power is veiled. To drive his point yet further, Galbraith coins the forceful phrase, the imagery of choice (Galbraith, 1973b). The apparent discretion evident in corporate efforts to expand commodity production is obscured by the semblance that corporate decision makers are ultimately constrained by individual product and factor market choices.

The test of anxiety In Economics and the Public Purpose Galbraith makes an explicit, detailed contrast of the more conventional economics model to his administered economy model, the so-called test of anxiety. This strategic artifice had been prefigured in the 1969 lecture to the American Economic Association in which Galbraith asked the profession to confront the prevalent social unease by abandoning the presumptions of consumer and citizen sovereignty (Galbraith, 1971: Chap. 4). The test of anxiety is based upon the pragmatic principle that economics as a useful social science should seek to relate in a meaningful way to the issues about which citizens are anxious. The ultimate test of a set of economics ideas…is whether it illuminates the anxieties of the time. Does it explain problems that people find urgent? Does it bear on the current criticisms of economic performance? Does it bear on the issues of political debate…? Galbraith (1973b:198) Galbraith applied the test of anxiety in several key areas of concern—economic instability, corporate hegemony, inequality, and ecology.

14

James Ronald Stanfield

Economic instability The matter of economic instability is the most visible failure of the neoclassical synthesis, if only because economic stabilisation is its major promise. Common knowledge of the record of the aggregate economy in the 1970s is sufficient to indicate that conventional opinion of the post-war synthesis was impaled on the dilemma of inflation and unemployment. Opinion polls routinely indicate that one or the other, or both, of these macroeconomic ills, are among the most urgently perceived problems of our time. The experience of stagflation in the 1970s severely impacted the neoclassical synthesis and there has been no clear consensus or orthodoxy in macroeconomics since that time. In the face of this popular anxiety, the neoclassical synthesis offers a theory of aggregate income determination grounded upon the presumption of smoothly functioning microeconomic behaviour. To be sure, problems of frictional adjustment and structural imperfections are offered to explain the simultaneous occurrence of inflation and unemployment. It is equally certain that this explanation is valid, insofar as it goes. But it does not go far enough. It cannot meaningfully account for periods of stagflation in which observation can be readily made of the presence of high, and at times simultaneously increasing, rates of both macroeconomic ailments. Most significantly, the neoclassical synthesis does not offer a theory upon which to base an effective structural policy. Such structural policy proposals as it offers—wage-price controls and human power development—are haphazard or piecemeal in character and temporary or emergency in mood. Moreover, many such interventions are proposed with reluctance, indeed apology, as they must be from a perspective that emphasises the self-regulating character of markets. At the very least, this presented a vast opening for the more classically liberal of the profession to mount their highly reactionary monetarist and expectationist counter-revolution against the Keynesian element of the neoclassical synthesis. Then too there is the curious episode of the rise of so-called supply-side economics in American political discourse. To their partial credit, because they must be held in part responsible for this nativistic recrudescence of Social Darwinism, most economists of conventional sensibilities refused to accredit this intellectual distemper of the Reagan years, trusting no doubt that the fever would burn itself out if isolation curbed the spread of the virus at fault. In contrast, Galbraith’s institutional economics offers an historical viewpoint and a demand for a new (structural) departure in theory and policy. The orthodox theory of the market economy was evolved to fit the nature of a very special institutional configuration which prevailed for a century down to the latter part of the nineteenth century. The profound technological and institutional changes since that time have invalidated that special theory. The microeconomic motives and expectations now extant no longer add up to aggregate stability in the absence of systematic social control. The Keynesian Revolution, as comprised in the neo-classical synthesis, is incomplete because it does not provide the groundwork for that systematic

The useful economist

15

control. A new theory expressing the socio-economic configuration of administered capitalism is required. The technostructure’s decisions have displaced market discipline in the economy’s commanding heights. But its administration is only partial planning, it cannot coordinate the interstices between industries. Nor do its ministrations stabilise the market sector. Nor is the accommodation of the structure of labour supply closely attuned to the technostructure’s choices of technology. The wage-price spiral is attacked only at great long- and short-run cost by the crude methods of aggregate demand management. In the short run output is lost and income denied, especially to the denizens of the market sector who already have less than the administered sector by way of income access to life’s chances. In the long run, denial of life chances worsens the very structural problems that the technostructure is unable to administratively avoid. The population becomes more segmented and the accommodation of the structure of labour supply is slowed down as school and family budgets suffer recession and reduced ability to provide human capital. Increasing segmentation and secular slowdown or decline in real income growth is also in part responsible for the rise in dual earner and single-parent households which face severe obstacles in providing pre-school and after-school superintendence, quite apart from the further ministrations necessary to socialise a new generation in the practical arts and sciences of social and economic life. School systems faced with such poorly socialised brigades necessarily become exercises in crowd control, which necessarily displaces much academic instruction. The main dimensions of the test of anxiety are clear. Instability that flows from the operation of a system of administration requires countervailing intervention that, mindful of power, turns that power to account in terms of the destabilising effects of its decisions. A direct adjustment and intervention mechanism is required to control the wage-price spiral and facilitate the structural adjustments of the economic process. Public planning of the broad dimensions of investment policy and price/income relations is required.

Corporate hegemony In the address to the American Economic Association, Galbraith (1971:76) referred to the social unease and ‘tension and discontent’ of democratic industrial society and the ‘commonplace explanation’ in this regard ‘that the individual feels himself in the grip of large, impersonal forces whose purposes he senses to be hostile and in relation to which he feels helpless’. This sense of disarray is often marshalled by various protest movements aimed at major constellations of power, such as General Motors, the National Aeronautics and Space Administration, or the Department of Transportation. This indicates that the citizens thereby organised recognise the reality of power and administration. Otherwise their protests would be aimed at changing the sovereign popular consciousness. A major component of administered capitalism is the modern corporation. Corporate power is a source of anxiety not only for its pivotal importance to the

16

James Ronald Stanfield

stabilisation dilemma, but also due to its enormous influence over matters of ecology, work routine, political decision making and culture. Beyond particular problem areas, the reach of corporate influence is, in a word, illegitimate, because there are no well-defined, dependable mechanisms by which to hold corporate power accountable (Stanfield, 1995a: Chap. 4). In the face of this multifaceted anxiety, the neo-classical synthesis offers the view that the corporation is a firm with market power. Corporate profits and prices are too high, that is, greater than they would be under competitive conditions. Production and resource utilisation are too low, again relative to the would-be of competitive conditions. The policy alternatives which are offered relate simply to resurrecting the competitive conditions. But Galbraith saw little evidence of popular preoccupation with the issue of static supply restriction. The wider influence of the corporate behemoths, and indeed the massive production they generate, is more the focus of popular anxiety. Corporations are perceived as too large rather than too small and their cumulative influence on political decision making and popular tastes is the source of popular anxiety. In the Galbraithian Model the modern corporation and its surrounding milieu are portrayed as a fundamental historical mutation which requires a new departure in theory and social control. Its power reaches beyond the concerns of the market to the basic realm of opinion formation. The modern corporation is a governing institution and must be dealt with as such. The imagery of choice is again revealed to obscure essential questions. If the comforting illusion of citizen and consumer sovereignty is set aside, profoundly unsettling questions with regard to the structure of output and the quality of life emerge. One can then entertain the very basic question about the level of cultural achievement attained by the disposition of the unparalleled affluence available (Galbraith, 1971:79). The clear conclusion is that consumer decisions buttressed by anti-trust activity are inadequate; new institutional departures are required, and the state is the only forum for the scale of the collective action needed to countervail the influence of the administered sector. The myopia of the self-regulating market mentality and the continuing suspicion that any public intervention in the affairs of the corporation is a dangerous transgression of the liberal sphere is revealed to be a powerful barrier to the reform that is necessary.

Inequality The unequal pattern of not only income and wealth distribution, but of life chances in general, is also a major source of popular concern. The conventional explanation for the pattern of income and wealth distribution is, of course, that market forces are determinant. These forces are held to operate outside the influence of the participants. So, high technostructural incomes are but the necessary supply prices of scarce technical and managerial talent Competition for this scarce talent is necessary to secure its apportionment to its best uses. That this results in an unequal pattern of distribution may be ethically lamentable, but

The useful economist

17

as such it is of no concern to the economic scientist. Of course, given a popular taste for greater equality, it is within the parvenu of economic science to trace the disincentive effects of a redistributive programme. In contrast, the Galbraithian Model asserts the American Institutionalist insistence that the pattern of income and wealth distribution is a basic element of socio-economic organisation, inseparable from the issue of economic effectiveness. A perception of reasonable justice is required for the social bonding essential to a functional social economy. Efficiency in the narrow sense, as the degree to which the preferences of those empowered by income are met in the allocation of resources, is socially efficient only so far as the distributive pattern is efficient. Efficiency is a vacuous concept if it is not grounded in the basic substantive economic function of provisioning the continuity of social life and the participation of the populace therein. To focus upon a pattern of distribution as the result of the market mechanism in isolation from the structure of social and political power is to emphasise epiphenomena and neglect the phenomena that determine them (Stanfield,1995a: Chap.1). Galbraith insists that tradition, notably the customary hierarchical precept that those higher on the totem pole should be paid more, is a major factor in determining the structure of income distribution. Power also increases as one proceeds up the pecking order, including the power to augment one’s own compensation (Galbraith, 1973b: 264–5). Here again the imagery of choice conveniently serves the powerful. The matter of executive compensation and expense accounts, so also the higher pay of the technostructure and others in the administered sector relative to the market sector, are conveniently hidden from view. The doctrine of necessary supply price, basic to the imagery of choice, renders the issue largely nugatory. If, however, inequality were to be seen as the outcome of administration, it would likely be challenged; indeed such compensation issues would become ‘a question of much interest and the proper subject of public policy’ (Galbraith, 1973b:264).

Ecology A persistent source of popular anxiety, if here ebbing, there flowing in the last forty years, has been that associated with issues of ecology and environmental protection. The anxiety over resource depletion and environmental degradation runs a gamut of concerns from an individual’s health to the moral responsibility to subsequent generations. The anxiety transcends the concern for any particular resource or waste-sink problem and embodies the spectre of a civilisation gone pathologically parasitical and functionally illiterate in its production of inane output to the detriment of the habitat that bears along human, as all other, natural life. In the face of this humiliating and agonising disgust, orthodox opinion offers the concept of externalities and market failures. The strategy of internalising external costs and benefits so as to achieve competitive market outcomes is dubious on its own terms since the measurement with any precision of the

18

James Ronald Stanfield

relevant marginal social costs and benefits is well nigh impossible. Moreover, still on its own terms of seeking accuracy of preference monitoring, there is a bias imparted to individual choice by the exercise of power in the process of collective decision making. As North (1990) has emphasised, institutions matter precisely because decisions are incessantly made which alter the rules of the game and select technologies for development and deployment. The notion of ‘path dependence’, that instituted procedures may be adopted and technologies selected by accident or because they serve powerful vested interests, is reminiscent of the Veblenian emphasis on processes of circular and cumulative causation. The implication is that no presumption of efficacy can be made for any aspect of the observed institutional pattern or technological configuration. Yet such decisions structure future decisions. As already noted, a compelling example of the exercise of power in the collective limitation of individual alternatives is the heavy reliance of America on the automobile, which is by any reckoning a major aspect of the environmental problem (Galbraith, 1973b:106n).This heavy reliance has come about via the exercise of power in political decisions to invest in the social overhead costs of automobile transportation rather than collective transportation systems. Incremental private and collective decisions form a vicious circle in that as public transportation deteriorates, we are given an extra incentive to use our own private mode of transport which in turn results in further deterioration and a worsened position of public vis à vis private transportation. The choice is posed at each stage in a dynamic process; there is no chance of selection between the states at either end of that process. Hirsch (1976:18) Similar concern exists for the neglect of some sources of energy, such as solar power, and of conservation in the face of heavy reliance on petroleum and nuclear sources. Calculations of the social rates of return on investment in R&D and production capacity in these regards are biased by power and path dependence. As noted above, beyond the accuracy of monitoring preferences there is the issue of the formation of the preferences themselves. Powerful media largely under the aegis of the technostructure incessantly drone with the cant of the consumerist culture, at least reinforcing the ideology of consumption (Stanfield, 1995a: Chap. 6). In the face of such powerful socialisation, the task of insinuating ecological concern into the unfolding political economic process is exceedingly difficult Nothing short of a comprehensive confrontation with the ‘high intensity market setting’ is required (Leiss, 1976). This confrontation is necessarily a psychocultural exercise. The issue involved is no less than the habitual perceptions and inclinations of people as to what is valuable, and as to what modes are available by which they can pursue solutions to their problems and development of their faculties. The ecological crisis is ultimately a crisis of social character (Stanfield, 1995a: Chaps. 2, 9).

The useful economist

19

The general point of the test of anxiety is that if these social problems were to be understood to result from the exercise of power by the corporate elite, the public response to them would be very different. Hence Galbraith called for an emancipation of belief as the first step towards sensible social reform. The power arrayed on the side of the Growth lobby seems virtually insurmountable, yet Galbraith was not without hope because he detected an operant antagonism that may yet bring the public purpose to bear on the technostructure. In The New Industrial State Galbraith argued that to have affect the lamentations of disaffected youth require leadership and focus which can only be provided by the ‘political lead’ of the ‘educational and scientific estate’ (1967:387). The operant antagonism consists in the fact that ‘the state not only educates those who accept and defend the values’ of the administered sector. ‘It also nurtures its critics—for there is no practical way of doing one without the other’ (Galbraith, 1973b:156). The ‘educated proletariat reflects the values of the educational system’ in which it is lettered and in which it accrues the credentials necessary to enlist in the technostructure. Liberal, humane precepts may prevail in academia. These values are constitutionally alien to the needs of the administered sector in that they are grounded upon the idea of self-worth and independent thought. Students are thus imbued with a ‘sense of personality’ and instructed in the social doctrine that ultimate power resides in the individual calculus of good and bad, right and wrong. But outside the universities students encounter a world in which organisation and entrenched interests seem to exercise plenary power over individual action (Galbraith, 1971:77). Galbraith placed much hope on the resulting cognitive dissonance. ‘Thus, in effect, the technostructure cultivates the criticism of its own need to override personality—to harness people to its purposes. This is a fact of first importance, a fulcrum on which much reform must rest’ (Galbraith, 1973b:211). It would seem to be little if any exaggeration to ascribe to Galbraith the conviction that this ‘fact of first importance’ is the moral and analytical equivalent of Marx’s inveterate contradiction or antagonism between the classes of owners and non-owners. That this was Galbraith’s intent is suggested by his denial of any notable stridency or conflict in the relation of the industrial proletariat to its technostructural masters as well as his selection of phraseology, the ‘educated proletariat’ and the ‘unlettered proletariat’. For this operant antagonism to become effective in the redirection of social effort to social purpose, the way must be cleared for public regulation of the administered sector. This requires that the public mind focus on the normal condition that the purposes of the technostructure diverge from the public purpose. This being normality, regulation to affirm the superiority of the latter shall also be normalised. Only then can the strategy for emancipating the state from the administered sector emerge so as to permit, when accomplished, the regulation of the administered sector by the state. Again, the first step, the emancipation of belief, is likely to be exceedingly difficult. The belief which must be contested is clear enough but so also is the inordinately powerful sway of the imagery of choice upon the public mind. The

20

James Ronald Stanfield

acceptance of the purposes of the technostructure as identical to those of society must be contested; the preoccupation with growth in the production and consumption of commodities must be challenged. People who have capacities to develop and relationships to nurture and cherish need not subordinate themselves to the treadmill of an incomes race of emulative, competitive consumption. To emancipate belief from this self-justifying commodity expansion, the mythology that identifies the public interest with the purposes of the administered sector must be contested at four basic nodes. The present economics pedagogy must be subjected to the excruciating embarrassment of the test of anxiety. The doctrine of inexorable scarcity must be countered by the inordinate attention devoted to manufacturing wants. The educational system must devote itself to critical thought and throw off its most basic assumptions about the social value of educational achievement. The pecuniary interpretation of achievement and the identification of money income with social purpose must be broken. At the university level students bent on mercenary self-commodification must be challenged in their selection of majors and curriculum. That which separates them from the other beasts in nature as sentient and aesthetic beings must be celebrated for its own sake. Making money is surely a fact of life in a society that commercially governs and accounts its material provisioning. But making money need not therefore be confused with life itself. Making a living is the means of living; it is surely a malicious misconstruction to pursue it as the end of living. A good society must subordinate livelihood to living (Stanfield, 1986; Galbraith, 1996:69–73). The way people respond to overt persuasion and to the manufacture of public policy in the interest of the technostructure must also be a focus of the cultural resistance. Alternative financing of media would free popular entertainment from the enervating commitment to the mundane and allow niches of excellence to replace the marketing niches so popular in the cable industry. Differentiation of programming, it is now clear, should not be confused with discriminate programming. Resigned acceptance of the commercial pollution of entertainment must be converted to resolute resistance. Here again the service of economic doctrine is not without import The doctrine of necessary supply price informs us that competition allows only necessary costs to be covered in the prices of commodities we purchase. But it is difficult to see how financing the provision of commercial television and radio is technologically essential to the hygienic purpose of a tube of toothpaste or the mobilising function of an automobile. Consumers surely pay for commercial media but how their doing so is an exercise of their celebrated sovereignty is a sweet mystery upon which the conventional economics pedagogy is becalmingly silent The public cognisance is Galbraith’s term for the development on the part of American citizens of a healthy suspicion towards their elected representatives and other government officials. He asserted that the public cognisance must presume that the interests of the administered sector diverge from the public purpose. This means that in the absence of contrary evidence, citizens should assume that the positions advocated by the technostructure are not in the public

The useful economist

21

interest Likewise, government officials should be assumed to be active in the technostructure’s interest without proof to the contrary. Galbraith held this to be of especial import for the legislative branch which he considered to be the focus of emancipation. Recapture of legislative initiative for the public interest would create an opportunity to enlist the executive branch. After the emancipation of belief has progressed, the state can be emancipated and turned back to its task of overseeing the public purpose.

The Galbraithian challenge and prospect The Galbraithian Model of advanced capitalism is open-ended. It leaves a research and policy agenda that must necessarily be revised in the wake of changing circumstance. The pulse of the public must be routinely taken to satisfy the strictures of the test of anxiety. Policy experimentalism is a core feature of American Institutionalism. The Galbraithian Prospect remains open. This openness is a basic feature of the evolutionary paradigm. Full recognition that human life is an unfolding stream of tendencies and that human discretion configures this incessant change promises to be a liberating albeit intimidating awakening. For example, the spectacular expansion of merger and takeover activities adds new questions to the issues of corporate governance that Galbraith raised. Nor did he put to rest lingering questions about financial versus managerial control (Kotz, 1978; Balogh, 1982:241; Munkirs, 1985), the relation between corporate size and innovation, or the distinction between real and pecuniary economies of scale in relation to the increase in corporate size (Adams, 1953, 1967). Rapid change in the technology of communications also raises new opportunities and challenges in the area of corporate governance. The critical examination of advertising requires considerably more work with regard to the specifics of the effects of advertising on public sentiment (Schudson, 1984). Galbraith (1983:29–30) continued to slide too readily from the visibility of advertising to its effectiveness even in the promotion of particular brands. His case would perhaps be stronger if he had stuck to the aggregate effect of advertising in promoting the ideology of consumption. But even so, some examination of the role of transactions costs in shaping the development of advertising would still be needed (Ekelund and Saurman, 1988; North, 1990). Continuing work is necessary on the problem of economic structure in relation to unemployment and inflation. Galbraith’s abandonment of wage and price controls as politically inexpedient left a chasm in his macroeconomic policy scenario. Moreover, there has to be careful examination of the observed results in such countries as Sweden which attempted to combine aggressive social democracy and active labor market policies with capitalist economic structure. The recent economic crisis in Sweden offers little if any encouragement for the Galbraithian Prospect. Of course, the strictures of the global economy come into play at this point Intensifying international competition and the emergence of new market economies raise many nuances that were neglected by Galbraith;

22

James Ronald Stanfield

indeed, his treatment of the international dimensions of the social economy was sketchy at best In any case the details of international trade management regimes require a strong dose of the public cognizance; an unmanaged trade regime is not consistent with the Galbraithian Prospect or the outlook of American Institutionalism in general (McClintock, 1990). So there is much work needed to update and revise the Galbraithian Model of advanced capitalism. The Galbraithian Challenge is the same as that laid down by the tradition of social or institutional economics—lives and livelihood: the examination of the interaction of economy and society. It is the task of focused inquiry into the social context of the instituted process for making a living. The Galbraithian Challenge is a critical concern for the organisation of work, the nurturing activities of families and communities, the stability and the distribution of the flow of real income, the continuity of cultural context, the preservation of the rest of nature, the widening of participation in social process, and the liberation of the human spirit. The Galbraithian Challenge is a commitment to perpetual reform based upon identification of particular problems and the institutional adjustment necessary to empower people to solve them. The Galbraithian Challenge is to resolutely apply public cognizance to the analysis of prices and public policy. In so doing, the critical scrutiny of the present order must proceed on the two levels raised as well by other American Institutionalists. One level is concerned simply with the accuracy of relative prices in reflecting current individual preferences. The issues here have to do with the ability of powerful agents to administer prices and shape political decisions. But there is a second and more fundamental level. The critical examination of power does not stop with the contexts of choice. It extends beyond this to include grave questions about the formation of the preferences which operate within the contexts of relative prices and political advocacy. Critical theory in this regard challenges the validity and authenticity of preferences shaped by the exercise of concentrated power (Stanfield, 1995a, 1995b). In this regard, Galbraith’s analysis needs to be linked explicitly to a higher standard of evaluation, such as the instrumental reasoning developed by C.E.Ayres, Marc Tool, and others (Ayres, 1961; Tool, 1979; Stanfield, 1999). The persistent values conflicts need to be explicitly analysed to advance their articulation within the cultural and ecological contexts of advanced industrial life (Frederick, 1995). No doubt the issues raised by the Galbraithian Challenge are as daunting as they are compelling. The challenge posed is to reconstruct the complex of liberal values upon firmer foundations than the atomistic individualism inherited from classical liberalism and revised on an ad hoc basis. The Galbraithian Prospect is that humanity will consciously accept collective responsibility for its social economy and hence for the volume of individual freedom and self-actualisation that its institutions permit, indeed mandate. So also with respect to security, equality, abundance, achievement and solidarity. So also with respect to the democratic process, for in the end the Galbraithian Challenge is the democratic challenge of fostering the widest possible participation in the process of reasonable discourse and inquiry that is democracy (Stanfield, 1999).

The useful economist

23

If the Galbraithian Prospect seems to indicate the need for radical change, it is because the present institutional pattern so wildly violates the social and personal values of liberal culture. But the Galbraithian Prospect is not revolutionary; it does not advocate abrupt social disjuncture and reconstruction. Instead, the Galbraithian Prospect indicates that the steadily evolving institutional complex should be continuously scrutinised so that the trajectory of change can be deflected in a more sustainable and serviceable direction. One could say that Galbraith is liberal and conservative in the same paradoxical sense that he attributed to Keynes (Galbraith, 1987:235–6). Galbraith challenges fundamental conceptions as to how the present social economic system operates but he does so in the interest of improving upon its performance in particular problem areas and not to make the case for its eradication in the interest of wholesale reconstruction. The Galbraithian Challenge concerns the critical examination and conscious adjustment of the institutions that pattern social life. The Galbraithian Prospect indicates the need to unify social inquiry. The task is to connect examination of the economic process with the psychological and cultural examination of the quality of human life. Nothing less will suffice than a critically focused understanding of the human individual and the joy to be derived from the selfauthentic conduct of everyday life (Stanfield, 1995a: Chap. 13). As noted, the Galbraithian vision is essentially reformist not revolutionary. Galbraith’s political quest is to initiate or accelerate construction of an aggressive social democracy that seeks not only economic stabilization and social security but also affirmation of the quality of human life. This would include the pursuit of enhanced equity and working class solidarity through wage compression policies and affirmative action policies to overcome discrimination on the basis gender, race and nationality. It would also involve generous expansion of public support for education, the arts and public amenities. A broadly shared cultural experience through extensive public services would provide equal opportunity and solidify social bonds even as it enriches the social character the limits of which ultimately none of us can escape—we attain and aspire only to the extent that those around us ask us and help us to do so. Galbraith, the useful economist, has set for political economists and citizen cognisance a daunting prospect but his work should inspire and assist us in the challenge ahead.

References Adams, W. (1953) ‘Competition, monopoly, and countervailing power’, Quarterly Journal of Economics 67 (November): 469–492. —(1967) ‘A blueprint for technocracy’, Science (August): 532–533. Ayres, C.E. (1944) The Theory of Economic Progress, New York: Schocken edn., 1962. —(1961) Toward a Reasonable Society, Austin: University ofTexas Press. Balogh, T. (1982) The Irrelevance of Conventional Economics, New York: Liveright Baran, P.A, and P.M Sweezy (1966) Monopoly Capital, New York: Monthly Review Press. Dugger, W.M (1989) Corporate Hegemony, New York: Greenwood Press.

24

James Ronald Stanfield

Ekelund, R.B., Jr, and D.S.Saurman (1988) Advertising and the Market Process, San Francisco: Pacific Research Institute for Public Policy. Frederick, William C. (1995) Values, Nature, and Culture in the American Corporation, New York: Oxford University Press, Galbraith, J.K. (1958) The Affluent Society, Boston: Houghton Mifflin. —(1967) The New Industrial State, Boston: Houghton Mifflin. —(1971) Economics, Peace, and Laughter, Boston: Houghton Mifflin. —(1973a) ‘Power and the useful economist’, American Economic Review, 63 (March): 1–11. —(1973b) Economics and the Public Purpose, Boston: Houghton Mifflin. —(1973c) A China Passage, Boston: Houghton Mifflin. —(1979) Annals of an Abiding Liberal, Boston: Houghton Mifflin. —(1981) A Life in Our Times, Boston: Houghton Mifflin. —(1983) The Anatomy of Power, Boston: Houghton Mifflin. —(1987) Economics in Perspective, Boston: Houghton Mifflin. —(1996) The Good Society, Boston: Houghton Mifflin. Hirsch, F. (1976) The Social Limits to Growth, Cambridge, MA: Harvard University Press. Kotz, D.M. (1978) Bank Control of Large Corporations in the United States, Berkeley: University of California Press. Leiss,W. (1976) The Limits to Satisfaction, Toronto: University of Toronto Press. McClintock, B.T. (1990) ‘International economic policy and the welfare state’, Ph. D. dissertation. Colorado State University, Fort Collins, CO. Munkirs J.R. (1985) The Transformation of American Capitalism, Armonk, NY: M.E.Sharpe. North, D.C. (1990) Institutions, Institutional Change and Economic Performance, New York: Cambridge University Press. Schudson, M (1984) Advertising, The Uneasy Persuasion, New York: Basic Books. Stanfield, J.R. (1979) Economic Thought and Social Change, Carbondale, IL: Southern Illinois University Press. —(1986) The Economic Thought ofKarl Polanyi, London: Macmillan Press and New York: St Martin’s Press. —(1995a) Economics, Power, and Culture: Essays in the Development of Radical Institutionalism, London: Macmillan. —(1995b) ‘Institutions and the significance of relative prices’, Journal of Economic Issues 29, 2:459–466. —(1996) John Kenneth Galbraith, London: MacMillan and New York: St Martin’s Press. —(1999) ‘The scope, method, and significance of original institutional economics’, Journal of Economic Issues 33, 2:231–255. Stanfield, J.R., and J.B.Stanfield (1980) ‘Consumption in contemporary capitalism: the backward art of living’, Journal of Economic Issues 14, 2:437–450. —(1997) ‘Where has love gone? Reciprocity, redistribution, and the nurturance gap’, Journal of Socio-Economics 26, 2:111–126. Tool, M.R. (1979) The Discretionary Economy. Santa Monica, CA: Goodyear Press.

3

The making of a heterodox economist The impact of Henry S.Dennison on the economic thought of John Kenneth Galbraith Kyle Bruce1

Much like Veblen, the intellectual figure with whom his thought is most often likened, a voluminous literature has evolved in the history of economic thought attempting to unravel the unique contributions of John Kenneth Galbraith. Longtime Harvard professor, presidential advisor, speechwriter and Ambassador to India, bestselling author and a former editor of Fortune, Galbraith is without doubt one of the most widely read and easily recognisable (excusing the pun) of twentieth century economists. Not nearly as much the subject of confusion and debate as is Veblen, though no less controversial, Galbraith and his work are a lively topic of debate amongst economists.2 Yet within this research field and despite Galbraith providing some guidance in interviews and his ‘official’ and ‘unofficial’ memoirs (much of his work is in some sense autobiographical), very little has been said about a key period in Galbraith’s intellectual development that laid much of the philosophical groundwork for his ensuing research agenda. The period I refer to is the second half of the 1930s when, following his early New Deal service and initial Harvard appointment, Galbraith became something of a peripatetic scholar, teacher and researcher and found himself employed as a ‘tutor-in-residence’ to Boston businessman Henry S.Dennison. The two subsequently penned two largely overlooked monographs, Modern Competition and Business Policy and Toward Full Employment, both published in 1938. The purpose of this paper is to explore Dennison’s influence on an economist considered by many adherents, though less so by himself, to be the most important living exponent of ‘old’ institutionalism in the sense of being in the tradition of Veblen, Commons and Mitchell. The central task is to review Dennison and Galbraith’s two joint works and more importantly, to utilise the latter’s testimony to elaborate upon the snippets of reference in the secondary literature to this key period in his life.3 It is argued that Dennison played a key role in prodding Galbraith to defect from the mainstream orthodoxy and embrace the then controversial ideas of Keynes’ General Theory before their wider acceptance at Harvard, the latter being ‘the principal avenue by which Keynes’ ideas passed to the United States’ (Schlesinger, 1984:9; Galbraith, 1971:49).4 Apart from positive affirmation of this point in Galbraith’s reminiscences, this comes through loud and clear in the second 25

26

Kyle Bruce

of their ‘joint’ publications, Toward Full Employment (TFE hereafter), a volume that is decidedly Keynesian in its overall flavour. It is also argued that Galbraith’s later forays into the U.S. industrial order— particularly in American Capitalism and The New Industrial State—were also an important outcome of his defection from mainstream economics, particularly in the realm of industrial organisation and the theory of the firm. It is seen that the seeds of Galbraith’s embrace of more heterodox ideas regarding the corporation and the functioning of the industrial order were planted in his mind as a result of his relationship with Dennison and that this can be gleaned, in part, in their first joint venture, Modern Competition and Business Policy (MCBP hereafter). In this way, the chapter builds on the recent work of Dunn (2001) by chronicling the origins of Galbraith’s original, though much neglected theory of the firm and provides support for Dunn’s thesis that Galbraith ‘had long mused on the role and salience of the large corporation in advanced industrialised economies’ anticipating much of the work of Coase, Penrose and Williamson (Dunn, 2001:158–9). Expressed in a rhetorical sense, the vital question this chapter seeks to answer is: why did an agronomist cum agricultural economist, who by his own admission was heavily steeped in economic orthodoxy, subsequently embrace the then heresies of Keynesianism and subsequently embark upon an unmistakably heterodox expose of the inner workings of the U.S. socioeconomic system? In other words, what forces were at work to inspire an individual from an otherwise ordinary rural background in Canada to write perhaps some of the most incisive analyses of American society and its most pervasive and distinguishing sociocultural artefact, the modern business corporation? In positing answers to these questions, the chapter is organised as follows: the first section will outline the nature and significance of the intellectual relationship between Galbraith and Dennison and in this context. The second section will examine Galbraith’s recollections in order to assess the extent of Dennison’s influence on the former’s embrace of the ideas of Keynes. The following two sections turn to Dennison and Galbraith’s joint monographs as a means of evidencing both Galbraith’s evolving acceptance of Keynes, and also the emergence of his interest in a more heterodox consideration of industrial organisation. This line of argument is pursued more forcefully in the concluding section, where it is demonstrated that the germ of ideas developed by Galbraith in later writings on industrial organisation, the corporation and the behaviour of business managers were contained in his joint publications with Dennison.

The Dennison-Galbraith nexus In 1937 he [Galbraith] became a citizen. In the meantime, under the prodding of industrialist Henry Dennison and the stimulus of Keynes’ General Theory he began both his inquiries into the industrial order and his defection from neoclassical economics. Arthur Schlesinger (1984)

The making of a heterodox economist

27

After completing doctoral work at Berkeley and following a brief stint with the Agricultural Adjustment Administration in Washington, in late 1934 Galbraith joined the Department of Economics at Harvard, arriving at around the same time as Schumpeter. Here Galbraith met, among others, Edwin Gay who had returned to the Cambridge side of the Charles River after distinguished service as foundation dean of the Harvard Business School. In the summer of 1936, Gay introduced and recommended Galbraith to his friend, Boston businessman Henry S.Dennison, as a possible teacher of economics. Galbraith was subsequently hired by Dennison as a tutor-in-residence5 and to assist in the preparation of a manuscript that Dennison, together with fellow scientific managers Lincoln Filene, Morris Leeds and Ralph Flanders, wished to propound as the liberal business response to the Depression. These corporate liberals were united in the view that government had to do something about escalating unemployment and so broke with conservative business ranks in support of Roosevelt The ensuing intellectual collaboration between Galbraith and Dennison marked the beginning of a friendship that lasted until Dennison’s death in 1952 and that continued thereafter with members of the Dennison family (Galbraith, 1996a; 1981:63). Dennison was a Boston paper-products manufacturer and president of the Dennison Manufacturing Co., well known at that time for the production of shipping tags, Christmas cards, gift wrapping (including a patent on the rights to making crepe paper) and gummed labels.6 In a career spanning some fifty years, he was an early exponent of scientific management,7 his company was the first in U.S. corporate history to introduce private unemployment insurance (in 1916), and he was a leading corporate liberal of the interwar period serving as an economic adviser to the Wilson, Harding, Hoover and Roosevelt Administrations.8 As I have argued elsewhere (Bruce, 1998), Dennison was an economic analyst who, in both his private and public activities, demonstrated an activist concern with the place, character and management of the modern business enterprise and also with the impact of the capitalist business cycle on broader society. He sought to deal with these issues in his role as a business leader and public figure; that is, as a practitioner or ‘doer’. But he did so also as a theoretician or ‘thinker’, both in the discipline of economics and also in management. His thought was published widely in economics, management and other social science journals and in the five monographs he authored. In this way, Dennison was reminiscent of his friend Edwin Gay whose biographer9 characterised him as A Scholar in Action’, though perhaps Dennison might be thought of as A Business Actor in Scholarship’. In an interview with this writer in 1996, Galbraith stated that Dennison was a ‘quasi-parent’ or ‘parent in residence’ to him, taking him in10 when he knew few others amongst the hallowed Harvard environs. It would seem that Dennison sympathised with Galbraith who was very much an outsider owing to his educational, ethnic and class background. Despite being from a background much like his Harvard peers, Dennison felt a distinct sense of alienation both during and after his own Harvard years (Galbraith, 1996a; 1981, 63).11 Besides this point of commonality, and crucial for the scope of this paper, Dennison had

28

Kyle Bruce

a profound effect on Galbraith’s economic thought, just as Galbraith, through his intellectual relationship with Dennison, was to sharpen and deepen the latter’s perspective on economic matters. It is to these issues that this chapter now turns.

Dennison’s proto-Keynesianism and its impact on Galbraith: conflict and conversion In 1938 his name [Galbraith] appeared as the junior author on the spine of Modern Competition and Business Policy. The senior author was Henry S. Dennison, an American businessman…[with] a wide reputation as a model employer and a pioneer Keynesian—at least among businessmen. John S.Gambs (1975) Upon commencing his duties as Dennison’s tutor, Galbraith was immediately struck by Dennison’s deep understanding of economics—he possessed what Galbraith termed ‘a shrewd analytical view’ towards the workings of the economy, a rare thing for a businessman both then and now. So much so, Galbraith ventured to call Dennison ‘arguably, the most interesting businessman in the United States’ (Galbraith, 1981:61). When questioned recently as to the basis of this statement, and to what extent Dennison differed from other notable corporate liberals of the period, like the Filene brothers or Gerard Swope and Owen D.Young at General Electric, Galbraith replied as follows: They had a welfare bent but none of them, with the possible exception of E.A. Filene had thought deeply about the working of the economy, how through macro and micro economics, as it later came to be called, you facilitated a better operating economy. They had welfare sense, but Dennison, for a businessman, had a shrewd analytical view… As a businessman, he was a pioneer in welfare economics. His staff, his workers had unemployment compensation, social security, and when the Depression came—which was a very difficult time for him—he reduced his own salary as part of a program of maintaining income for his workers. Galbraith (1996a) Galbraith also discovered that most of Dennison’s economic ideas ran counter to the textbook teachings on which he himself had been reared. At their time of meeting, though he had been exposed to Veblen and Marx at Berkeley (and he was very much taken with the former), Galbraith was first and foremost a neoclassical economist.12 The clash of economic ‘world views’ between the orthodox young economist and the progressive businessman ensued when Galbraith attempted to answer Dennison’s questions concerning the causes of the 1930s Depression. This caused a major difficulty:

The making of a heterodox economist

29

It was that Dennison already had a firm idea as to what was wrong with the economy. And so had I. My view derived from the…classical orthodoxy of Alfred Marshall as modified by the recently published work of two young economists Edward H.Chamberlin of Harvard and the wonderfully independent and formidable Joan Robinson of the University of Cambridge. Galbraith (1981:63). Accordingly, I told him that free competition had given way to oligopoly and monopolistic competition, and because of the latter too many resources were being wasted on advertising and salesmanship. The shortfall in production from these defects caused the depression from which the United States and the world then suffered. The remedy was more competition. Galbraith (1981:64) Or as he expressed it more recently: When I first met him, I was ‘caught’. This was before The General Theory and I was of the orthodox impression at that time that the Depression was caused by the restrictive activities of great industry—monopoly—that one had full employment, large capacity in agriculture where you had competition. You did not have that in industry and that was what explained the depressive character and unemployment of industry and this was associated with its rigid prices. I persuaded Dennison along these lines. He was resistant to it, but I persuaded him and that was one of the themes of the (first) book we wrote together, Modern Competition and Business Policy. Galbraith (1996a) And elsewhere: I came up with the notion that the problem was in the price structure, and persuaded Dennison sufficiently so that the two us [sic] wrote a book, which I’ve always recommended that people not read… [It] was published by the Oxford University Press, which must have been hard up for material at that time. Galbraith (1996b:136) Yet despite being temporarily persuaded by Galbraith, Dennison in fact held a decidedly different view and one that shook the very foundations of Galbraith’s commitment to economic ‘truth’, personified at that time by the twin edifices of Say’s Law and neo-classical orthodoxy. In short, Dennison did not accept the mainstream explanation of the Depression, as Galbraith observed: [O]ne of his more remarkable features in the area of economic affairs was that, in some respects, Dennison anticipated Keynes… He [Dennison] saw

30

Kyle Bruce

income moving out from the production of goods in two broad streams. One stream went to people of modest income and was likely to be spent The other went to the more affluent or to the business enterprise, and this was likely to be saved. There was a spendings and a savings stream, and these terms…were Dennison’s own. Depression, he believed, was caused by the nonspending of the income in the savings stream. The remedy or partial remedy was to shift taxation from income that was being spent or was on its way to be spent to income that was on its way to be saved—from a sales tax, as one example, to the corporate or personal income tax. Galbraith (1981:64) To Galbraith, and indeed anyone properly weaned on the orthodoxy, this was pure heresy. Though mainstream economists frequently made allowances for temporary market failure to be corrected by government intervention, few if any were prepared to question the sanctity of Say’s Law. For the majority of mainstream economists before the publication of The General Theory, production created the necessary purchasing power to ensure that all that was produced was bought and any ‘leakages’ in the savings stream, as they were later to be called, were ‘soaked up’ by borrowers who would then use these funds to consume.13 In other words, the economy if left to itself would find equilibrium at full employment owing to the adjustment of wages or interest rates. Galbraith therefore resisted Dennison’s line of thought. And for good reason it seemed: Whether a man accepted or rejected Say’s law was, until well into the nineteen-thirties, the test of whether he was qualified for the companionship of reputable scholars or should be dismissed as a monetary crank. Galbraith (1952:22) And elsewhere: In 1936, it was not only wrong but professionally unwise to resist Say’s Law. It was a litmus by which the reputable economist was separated from the crackpot… Since I took seriously my reputation as well as my commitment to economic truth, my dilemma, given Dennison’s heretical vision, was a difficult one. Galbraith (1981:65) This dilemma became more difficult for Galbraith, for as he observed, ‘in the very same weeks that I was writing my brief for my views on competition and thus refuting the errors of Dennison, I was reading The General Theory’. Thereafter he discovered that Keynes was with Dennison and not with himself: Keynes’ underemployment equilibrium explanation was more sophisticated but held the same practical consequences as Dennison’s! As he explained:

The making of a heterodox economist

31

While [our] book [MCBP] was going through final revisions I read The General Theory. The terrible thought developed in my mind that I had been wrong in persuading Dennison as I did, that he was instinctively right, and I told him so. I got the disconcerting answer that, ‘Indeed, I always thought that among economists Keynes made more sense than most’ Unfortunately the book had gone so far it couldn’t be stopped. It was well received by some of the orthodox of the profession. Galbraith (1996b:136–7) And elsewhere: I was shaken. This was not the primitive instinct of a businessman; this was the sophisticated case of a greatly renowned economist. I decided I should tell Dennison… I explained how Keynes supported him and not me. Galbraith (1981:65–6) Dennison had, in fact, read most of Keynes’ earlier work and had always admired him (Galbraith, 1996a). Yet neither Galbraith nor Dennison was completely sure of the accuracy of their respective positions as to the cause of the Depression. For his part, in 1937 Galbraith went to Cambridge, England, to study under the master himself. Though Keynes was absent owing to the first of his heart attacks, there were plenty of forthcoming acolytes in the guise of R.F.Kahn, Joan Robinson, Michal Kalecki and Piero Sraffa, to convince Galbraith of the logic of the ideas espoused in The General Theory, Meanwhile, back at Cambridge, Massachusetts, Dennison wondered if there might be some truth in Galbraith’s position and took their joint manuscript to his friend Felix Frankfurter at Harvard Law School for judgement. The latter left the manuscript on his desk unread and subsequently passed it to an editor of Oxford University Press, thinking it a book in search of a publisher. It was accepted for publication. According to Galbraith, it was a bad book that should never have been written. But being in accordance with majority orthodox opinion, it was warmly received (Galbraith, 1981:66, 74).

Modern Competition and Business Policy: a prelude to the later Galbraith Despite Galbraith’s reservations about MCBP—the book rarely appears in his publications under the banner of books under his authorship14—and even if marred by the ‘blinkers’ of its relatively orthodox outlook, the volume was an interesting exercise in industrial organisation and a neat popularisation of the work of Chamberlin and Robinson on market structure, and Berle and Means on the corporation. As the anecdotal evidence referred to above attests, MCBP proved to be more representative of the views of Galbraith before his ‘conversion’ to the more heterodox ideas held by his co-author, Dennison. Recall that MCBP was the

32

Kyle Bruce

outcome of a ‘brier’ that Galbraith prepared for Dennison to correct his heretical opinions as to the cause of the Depression and to sway him to the view that more competition was the most appropriate remedy (Galbraith, 1981:64). This was a view that would undergo a fundamental transformation in Galbraith’s later work. In the Foreword to MCBP, Dennison and Galbraith stated that their aim was to explore the shortcomings of what they termed the ‘good health equilibrium’ view of the economy in relation to the workings of the business sector or ‘industrial organization’ and to suggest appropriate remedies. They claimed to have built their analysis around the theory used to gauge the ‘degree of competition’—the converse of Lerner’s ‘degree of monopoly’. In other words, they aimed to describe the modern competitive structure and compare this with actual business experience or practice. In their disclaimer, they stated that ‘responsibility for the correctness of their theory and analysis must rest primarily with the economist and for suggested action upon the business man’ (Dennison and Galbraith, 1938:6–7). They opened the volume proper by outlining the standard ideal of competition familiar to any economics undergraduate and which will not be further elaborated. They then qualified this précis by advancing a perspective Galbraith was to later refine and strengthen in The New Industrial State: that the simple statement of textbook orthodoxy, or some refinement of it has been regarded as more, much more, than a statement of what would be ideal in industrial organization. It has been regarded as the state of affairs which actually exists when industry is organized by competition. Dennison and Galbraith (1938:13) In reality, the authors further observed, this kind of competition is quite different from that which prevails in modern industry…and there are, in fact, very real differences between competition of the automatic and self-regulating sort…and competition of the modern industrial world. It has been one of the most pervasive and dangerous misconceptions of our economic and political life to think that there is only one kind of competition. Dennison and Galbraith (1938:19) They stated that agricultural staples were perhaps the only major example of selfregulating competition and elsewhere, the industrial terrain is characterised by ‘a relatively small number of relatively large producers and the tendency of many individual producers to acquire more or less distinct submarkets of their own’ (1938:21). This was said to give the leaders of these enterprises ‘a measure of jurisdiction over the prices of his products’. In other words, and in the ChamberlinRobinson-Berle-Means tradition, Dennison and Galbraith saw that industry was characterised by administered prices—price makers rather than price takers—and that this ‘market power’ emanated from product ‘separation or differentiation’, market segmentation, and diversification into upstream and downstream markets.

The making of a heterodox economist

33

The effects of ‘producer price jurisdiction’ and the ensuing relative price inflexibility, at least in terms of the frame of reference of the competitive ideal, were judged by Dennison and Galbraith to impair or eliminate the self-regulatory aspects of competition. Price-making or market power was said to result in underproduction and overpricing, price wars and cutthroat competition, and overinvestment, excess capacity and wasteful sales promotion. Herein the essence of the explanation Galbraith gave Dennison as to the cause of the Depression: ‘we have in price jurisdiction and the attendant curb on potential output one significant explanation of the failure of the American economy to achieve the standards of abundance which all with a gleam of imagination know are possible’ (1938:37). Important also in this regard is the fact that the duration of the Depression was explained by the authors as being due to the interference, by price jurisdiction and resultant relative inflexibility or rigidity of prices, with the delicate signalling network characteristic of self-adjusting or clearing markets: ‘That prices in most of the industrial world have no such prompt and sensitive response, is a matter of common knowledge’ (1938:51). The remedy therefore, was more competition. As suggested above, this explanation proved to be premature and underwent substantial revision as part of Galbraith’s intellectual ‘conversion’ to the ideas of Keynes and his belated acceptance of Dennison’s reasoning. It will be argued later that Galbraith underwent a wholesale intellectual ‘turnaround’ in this regard, from being an exponent of more competition to a staunch critic and further, to a defender of big business as an organic and necessary component of contemporary industrial life. With the competitive ‘ideal’ out of the way, the second part of the volume turned from the atomistic producer and moved to a discussion of the modern day corporation, foreshadowing much of Galbraith’s future work. Yet having said this, the bulk of the analysis remained squarely within the mainstream, Chamberlin-Robinson tradition.15 Nevertheless, towards the conclusion and without any apparent supporting argument, the authors claimed that ‘[w]e dissent from efforts to meet the problems of the modern corporation by reducing its size. Arbitrary measures to prevent bigness per se we regard as not so much harmful as merely lacking a reasoned and defined objective’ (1938:118; emphasis added). This is an important point, because despite the authors’ apparent case of ‘intellectual schizophrenia’ (which is not surprising given the lack of finality in both their minds as to the soundness of their views in this particular volume), the final chapters of MCBP proved to be more representative of the intellectual debates between the authors referred to above and more indicative of the direction Galbraith was to take in later work. This surfaces clearly in the proposition made by the authors: ‘if it is accepted that any form of industrial organisation straying from the self-regulatory competitive ideal is bad, and that a restoration of this ideal is good, this raises the problem of restoring something which has never existed in most modern industry’ (1938:82); or, restoring ‘the sort of business structure which the nineteenth-century business man and economists assumed (and still assumes) to exist, but which may not exist’ (1938:80). The alternative’, for Dennison and

34

Kyle Bruce

Galbraith therefore, was ‘to accept American business as it now is and to attempt to design a set of mechanisms which will do some of the work of the automatically self-regulating features which have been lost’ (1938:80; emphasis added). In other words, in order ‘to re-design and supplement the organization of modern industry to provide that degree of regulation which is so obviously essential’ (1938:83), it is necessary that socio-economic institutions be called upon for this service. In this regard, the authors note that ‘[t]he present task…is not to improve the machinery for doing an old and familiar job. It is to invent new machinery for a new job’ (1938:104). In other words, there is no advocacy of anti-trust action and so, it was an important departure from the regulatory consequences of the ChamberlinRobinson theory which, almost without exception, leaned towards virtually automatic anti-trust action. It was a stance vindicating the decidedly institutionalist outlook of the authors and one that very much foreshadows Galbraith’s later insistence that corporations should be regulated in the public interest rather than broken up into smaller firms as prescribed by anti-trust laws motivated by outdated notions of atomistic competition (Hession, 1972:24; Gambs, 1975:40). To be sure, the proposals offered by the authors for restoring close to capacity production with less unemployment, for freedom from price warfare at consumer expense, and for reducing the susceptibility of industry to booms and depressions were very much in keeping both with Dennison’s personal activities and his philosophical approach to business management as a profession: industrial publicity, regulation and corporation policy. The first proposal, ‘industrial publicity’, urged the sweeping away of the veil of secrecy shrouding American business and reporting and releasing information pertaining to production, prices, sales, earnings, assets and liabilities, inter-corporate stockholdings, employment and wages and hours. This would ensure ‘that sound national progress and sound business growth alike [be] made on the basis of knowledge and not on guesswork’ (1938:85). This would be administered, claimed the authors, by Congress designating a government department and bureau to ‘direct the work and give formal recognition to the trade association as a co-operating agency’ (1938:96)—in other words, by utilising the existing trade association machinery ‘organized for a similar purpose’ except now the focus would be macro rather than a microeconomic. Dennison and Galbraith’s analysis of regulation focused on the history and problems of regulation, surveying regulation in railways and utilities and other industries subject to natural monopoly conditions. They repeated their earlier aversion to automatic and blind reliance on anti-trust action noting that this might work should there exist pure, or what they call’ 100% monopolies’. However, and this foreshadows much of Galbraith’s future work, they characterise antitrust legislation as a ‘misdirection of legislative emphasis’ noting that it is not isolated cases of monopoly or else firms controlling over half of the industry, ‘but a growth of single producers to sizes large enough to affect price appreciably which is the basic factor in eliminating the self-regulatory character of industry’ (1938:103). Accordingly, they argued that the U.S. economy was incapable of being controlled by self-regulation and therefore, government must become more

The making of a heterodox economist

35

than a passive referee: ‘If industry cannot regulate itself… then the responsibility rests with the state’ (1938:105). By this they meant cooperative and experimental industrial planning under the aegis of a planning commission empowered by Congress to regularise and stabilise production and output and enforce price and labour policies and standards in the social interest (1938:106). Overall, MCBP can be best considered as providing a window into the intellectual relationship between the authors and their debate as to the efficacy of mainstream economics—Marshall plus modifications by Chamberlin and Robinson—in explaining the cause of the Depression and more importantly, what was to be done about it. As argued below, it also laid the foundations for Galbraith’s incisive exploration of the inner workings of oligopolistic U.S. corporations.

Making amends: Toward Full Employment Though Galbraith was formally employed as a ‘ghost’ writer in the preparation of TFE, he used it as a launchpad for his revised economics ‘worldview’—as he noted, ‘[i]ts publication coincided almost precisely with my emerging doubts as to the validity of its argument’ (Galbraith, 1994:86). After reading The General Theory and studying at Cambridge University, he became convinced that ‘Dennison was right and that our book [MCBP] was wrong’ and therefore, TFE ‘was designed to correct that earlier error’ (Galbraith, 1996a). He has also recently stated that TFE ‘embraced Keynesian ideas to a much larger measure’ and that when he was drafting the ideas of Dennison, Flanders, Leeds and L.A.Filene, ‘I put together their ideas with, as I say, a heavy Keynesian overtone’ and noted that though his name does not appear on the title page, drafting this volume ‘was the process by which I became attracted to Keynesian ideas’ (Galbraith. 1996b:137). The official ‘authors’ met on a regular basis at Dennison’s home to ‘brainstorm’ with Galbraith, though the latter was responsible for the final draft The book represented a liberal business view of the Depression and the New Deal, seeking to ‘diagnose our trouble and suggest remedies’ (Dennison et al., 1938:v). The ‘authors’ noted that ‘[n]one of us can claim technical training as…economist[s], but we have spent our lives dealing with the basic material of economics’ (1938:v). The book was divided into three parts: Part One was concerned with The Provision of Useful Employment’ and was Leeds’ section; Part Two with ‘Fiscal Policy and the Business Cycle’ was Flanders’ contribution; and Part Three on the tax system was Dennison’s section. Lincoln Filene listened and encouraged during the ‘brainstorm’ sessions but did not contribute appreciably (Galbraith, 1981:66). Dennison’s paper, entitled ‘Toward A Tax System That Fits’, revealed the impact of Keynes on both ‘authors’.16 The emphasis was on demonstrating how the tax system could be used for maximum employment.17 As mentioned in the anecdotal analysis above, Dennison convinced Galbraith of the continuous and

36

Kyle Bruce

dynamic flow of income as divided into two streams: a consumption stream and a savings/investment stream. As he reasoned: The money income which is being released by production of goods and services at any time may be looked upon as a stream which separates itself to flow into two channels. One fork of this stream—it may be termed the consuming stream—flows to be exchanged for consumers’ goods… The second fork of the stream—which may be termed the savings stream—… is spent not for consumers’ goods, but for the purchase or construction of capital goods. Dennison et al. (1938:160–1) Therefore, he continued, ‘[i]n one sense the consumption stream turns the millwheels while the investment stream furnishes more wheels to be turned’ (1938:5). According to Dennison, the latter was a point lost on the fiscal authorities. Through his analysis of the tax system, he found that it was ‘too heavily weighted against consumption’ (1938:5). His overriding aim, therefore, was to ‘reexamine [the] distribution of taxation between income flowing into consumption and income flowing into savings’ because, in his opinion, the present distribution between these two was ‘not the best possible’ (1938:163). The current distribution of tax burden was inefficient, according to Dennison, because it impacted unfavourably on consumption. This was because households’— especially lower income-higher spending households—‘ability to pay’ taxes depended on their budget constraints or nominal incomes. In other words, Dennison realised that ‘it is not necessarily true that all of the taxes paid by each income group are divided between saving and consumption in strict proportion to the way in which the group divides its entire income’ (1938:166). The imposition of taxes may actually alter or thwart consumption, as he highlighted: the imposition of tax on a commodity of a highly inelastic demand may not reduce its sale to low income families, but may force these families to reduce the use of another commodity of more elastic demand. Such a tax would thus come completely from consumption. On the other hand, wealthy groups may maintain a given living standard regardless of changes in taxation. An increase in the tax on bread would merely diminish their surplus of income over all consumption expenditures. It would come entirely out of what would have been saved. This is disastrous for overall consumptive demand (later called aggregate demand), according to Dennison, because it is lower income groups that have a higher tendency (known subsequently as propensity) to consume. He suggested that this was a possible factor behind the underconsumption that caused the Depression. In his examination of the contemporary distribution of tax incidence on consumption and savings in the US, Dennison found evidence to support his initial hypothesis regarding the overburden on consumption. That is, after

The making of a heterodox economist

37

examining taxes on corporations, individuals, goods and property, he found that ‘taxes in our country fall 73 percent upon the consuming stream and 27 percent upon the savings stream’ (1938:185). He noted that in some cases, such as that of tobacco and alcohol, taxation on consumption was deemed to be a social necessity to control demand for those commodities. But on the other hand, it is apparent, also, that by shifting to income and inheritance taxation and abandoning taxation of commodities, it is possible to shift some of the burden from consumption to savings. Dennison et al. (1938:188) In this way, Dennison was an early U.S. advocate of progressive income taxation as a means of restoring and maintaining purchasing power, while his focus on the ‘savings stream’ as a possible tax base revealed that both he and his ‘ghost writer’, Galbraith, were decidedly influenced by The General Theory. This is evident in Dennison’s refutation of the capital market clearing function of interest rates,18 being of the view that ‘the rate of interest has a very limited bearing on the decision to invest in capital goods’, ‘that the supply of savings and the extent of the use which is made of that supply have no close relation to one another’, and that ‘in the case of an excessive supply of savings there would appear to be no “self-corrective” influence which would lead (through a lower interest rate) to restricted saving and increased use and so to complete utilization of supply’ (1938:192–3).19 This was dangerous for overall consumptive demand or purchasing power, he postulated, because it meant there was no self-corrective mechanism to prevent hoarding: ‘Is it possible that the total of the income paid out or made available by production will not be spent?’ (1938:194). In words reminiscent of Keynes, ‘[t]here is a “leak” between what he (the consumer) receives and what is spent’ (1938:197). Savings here being explicitly labelled a ‘leakage’ from the circular flow of income. The crux of Dennison’s analysis in this context is that he observed that there is ‘evidence of an insufficiency of purchasing power in the hands of consumers to buy the potential output of industry’ but that there is ‘no evidence of an insufficiency of saving to meet the demands of industry for new capital equipment’ (1938:199). This being the case, it was obvious—at least for Dennison—‘that the case for shifting a reasonable amount of taxes from the consuming stream to the savings stream is a strong one’ (1938:201). During good times, he continued, taxation of consumption is replaced or counterbalanced by government or government employee spending. So too taxation of savings during good times results in government spending replacing private investment and in some cases, replacing wasteful speculation in stocks. Yet during depression, the effect of these two types of taxation is different Taxation of the savings stream will bring a positive increase in spending. For now part of funds which would otherwise have been uninvested savings are taxed and spent by the government The result is a larger volume of

38

Kyle Bruce

spending and a smaller volume of hoarding during depression than if taxes all fell upon the consumer. Dennison et al. (1938:200) And further, given these potentially idle savings funds, [i]f taxed and expended by the government there will be not only the initial employment and expenditure by the amount involved but also the indirect and secondary expenditure by those from whom the government buys materials or at whose establishments the recipients of government paychecks trade. The relief of the consumer from taxation causes the tax system to work against rather than with the deflationary pressure of a depression period. Dennison et al. (1938:201–2) As for overall policy prescriptions, Dennison advocated a long-time programme of tax reform that generally eliminated Federal consumption taxes—except where socially necessary—and a greater taxation of income and wealth at all levels and on all economic actors. In his view, ‘the case for shifting a reasonable amount of taxes from the consuming to the savings stream is a strong one’ (1938:201). Further, an income tax ‘affects the redistribution (of income) with less damage and more benefit to the functioning of the economic system than any other tax of equal importance’ (1938:217). Likewise, a tax on inheritance, general property and land transfers has the same properties as income taxes in terms of taking some of the burden off consumption.

Intellectual convergence: the later Galbraith That the tension between the authors, albeit somewhat shrouded in MCBP, was in some way responsible for Galbraith’s later heterodox position regarding industrial organisation has been intimated rather than fully explored by Hession (1972:24) and Gambs (1975:40). It should be also noted that the line of causality of influence was certainly not all in one direction: Dennison’s own ideas were evolving and becoming sharper as a result of his debates with Galbraith. The fact that he allowed his name to appear on MCBP bears testament to the fact that despite severe misgivings, he thought there was some truth in Galbraith’s position. These points are borne out nicely by comparing and contrasting a small discussion of Dennison’s in the Journal of Economic History in 1943, and two largely overlooked papers written by Galbraith in 1949 and 1955. These writings reveal both authors’ re-evaluations and sharpening of earlier ideas in light of their mutual influence on one another. The outcome of a commentary on a paper by economic historian Thomas C. Cochran concerning historical and theoretical aspects of Chamberlin-Robinson imperfect competition, Dennison’s 1943 paper continued in the spirit of MCBP

The making of a heterodox economist

39

by comparing theory with actual business practice. As to production decisions as having no relation to effective scale of production, for Dennison, this was nothing novel, ‘for of course our output never did have any relation to theoretical effectiveness’. And further When fundamentally you make to order (as what manufacturer doesn’t?), and are not in business solely for your health but are trustees for a thousand or two stockholders, how in glory can you choose the ‘most effective scale of production’ unless you define ‘most effective’, as we always did, as that which yielded the most net profit or the least net loss? Dennison (1943:48) And as to mutual interdependence in pricing decisions, again, apart from finding nothing all that new in this theory in light of his business experience, Dennison believed that Cochran makes too little of the point: Our company…universally set prices on our guess or knowledge of the action (please note I did not say ‘logical action’) of our market rivals… [T] he process of pricing was always the same. After Thurman Arnold’s reverberations have died out there will still be uniformity and some unanimity in pricing because we shall each judge of our rivals’ logic by starting on the basis of our own. This is an important point in light of Galbraith’s later position on the efficacy of anti-trust legislation: it demonstrates that Dennison harboured a sceptical stance on the worth of the Department of Justice’s most visible protector of free market competition. As he remarked further: It has always seemed to me that the word competition (like several others) as used in economic theory was a huge over-simplification; there are too many varieties and mixtures of elements to pack into that one word; it is as if chemists had no word beyond ‘element’ or ‘metal’… I suppose economic theories deal with averages; but economic history will have to hunt hard and long to find an average fact… My guess is that economic theory must move, and is moving, along the painful road from the over simple to the truly complex, just as physics has moved from four elements (earth, air, fire, and water) to eighty-six elements and God knows how many isotypes and crippled atoms. Dennison (1943:48–9) Dennison’s concluding remarks in the paper are also indicative of the direction in which Galbraith would later head, particularly in the context of the nexus between imperfect competition and cyclical downturns. Dennison here repeated the stance he originally took on Galbraith’s explanation for the Depression; that is, he rejected the mainstream policy (though not the theoretical import)

40

Kyle Bruce

interpretation of the Chamberlin-Robinson line—virtually automatic anti-trust action—which Galbraith had espoused prior to his acceptance of Keynes’ General Theory. As he concluded: When a community produces more than the bare staples of subsistence, and especially when it begins making goods to order, prices seem to get further and further away from being automatic regulators of the business cycle. And in all essentials a large majority of manufactured goods are made to order, or to an order in sight. To prosecute combinations in restraint of trade has its good point, but to suppose that when they’re all prosecuted we shall be freed from cyclical depressions and unemployment is fatuous. Dennison (1943:50) As will be seen below, this is almost identical to Galbraith’s later stance on the (what he believed to be) misguided actions of the Temporary National Economic Committee in restoring and maintaining a textbook notion of competition in the industrial sector of the American economy. Turning, then, to the first of Galbraith’s papers mentioned in opening this section—‘Monopoly and the Concentration of Economic Power’, written for the American Economic Association’s Survey of Contemporary Economics in 1948—after an overview of the work of Sraffa, Robinson, Chamberlin and Gardiner Means, Galbraith concluded that ‘[w]ithout much doubt the dominant market of modern capitalism is not one made up of many sellers offering either uniform or differentiated prices. Rather it is a market of few sellers’. And in this way, he argued further, the notion of pervasive oligopoly has emancipated market analysis from the inadequate extremes of competition and single-firm monopoly (Galbraith, 1949:101). It also resulted—particularly following Means’ empirical work on rigid prices—in the discovery of ‘administrative as distinct from market coordination’ in the industrial heartland of the American economy (1949:106; emphasis added). None of this is all that different from Galbraith and Dennison’s work in MCBP a decade earlier. Yet in the second half of the paper, Galbraith exhibited a distinct turnaround in his reasoning from that which guided his early advice to Dennison regarding the cause of the Depression. Tackling the nexus between imperfect competition and depression and unemployment head-on, as well as undertaking a ‘deeper questioning of capitalist institutions for which the depression provided a hospitable environment’, Galbraith admitted that a prima facie case could be made for generalised monopoly as an explanatory variable in depression, ‘as entrepreneurial returns maximized (or protected) at the expense of production’. But following the work of Chamberlin and Robinson, that put in more familiar theoretical terms the musings and intuitive opinions of Dennison as discussed in his 1943 paper above, Galbraith conveyed that restricted production, excess capacity and so unemployed resources under imperfect competition became the rule rather than the exception. He argued further that ‘[n]ot many accepted this vulgar formulation’, yet once outside the world of academia, imperfect

The making of a heterodox economist

41

competition was ‘undoubtedly credited with diagnostic and even therapeutic values which it did not, in fact possess’ (1949:109). This he explained thus: Once oligopoly and monopolistic competition entered the picture, to prescribe the elimination of monopoly became tantamount to demanding a wholesale revision of the economic order. Economists, some sections of the press oddly to the contrary, are not given to such violent prescriptions. The highly restricted definition of pure competition, which the new theory brought into use, also helped make the competitive goal seem remote and impractical. Galbraith (1949:111). In a complete turnaround from his younger self, he concluded by stating that ‘[t]o say that a flexible competitive economy has greater cyclical stability than an inflexible and monopolistic one’, despite its appeal in the early 1930s even to himself, ‘is to say little that is useful. The real question is whether, given a rule of monopoly or monopoloid forms, stability is enhanced by increasing the area of competitive and flexible prices’ (1949:113). His verdict on this count was in the negative: ‘[t]he selection of inflexible prices as the devil of the piece seems…to have been based more on tradition than on the analysis of demand and income effects…and is clearly unfinished business’ (1949:114). This is virtually wordfor-word what Dennison had said six years earlier. Accordingly, and promoting a policy conclusion for which he later became noted, Galbraith argued against automatic anti-trust action for cases of imperfect competition and further, that in some cases, far from inherently breeding ‘senescence and protection of the status quo’, monopolistic or oligopolistic firms may actually spend more money on what later would be called R&D with positive externalities for the whole industry. This is a superior outcome to conditions approaching perfect competition (1949:120). He concluded with a caustic attack on the administrative arm of anti-trust action, the Temporary National Economic Committee (TNEC) and its most visible exponent, lawyer Thurman Arnold: In placing the antitrust laws in perspective, one has to conclude that they are not serviceable for many of the cosmic purposes that their ardent proponents hold sacred… No serious effort was made (by the TNEC) to provide an appreciation or rationale of large-scale enterprise and concentrated economic power as facts of contemporary economic life… We do live in an industrial community where oligopoly—or, more horrid word, private collectivism—is the rule. But strangely, we do live. Our dissatisfaction with our world is less the result of having known any other than of constructed a model of another economic society, the rationale of which we know and which is more companionable to our sense of elegance and order. We shall never find anything so agreeable in the world we have. Galbraith (1949:120, 123, 127–8)

42

Kyle Bruce

In his 1955 paper, entitled The Businessman as Philosopher’, completed shortly after Dennison’s death, Galbraith continued in this vein and provided a rationale for Dennison’s association with MCBP despite the fact that the views expressed in that volume were more reflective of Galbraith’s than those Dennison held himself. In almost an apologia for his earlier views—keeping in mind his ‘father figure’ Dennison had died three years earlier—Galbraith urged that a careful distinction be made between the formal and ritualistic beliefs of business and those that actually govern private business behaviour. So though the formal creed commonly professed by businessmen was individualism and unfettered competition—coordinate with suspicion of and resistance to government intervention—he was of the belief that the actual behaviour of the American businessman, however, suggests the existence of conflicting attitudes which, if less brave than those just outlined, are also a good deal more practical. It is doubtful if the United States or any other country could survive a rigorous application of [unfettered competition and individualism] and it seems certain that no business firm ever could. Galbraith (1955:60–1) Continuing on from the germs of insights contained in MCBP, he observed that the hallmark of competitive behaviour—price competition—was noticeably absent in the U.S. industrial structure characterised as it was by a small number of large firms. The norm here, he continued, ‘with a consent so tacit that its existence often goes unrecognized’ was for the avoidance of ‘uninhibited price competition’ (1955:61). Dennison, in fact, had questioned its existence and highlighted tacit cooperation as being the norm much earlier, in 1936, highlighting the confluence between the two thinkers: We have bunked ourselves with an old theory which lasted for one hundred and fifty years because it applies to a growing world constantly pioneering in all its sections. It is the classical economic theory which has its valid elements, but as Keynes says, it is only a special case of a general theory which applies to a pioneering and growing world. We have taken the simple rule of prices and what prices will do. If you reduce them you will sell more, and if you increase them you will sell less. But in case after case price changes do not make any difference. We do not know anything about the effects of price changes. Prices, such as printed as market prices, are not true anyway, because prices are made secretly through all sorts of deals. Dennison (1936:8) Likewise, with regards to the freedom of entry and exit ideals, Galbraith observed that few businessmen worry about these matters because of the immense capital requirements for effective operation in established industries like steel, automobiles, aluminium or tobacco: ‘the dramatis personae of the characteristic

The making of a heterodox economist

43

American industry changes little from year to year’ (Galbraith, 1955:61). And so, he concluded that competition, in the American business faith, is no rigorous, classical idea toward which, however painfully, the economy must be made to conform. There is a singular—and no doubt quite sensible—unwillingness to die in its name… This means that the typical businessman is exceptionally subject to the restraints of organization and the authority of the large firm. All of his active life is lived in a hierarchy which, if less formal than that of a military organization, is no less insistent on its demands for team play and discipline… He is, in short, the creature of modern business administration in all its modern vastness and intricacy of human association. No one could be more hopelessly miscast in such a milieu than the swashbuckling individualist idealized by the formal creed. Galbraith (1955:62–3; emphasis added) These were issues he had tackled three years earlier in American Capitalism where he spoke of a convention or custom among businessmen outlawing price ‘warfare’ and the means by which they avert ‘disaster’ of going out of business (Galbraith, 1952:48–9). Dennison, as a practising manager and an accomplished author in the area of management or organisational economics (Dennison, 1931, 1936), was no stranger to these ideas. He almost certainly played an influential role in Galbraith’s later appreciation of the behaviour of the modern business enterprise as being contrary to the received wisdom of the orthodox view. Dennison’s influence can be gleaned further in Galbraith’s analysis both in American Capitalism (AC hereafter) and The New Industrial State (NIS hereafter). Turning firstly to AC, published in 1952, Galbraith again repeated the now familiar observation ‘that over an important sector of the American economy individual markets are shared by a small number of producers’ (Galbraith, 1952:42) and extended earlier views regarding the ‘triumph’ of big business and the apparent inefficacy of anti-trust action and the ‘illusion’ of a competitive business world: ‘[i]t is evidently possible to prosecute a few evil-doers; it is evidently not so practical to indict a whole economy’ (1952:55). He criticised economists and policy-makers for their pursuit of illusory competition and antitrust action, their preoccupation being less about interpreting reality than with building an ideal or model economic society (1952:15–7). Furthermore, he called for a more pragmatic recognition that imperfect competition was more realistic than supposing that ‘the very fabric of American capitalism is illegal’ (1952:58), but more important, that it was more ‘workable’ and ‘that overall consequences, which in theory are deplorable, are often in real life quite agreeable’ (1952:61). In this context, Galbraith went even further and asserted that ‘there must be some element of monopoly in an industry if it is to be progressive’. He justified this on the grounds that because R&D and technological innovation are costly and subject to positive externalities and imitation, it will almost certainly be large, powerful firms that have the financial resources and the incentive to undertake

44

Kyle Bruce

‘technical development’. The model of pure competition, he argued further, is anathema to innovation for ‘the very mechanism which assures the quick spread of any known technology in the purely competitive market—and which was a strong recommendation of that market—eliminates the incentive to technical development itself… [M]arket power protects the incentive to technical development’ (1952:92– 3; emphasis added). And finally, turning to NIS, in words almost identical to those in MCBP and AC, Galbraith stated that a ‘vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality’ (Galbraith, 1967:72). Unlike this blind pursuit of competition, Galbraith’s overarching concern in NIS was to highlight that in an age of large, vertically and horizontally integrated corporations, far from being the controlling power in the economy, markets were increasingly accommodated to the needs and convenience of business organisations (1967:vii). Modern economic man, he argued, is no longer subject to the authority of the market Instead, we have an economic system which, whatever its formal ideological billing, is in substantial part a planned economy. The initiative in deciding what to be produced…comes from the great producing organization which reaches forward to control the markets that it is presumed to serve and, beyond, to bend the customer to its needs. Galbraith (1967:6; emphasis added) This was, indeed, a far cry from the young Galbraith who tutored Dennison. He argued further that the need for planning emanated from ‘the imperatives of technology’ and innovation; that is, ‘from the time and capital that must be committed, the inflexibility of this commitment, the needs of the large organization and the problems of market performance under conditions of advanced technology, comes the necessity for planning’ (1967:16). With the rise of the large, innovative corporation, using the market is too uncertain to risk the massive capital outlays to develop and sustain organisational capabilities. Accordingly, the corporation ‘must replace the market with planning… [I]t must exercise control over what is sold…[and] what is supplied… Need must be elaborately anticipated and arranged’ (1967:24–5).20 Companies have a variety of strategies at their disposal for replacing the price mechanism as the coordinator of resources, particularly using vertical integration to transform bargaining transactions into internal transfers within a planning unit: [E]limination of a market converts an external negotiation and hence a partially or wholly uncontrollable decision to a matter for purely internal decision. Galbraith (1967:28) And following Dennison’s intuitive understanding of non-price competition as a condition for ‘workable’ competition and controlling markets, Galbraith opined

The making of a heterodox economist

45

that vertically integrated corporations, particularly in their dealings with upstream suppliers, find it essential for effective planning to engage in ‘highly cooperative’ relations and enter into long-term contracts with one another. The option of eliminating a market is an important source of power for controlling it… Each seller shares the common interest in secure and certain process; it is to the advantage of none to disrupt this mutual security system… [I]n an economy where units are large, firms can eliminate uncertainty for each other. This they do by entering into contracts specifying prices and amounts to be provided or bought for substantial periods of time. Galbraith (1967:29–30) In this way, in the industrial heartland of the American economy, markets have largely if not completely been supplanted by managerial-entrepreneurial hierarchies—what Galbraith called the technostructure. Thus it is, Galbraith argued further, that markets are somewhat self-regulating: ‘size and small numbers of competitors lead to market regulation’ (1967:30), which, combined with the exigencies of technological innovation, makes antitrust action somewhat self-defeating. Size is the general servant of technology, not the special servant of profits. The small firm cannot be restored by breaking the power of the larger ones. It would require, rather, the rejection of the technology which since earliest consciousness we are taught to applaud. Galbraith (1967:33) The modern firm, if it is to generate and sustain competitive advantage over rivals and provide quality products at least cost, must be of the requisite size to ‘carry the large capital commitments of modern technology’ and ‘large enough to control its markets’. The size of firms is inextricably related to planning not with monopoly power, ‘[a]nd for this planning—control of supply, control of demand, provision of capital, minimization of risk—there is no clear upper limit to the desirable size’ (1967:76). And so, [t]echnology and the companion commitments of capital and time have forced the firm to emancipate itself from the uncertainties of the market And specialized technology has rendered the market increasingly unreliable. So the firm controls the prices at which it buys materials, components and talent and takes steps to insure the necessary supply at these prices. And it controls the prices at which it sells and takes steps to insure that the public, other producers or the state take the planned quantities at these prices. So far from being controlled by the market, the firm, to the best of its ability, has made the market subordinate to the goals of its planning. Galbraith (1967:110)

46

Kyle Bruce

Again, it must be emphasised that this was a decidedly different conception of industrial organisation and competition than that which Galbraith attempted to adumbrate to Dennison some thirty years earlier.

Conclusion This chapter has explored the intellectual relationship between John Kenneth Galbraith and Boston businessman, Henry S.Dennison. Utilising their joint publications and the testimony of Galbraith in the guise of interviews and reminiscences, it has been demonstrated first, that Dennison played a decisive role in Galbraith’s embrace of the initially heretical ideas of Keynes. Secondly, and related to this intellectual ‘conversion’, Galbraith’s much neglected but incisive foray into the place and character of the modern large corporation and the important strategic function of businessmen was, in important respects, a result of Galbraith’s association with Dennison in the late 1930s. It would seem that Galbraith, after setting out to convince Dennison of the efficacy of unfettered competition for regulating economic affairs, came to appreciate a decidedly different view; one that focused on the centrality of managerial hierarchy and innovation, and on the abiding presence of the large, vertically integrated business organisation for planning economic activities internally and strategically.

The making of a heterodox economist

47

Notes 1. 2.

3.

4.

5.

6.

7.

8.

The author gratefully acknowledges comments on early drafts of this paper from Alan Duhs, Craig Freedman, Chris Nyland and Stephen Dunn. Particularly so amongst those analysts operating within the American institutionalist tradition who readily claim him as one of their own. See, for instance, Gruchy (1972: Chap.7) and Stanfield (1996:153–60). See Hession (1972), Gambs (1975) and Schlesinger (1984). A more recent work, that by Stanfield (1996), makes no reference whatsoever to Dennison or his work. In this context, it should be noted that because of his friendship with Dennison, Galbraith’s interest in Keynes’ ideas, though no doubt heightened in 1938 and into the 1940s, chronologically preceded those of his more wellknown colleagues (save, perhaps, for Lauchlin Currie—see Sweezy, 1972) such as Alvin Hansen, newly arrived from the University of Minnesota, and others who attended Hansen’s fiscal policy seminars. Yet given that most of his colleagues were beginning to embrace the ideas contained in The General Theory in the late 1930s and early 1940s, Galbraith, a junior appointment, would have found it more congenial and more practical career-wise to express his ‘conversion’ more openly at this time rather than earlier. To wit, an earlier colleague of Galbraith’s (and later an economic advisor to Roosevelt), Lauchlin Currie, ‘failed of promotion at Harvard partly because his ideas, brilliantly anticipating Keynes, were considered to reflect deficient scholarship until Keynes made them respectable’ (Galbraith, 1971). The fact remains, as will be made clearer below, that Galbraith was on the side of Keynes much earlier than Hansen et al. as a result of his debates with Dennison and his reading of Keynes in 1936 and owing to his visit to the Cambridge University in 1937. In this context, it might be apt to mention Dennison’s diverse interests beyond the scope of running a business, as Galbraith (1981:61) does, and that Dennison was by no means a dilettante: ‘When some new subject captured his imagination, he regularly hired someone of professional competence to give him instruction’. Dennison’s family company still operates today, following a 1990 merger, as the Avery-Dennison Corporation, a $5.5 billion, Fortune 500 company recognised globally for its innovative pressure-sensitive technologies and products. Its core business remains as paper and adhesive products. Between 1919–21, Dennison was president of a society devoted to the ideas of Frederick W.Taylor, theTaylor Society. As a matter of interest, Irving Fisher was also a member. In this context, Dennison served in Wilson’s War Industries Board and the first of his Industrial Conferences; he was a key member of Harding’s Conference on Unemployment and well known to the organizer of the latter, Herbert Hoover, Dennison was intimate with Roosevelt and during the New Deal was a member of the Business Advisory Council, the

48

9.

10.

11.

12.

13.

14. 15.

16.

17.

Kyle Bruce

Industrial Advisory Board, the abortive National Labor Board, and the National Planning Board. An Australian born economic historian, Herbert Heaton. Heaton’s biography of Gay, A Scholar in Action (Greenwood Press, New York) was published in 1968. Galbraith actually lived in Dennison’s spacious Framingham, Massachusetts home and occupied a room in the house at intervals for several years (Galbraith, 1981:63). As Galbraith (1981:62) explains, Dennison thought most of his fellow Boston businessmen were boring, and ‘allowed their commitment to personal dignity, popular cliché and the Republican Party and their hatred of unions to override any residual intelligence’. In this context, it might be mentioned that at one stage some of his fellow businessmen boycotted Dennison products because of his ‘radical’ tendencies; he was thought to be spoiling the working classes. In this context, Gambs (1975:17) has noted that upon completion of his Ph. D. at Berkeley, Galbraith ‘was thoroughly grounded in neoclassical economics and acknowledged a considerable debt to Alfred Marshall’. Pratson (1978:6) similarly observed that ‘[i]n his early reading of economics, Galbraith was thrilled by neoclassical economics as it was presented by Alfred Marshall’ More recently, Galbraith himself stated that ‘It was Marshall’s Principles that I read, to some extent mastered and to a large extent accepted after arriving in California in 1931’ (Galbraith, 1994:43). There was, however, a vibrant minority of economists who questioned Say’s Law well before Keynes as analysts such as Davis (1971) and Barber (1985, 1996) have documented. As Galbraith has noted, ‘I thoughtfully omitted it from my list of published writings’ (Galbraith, 1994:86). In small part, this is vindicated by the fact that there is no reference to Coase’s 1937 paper on the nature of the firm, the authors concluding that industry is organised or coordinated ‘largely through the price machinery’ (Dennison and Galbraith, 1938:63). Although Dennison’s interest in taxation and public spending had a long history. For instance, just after becoming president of the Dennison Manufacturing Company in 1917, and as a leading figure in the city of Framingham local government, he made an eight-year estimate of future tax rates and a five-year street building plan involving advanced town budgeting (J.T. Dennison, 1999). This is actually different from the emphasis of Keynes who, as is well known, saw the problem of insufficient aggregate demand in terms of inadequate investment demand. Dennison saw the same problem in terms of aggregate demand but focused more on consumption expenditure as being inadequate, hence his policy prescription of tax reform.

The making of a heterodox economist

49

18. A matter of some importance in light of contemporaneous developments across the Atlantic, where at Oxford, Hall and Hitch (1939) reached the same conclusion after doing extensive empirical work in 1938. 19. In this context, it is interesting to note the similarities of Dennison’s views to those of Oxford Economists’ Research Group, like Hall and Hitch (1939), and Philip Andrews (1949), who in the exact same period, also disputed the significance of interest rates in management investment decisions. 20. In this way, Galbraith anticipated much of the work of Alfred Chandler (1977, 1990) and William Lazonick (1991).

References Andrews, Philip (1949) Manufacturing Business, London: Macmillan. Bruce, Kyle (1998) Activist Management: The Institutional Economics of Henry S. Dennison. Unpublished Ph. D. Dissertation, Department of Economics, University of Wollongong, Australia. Chandler, Alfred (1977) The Visible Hand: The Managerial Revolution in American Business, Cambridge: Harvard University Press. —(1990) Scale and Scope: The Dynamics of Industrial Capitalism, Cambridge: Harvard University Press. Davis, J.R. (1971) The New Economics and the Old Economists, Iowa: Iowa State University Press. Dennison, Henry S. (1931) Organization Engineering, New York: McGraw Hill. —(1936) ‘The present opportunity of management’, in Influences Bringing Change in Company Policy, American Management Association General Management Series No. 138, New York: AMA. —(1943) ‘Imperfect competition: a discussion of the Dennison manufacturing company’, Journal of Economic History 3 (Supplement): 48–50. Dennison, Henry S., and John Kenneth Galbraith (1938) Modern Competition and Business Policy, New York: Oxford University Press. Dennison, Henry S., L.A.Filene, R.E.Flanders, and M.Leeds (1938) Toward Full Employment, New York: Whittlesley House. Dennison, James T. (1999) Interview with author, July 1, Antrim, New Hampshire. Dunn, Stephen (2001) ‘Galbraith, uncertainty and the modern corporation’, in Michael Keaney, ed., Economist with a Public Purpose: Essays in Honour of John Kenneth Galbraith, London: Routledge. Galbraith, John Kenneth (1949) ‘Monopoly and the concentration of economic power’ in H.S.Ellis, ed., A Survey of Contemporary Economics, Philadelphia: The Blakiston Company. —(1952) American Capitalism: The Concept of Countervailing Power, London: Hamish Hamilton. —(1955) ‘The Businessman as Philosopher’, Perspectives USA, Autumn: 57–69. —(1967) The New Industrial State, London: Hamish Hamilton. —(1971) Economics, Peace and Laughter, Boston: Houghton Mifflin. —(1981) A Life in Our Times: Memoirs, Boston: Houghton Mifflin. —(1994) A Journey ThroughEconomic Time: A Krsthand View, Boston: Houghton Mifflin. —(1996a) Interview with Author, May 13, Cambridge, Massachusetts. —(1996b) ‘John Kenneth Galbraith’ in D.C.Colander and H.Landreth, eds, The Coming of Keynesianism to America: Conversations with the founders of Keynesian Economics, Cheltenham: Edward Elgar. Gambs, John S. (1975) John Kenneth Galbraith, Boston: Twayne Publishers.

50

Kyle Bruce

Gruchy, Allan G. (1972) Contemporary Economic ‘Thought: The Contribution of Neo-Institutional Economics, Clifton, NJ: Augustus M.Kelley. Hall, R.L., and C.J.Hitch (1939) ‘Price theory and business behaviour’, in T.Wilson and P.W.S.Andrews, eds (1951), Oxford Studies in the Price Mechanism, Oxford: Clarendon Press. Hession, Charles H. (1972) John Kenneth Galbraith andHis Critics, New York: Mentor. Lazonick, William (1991) Business Organization and the Myth of the Market Economy, New York: Cambridge University Press. Pratson, Frederick J. (1978) Perspectives on Galbraith: Conversations and Opinions, Boston: CBI Publishing Co. Schlesinger, Arthur M., Jr (1984) ‘The political Galbraith’, Journal of Post-Keynesian Economics, 7, 1:7–17. Stanfield, James Ronald (1996) John Kenneth Galbraith, New York: St Martin’s Press. Sweezy, Alan (1972) ‘The Keynesians and government policy, 1933–39’, American Economic Review, 62:116–124.

4

Social capital and political economy Galbraith on states and groups David A.Reisman1

Galbraith’s political economy is a response to the laissez-faire utilitarianism of the free market text. Neo-classical economics reconstructs the maximising calculus of the windowless monad who stands alone before the tâtonnement of Walras, the optimisation of Pareto. Galbraith’s political economy, synthetic where the classical liberals are reductionist, takes a more pragmatic view of the relationship between the component and the collectivity: ‘Even economists must agree with a social goal which accords the individual the opportunity of providing for all of his needs, not merely for a part of them’ (Galbraith, 1964a:13). Galbraith’s political economy, more specifically, responds to the orthodox emphasis on ‘private vices, public virtues’, on ‘man versus the State’ with an assertion that government is not a threat to well-being but rather a complement to it—that people must ‘become somewhat more aware of the importance of maintaining a balance between our private wealth and our public services’ (Galbraith, 1965:657). Galbraith is a theorist of social balance. The balance that he would like to see necessitates a politicised re-equilibration, a recourse to leadership where automaticity by itself fails demonstrably to satisfy the monad’s needs. Galbraith’s political economy is the response of the early Keynesian, the New Dealer, the price controller, the lover of unspoilt countryside, the connoisseur of fine art to the self-defeating individualism that perpetuates market failure because it fails to assign an enabling role to the State. It is the political economy of centralisation in preference to factoring down, of conscious coordination in place of the invisible hand. It is in that sense a social moderate’s call for the atom sometimes to be made free to choose and sometimes given the empowerment that he needs to fit in. Galbraith’s theory is a theory of individual and State. The politics is the primary interest. The sociology is only a secondary concern. It is the thesis of this chapter that perceived interaction and shared attitudes, far from detracting from the debate about individual and State, in fact enrich the discussion by challenging still further the normative isolationist’s emphasis on unit choice. Economic agents live together in communities, not separated, sealed off and alone. Political economy is for that reason bound to be enriched where interventionism is complemented by interrelatedness and by an awareness of the common ground 51

52

David A.Reisman

Interaction and attitudes can be seen as a productive asset The possibility that networks and values can be approximated to an economic input is considered in the following section on social capital. Thereafter the section on social investment examines the micro-social linkages and the macro-social rights and duties that build up and channel the national stock of ties and mindsets. Finally, the section entitled ‘Society and the State’ returns the discussion to Galbraith and his political economy by establishing when social capital is a substitute for social democracy and when it lends support to the ‘learned and sensible men’ (Galbraith, 1964b: 504) who champion the proper balance between public good and commercial interest.

Social capital Social capital can be defined as a stable structure of inter-personal relationships: ‘Le capital social est l’ensemble des ressources actuelles ou potentielles qui sont liées à la possession d’un réseau durable de relations plus ou moins institutionalisées d’interconnaissance et d’inter-reconnaisance’ (Bourdieu, 1980:2). It can also be defined as the continuing body of beliefs and standards that contributes to cohesion and prevents the breakdown of the replicated connections: ‘Social capital can be defined simply as the existence of a certain set of informal values or norms shared among members of a group that permit co-operation among them’ (Fukuyama, 1997:4). Both in terms of formal patterns and of subjective appreciations, it is the contention of thinkers like Bourdieu and Fukuyama that social capital is an argument in the production function and a source of nonnegligible economic efficiency. The term capital has traditionally been applied to the stock of non-human inputs, notably inventories, premises and plant. Some economists from Smith to Becker have extended its meaning from physical to human capital by bringing in the improvement in labour’s productivity that is the consequence of education or healthcare, de facto ‘the imbedding of resources in people’ (Becker, 1962:9). Social capital in the sense of structures and virtues is a logical next step in the unfolding of the analogy: ‘The market can be seen as consisting of a set of individual merchants, each having an extensive body of social capital on which to draw, based on the relationships within the market’ (Coleman, 1990:304). Social capital, like human capital, may evidently be seen as similar to physical capital to the extent that it is a long-lived fixed cost delivering expected benefits in a discountable stream over time. Social capital is stable connectedness (the recognised trading partner as a reassuring alternative to the ab initio contact) and the market-facilitating mindset (the internalised virtues of truth-telling and promise-keeping as an extra-legal guarantee that information asymmetry will not be abused). In the one way as in the other, it may be said to be like a machine. Even so, the obvious resemblances should not be allowed to crowd out the equally prominent distinctions, One important difference relates to the ownership of the asset ‘Unlike other forms of capital, social capital inheres in the structure of relations between persons and

Social capital and political economy

53

among persons. It is lodged neither in individuals nor in physical implements of production’ (Coleman, 1990:302). Social capital, non-appropriable and nonproprietorial, cannot be divided or exchanged, bought and sold. It exists exclusively in the and of an inter-personal nexus. That being the case, it can never be the property of a capitalist, however much it may itself be—or be like—a capital. In its use as in its tradeability, social capital once again is open-ended and nonrestricted. A machine can be patented, its benefits priced, non-contributors fenced out. A code of self-policing rectitude that is the spillover gift to the nation of a strict religious sect is different. Access being non-exclusive, the collective (‘public’) good is an externality with a neighbourhood effect which even free riders are in a position to access. Consumable without an entry-fee, there is no incentive for bystanders to limit their take-up or to put back an analogous contribution. Commercially speaking, therefore, there is some reason to fear an under-supply. Social capital, as it happens, is seldom if ever the result of a commercial calculation. In the very fact that the investment is seldom if ever a planned one may be seen a further distinction between the social and the mechanical. A new factory will not be opened until a conscious decision has been made on the basis of the costs and the benefits. A web of contacts, in contrast, will more frequently be the unintended outcome of identifiably non-economic influences. No one makes a rational choice to be born into an extended family specifically because of the career moves it promises through nepotism and preferment No one by the same token becomes a Seventh-Day Adventist exclusively because his membership will for him be a testimonial to moral rectitude and a source of business referrals. If the installation of social capital is indeed a cause of economic upgrading, then the investing capitalist can only be the invisible hand that optimists like Hayek claim to identify in the evolutionary sift A fourth way in which social capital is different from physical capital has to do with the ambiguous nature of the discountable stream. The stock can indeed depreciate to zero over time: this would be the experience of a closely knit immigrant community that dissolves gradually into the surrounding population. The stock, importantly, can also grow and expand: where new muscles are formed as other-regarding conduct becomes constitutionalised into stable predictability, it would make more sense to speak of a growth rate than of an outside opportunity cost Social capital, besides that, is an output and a consumable even as it is an input and an instance of deferred gratification. People enjoy the services of the Reform Club or the amateur choir irrespective of the return on the assets that they choose to commit The flow of returns accruing to a precision lathe may meaningfully be compared to the next-best foregone of an interest-bearing account The economic benefits generated by Good Samaritans who see their citizenship as incompatible with litter are more difficult to discount in terms of a maximising subjectivity that is an authentic ex ante and not an imaginative observer’s reconstructed as if. Social capital, finally, is different from physical capital in the sense that a physical asset has clearly defined boundaries whereas a network of contacts or a mindful of attitudes is more difficult to circumscribe. What is the precise size of

54

David A.Reisman

the Mafia or the world-wide stock of economists, and what allowance should be made for physical separation? How many former schoolmates count as a presentday instrumentality, and to what extent? How should multiple, nested or incompatible allegiances be incorporated in the specification? How should the frontiers of the asset be re-drawn in line with changes in transportation, communication and the mobility of labour? It is, clearly, easier to recognise a locomotive or a drill than it is to satisfy the examiners in respect of questions such as these. The differences are palpable; but there do remain the similarities. Thinkers who believe it useful to interpret the interactions and the attitudes through the analogy with the locomotives and the drills draw attention in particular to the improvement in economic well-being that they see as a direct consequence of structural continuities. Thus identity and face-to-face sanctions provide a ‘brand-name’ guarantee in a way that anonymity and invisibility would not. Perfect competition may defend the interests of the shopper in a street market where the fruit is familiar and easy to inspect. Not so the utility of the consumer where relevant information is asymmetrically distributed and quality assessment the specialists’ monopoly. As Ronald Dore explains it, market failure in the latter case is a clear invitation to fall back on morals: ‘You always know whether the butcher is charging you sixpence or sevenpence. But if you don’t know the difference between sirloin and rump, and you think your guests might, then you have to trust your butcher: you have to depend on his benevolence’ (Dore, 1983:477). Trust is essential—and it is promoted by the long-term quasi-marriage between the butcher and his client. Short-term signalling and sequential desertions might be favourable to value for money where all that is of interest is picked up on the two axes of price and quantity. Quality consciousness changes the rules of the game. Where truthtelling is indispensable —‘You have to trust your butcher’—there it might actually be in the interest of the shopper to pay slightly more for an implicit contract that delivers honesty as a characteristic in the bundle. Stable relationships discourage Williamson’s ‘self-interest seeking with guile’ (Williamson, 1975:9) that, known as opportunism, is conducive to defection, misrepresentation and short-horizoned abstention. The worker is less likely to shirk if taught the company song and promised a career for life. The hairdresser is more likely to be attentive (and more confident of a tip) if the cut is an iteration in repeat business. The shepherd is less likely to over-graze the public commons if a recognisable participant in an ongoing community. The villager is more likely to aid a known neighbour if he expects the known neighbour one day to return an equivalent favour. In all of these cases, economic possibilities are actually expanded as a direct result of market skewness brought about by situation, reputation and identifiability. Convinced that locking-in is conducive to efficiency, Francis Fukuyama, like Schumpeter, Knight and Hirsch, has therefore expressed serious reservations about rootlessness at the cost of consistency, faceless rationality to the detriment both of common habits and of background values. Not liabilities but assets,

Social capital and political economy

55

Fukuyama writes, the skeins and the internalisations are nothing less than the sine qua non for calculative capitalism’s sustained success: Communities of shared values, whose members are willing to subordinate their private interests for the sake of larger goals of the community as such, have become rarer. And it is these moral communities alone that can generate the kind of social trust that is critical to organizational efficiency. Fukuyama (1996:309) Economic individualism would appear to be eroding the very supports upon which the free market most immediately depends. If so, then it might also be making the leaderly State in the sense of Galbraith an inescapable alternative to the spontaneous growth that is increasingly in under-supply. Yet there is a concluding comment to make; and it is a warning that the ties and the attitudes might not actually be on the side of the market after all. The ties might stifle search. The attitudes might discourage innovation. The past might dominate the present to such an extent as to rob capitalism of its dynamism. If some inheritance provides the functional bedrock of convention, then too much tradition, turned dysfunctional, can become an agency of immobilisation that freezes progress into stasis, inertia and complacent self-perpetuation. Nor should it be forgotten that either enterprise or government, irrespective of the networks and of the ideals, might itself be in a position to supply the constraint that is needed. The market sells locks, dogs and security guards. The State intervenes through improved detection and longer sentences. It is premature given such a menu to insist that the skeins and the internalisations are the only, or even the most economical, means to the specifically capitalistic end of economic prosperity. It would make more sense to say that self-policing is one strategy, nonego policing a second strategy, and the best policy, economically speaking, nothing other than the policy that constitutes the best cost-benefit buy. As Galbraith himself writes: Ideological identification represents an escape from unwelcome thought… Decision must be made on the social and economic merits of the particular case’ (Galbraith, 1996:14, 20). On Monday it is cheaper to rely on the doctor’s professional ethic and his sensitivity to peer-group pressures. On Tuesday it is cheaper to rely on a second paid opinion and the State regulator’s ex post check. Comparing Monday to Tuesday, what is clear is that the advocate of economic efficiency would be well advised to postpone his choice of market, State or social capital until the respective selling points had impartially been examined.

Social investment An asset, a liability or an irrelevance, the fact is that ties and attitudes do exist. It is the task of this section to consider the nature of the forces that inculcate in the individual the sensation of belonging to, and acceptance of the normative guidance deriving from, the supra-individual whole.

56

David A.Reisman

Social investment can be approached in two ways. The first (considered under the heading Micro to Macro) aggregates upward to the nation from the intermediate corporations that stand between the atom and the totality. The second (considered under the heading Macro to Micro) works downwards from the collective consensus to the discrete stakeholder with a share in the common culture. Neither approach starts with the isolated shopper attempting a rational choice. Groupings, small or all-encompassing, are the agencies that build up the social capital. The individual shopper turns up post festum and plays his part.

Micro to macro In America Tocqueville was struck by the power of local patriotism and the emotional pull of devolved democracy: The native of New England is attached to his township because it is independent and free: his co-operation in its affairs ensures his attachment to its interest; the well-being it affords him secures his affection; and its welfare is the aim of his ambition and of his future exertions. Tocqueville (1835:64) Alfred Marshall as an economist believed he could see a similarly ‘far-reaching wisdom which verges on morality’ in that increasingly Kantian social machine, ‘a first class English trades union’: Unions generally are showing signs of beginning to ask themselves whether any republic can be justified in adopting regulations, the general adoption of which by the surrounding republics would be injurious to all. In asking themselves this question they are giving themselves a great education. Marshall (1875:364, 366) Tocqueville was drawn to intermediate associations built around politics. Marshall was more inclined to take his examples from the economy. Both, however, assigned a great importance to micro-groupings such that gave the individual a structured rootedness to fellow team members in pursuit of the common goal. The local community in the sense of Tocqueville situates the individual on the social as well as the geographical map. It imposes a code that is internalised in each and enforced by all: Communities are social webs of people who know one another as persons and have a moral voice. Communities draw on interpersonal bonds to encourage members to abide by shared rules… Communities gently chastise those who violate shared moral norms and express approbation

Social capital and political economy

57

for those who abide by them. They turn to the state (courts, police) only when all else fails. Etzioni (1995:ix) It is well known that a busybody neighbourhood can threaten deviance: good from the perspective of keeping down burglary, the pressures are also a cause of stagnation where entrepreneurs are made into bureaucrats and growth is frightened into a rut Too much community, and not just too little, can evidently brake the rise in the standard of living. Arguing nonetheless that the benefits normally exceed the costs, what the advocates of Gemeinschaft would stress is that stable networks are the well-spring of reputational capital. They make citizens trustworthy enough to respect verbal contracts and to act in the expectation of a multi-period payoff that lacks the force of law. Precisely because the patterns of the past make possible the initiatives of the future, they must, of course, be protected from unwelcome upheavals. That is why the Galbraith-like State might do well to subsidise jobs in a declining area or to exclude foreign competitors by means of tariffs. Only superficially attractive, the social conservative would say, the true cost of textbook undercutting, of flexible non-conformity, will in truth be the profoundly normless anonymity of ever-changing environments in which there is no real chance that the discipline of all over each will inculcate the acceptance of duties and not merely the consumption of rights. The economic network fulfils a function similar to that of the locality. Embedding action in sustained interdependence, it provides an inter-personal context such that it exposes each actor to recognition and stores up judgements in memory. Perfect competition and the one-off exchange are pushed to the margins of the model. Central to the satisfactory performance of the economy are the regular partner and the past-patterned future that at the very least give the Galbraithian technostructure the certainty it needs to plan ahead. Goodwill and familiarity make each trading partner de facto into a monopolist, de facto the supplier of traditions and not just of commodities. The result, it can be argued, is a social capitalism which is superior in its efficiency to the pure-market bellum on the one hand, the all-directing Leviathan on the other. Thus habit and knee-jerk reordering may be said to be productivity-enhancing to the extent that they permit an economy in the transaction cost of search and contract. The heuristic makes prediction possible, but only within a range: the supplier knows that his delivery dates, prices or standard of service cannot slip below an implicit minimum lest his client, discontented, reopen the scan. The longterm relationship evidently combines the reassurance of satisficing in the sense of Simon with the tacit contestability that keeps potential rivals on their toes. Same-side understandings complement those between buyers and sellers. Institutional arrangements such as the oligopolistic cartel, the professional association, the holding company, have the effect that, making competitors into collaborators, the wasteful over-commitment of beggar-my-neighbour marketing can be avoided and overheads like information and lobbying can be more economically pooled. Trade unions provide countervailing power for their

58

David A.Reisman

members. The workers, more informally, use their own networks as a source of intelligence about job vacancies, organisational opportunities, even (since no contract of employment is ever fully specified) the conventions governing the pace and demarcation of the tasks themselves. To the extent that this coordination is a productive input, the same-side alliances may be said to improve the efficiency with which economic resources are employed. Polity and economy can be the source of accumulated contacts and ongoing interaction. Important as the town meetings and the works councils, the neighbourhood watch schemes and the business cocktail parties may be, it should not be forgotten that society itself is the source of a multiplicity of webs—consider those that are formed by the school or the chapel—which cannot be factored down to the selective imperatives of governing and producing. Of especial prominence is the skein of kinship. The family, building on blood ascription and not on achieved status, has at once a temporal dimension (in the abstract, because it has a past and a future; in practical terms, because the very young and the very old become a lifecycle responsibility of relatives in the earning phase) and a spatial relevance (since the extended skein can be multinational and multi-faceted, a resource for openings and promotions and a guarantor of truthfulness and standards). Temporal and spatial, the family has the universality that is needed if it is to deliver spillover benefits to the wider society. One such benefit would be the selfdenying husbandry of non-replaceable fossil fuels precisely because the kindred take a view today on the future welfare of their cognates and agnates as yet unborn. There are, needless to say, negative externalities alongside the economic attractions. Banfield uses the term ‘amoral familism’—the ‘inability to concert activity beyond the immediate family’ (Banfield, 1958:10)—to pick up the narrow selfishness of family members unprepared to contribute to orphanages, look after their workers, or in other ways exert themselves for the wider community outside. Appointment by consanguinity and not by merit is itself a private tax levied by the family firm on the nation’s rate of economic advance. In some respects at least, the family can be a threat and not a reinforcement to the wealth of nations.

Macro to micro In some cases the club is not a part in the sense of the family but the whole in the sense of the nation. Social democrats like T.H.Marshall, and economic sociologists like Emile Durkheim, have noted the circumscription of individual perceptions by a social consensus. They have seen in that conscience collective the common mind that multiplies paper citizenship into One Nation that shares. Richard Titmuss found the legitimation of the welfare State in precisely that perception of the nation as a club, a communion, a family writ large: All collectively provided services are deliberately designed to meet certain socially recognized ‘needs’; they are manifestations, first, of society’s will to

Social capital and political economy

59

survive as an organic whole and, secondly, of the expressed wish of all the people to assist the survival of some people. Titmuss (1963:39) Organic seamlessness is the cause of other-regarding intervention financed through fiscal constraint, enthusiastically endorsed: ‘What more pleasure can a millionaire have than to know that his taxes will help the sick?’ (Bevan, 1958: Col. 1389). Organic integration is also the consequence of common welfare experiences engineering common social allegiances in core states of dependency like health and education: ‘It is now (or should be) an objective of social policy to build the identity of a person around some community with which he is associated’ (Titmuss, 1974:38). Titmuss argued that it was the function of the welfare sector simultaneously to reflect and to strengthen the felt integration which makes each into a part of the all, all into a part of the each. Titmuss believed that welfare policy could never be made a topic in economic policy. The reason was the non-negotiable point of view. The market dissolves, individualises and divides. The socio-political gift, on the other hand, is an emanation from the totality and an embodiment of the soul: What unites it with ethical considerations is its focus on integrative systems: on processes, transactions and institutions which promote an individual’s sense of identity, participation and community and allow him more freedom of choice for the expression of altruism and which, simultaneously, discourage a sense of individual alienation. Titmuss (1970:253) Arguing micro to macro, the religious sect or the military detachment may be said to integrate the individual in a collectivity of which he is but a cog. Arguing macro to micro, adjacent beds in a National Health Service hospital ward and a comprehensive school system unstratified by the ability to pay set the individual free from loneliness and give him the chance to proclaim his relatedness through stranger-gifts made to unknown fellows: ‘Altruism in giving to a stranger does not begin and end with blood donations. It may touch every aspect of life and affect the whole fabric of values’ (Titmuss, 1970:223). The welfare State builds up a welfare society in which citizens donate truthfulness as well as blood and see themselves as their neighbour’s Good Samaritan. The privatisation of the welfare State puts at risk the role-playing and the learning-by-doing that educate each citizen in the nature of right relationships: ‘It is likely that a decline in the spirit of altruism in one sphere of human activities will be accompanied by similar changes in attitudes, motives and relationships in other spheres’ (Titmuss, 1970:224). Our national stock of social capital is clearly exposed to dangerous depletion where citizens fail to see in the hospitals and the schools the hidden equalisation that makes them feel as one. Titmuss associated felt nationhood not with passports, genes, policed borders and external enemies but with congruent expectations developed through welfare

60

David A.Reisman

encounters. Tawney, going further, associated it with the nationalisation of functionless claims such as, creaming off profit and rent, undermine the morale of ‘Henry Dubb’, resistant to being used: ‘The first condition of enlisting on the side of constructive work the professional feeling which is now apathetic, or even hostile to it, is to secure that, when it is given, its results accrue to the public, not to the owner of property in capital, in land, or in other resources’ (Tawney, 1921:146). Tawney saw the payment to the absentee shareholder and the passive rent-recipient as an affront to the principle of remuneration based on effort. It was, he believed, a lion in the path of the harmonious society in which no creator would regard his neighbour as his thief. Tawney was a Christian who refused to look the Bible sceptically in the mouth when it reported that all human beings are born equal in The Maker’s image. He legitimated his notion of citizenship-based cohesion with reference to God’s revealed will that all should contribute their fair share to the common good. His theory of social capital may in that sense be said to be a theory of socialist capital as well. Tawney’s socialism involves the suppression of rentier free-riding and the expropriation of property rights not linked directly to the performance of function. It also involves consultation. Tawney assigned particular importance to the participation of the labour force in the setting of business ends, the selection of business means: ‘It is idle to expect that men will give their best to any system which they do not trust, or that they will trust any system in the control of which they do not share’ (Tawney, 1921:149). Power-sharing perhaps even more than profit-sharing gives the employee the feeling that he is a moral being and not simply an input. Thus does the workplace network become a beehive of discussion and initiative, the code of practice secure the legitimation of representative democracy. Both at the level of the network and in the sense of the rules, Tawney would say, social capital is built up as the much-desired consequence of making all stakeholders into decision takers whose social constitution is fully their own.

Society and the state Galbraith’s political economy, in sharp contrast to the abstract economics of formal market modelling, is a continuation of the historic debate about the proper role for the individual, the preferable role for the State, that framed the analysis of Smith, Mill, Marshall and the other great theorists of the mixed economy. Galbraith is first and foremost a political animal. His interpretation of interaction is typically subordinated to his defence of intervention. Writing in the homeland of free enterprise and the American Dream, aware at all times that his own subject of economics was more and more being captured by the self-perpetuating neo-classical libertarianism of mathematically refined homeostasis, probably he felt that it was enough of a crusade to carry forward the tradition of Roosevelt and Keynes, wartime controls and post-war fine tuning, without venturing into social structure as well.

Social capital and political economy

61

The primary concern is the political economy. That said, social networks and social attitudes are by no means an irrelevance in Galbraith’s explanation of modern capitalism’s dynamic. Social capital is in some places quite clearly a construct he employs in support of the leaderly State that corrects a market failure. Other observers, arguing that social capital is itself the corrective, will be less convinced that interrelatedness will invariably vote for a Kennedy while consigning to the museum of obsolete ideas the ‘Victorian values’ of a Mrs Thatcher.

Micro to macro Galbraith’s economic ideal has never been the ‘market system’ of powerless individual consumers facing powerless perfect competitors. In the technologyintensive ‘planning system’ that serves as the cutting edge, it is his contention that ‘the impersonal magic of the market’ (Galbraith, 1967:358) has been superseded by a new-style corporate capitalism that counterbalances the management of trade and the concentration of influence with the selling points of economies of scale and research and development that promise exciting new breakthroughs and challenge sleepy replication: ‘Large tasks require large organizations. That is how it is’ (Galbraith, 1977:277). The average size of the unit has risen. The number of participants in the industry has fallen. As if guided by an invisible hand, the corporatised economy has come into being. In American Capitalism Galbraith introduces the notion of countervailing power and equal-but-opposite blocs. The theory is one of intermediate organisations, neither the individual alone nor the government in charge. Explicit is almost exclusively the bargaining strength that produces the equilibrium of force. Implicit, however, must inevitably be the social capital (in the sense of networks and attitudes) that comes into being within the black box of the Marshall-like republics. Firms grow bureaucratic—one consequence is conformity to standards and personal status bound up with the company name that in limit can ossify into ‘organizational stasis and senility in the modern great enterprise’ (Galbraith, 1987:279). Workers join unions—one consequence is bloc-imposed rhythms and an esprit de corps sometimes the conduit for change, sometimes strongly opposed. Implicit rather than explicit, what must be concluded is that the evolution of groups must inevitably be the high income elasticity of members’ interactions as well. So welcome is this corporatisation to Galbraith that he has consistently invited the State to lend its support to groupings where without the visible hand they would regrettably not have come into being at all. His observation in 1996 about the decline in union membership provides an illustration of a consistent— and a Marshall-like—attitude to social capital made up of labour ‘The good society seeks, where possible, to reverse this decline in trade union power, for worker organization remains a major civilizing factor in modern economic life’ (Galbraith, 1996:66). In The New Industrial State, the economics of intermediate associations is applied to the technostructure (in each corporation a face-to-face network targeting the

62

David A.Reisman

private maximands of job satisfaction, security and growth by means of the committee’s monopoly position in the supply of expertise) and to the educational and scientific estate (a more amorphous body of intellectuals who, although never all in direct contact, are unified in their crusade against over-development, commercialisation, the neglect of public sector infrastructure, the erosion of environmental amenity by ‘the values and goals of educated men’ (Galbraith, 1967:377)). Networks regrettably engender self-seeking redistribution in the case of in-house coalitions; but at least the teachers and writers are imbued with shared absolutes better in tune with society’s needs. In The Affluent Society Galbraith had made clear that productive efficiency, materialistically defined—the quantity of goods, as opposed to the quality of life— was, in a richer country, not a social need that any longer deserved a high priority. The neo-classical economists were not prepared to accept that the economic problem of scarcity had at last been resolved. Members of the educational and scientific estate as they are, they nonetheless make use of their networks (their personal contacts, their professional bodies, their stranglehold over the ‘publish-orperish’ and the grant-awarding mechanisms) and of their attitudes (not least their obsession with non-satiety, consumer sovereignty, power-free markets, methodological individualism) to defend an ideological position that, ‘the image of an earlier economic society’, coincidentally ‘serves admirably the instrumental purposes of a later one’ (Galbraith, 1973:24). Social capital in the case of so datestamped a belief system, so single-minded a network of worshippers is evidently not a cause of social well-being so much as a source of distortion and mystification. The same must be said of the social capital that is plunged in bureaucratic symbiosis. Corporate officers interact on a continuous basis with their opposite numbers in the civil service. An important by-product of their life in common is the growing awareness of the mutual advantage that organisation men can confer on one another in the form of pay, prestige, promotions, perquisites, power at the cost of the public interest ‘The modern state…is not the executive committee of the bourgeoisie, but it is more nearly the executive committee of the technostructure’ (Galbraith, 1973:188). Galbraith’s warning in Economics and the Public Purpose that weapons executives and Pentagon analysts might exaggerate the nation’s military under-preparedness in order to benefit not the profitrecipients but themselves is a salutary reminder of the sub-optimality that can result when networks become self-serving. No less is the public interest likely to be imperilled where the bureaucracies are sustained not just by greed and acquisitive self-interest but also by an organisational ideology that has become profoundly out of touch. Consider the American involvement in Vietnam, heavily promoted by ministerial careerists who had fallen victim to a self-reinforcing world-view founded ‘on official convenience and belief…rather than on the underlying reality’ (Galbraith, 1965:65). ‘What was essentially a civil war between the Vietnamese was converted into an international conflict with rich ideological portent for all mankind’ (Galbraith, 1969:15). Given the bureaucratic symbiosis, given the bureaucratic inertia, the antidote to social discapital will understandably appear to some to be not a more alert executive

Social capital and political economy

63

(Galbraith’s political answer to the organisational malfunction) but rather the minimal State (the market liberal’s proposal that vested interest should perpetually be challenged through competition). Galbraith is alert to the groups and beliefs that are at the interface of social capital and political economy. He shows less interest in those micro-affiliations which are less obviously of relevance to the either/or of the market and the State. His discussion of the family is confined to an endorsement of the changing role of women, increasingly aspiring, like men, to paid jobs outside the home. He says nothing (an indication of particular significance in the United States where churchgoing remains widespread) of the inter-personal sanctions and the Weberian Ethic that are the free gift of religious communities to social and economic life. He expresses no recognition of voluntary associations like self-help groups, of the lifetime links (and the invisible curriculum) of schools and universities, of the stimulus that could be provided by devolution and local democracy to the strengthening of grass-roots attachment. His selectivity is entirely valid in the context of his primary concern with the market and the State. Even so, there are grounds for saying that his political economy would actually gain and not lose from a more comprehensive sampling of the networks and of the mindsets. Some of the investments he plays down would reduce the need for State intervention: thus the school run is the functional equivalent of the school bus, the Ten Commandments a private-sector alternative to Scotland Yard. Some of the assets he omits are in contrast a vocal lobby for the Big Government he believes to be right: the members of The Friends of the Heritage will be more likely to join the intellectuals in demanding museums and concert halls than will easily manipulated consumers living from one advertisement to the next. It would clearly be both interesting and helpful to amplify Galbraith’s own insights into social capital in order to establish the implications for his political economy of a wider range of intermediaries and perceptions than that which he personally explores.

Macro to micro As a social democrat, Galbraith has an especial interest in the national team collaborating for the collective good. His call for pragmatic statism, his rejection of across-the-board individualism, is in essence the insistence of an American Fabian on links and values in the sense of Tawney and Titmuss. Galbraith has consistently been an advocate of public spending: ‘There are few problems in New York City which would not be solved by doubling the city budget’ (Galbraith, 1971:33). The additional resourcing should certainly be channelled into welfare services such as public housing schemes, better inner-city schools, healthcare and income maintenance for the seriously deprived. Importantly, a balanced society should also be increasing its governmental allocations for road building, refuse collection and law and order—public services from which all income groups stand to derive a benefit The State should provide support to small businesses in the form of sponsorship of research and development and coalition-

64

David A.Reisman

building that is the visible hand’s contribution to countervailing power. The State should even provide support to the giant (‘mature’) corporations through longterm contracts, last-resort loans, capital write-offs, progress payments such that they protect the community’s interest in innovation and technological advance. In contrast, therefore, to the Beveridge-style conception of deprivation as a neediness apart, Galbraith widens his theory of intervention to embrace not just the dependencies of the very young, the very old, the unemployed and the sick but also the stake of the collectivity as a group in well-tended parks, corner shops, improvements in passenger aircraft and the exploration of space. The nation as a group has a further stake in stable prices. In 1996, breaking with the practice of a lifetime, he declared in The Good Society that the answer could no longer be the State: This…is in conflict with the basic structural character of the market system and likewise with powerful economic and public attitudes and beliefs. The most that can now be urged is a sense of responsibility on wage-price negotiation that reflects the larger public interest Galbraith (1996:47) Galbraith in 1996, moving away from political economy, continued to seek the containment of inflation in ‘a sense of responsibility’ and ‘the larger public interest’—in social capital, in other words, and not in the market-clearing free-forall. Non-monetarist as his recommendation continued to be, still it indicated a significant privatisation of his position. Earlier he had argued that inflation was a regrettable market failure, and that the answer could only be the State. What this meant in practice was that aggregate demand had to remain high in order to minimise involuntary unemployment but that there had to be a permanent structure of prices and incomes controls: ‘I see no alternative, no other way of reconciling high employment with price stability’ (Galbraith, 1975:131). The policy was to be one of ‘supervised self-regulation’ (Galbraith, I960:73), in the sense that it was to be administered by a tripartite commission representing all three of the groupings (the workers, the employers, the consumers) that have a close interest in an equitable settlement This application of corporatism to macroeconomics was a deliberate attempt to use social capital to contain cost push. Radical as the proposal will clearly have been in the field of political economy, Galbraith was quick to remind the reader that, in the era of collective bargaining, union power and oligopolistic understanding, the corporate sector had long since made price-fixing the norm. Where private controls were already in place, the politicisation of the plans involved no greater suppression of supply and demand than had already been the consequence of accommodation among the few. As Galbraith wrote so confidently in his A Theory of Price Control: ‘It is relatively easy to fix prices that are already fixed’ (Galbraith, 1952:17). Galbraith throughout his long career has written in support of public spending and (at least until the 1990s) of incomes policy. Less prominently (and almost exclusively in the twelve years between The New Industrial State in 1967 and the

Social capital and political economy

65

Annals of an Abiding Liberal in 1979) he has also written in favour of the nationalisation of industry. His more moderate position would be that captured by the title of an article he wrote for the New York Times in 1969: ‘The Big Defense Firms are Really Public Firms and Should be Nationalized’. Galbraith’s more moderate position was effectively that the armaments manufacturers were already socialised in all but name and that the State would therefore be taking a valuable step in the direction of accountability were it decisively to convert the double bureaucracy into one: As a rough rule a corporation (or corporate subsidiary) doing more than half of its business with the government should be converted into a full public corporation’ (Galbraith, 1973:303). In 1974, in ‘Perfecting the Corporation: What Comes After General Motors’, he went further and adopted a more extreme position. In 1974, writing in the New Republic, he proposed the State ownership of Shell, Exxon and all other corporations where the shareholder had become a ‘purely passive recipient of income’, where the management and its technostructure had for that reason become a ‘self-governing, self-perpetuating bureaucracy’ (Galbraith, 1974:81). The failing was self-ruling organisations out of touch with the national interest The solution was a State-sector ‘board of public auditors’ accorded the mandate to evaluate and to propose. The board was to be a source of socially responsible opinions. The social consensus was only indirectly to become involved. While Titmuss and Tawney legitimate State intervention with reference to popular attitudes, Galbraith does so in terms of needs far more than of wants. As with Keynes, he tends to regard social interest as a specialist concern, a matter not so much for generalists as for the well-educated and the well-informed. Social capital in the sense of social attitudes plays an active part in identifying the political elite which most people most want to see in charge. The prudent and the far-seeing at the helm, there is then no task so great for social capital as to lend continuing support to the wise leaders who make the most of the political economy.

Note 1.

The author would like to thank Professor J.K.Galbraith for his comments on an earlier draft of this paper.

References Banfield, E.C. (1958) The Moral Basis of a Backward Society, Glencoe, IL:The Free Press. Becker, G.S. (1962) ‘Investment in human capital: a theoretical approach’, Journal of Political Economy, 70, Supplement 9–49. Bevan, A. (1958) Speech in the House of Commons, 30 July, in Parliamentary Debates (Hansard), Cols. 1382–1398. Bourdieu, P. (1980) ‘Le capital social’, Actes de la Recherche en Sciences Sociales, 31 Janvier: 2–3. Coleman, J.S. (1990) Foundations of Social Theory, Cambridge, MA: Belknap Press.

66

David A.Reisman

Dore, R. (1983) ‘Goodwill and the spirit of market capitalism’, British Journal of Sociology, 34:459–482 Etzioni, A. (1995) The Spirit of Community, London: Fontana. Fukuyama, F. (1996) Trust, Harmondsworth: Penguin Books. —(1997) The End of Order, London: Social Market Foundation. Galbraith, J.K. (1952) A Theory of Price Control, Cambridge, MA: Harvard University Press. —(1960) The Liberal Hour, Harmondsworth: Penguin Books, 1963. —(1964a) ‘Economics and the quality of life’, Science, 10 July, also in his Economics, Peace and Laughter, Harmondsworth: Penguin Book 1975, 3–21. —(1964b) ‘Reflection on the Asian scene’, Journal of Asian Studies, 23:501–504. —(1965) ‘Critic of affluence’, interview with J.K.Galbraith, The Listener, 73 (6 May): 657–659. —(1965) ‘Foreign policy: the stuck whistle’, The Atlantic, 215 (February): 64–68. —(1967) The New Industrial State, Harmondsworth: Penguin Books, 1969. —(1969) How to Control the Military, Garden City: Doubleday. —(1971) The American Left and Some British Comparisons, Fabian Tract 405, London: Fabian Society. —(1973) Economics and the Public Purpose, Harmondsworth: Penguin Books, 1975. —(1974) ‘What comes after General Motors’, New Republic, 2 November, also in his Annals of an Abiding Liberal, Boston: Houghton Mifflin, 1979, 73–85. —(1975) ‘Will the answer be controls?’, The Listener, 93 (30 January): 130–131. —(1977) The Age of Uncertainty, London: British Broadcasting Corporation and André Deutsch. —(1987) A History of Economics, London: Hamish Hamilton. —(1996) The Good Society: The Humane Agenda, Boston: Houghton Mifflin. Marshall, A. (1875) ‘Some features of American industry’, in J.K.Whitaker, ed. The Early Economic Writings ofAlfred Marshall 1867–1890,Vol II, London: Macmillan, 1975, 352–377. Tawney, R.H. (1921) The Acquisitive Society, London: Fontana Books, 1961. Titmuss, R.M. (1963) Essays on ‘The Welfare State’, 2nd ed., London: George Allen and Unwin. —(1970) The Gift Relationship, Harmondsworth: Penguin Books, 1973. —(1974) Social Policy, London: George Allen and Unwin. Tocqueville, Alexis de (1835) Democracy in America, Vol. I, tr. by H.Reeve, New Schocken Books, 1961. Williamson, O.E. (1975) Markets and Hierarchies, New York: The Free Press.

5

The role of the state in the good society Michael Keaney

In his landmark work of political philosophy, Politics and Vision, Sheldon Wolin identified the essential ideological shift which both accompanied and facilitated Western civilisation’s passage to modernity: the supplanting of the political by the economic (Wolin, 1960:195–285). It was a phenomenon most keenly appreciated by Karl Marx, whose theoretical construct of the ‘base’ (the social relations of production) essentially determined the nature of the ‘superstructure’ (state and civil society). The ascendancy of the economic continues even today, as governments routinely acknowledge the perceived verity that success in other aspects of life is dependent upon economic growth and prosperity—‘It’s the economy, stupid!’ Bill Clinton’s 1992 presidential campaign slogan merely stated what the leaders of the two major opposing political economic systems of the twentieth century had believed since the Russian Revolution of 1917. Yet, as C.Douglas Lummis highlights, economic development, under whatever political guise, has brought about the often savage uprooting of old ways and customs in the name of progress (Lummis, 1996:50ff ). Tony Blair’s mantra of ‘modernisation’ is simply more of the same: justifying fundamental change in the name of irreversible, inevitable ‘progress’. Economic development and growth are promoted as and perceived to be of absolute necessity in humanity’s pursuit of happiness. Surrounding this central tenet is a pot pourri of rationalisations (ranging from the elaborate to the downright crude) for why this should be. Among the most elaborate of these, of course, is neo-classical economic theory. This is what mostly passes for ‘economics’ today, whether in the teaching of university and college students or in the ‘understanding’, interpretation and forecasting of economic phenomena by professional economists. Resting upon some simple assumptions concerning human nature and from there proceeding by logical deduction, economists have constructed models of ‘human’ behaviour whose mathematical complexity belies their intellectually impoverished origins. Most often these are of little practical consequence—a feature satirised by John Kenneth Galbraith in his novel A Tenured Professor. Never forget, dear boy, that academic distinction in economics is not to be had from giving a clear account of how the world works. Keynes knew that; had he made his General Theory completely comprehensible, it would 67

68

Michael Keaney

have been ignored. Economists value most the colleague whom they most struggle to understand. The pride they feel in eventually succeeding leads to admiration for the man who set them so difficult a task. And anyone who cannot be understood at all will be especially admired. All will want to give the impression that they have penetrated his mystification. This accords him a standing above all others. Galbraith (1990:50) To useThorstein Veblen’s phrase, this ‘trained incapacity’ either to understand or communicate beyond academia is most useful for those who might otherwise be challenged over the nature and function of the present economic system. The basic emphasis upon efficiency at the deliberate expense of all else serves to magnify the specific (in many cases minutely so) whilst ignoring the broader landscape, and therefore the consequences, which are designated with the epithet, ‘externality’. ‘External to what?’ one may ask, and with good reason. The convenient removal of troublesome variables from social scientists’ models can have serious practical consequences, now more than ever on a global scale. The irony of this, of course, is that those who once decried the Utopian project as fundamentally inhumane in its execution are themselves implicated in the catastrophe that has befallen the former Soviet Union. The visible collapse of Soviet communism from 1989 to 1991 precipitated a wave of triumphalism among the political and business classes of the West. Not only had the opposing state-centred political economy of communism been shown to be utterly bankrupt, but now ‘free-market’ capitalism could flourish throughout the world. As the theoretical models dictated, so would actuality reveal the infallibility of market solutions. Thus teams of ‘experts’ from the West headed east to make disciples of all nations, installing the ‘core institutions’ of capitalism, to use the revealing phrase of Jeffrey D.Sachs, Lacking any theory or even nominal concept of institutional adjustment, these wise men instigated the now notorious policy of shock therapy, whereby all that was solid melted to air, all that was sacred became profane, and all in a manner most reminiscent of the Bolsheviks’ wresting of power in 1917. The consequences of this, as with those of ‘War Communism’, were predictable: Institutional adjustment by means of ‘implementing the model’ is incapable of effectively resolving problems, either in analytic or behavioural terms. The past cannot be abandoned; habitual beliefs and behaviours cannot comprehensively be overturned without inducing chaotic, wholly desperate conditions of disrapport, discontinuity and disruption in the flow of real income. Maximum dislocation is foreshadowed. Tool (1995:198) But by externalising all considerations of efficiency extraneous to the contract between buyer and seller, such matters registered only after the painfully slow recognition of the damage wrought by the technical wizards of Western social science. Even as late as 1996, Richard Layard and John Parker could publish a

The role of the state in the good society

69

book entitled The Coming Russian Boom. And no, the authors were not employing a variant of long-wave analysis. Nor did ‘boom’ designate a violent explosion, although that might have conveyed a more accurate sense of the economic meltdown that followed. Speaking of his novel, The Triumph, Galbraith has remarked that only in fiction could one extract full value from the highly trained, profoundly certain, deeply solemn foreign policy experts who, aided by all the available intelligence, proceed from wrong assumption to disastrous result. Galbraith (1981:521) One could easily substite the word ‘foreign’ with ‘economic’ with respect to the regrettably wholly factual episode of shock therapy. Nevertheless, not content with having participated in the laying waste of vast quantities of physical and human capital, global finance capital is attempting to institute its own shock therapy through such vehicles as the World Trade Organization (WTO) and the Multilateral Agreement on Investment Despite the apparent disarray of the neo-liberal agenda, following the’Battle of Seattle’ in November 1999, it is unlikely that this spells the end of the push towards the untrammelled commodification of all that may conceivably be bought and sold. As James O’Connor puts it, and not too strongly, the goal of a more perfect market society serves only to reveal, ever more clearly, the ‘fundamentally psychotic nature of the neoliberal model’. Just as in the former Soviet Union, the pathogenesis is evident: The Utopian neoliberal model of world capitalism (like the tragic Emma Bovary) first builds castles in the air (neoliberal economic theory), then tries to live in them (the subordination of all social relations to exchange relations). O’Connor (2000:2) Perhaps the essence of the problem facing economic advisers in the former communist bloc was their totally inadequate concept of the state. Reared, for the most part, on an almost biblical tenet emphasising the desirability and eminent practicability of laissez faire, the trained incapacity of conventional economists became all too evident in the shock therapy debacle. The practitioners of ‘positive’ economics came unstuck in their efforts to apply the explicitly normative policies in pursuit of the ideal ‘endpoint’—that which they imagined true capitalism to be. Ron Stanfield correctly notes that conventional economic theory ‘is severely limited by the lack of a well-defined theory of the state as an endogenous variable’ (Stanfield, 1991:765). His subsequent observation that ‘classical liberalism insists upon a sharp separation of social authority into the political and economic realms’ (1991:775) is equally true. Nevertheless, it is also the case that this theoretical demarcation is as responsible for the inadequacy of neoclassical economic theory vis à vis the state as it is for the inadequacies of the modern state (Dugger, 1992:245–6). The corporate welfare subsidies and other transfer payments made

70

Michael Keaney

by the state in support of the military-industrial complex, and now the growing prison-industrial complex, somehow escape the opprobrium attached to those geared towards the alleviation of individuals’ economic hardship—witness the strident attacks made by certain political standard bearers, most prominently Newt Gingrich, on the legacy of Lyndon Johnson’s Great Society programme. But having posited an artificial demarcation of the economic and the political, classical liberalism is able to justify such state activism in the name of order, domestic and international. Thus in essence it reverts to a position not dissimilar to that of the conservative, if only more vigorously ideological because of its conception of property. Of course the normative premise of classical liberal theory helps to mask the reality of the capitalist state. The fictitious demarcation of the economic and the political elides the fundamental truth of the modern state, which is its functional symbiosis with the capitalist system. The nature of the state’s functions may change significantly over time, as captured by the social structure of accumulation (SSA) theory first articulated by David M.Gordon (see Kotz et al., 1994). Baran and Sweezy (1966:67) argued that ‘to lay special emphasis on the role of the state in the present stage of monopoly capitalism may only mislead people into assuming that it was of negligible importance in the earlier history of capitalism’. This is most certainly an important qualification. But it is especially relevant in this time of globalising ‘free markets’ to emphasise just how the relationship between the state and economy continues to evolve. As the system demands it, so does the state grow in response to crisis: Capitalist production has become more interdependent—more dependent on science and technology, labor functions more specialized, and the division of labor more extensive. Consequently, the monopoly sector (and to a much lesser degree the competitive sector) requires increasing numbers of technical and administrative workers. It also requires increasing amounts of infrastructure (physical overhead capital)—transportation, communication, R&D, education, and other facilities. In short, the monopoly sector requires more and more social investment in relation to private capital… The costs of social investment…are not borne by monopoly capital but rather are socialized and fall on the state. Increasing interdependency in production also dictates greater outlays on social consumption (or social variable capital)—for example, insurance against sickness, old age, economic insecurity, public housing; state-financed suburban development; recreational facilities. Unquestionably, monopoly sector growth depends on the continuous expansion of social investment and social consumption projects that in part or in whole indirectly increase productivity from the standpoint of monopoly capital. In short, monopoly capital socializes more and more costs of production. O’Connor (1973:24)

The role of the state in the good society

71

Some interpret the continuing wave of privatisation that has followed the Thatcher period as evidence of the ‘shrinking’ of the state. This, I argue, is incorrect What has happened is a fundamental change in the nature of the state sector, as governments have retreated from the direct ownership and administration of key industries. Not only that, but, largely following the British lead, they have begun to transfer ownership of assets and the administration of service provision to private enterprises. Basic utilities, social services, even air traffic control, are all fair game for monopoly capital, subject to state ‘regulation’. As a result some authors speak of the ‘managerial state’ (e.g. Clarke and Newman, 1998). This does not represent a diminution of state activity, however. Rather, it is the manifestation of the everdeeper entwining of the state and monopoly sectors, with the state acting as regulator, legitimising the new regime whilst facilitating accumulation, and the monopoly sector taking over either the ownership or administration of formerly ‘public’ assets and earning income from these, while costs, as much as possible, are socialised. The so-called shrinkage of the state is, in fact, merely the continuing expansion of capitalism as it commodifies that which was previously regarded as part of the commons. In this the state has been monopoly capital’s willing, and sometimes leading, accomplice. The central importance of the state to the capitalist economic system was recognised, in a moment of clarity unfettered by fashionable ideology, by the World Bank. Its World Development Report of 1997 highlighted a ‘crisis of state effectiveness’, and emphasised the need for effective state action to facilitate economic development and growth (see Panitch, 1998). So much for classical liberal theory, then. The question remains: what of the state? Marx foresaw its withering away, while libertarians of the Right actively pursue its containment, if not in certain cases outright extinction. But this hardly seems realisable, let alone desirable. The point is not to abolish the state, which administers the division of social labor, because if the state were abolished, so would be the division of labor. The point is rather to make the state democratic, and especially to obliterate the distinction between mind and manual labor, thinking and doing, that is reproduced in the capitalist state, with the representative branch doing the thinking (lawmaking), the bureaucracy doing the doing (law implementation). O’Connor (1998:310) In Britain’s Westminster Parliament even the latter would be something of a progressive development, as the legislature is most commonly employed as a rubber stamp for the executive, which imposes its will upon representatives by means of an ever-tightening system of control. But there is no doubt that democratising the bureaucracy, the Civil Service, is a goal in need of public assertion and debate, and has been so for many years. The problem arises from the fact that the civil service sees itself as being above the party battle, with a political position of its own to defend against

72

Michael Keaney

all-comers, including incoming governments armed with their philosophy and programme. Civil service policy—and there is no other way to describe it—is an amalgam of views that have been developed over a long period. It draws some of its force from a deep commitment to the benefits of continuity and a fear that adversary politics may lead to sharp reversals by incoming governments of policies devised by their predecessors, which the civil service played a great part in developing… Thus, when the senior civil servants see a new government come into power with a policy that goes outside that consensus, there is anxiety at the possible effect upon their own policy. Plans are laid that seek to contain this new surge of political power and divert ministerial energies into safer channels that do not disturb the even flow of established Whitehall policy. Benn (1981:50–1) There is little reason to doubt the validity of this analysis twenty years later. The marked continuities between the ‘modernising’ Blair administration and its tired predecessor must originate not only in the singular lack of radicalism attached to the present Labour Government, but as much in the institutionalised consensus that was embedded during eighteen years of relentless Thatcherism. Thus preelection pledges concerning the renationalisation of the national railway network, the retention of air traffic control under state ownership, the repeal of stringent asylum and immigration laws, and a freedom of information Act of Parliament, to name but four, have all undergone a curious revision. While the latter proposal has been greatly diluted as civil servants have proceeded upon its ‘formulation’, the former policy areas have seen the continuation, if not the intensification, of the prior Conservative programme. The scale of the task before any advocates of democratic reform is immense. The forces arrayed against public accountability are formidable, and are set to become more so. This is not to say that change is not possible—events in Seattle clearly showed otherwise. Nevertheless, it will require sustained vigilance and effort. Part of that effort will involve the identification of potential common interests across traditional, sometimes adversarial, boundaries. Not the least of these is the shared opposition of radical and conservative critics to the rampant commodification entailed in the neo-liberal agenda. In Britain, this sort of approach is perhaps best personified by Tony Benn, whose consistently eloquent defence of Parliamentary prerogative belies the corporate media’s portrayal of a dangerous fanatic. In the United States, the Jeffersonian tradition similarly marries radical democracy to the nurturance of both individual and community. There remains the twin task of understanding the nature of the state and executing its functions in such a way as to be truly accountable to the people, as opposed to the CEOs of the Fortune 500, the Joint Chiefs of Staff, or the foreign policy and national security wallahs of the United States, for example. A theory of the state must account for the inevitable empirical differences in states, geographically and temporally. While states over time and space possess

The role of the state in the good society

73

features common enough to allow for a realistic concept of ‘the state’, a reified conception impedes the understanding of the dynamic nature of states, as it does that of institutions per se. At the other end of the spectrum, the assumption that institutions instantaneously reflect the conjuncture of power relationships in society ignores the problem of institutional lag, which particularly applies to constitutional states: A state apparatus tends to remain intact long after the class which gave it its original nourishment ceases to perform decisive economic functions’ (Horowitz, 1999:238). This problem intensifies as the impact of technological change becomes more readily apparent, with important ramifications for political democracy: In a period of rapid technical change it is essential that the machinery of government at all levels should be capable of reflecting the desires of the people expressed through the ballot box more rapidly than is now the case. Indeed, it must, if we are to maintain the stability of our society. Benn (1981:67) Of course, the agility and nature of states’ response to crisis is a function of the jockeying for position among those interests most readily represented by the organs of state. In Marxist parlance, this will include intra-class conflict as much as any between capital and labour. In Veblenian terminology, the time lag and other distortions caused by the wholly disproportionate lobbying and interference of special interest groups—globalising monopoly capital being the most notable of these—in the political process amounts to nothing less than wilful sabotage. However, the remoteness of states from their nominally sovereign electorates is as nothing compared to that of the emerging meta-state, whose role in the exercise of global governance is as yet indeterminate, but nevertheless the subject of power struggles involving individuals and collectivities far removed from public scrutiny. However, as no less an authority than the World Bank has acknowledged, the success of the global governance regime is dependent upon the ‘effectiveness’ of states. If we believe that states might still be captured by democratic interests, or even simply influenced significantly by them, then this represents a good starting point for both theory and practice. Most recently, it is the latter, as manifested at Seattle, that has offered the vital hope to inspire such a project. As with all social institutions, the task of determining the role of the state is one of reconciling means and ends. The evolutionary, mutually informative nature of these has been most clearly highlighted by John Dewey, though it is an implicit feature of much work undertaken by those employing the methods that may be defined broadly as radically institutionalist. The plurality of perspectives within this tradition, while the object of scientistic sneering, is in fact a major source of its strength, and not least its contemporary relevance. John Kenneth Galbraith, by common accord, stands firmly in this institutionalist tradition. Throughout his career, he has undertaken the twin tasks of understanding where we are, and how we might get to where we would like to be given the circumstances. His most recent work of political economy, The Good Society (1996),

74

Michael Keaney

reiterates the themes which have guided his contributions to the debate throughout his long career, though with a nod to the present political climate. Before discussing Galbraith’s evolving views of the state and the prospect for progressive change, this chapter first examines the position of Galbraith’s greatest intellectual forebear, Thorstein Veblen. His influence on Galbraith has, if anything, become more pronounced over the years. Galbraith has, along with others including Douglas Dowd (1966) and Rick Tilman (1992, 1996), done much to enhance Veblen’s reputation among social scientists. While he has been careful not to retreat into almost despairing cynicism like Veblen ultimately did, Galbraith has become markedly more pessimistic with the passage of time. While the reasons for this will be appraised, the more important task of drawing from the more hopeful proposals of his earlier work, including their theoretical basis, will form the basis of the concluding section.

Veblen and the state Thorstein Veblen did not bequeath much in the way of guidance regarding the role of the state. He was concerned with the evolution of imperialism and nationalism, and viewed the modern state as ‘a residual form of the predatory dynastic State of early modern times, superficially altered by a suffusion of democratic and parliamentary institutions in recent times’ (Veblen, 1997:398). While many of the clues he did leave suggest that he viewed the state as an instrument of the vested interests, subject to their jockeying for position, he did also look more kindly upon the use of state apparatus to advance a more egalitarian agenda: It is now not an unusual thing for orthodox Marxists to hold that the improvement of the conditions of the working classes is a necessary condition to the advance of the socialistic cause, and that the unionist efforts at amelioration must be furthered as a means toward the socialistic consummation. It is recognised that the socialistic revolution must be carried through not by an anaemic working class under the pressure of abject privation, but by a body of full-blooded working men gradually gaining strength from improved conditions of life. Instead of the revolution being worked out by the leverage of desperate misery, every improvement in working-class conditions is to be counted as a gain for the revolutionary forces. This is a good Darwinism, but it does not belong in the neo-Hegelian Marxism. Veblen (1990:450) This linkage of means and ends is echoed by Stanfield, who encapsulates the ‘radical democratic faith’ as advancing the implementation of ‘the comprehensive social democratic program [within] the existing social order yet remain[ing] idealistic with regard to imagining a more desirable future’ (Stanfield, 1991:778). While it is not universally conceded, the collapse of the Soviet bloc has largely dissipated the idealistic faith in violent, cataclysmic revolution. The fallout of the

The role of the state in the good society

75

momentous events of 1989–1991 has featured most profoundly the unmasking of the poverty of what ‘really existing socialism’ had become. Perhaps most galling was the Soviet state, which, contrary to theory, had grown into a colossus, rather than withering away. However, subsequent experience has highlighted the deep inadequacy of the ‘economics of transition’ administered by Western gurus of the secular theology of free market economics. Parallel to this has been the realisation that, despite over two decades of New Right anti-statist hegemony in the Anglo-American sphere (with consequent spillover effects), the state as an entity looms larger than ever before. Irving Louis Horowitz goes so far to pronounce: ‘It is my contention that society itself has come to be defined by the state’ (Horowitz, 1999:17). So, rather than simply wishing it away, ignoring it, or pursuing an ideologically driven programme of state emasculation—itself bound to fail—we must consider what sort of state we would envisage as desirable: in the name of realism, unpleasant as that name might be, we need to structure a world that takes seriously the existence of the state, not as a curse upon the poor or a blessing upon them for that matter, but simply as that agency which has come to dominate our age… Serious critics no longer speak in big terms about smashing state power; they are content to consider ways in which state power can be contained. Horowitz (1999:17) The best form of containment is democracy. If ‘power is the measure of disequilibrium’ (Horowitz, 1999:236–7), then the power of the state will be contained more effectively as it is countervailed by other forces. Unfortunately, the contemporary state, replete with the residues of the early modern predatory dynastic state and that of the subsequent bourgeois period, retains the classical liberal separation of the political from the economic. Thus countervailing power tends to reside in the ‘capitalist private sector’ (Stanfield, 1991:776). In fact, there are times when this power is such that instead of countervailing, the state and corporate sector enjoy a cordial relationship that at times borders on symbiosis (Galbraith, 1973:160), and increasingly so: Whatever historical truth there may have been to this conception of civil society, it was radically changed by the rationalization of society effected by late modern capitalism. Civil society now presents itself as a structure of control and discipline rather than as a paradigm of freedom and spontaneity. The contemporary business organization is not only a mechanism for economic decisions; it is also a carefully cultivated life-form that is deliberately imposed, with varying degrees of severity, on its employees. In the same vein, recent demands for re-schooling society have placed great emphasis upon restoring ‘discipline in the classroom’ and modeling students for life in the era of high technology. These same trends are evident in the rigors of Protestant fundamentalism and in the reactionary pronouncements of the Vatican. In short, civil society now represents structures of power which self-

76

Michael Keaney

consciously exercise disciplinary functions that erase the differences between state and society, public and private. How far the revolution has gone may be gauged by the parallel efforts of private and public employers to impose drug tests and lie-detector tests on their employees and to insist on security clearances for numerous employees in both sectors. As a consequence, it becomes increasingly more difficult to discern where the public sector begins and the private leaves off. From this vantage point, ‘deregulation,’ with its faith in market ‘discipline’ and ‘free economic forces,‘ appears less as a policy than as a Freudian slip. Wolin (1989:27–8) In a passage most reminiscent of the work of John Dewey, Horowitz declares: ‘The abuse of democracy is perhaps the soundest argument for broadening the scope of human involvement in political processes’ (Horowitz, 1999:248). What is not made clear by Horowitz, however, is what qualifies as ‘political’. The implication of Horowitz’s statement, confirmed by his other recent works, is that he retains the classical liberal demarcation of the political and economic, whereas a more radical conception of democracy would extend participation to all aspects of social life, most especially the economic. We are well-acquainted with the mythical mantras intoning against state ownership of the means of production owing to the inherent inefficiency of all state enterprise. We are also familiar with the lessons of the Soviet era, including the one about unchecked state encroachment into all aspects of social life as being detrimental to democratic freedoms. It is not at all clear how the unchecked encroachment of commercial imperatives into all aspects of social life would provide suitably fertile ground for these same freedoms. Corporate executives are not commonly noted for enlightened views on free speech, rest breaks, participatory decision making, and the physical and intellectual health of employees. In the United States, ‘land of the free’, even the ability to visit the lavatory during working hours is contested terrain (Linder and Nygaard, 1998). Traditionally, the alternative source of countervailing power has been regarded as the proletariat Marx, however, did not frame his theory of change within the classical liberal demarcation of political and economic. Rather, his analysis was founded upon an essentially economistic conception of history, his ultimate aim being ‘to lay bare the economic law of motion of modern society’ (Marx, 1976:92). While not adhering to the ‘state versus market’ dualism of classical liberalism, seeing the state instead as the instrument of capitalist interests, Marx’s concentration upon the economic as opposed to the political was consistent with the liberal mainstream’s prioritisation of the economic. But here the consistency ended. Among liberals…the lack of interest in political action, the conviction that economics formed the proper study of mankind and economic activity the proper end, hastened the decline of political theory. For these beliefs encouraged the imposition of economic categories onto political thought with the result that the role and status of political theory came to be usurped

The role of the state in the good society

77

by economic theory. Liberate came to assert not only that economics was the most useful form of knowledge for the individual in his pursuit of happiness, but that it also provided the necessary prescriptions for handling the common affairs of society. Wolin (1960:302) The major difference between Marx and liberalism, with respect to the relationship between the political and the economic, is that Marx focused upon the economic in order to effect political change, whereas the classical liberals adopted an essentially conservative position, believing in the primacy of ‘economic laws’ and their uninhibited unfolding as the means to the good society. This was on the basis of the conditions prevalent in early to mid-nineteenth century England (Galbraith, 1993:12–13). Although Marx shared with the liberals a debt to the work of David Ricardo especially, he foresaw the tendency to monopoly, which became manifest towards the end of the nineteenth century, with the rise to prominence of the large corporation. Marx’s prediction of the overthrow of capitalism by the proletariat has not enjoyed empirical vindication. Even his followers have had to adapt Marx’s theory in order to provide justification for their actions, as with Lenin’s identification of the need for a politically aware vanguard to lead the proletariat in revolution. Leninism’s legacy included the hegemony of the communist state over society, since the position of the vanguard, by definition more insightful than the masses, was retained and embedded within Soviet society. If those blessed with greater knowledge deemed it necessary, who were others to challenge such a state of affairs? They could only be enemies, saboteurs, traitors, or the deluded requiring psychiatric correction. All who have sought, and continue to seek, fundamental social change must grapple with the problem of identifying the most likely source of radicalism. Marx’s identification of the proletariat never gained currency in the United States, despite the modifications made by his direct followers. Brian Lloyd, a Marxist of a rigorously orthodox kind, views the ‘Bleary political visions…in the texts of the American radical tradition and the histories of that tradition’ as ‘petty bourgeois socialism’ (Lloyd, 1997:15). Others, however, share Rick Tilman’s more generous—and accurate—appraisal of this tradition as one of ‘eclecticism in terminology and perspective, method and value’ (Tilman, 1996:227). Veblen did not believe that the proletariat would be the most likely social force to press for change. He acknowledged the reformism of the German trade unions and Social Democrats, crediting that strategy with a greater political realism than the determinism of Marx’s Hegelian-influenced philosophy of history. Nevertheless, he also noted the co-opting of labour representatives and organisations by what he termed the Vested Interests, This was in part due to the tactics employed by the captains of industry and finance, and to the original purpose of labour organisations themselves, as ‘not organized for production but for bargaining’ (Veblen, 1983:97). Veblen did, for a time, view the activities of the Industrial Workers of the World more hopefully. However, it appears that by

78

Michael Keaney

1919 his assessment of the most practical (which is not to say likely) source of social change rested upon the emergent engineering profession. The nature of modern industry meant that the newly ascendant class of workers, the engineers or technicians, potentially were in a uniquely powerful position with respect to the control of the production and distribution of material wealth. The gradual estrangement of the ‘captains of industry’ from industry itself, and the concomitant rise of absentee ownership, meant that those extracting the surplus created by the work force of necessity relied upon those with the requisite technical expertise to ensure the continuing productivity of business enterprises. In 1919 Veblen wrote a series of essays for The Dial, which two years later were published together as The Engineers and the Price System. This controversial work is the source of much disagreement between Veblen scholars concerning its significance in relation to the rest of Veblen’s published work It appears to express the hope, perhaps even going so far as to exhort, that the engineers would overthrow the system of absentee ownership and instead organise industry on the basis of need, rather than profit. However, Veblen is always careful to qualify his speculations and exhortations with the disclaimer that the engineers themselves ‘are a scattering lot of fairly contented subalterns, working piecemeal under orders from the deputies of the absentee owners’, while their less skilled counterparts ‘are bound in rival trade organizations whose sole and self-seeking interest converges on the full dinner-pail’ (Veblen, 1983:151). The less-skilled strata of the work force were sufficiently content with the status quo, subscribing wholeheartedly to the system of absentee ownership: the vested rights of absentee ownership are still embedded in the sentiments of the underlying population, and still continue to be the Palladium of the Republic…the underlying population are as nearly uninformed on the state of things as the Guardians of the Vested Interests, including the commercialized newspapers, can manage to keep them. Veblen (1983:128, 151) Thus the prospect of any change in the status quo was very dim indeed. The controversy surrounding The Engineers and the Price System relates, however, to Veblen’s own vision of Utopia. While Donald Stabile (1984:15) argues, on the basis of these essays, that Veblen was ‘the chief ideologue of the New Class of coordinators’, Rick Tilman claims that the ‘ideal’ sketched by Veblen here can best be viewed as ‘an expository device expressing satirical intent, not as a serious plan for economic reconstruction’ (Tilman, 1996:177). But what if both views are, at least in part, correct? What if Veblen did see the most likely source of change coming from the ‘engineers’ and technicians, but thought even this so beyond the bounds of probability that he reverted, in the final analysis, to satire, given the hopelessness of the situation? If there is one characteristic that marks all of Veblen’s writings, it is his keen appreciation of the futility of much of modern social life. He could easily alternate between satire and gloom on the basis of his fine sense of the imbecilic. Gloom appears to have been more pronounced in his

The role of the state in the good society

79

final years, as evidenced by his analysis of Absentee Ownership (1923), and his gradual retreat from public view until his death in 1929. Ultimately Veblen seems to have been less concerned with political structures than with economic provision. Not unlike Marx, Veblen places economic criteria ahead of the political in his evaluation of the present, and his suggestion of a future: It is the degree to which the system effectively fulfills the economic life process of its citizens that is the ultimate test of its quality, not whether it falls into a particular set of categories in the history of Western political thought and behavior. Tilman (1996:188) But as Wolin and Dewey, among others, have emphasised, fulfilment of the economic life process in the long term depends upon the political, if only to ensure continuous fulfilment. After all, ‘Left to themselves, economic forces do not work out for the best except perhaps for the powerful’ (Galbraith, 1973:xiii).

Galbraith, capitalism and the state In an oft-quoted passage, Galbraith remarks that Veblen ‘was not a constructive figure; no alternative economic system and no penetrating reforms are associated with his name’ (Galbraith, 1981:30). Despite this, Veblen’s influence upon him has been profound, with respect to Galbraith’s keen awareness of the ideological functions of social theory—especially economic theory—and the incisive and insightful clarity with which he depicts the objects of his study. Phrases like ‘conventional wisdom’, ‘convenient social virtue’ and ‘private affluence amid public squalor’ would not have so captured the wider public’s imagination had it not been for their descriptive accuracy. In an important tribute to Galbraith’s lifetime contribution, Amartya Sen writes: In the exercise of richly critical, relevantly pointed, and constantly questioning description, it is hard to match Galbraith’s diagnostic skill or the power and reach of his discriminating observation. Sen (1999:141) Insight requires an analytical capacity founded upon a theoretical framework, however implicit or ill-formed that may be. But description that is ‘richly critical, relevantly pointed and constantly questioning’ is so because it is informed by a theory that has passed the test of relevance posed by one of Galbraith’s teachers at Berkeley, Leo Rogin: Ultimately a social scientist must do the same thing a natural scientist does. Both check theory for its truth. But in the social sciences, where reference is not to a constant external nature but to the everchanging historical

80

Michael Keaney

configuration of human affairs, theory which does not orient itself to the requirements of contemporary practice feeds on the bare bones of bygone practical issues and is destined to be both socially reactionary and scientifically sterile. Differences in values and in perceptions of the historical drift of events preclude unanimity in the appraisal of systems of theory. But criticism which has proceeded without explicit reference to historically conditioned practical ends has involved a waste of moral energy. Rogin (1971:13) One can certainly detect in Galbraith’s work his appreciation of Rogin’s identification of the institutional lag to which economic theory is susceptible, and which can prove to be ideologically convenient But if moral energy is not something that Galbraith may reasonably be accused of wasting, perhaps his prescriptions have sometimes underwhelmed the impact of his powerful diagnoses. Douglas Dowd, another student of Rogin, believes so: John Kenneth Galbraith is a witting and witty troublemaker, and though by no means a radical, his troublesomeness, and perhaps even more his graceful writing style, have placed him beyond the pale for most of the economics profession—despite that…he, like [Adolf] Berle, uses a fine mind to underscore problematic areas in the socioeconomy, but moves from these troubles, somehow, always to a comforting set of conclusions (and then in his next book, undermines those conclusions and repeats the process). Dowd (1993:123) Certainly, as Stanfield admits elsewhere in this volume, the withdrawal of a prices and incomes policy as a realistic option by Galbraith in his most recent work of political economy, The Good Society renders the solution to the dilemma of inflation and recession less than comforting simply for not offering any concrete alternative. ‘The most that can now be urged is a sense of responsibility on wage-price negotiation that reflects the larger public interest’ (Galbraith, 1996:47). This, it will be acknowledged, is not an adequate foundation upon which to build hopes for a better future. But it is reflective of a greater pessimism founded upon an apparently realistic assessment of the political prospect by Galbraith. Ever since the New Right ascendancy of the 1970s onwards, and the ‘Great Capitalist Restoration’ ushered in by the governments of Ronald Reagan and Margaret Thateher (though partially pre-empted by their immediate predecessors), Galbraith’s prescriptions have become noticeably less sanguine than before. For example, he is much less convinced of the willingness, if not the ability, of the scientific and educational establishment to combat the pernicious and pervasive influence of the pecuniary interest (Galbraith, 1985:xxxiv–v). Indeed, the impact of the Reagan presidency upon the American, and even international, psyche, perhaps prompted Galbraith to formulate an explicit theory of power, whose centrality of place in Galbraith’s work had not been, prior to this work, as articulately detailed (Galbraith, 1983).

The role of the state in the good society

81

Meanwhile the legacy of the Reagan presidency is such that no comforting solution follows the devastating analysis comprising The Culture of Contentment: ‘the prospect is not bright’ (Galbraith, 1992:182). Dowd’s remark that Galbraith is ‘by no means a radical’ is deserving, perhaps, of qualification. Galbraith’s historical association with the Democratic Party, and his participation in Americans for Democratic Action and the presidential campaigns of Adlai Stevenson, John F.Kennedy, Lyndon Johnson, Eugene McCarthy and George McGovern, as well as his stint as U.S. Ambassador to India, would suggest a mind at ease with the essential core of the U.S. political economy (McGovern far less so). Despite his involvement in the political mainstream, his has been a voice of criticism from within. He became an outspoken opponent of the Vietnam War, and, prior to that, advised President Kennedy against a recurrent ‘adventurism’ in American foreign policy (Galbraith, 1998b: 64). He later satirised the U.S. foreign policy establishment in his novel, The Triumph (1968). But with the New Right ascendancy and its ultimate hegemony over Western political and economic discourse, Galbraith’s voice has become ever more marginal, with respect to the corridors of power. Consequentially, in recent years Galbraith has begun to bear similarity to Veblen more closely than he might himself have wished, although he retains some hope that the ideas he propagates may yet bear fruit. Though Galbraith may yet consider himself an abiding liberal, as opposed to an arriviste radical, the words of John Dewey strike a telling, Rogin-esque, note of truth, especially today: If radicalism be defined as perception of need for radical change, then today any liberalism which is not also radicalism is irrelevant and doomed. Dewey in Hickman and Alexander (1998:325) Without ignoring the immensity of the task facing any who would wish to radically redress the distribution of income and power within the industrialised countries, and beyond these to include the impoverished ‘transition’ economies and the plundered, debt-ridden less developed countries, we require a reaffirmation of ends coupled with a ruthless criticism of all that exists so that we might identify realistic means. Realistic here does not mean a timid acceptance of ‘the Third Way’ or some such programme defined mostly on the basis of what it is not. Rather, it is the honest appraisal of the available instruments of progressive change, themselves thoroughly consistent with the nobility of the ends thus sought In other words, instead of falling into the fatal trap of ends justifying the means, we retain Dewey’s idea of ‘ends-in-view’, acknowledging the mutually informative relationship means have with ends. Both must be subject to reconstruction, in a manner consonant with Rogin’s test of validity, lest they become scientifically sterile and/or socially reactionary. ‘Ends’ are not necessarily fulfillments or consummations. They may be mere closures, abrupt cessations, as a railway line may by force of

82

Michael Keaney

external conditions come to an end, although the end does not fulfill antecedent activities. Dewey (1958:269) And even where fulfilment or consummation is achieved, there are always other goals ready to take their place. History is not an unfolding process directed towards some pre-determined final end. The ends we strive towards are provisional, and ought to be consistent with the values we seek to promote and embed within the fabric of social life. Eschewing any sort of determinism, Galbraith has instead engaged in ‘theoretically informed but concrete study of institutions as they are, motivated by the quest not for the highest level of generality but for historically contingent answers to questions concerning what might be done to design an economy more conducive to fairness, well-being, and freedom’ (Bowles and Edwards, 1989:50). In so doing he has employed what Stanfield (1996:62) has termed the ‘critical historical method’. It bears a marked resemblance to Deweyan empirical naturalism (see Boisvert, 1998:35–45). Accordingly, central to Galbraith’s analysis of the political economy of late modern capitalism has been the role of the state. This was not always the case, however. In American Capitalism (1952) Galbraith declared that the success of the U.S. economy would depend upon government policies only in time of war or under threat of war (Galbraith, 1993:105). It is not clear whether this was intended as a satirical barb aimed at hysterical anti-New Dealers, written as it was at a time of equally hysterical anti-communism at home and protracted conflict in Korea. Regardless, the extent to which American capitalism depended upon the state’s role in creating conditions favourable to accumulation subsequently became much clearer. In The Affluent Society (1958), Galbraith highlighted the evident contradictions underlying popular conceptions of government spending as wasteful and private investment as inherently wealth-creating. According to conventional wisdom, vacuum cleaners for clean homes are good, street cleaners for better public hygiene are bad (Galbraith, 1998a:109). Yet increased private production and consumption leads to heavier burdens being placed upon public services. The consequences of such an unmitigated trend are, to say the least, troublesome. ‘Failure to keep public services in minimal relation to private production and use of goods is a cause of social disorder or impairs economic performance’ (1998a: 193). While Galbraith’s main focus in The Affluent Society was upon the diminishing returns of private investment as opposed to the appreciably larger potential return on public investment, the pathological dilemma of the capitalist state that was later examined in such devastating detail by O’Connor (1973) was here identified. Of particular concern to Galbraith was the privatisation of human capital and the socialisation of the investment necessary to its development. Without a properly funded education system, the calibre of employees required by corporations and the state to administer the ever more complex apparatus of modern social life would fail to keep pace with technological development The result would be further stagnation and waste (Galbraith, 1998a:200–8).

The role of the state in the good society

83

At a time of economic expansion, forecasting stagnation appeared to be quite inappropriate. Yet in the 1960s Paul Baran and Paul Sweezy could foresee the subsequent economic debacle of the 1970s as the result of processes endemic to capitalism: simply put, a rising surplus and an increasingly inadequate process of surplus absorption (Baran and Sweezy, 1966). Their two-sector model of the U.S. economy mirrored that of Galbraith’s as detailed in The New Industrial State. But whereas Baran and Sweezy assume monopolistic firms to be profit maximisers, Galbraith, citing the supporting theories of William Baumol and Robin Marris, places greater emphasis upon the growth of the firm as consistent with the strong emphasis placed upon economic growth as a desirable social goal. This difference in emphasis does not necessitate two separate conceptions of the role of the state, however. While Galbraith is concerned to explore the nature and role of the technostructure as a distinct and self-serving stratum of the political economy, Baran and Sweezy concentrate more upon the logic of the capitalist system itself. From their different analyses similar conclusions regarding the state can be drawn. The state’s role in underwriting investment risk, either by direct financial support or guaranteeing a market for the final product, is acknowledged by each (Baran and Sweezy, 1966: Chaps. 6, 7; Galbraith, 1985:5, 20, 184). The latter can be accomplished either by the direct means of public procurement, as with military expenditure, or indirectly via expansionary fiscal and monetary policies. The underwriting of investment risk is one aspect of the more general effort of the state to minimise uncertainty on behalf of monopoly capital. Yet Galbraith’s emphasis upon the nature and role of the technostructure in the economic system leads him to examine in greater detail the overlap between the nominally public and private sectors. The imperatives of technology and capital use do not allow the firm to be subordinate to the market, and the mature corporation, so far from being separated organically from the state, exists…only in intimate association with it Galbraith (1985:179) As a result, much of our life, and nearly all of it that involves the procurement and use of income, is subject to the decisions of the technostructure. It sets our prices, persuades us on our purchases and distributes the resulting income to those who participate in production. The planning of the technostructure also extends…to the management of the demand for those products that are purchased by the state. Thus to know how and to what ends we are governed it is necessary to know the goals of the technostructure. Galbraith (1985:118) The Galbraithian concept of the technostructure echoes Veblen’s soviet of engineers as the most likely source of progressive change. But there are crucial

84

Michael Keaney

differences. While Veblen speculates on the ultimately rather unlikely Utopia of a society governed by principles of productive efficiency, meeting the material needs of all its citizens, Galbraith is describing the here and now of the 1960s. Not only that, but he sees this new power elite being undermined from within, as it is inculcated with the values of the scientific and education estate. But what exactly is the technostructure? According to Galbraith, it is not ‘management’ per se, but comprises those who as participants, contribute information to group decisions. This latter group is very large; it extends from the most senior officials of the corporation to where it meets, at the outer perimeter, the white- and blue-collar workers whose function it is to conform more or less mechanically to instruction or routine. It embraces all who bring specialized knowledge, talent or experience to group decision-making. This, not the narrow management group, is the guiding intelligence—the brain—of the enterprise. Galbraith (1985:74) It is Galbraith’s contention that, owing to the ever-deepening complexity of modern social life and the concomitantly deepening division of labour, power in economic life has passed from capital to organisation, rather than to labour, as Marx hoped. The nature of organisation has changed somewhat since the 1960s. It has become rather less fashionable for business firms to grow via such diversification as to become conglomerate enterprises. The 1980s, especially, witnessed the rise of the corporate raider and takeover specialist, whose ability to unlock value through divestiture led to the formation of a consensus which agreed that enterprises were best advised to concentrate on core business activities, thereby securing better returns. Subsequent technologically assisted ‘downsizing’, in which layers of middle management were dispensed with, seemed to herald the end of the Galbraithian technostructure. However, two factors may in fact signal not its passing, but rather its metamorphosis. Firstly, as David Gordon (1996) scrupulously uncovered, despite the apparent swathes of white collar workers made redundant during the era of ‘downsizing’, the proportion of managerial and supervisory employees compared with those being supervised has remained steady, if not actually increased. As a result the distribution of income in the United States has continued to widen, despite historically low unemployment. No wonder, then, that inflation remains suppressed. Secondly, state-corporate networks—the power elite—have not vanished. Not surprisingly they have changed in nature, but not in their role. Presently they are attempting to regain control following the global financial turbulence induced by illconsidered deregulatory policies vigorously promoted, if not imposed, by the World Bank and the International Monetary Fund. These organisations themselves act very much at the behest of U.S. establishment opinion. The World Bank’s recent identification of a ‘crisis of state effectiveness’, coupled with U.S. Treasury Secretary Larry Summers’ calls for greater international stability, signals the realisation among ideologues that deregulation for its own sake harms the

The role of the state in the good society

85

orderly process of accumulation. The World Bank (1997) and the propagators of the ‘Third Way’ (Blair and Schroeder, 1999; Giddens, 1998) are reasserting the importance of regulatory frameworks which would facilitate economic growth and prosperity. The power elite is becoming reacquainted with truths whose veracity did not lessen during the 1970s: Many have noted that regulatory agencies tend to become the instruments, even the puppets, of the industries they are supposed to regulate. This we see to be normal. Galbraith (1973:218) Given the deep dependence of the planning system on the state and the nature of its motivational relationship to the state, i.e., its identification with public goals and the adaptation of these to its needs, the planning system will not long be regarded as something apart from government Rather it will increasingly be seen as part of a much larger complex which embraces both the planning system and the state. Galbraith (1985:406) What has changed since the 1960s has been the steady globalisation of the world political economy. In part this has been driven by technological advance, facilitating the extended reach of a system dependent upon growth for its very survival. Related to this has been the parallel development of an ideology of globalism, which asserts the superiority of the political economic model of the ‘Washington consensus’ (Pieper and Taylor, 1998) as a means of ensuring ever-greater accumulation by U.S. corporations. Naturally this imperialism-by-any-other-name does not go unchallenged, as the leaders of the European Union, Japan and now China seek to protect their perceived interests. The Islamic countries represent a singular challenge to U.S. hegemony (see Huntington, 1996). Efforts to promote global stability—on terms favourable to the powerful—have foundered at present, following the Battle of Seattle in November 1999. This is not to say that there will be no such attempts in the future. The nature and substance of any future regime of global governance will be the subject of heated debate and not entirely visible power struggle for the foreseeable future. Given this uncertainty faced by an as yet fragmentary global technostructure, the present may offer the greatest opportunity since the 1970s for the development and propagation of an alternative, democratic agenda. As Galbraith (1985:175) states, ‘The first requisite for survival by the technostructure is that it preserve the autonomy on which its decision-making power depends’ In the more insulated regime of the 1960s, this it accomplished via its transcendence of the state and corporate sectors. The ideology of globalism is intended to facilitate the replication of this system on a global scale. Integral to its future success is the cooperation and participation of compliant states. As yet this is far from assured. The uncertainty surrounding the role of the state renders it more vulnerable to

86

Michael Keaney

efforts to harness its power for the good of society, as opposed to that of capital. The question remains, what kind of state should we be seeking to reconstruct?

The good state The question has already been answered in part earlier in the chapter. O’Connor’s call for the democratisation of the state contrasts somewhat with Galbraith’s more pessimistic view of recent events. Because of what he obviously regards as the rather regressive turn taken during the Reagan-Thatcher era, resulting in the embedding of a ‘culture of contentment’, Galbraith’s assessment of the political prospect is noticeably bleaker than it was at the time of his writing The New Industrial State. Then it seemed possible that the skills required by the technostructure, necessitating the expansion of higher education and scientific research, would lead to the unintended promotion of humanistic ideas supposedly enshrined in liberal education. In a manner analogous to the more traditional Marxist analysis of capitalism, the technostructure would be sowing the seeds of its own transformation, if not exactly destruction, because it would come, at least in part, to reflect the values of the scientific and educational estate (Galbraith, 1985:389). Reflecting this conviction, more detailed and ambitious proposals for progressive reform were discussed in Economics and the Public Purpose (1973). These Galbraith has subsequently scaled down in response to his gloomier appraisal of the political climate. Today the pragmatist in Galbraith appears to have the upper hand over his radical aspect. It could be said that he has always been a pragmatist, however; it is simply a measure of how circumstances have changed that what passes for pragmatism today is far less ambitious now than it was two or three decades ago. Then again, compared with the conventional wisdom of the present, Galbraith’s pruned manifesto is still manifestly more radical than anything the advocates of the ‘Third Way’ are proposing. Nevertheless, there is something to be said for unabashed advocacy, regardless of the likely opposition. Arguing for policies that would promote equality, Marc Tool (1996:121) writes: …it is probable that large segments of the ‘conservative’ political community would vigorously oppose these proposals. That opposition is, politically speaking, of interest and importance, but it should not be permitted to compromise the fundamental argument being made to ‘choose equality’. The latter’s credibility does not derive from its ‘political correctness’. The inquiry task is to make arguments and proposals that will stimulate public discussion and social action. In The Good Society, Galbraith, whilst acknowledging the bleaker prospects for radical change in the 1990s, figuratively draws a line in the sand by identifying the most basic elements of any society that would wish to be recognised as ‘good’. Fundamentally, this requires that there be a progressive redistribution of income

The role of the state in the good society

87

and power to enable the enfranchisement of those presently excluded from fuller participation in both the manufacture and enjoyment of the fruits of social life. The distribution of income in the modern economy derives ultimately from the distribution of power. This, in turn, is both a cause and a consequence of the way income is shared. Power serves the acquisition of income; income accords power over the pecuniary reward of others. Galbraith (1996:65) This process of cumulative causation which has been allowed to work more freely during the last two decades, resulting in an ever greater polarisation of rich and poor, must, Galbraith asserts, be addressed. How this is to be accomplished, and the extent to which that accomplishment favours the desired end, depends upon the state. Advocates of the ‘Third Way’ are correct in their argument that there can be no return to the old-style interventionism that typified post-1945 social democracy. The very notion of ‘interventionism’ connotes technocratic tinkering with a system or organism that is otherwise, when fully functional, quite acceptable. It is also premised on the idea that the state is somehow independent of the economic system, which is palpably fictitious. But this is where democrats and Third Wayers must part company, for the latter, in accepting the importance of the state as an integral economic actor, define ‘oldstyle interventionism’ as comprising non-means-tested social welfare benefits and the bailing out of ‘lame duck’ industries through nationalisation. Corporate welfare, on the other hand, is to be more liberally distributed than ever, and via euphemistic ‘public private partnerships’, provide yet more lucrative opportunities for private accumulation whilst the public picks up the tab in terms of poorer services or more expensive charges (Coates and Brown, 1999:51). It is not at all clear that Galbraith has ever advocated what is now caricatured as ‘old-style interventionism’. Certainly, his previous advocacy of public ownership has been noted by many, of whom most are disapproving. It ought to be emphasised that he never advocated the kind of nationalisation typified in Britain by the failed corporate model of Herbert Morrison. As with O’Connor’s (1973:10, n3) clear delineation of state from public, Galbraith has no illusions about the benignity of state power: public ownership is not a promising solution for privately exercised power if the state itself is the instrument of such power… All organization excludes interference from outside or above; its goals are those which serve the interest of its members. This is the behavior of an organization before it is taken over by the state; it will be its behavior after it has been taken over. This will be especially certain if its operations are technical in character and its power is derived from more or less exclusively possessed information. Galbraith (1973:219)

88

Michael Keaney

Foreign policy, the nuclear industry and now, more recently fashionable, monetary policy are all examples of areas where state control is in no wise ‘public’. Nevertheless, ‘[i]n the good society there is, must be, a large role for the state, and especially on behalf of the less fortunate of the community’ (Galbraith, 1996:30). While today this premises Galbraith’s argument for progressive taxation, almost three decades ago it was the basis of a far more radical proposal that is presently gathering support among many whose views could not normally be described as homogeneous. The Galbraithian formulation of the basic income as part of a general prices and incomes policy would not necessarily meet with the approval of other advocates, but it does represent an interesting point of departure for further debate. (For a good survey of the libertarian, feminist and socialist arguments for a guaranteed income, see Jordan, 1985.) Galbraith’s original proposal rested on the preceding analysis of the modern economy as comprising two sectors, the planning system (monopoly capital) and the market system (small, competing firms). The latter is dependent on the former. Wages in the planning system are generally higher than those earned in the market system. Given the subsequent haemorrhaging of employment as a result of corporate downsizing, it is now even more correct to aver that ‘the planning system is a club to which only a minority of workers belong’ (Galbraith, 1973:262). A guaranteed income for the market system would be ‘modestly below what can be earned in the planning system’, while for those who cannot find employment it would be modestly lower again, but sufficient to support an adequate standard of living by comparison with the rest of the working population. In other words, ‘adequacy’ is defined in relative, as opposed to strictly absolute, terms. One important aspect of Galbraith’s proposal of a guaranteed income is its setting of ‘a limit to involuntary self-exploitation’ by the self-employed. In Britain, the crude promotion of ‘entrepreneurship’ as an eminently desirable and practical facet of social life in recent years masks the intention of governments to reduce unemployment figures and thereby reduce the social security bill. This privatisation of costs previously socialised by the planning system is only temporary, however. The generous subsidies and supports offered to business start-ups already reduces the intended saving (if indeed any is preserved, given the pitifully low income supports remaining after the Great Capitalist Restoration). The relatively indiscriminate nature of government assistance means that there is little guidance as to what sorts of business start-ups should be preferred. As a result a proliferation of small enterprises threatens all competing for a dwindling share of an—at best—static market There is a superabundance of cheap labor [which] encourages the setting up of small business…thus produc[ing] ‘overcrowding’ in the competitive sector… Finally, because of the economically depressed condition of competitive industries, small businessmen and farmers (as well as workers) are forced to depend more and more on the state for material survival, indirectly in the form of fair-trade laws and similar protective legislation, directly in the

The role of the state in the good society

89

form of loan guarantees, farm subsidies, and similar programs. Outlays on such indirect and direct state programs are also forms of social expense. O’Connor (1973:30) Needless to say, such irresponsible use of nominally public funds to finance the aspirations of individuals who have no social obligation other than to succeed in the private accumulation of capital is not the result of any truly democratic decision making process. And in the unlikely event that even a small proportion of such beneficiaries achieve ‘success’, through ‘hard work’ which would doubtless be ‘all their own’, they will be free to do as they will with their surplus. This includes relocating production to more hospitable climes, should the relative cost of domestic labour prove to be too inhibiting of accumulation. Meanwhile, unprofitable but socially necessary work remains to be done, starved of the necessary investment by both private and state sectors. Basic income, even as part of a general prices and incomes policy, will not, of itself, result in a fairer and more efficient economic system, when the logic of that system continues to dictate pathologies endemic to itself. The first task of an alternative economic strategy must be to define exactly what sort of values ought to be promoted by and embedded in a reconstructed political economy. This goes to the heart of debates between critics of orthodoxy and those who would emphasise efficiency at the expense of fairness, their conceptions based upon a false dichotomy of the two (Atkinson, 1995). As Galbraith and many others have convincingly argued, narrow economic efficiency at the expense of equity eventually rebounds upon itself, as the logic of ceteris paribus renders institutions ever more imbecilic and, therefore, inefficient The social value theory of Marc Tool, drawing deeply from the legacy of John Dewey, rejects this conventional formulation, positing instead a definition of the economy as the servant of the people, and not vice versa. In short, the instrumental definition of the economy emphasizes lives and livelihoods. The economy is evaluated on its ability to reproduce lives without disrupting them. The economy is not instrumentally valid if it destroys the natural habitat of human life, undermines vital relationships of community or family life, distorts personalities, or unnecessarily represses individual freedom and development Stanfield and Stanfield (1995:211–12) In order to achieve this, the positive role of democratic government must be reasserted. While the Great Capitalist Restoration has brought about the shrinking of government, partly in response to conservatives’ original concerns about overload and governability (Parsons, 1982), state power has increased. This process is accelerating, as governments grant independence to central bankers, as privatised utilities become subject to regulation, as state-administered institutions of education and training promote commercially driven criteria at the expense of the pedagogic, as public services become profit-generating income streams for private investors,

90

Michael Keaney

and those that are not become ever more compliant to rules and performance standards whose formulation and monitoring are the province of the governmentappointed ‘expert’, as opposed to the end users themselves. Democratising the state is only half the political task that awaits those who would seek to bring about the good society. Nevertheless, it would go a significant way towards accomplishing the similar democratisation of the nominally private sector of the economy. The whole concept of private property requires reconstruction to take fuller account of the public consequences of its ownership and use. Such a reconstruction would do much to embed the values of democracy and community, subject as these are to the relentless pressures of commodification. The consequences of that process going unchecked would be an incalculable diminution and devaluation of social (and therefore human) life, as in the process of commodifying all things so that they may be subject to the rules of market exchange, we render ourselves mere commodities. As Robert Prasch and Falguni Sheth (2000) clearly demonstrate, this is precisely what becomes of our children in a system of school vouchers. As certain schools acquire the reputation of ‘good’, placements become valuable commodities. The schools’ managers (as opposed to teachers) therefore have discretionary power over whose children ought to be accepted. Calculations are made on the basis of past test results and social background (where monied equals aspirational), which become price analogues in the cost-benefit analysis conducted by school managers towards the end of maintaining and enhancing their schools’ reputation. That such invidious comparison should be so institutionalised by the state, at the beginning of life, is not something that should be tolerated in the least. Nothing more clearly represents the very antithesis of the good society. In the words of Galbraith (1996:139): ‘The decisive step toward a good society is to make democracy genuine, inclusive’. The democratic principles adumbrated by Tool (1998), very much in the spirit of Dewey (1954), offer an excellent basis for achieving such an end. Of particular importance in rendering the state sector truly public is the democratisation of the policy-making process. It is not enough that there should be far wider voter participation in elections, although that would certainly help. As with Tony Benn’s proposals for civil service reform, Tool (1998:24) asserts that ‘a viable democratic system reflects a problem-solving approach of successive approximations’ The very culture of the state must be reformed in order to effect lasting progressive change. It may take some time to occur, but the ruthless imposition of a single agenda is bound to become a tired effort at self-justification, as with the eighteen years of Conservative rule in Britain, or indeed any monistic political system. The reenergised and slightly altered trajectory of that agenda under ‘New Labour’ nevertheless reflects the entrenchment of unaccountable private interests within the state apparatus. So, too, must the culture of society be reconstructed in order to reassert the place of politics in social life. Instead of politics being a poor second to the demands of a capitalists’ economy, decisions that impact upon the welfare—social and material—of the community should be open not only to popular scrutiny, but as much to popular participation. Such is true public ownership.

The role of the state in the good society

91

Galbraith and the democratic prospect The ambiguity of the state within the present flux resulting from globalisation represents a unique opportunity for the formulation and advocacy of democratic alternatives to the neo-liberal agenda of globalism. The ‘Battle of Seattle’ showed that international elites are increasingly vulnerable to popular protest, which once again manifested at the January 2000 annual Davos convocation of the disingenuously titled World Economic Forum. Organisations like Greenpeace mount effective international campaigns against corporations and governments alike in seeking to prevent wilful environmental damage, as with Royal Dutch Shell’s failed attempt to dispose of the Brent Spar oil rig at sea in 1995. Widespread opposition to biotechnology firm Monsanto’s aggressive promotion of genetically modified seed crops resulted in the company’s climbdown on this issue and ultimate retreat, involving the change of its name to Pharmacia. None of the above marks the end of the agendas driving the thwarted goals of monopoly capital. But it does show what can be accomplished when both the thinking and the doing of progressive civil society are united in rejecting the prerogatives of monopoly capital. It is indicative of what would happen should there be the fulfilment of James O’Connor’s desire to make social movements self-aware that what they have in common is the demand to sublate local direct democracy, liberal democratic political forms, and bureaucracy into a new and unknown third term; that is to put democratic content into the democratic forms (or procedures) of the bourgeois liberal state. O’Connor (1998:310) The ideas promulgated by Galbraith throughout his long career offer, at the very least, a useful launch pad for continuing scholarship and activism aimed at the reconstruction of the good society served by a good state.

References Atkinson, Glen (1995) ‘Efficiency versus equity: a false dichotomy?’, in Charles M.A.Clark, ed., Institutional Economics and the Theory of Social Value: Essays in Honor of Marc R.Tool, Boston: Kluwer, pp. 85–95. Baker, Dean, Gerald Epstein, and Robert Pollin, eds (1998) Globalisation and Progressive Economic Policy, Cambridge: Cambridge University Press. Baran, Paul A., and Paul M.Sweezy (1966) Monopoly Capital: An Essay on the American Economic and Social Order, New York: Monthly Review Press. Benn, Tony (1981) Arguments for Democracy, edited by Chris Mullin, London: Jonathan Cape. Blair, Tony, and Gerhard Schroeder (1999) ‘Europe: The Third Way/Die Neue Mitte’, The Spokesman 66:26–37.

92

Michael Keaney

Boisvert, Raymond D. (1998) John Dewey: Rethinking ourTime, Albany, NY: SUNY Press. Bowles, Samuel, and Richard Edwards (1989) ‘Varieties of dissent: Galbraith and radical political economy’, in Samuel Bowles et al., eds, Unconventional Wisdom: Essays on Economics in Honor of John Kenneth Galbraith, Boston: Houghton, Mifflin, pp. 39–52. Bowles, Samuel, Richard C.Edwards, and William G.Shepherd, eds (1989) Unconventional Wisdom: Essays on Economics in Honor of John Kenneth Galbraith, Boston: Houghton Mifflin. Clark, Charles M.A., ed. (1995) Institutional Economics and the Theory of Social Value: Essays in Honor of Marc R.Tool, Boston: Kluwer. Clarke, John, and Janet Newman (1998) The Managerial State: Power, Politics and Ideology in the Remaking of Social Welfare, London: Sage. Coates, Ken, and Michael Barratt Brown (1999) ‘The Third Way to the servile state’, The Spokesman 66:38–59. Dewey, John (1954) The Public and its Problems, Athens, OH: Swallow Press. —(1958) Experience and Nature, 2nd ed., New York: Dover Publications. Dowd, Douglas F. (1966) Thorstein Veblen, New York: Washington Square Press. —(1993) U.S. Capitalist Development Since 1776: Of, By and For Which People? Armonk, NY: M.E.Sharpe. Dugger, William M. (1992) ‘Conclusion’ in William M.Dugger and William T.Waller, Jr, eds, The Stratified State: Radical Institutionalist Theories of Participation and Duality, Armonk, NY: M.E.Sharpe, pp. 245–257. —ed. (1996) Inequality: Radical Institutionalist Views on Race, Gender, Class, and Motion, Westport, CT: Greenwood Press. Dugger, William M., and William T.Waller, Jr, eds (1992) The Stratified State: Radical Institutionalist Theories of Participation and Duality, Armonk, NY: M.E.Sharpe. Fayazmanesh, Sasan, and Marc R Tool, eds (1998) Institutionalist Theory and Applications: Essays in Honour of Paul Dale Bush, Volume 2, Cheltenham: Edward Elgar. Galbraith, John Kenneth (1973) Economics and the Public Purpose, Boston: Houghton Mifflin. —(1981) A Life in our Times, Boston: Houghton Mifflin. —(1983) The Anatomy of Power, Boston: Houghton Mifflin. —(1985) The New Industrial State, 4th ed., Boston: Houghton Mifflin. —(1990) A Tenured Professor, Boston: Houghton Mifflin. —(1992) The Culture of Contentment, Boston: Houghton Mifflin. —(1993) American Capitalism: The Concept of Countervailing Power, New Brunswick, NJ and London: Transaction Publishers (originally published in 1952). —(1996) The Good Society: The Humane Agenda, Boston: Houghton Mifflin. —(1998a) The Affluent Society, 40th anniversary edition, Boston: Houghton Mifflin. —(1998b) Letters to Kennedy, Cambridge, MA: Harvard University Press. Giddens, Anthony (1998) The ThirdWay: The Renewal of Social Democracy, Cambridge: Polity Press. Gordon, David M (1996) Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial Downsizing, New York: The Free Press. Hickman, Larry A., and Thomas M.Alexander, eds (1998) The Essential Dewey, Volume 1: Pragmatism, Education, Democracy, Bloomington and Indianapolis, IN: Indiana University Press. Horowitz, Irving Louis (1999) Behemoth: Main Currents in the History and Theory of Political Sociology, New Brunswick, NJ and London: Transaction Publishers. Huntington, Samuel P. (1996) The Clash of Civilizations and the Remaking ofWorld Order, New York: Simon and Schuster. Jordan, Bill (1985) The State: Authority and Autonomy, Oxford: Blackwell.

The role of the state in the good society

93

Kotz, David M., Terrence McDonough, and Michael Reich, eds (1994) Social Structures of Accumulation: The Political Economy of ‘Growth andCrisis, Cambridge: Cambridge University Press. Linder, Marc, and Ingrid Nygaard (1998) Void where Prohibited: Rest Breaks and the Right to Urinate on Company Time, Ithaca, NY: Cornell University Press. Lloyd, Brian (1997) Left Out: Pragmatism, Exceptionalism, and the Poverty of American Marxism, 1890–1922, Baltimore, MD: Johns Hopkins University Press. Marx, Karl (1976) Capital Volume 1, Harmondsworth: Penguin (originally published in 1867). O’Connor, James (1973) The Fiscal Crisis of the State, New York: St Martin’s Press. —(1998) Natural Causes: Essays in Ecological Marxism, New York and London: Guilford Press. —(2000) ‘The Battle of Seattle’, Capitalism Mature Socialism 11(1). Panitch, Leo (1998) ‘The State in a Changing World’: social-democratizing global capitalism?’, Monthly Review 50(5):11–22. Parsons, Wayne (1982) ‘Politics without promises: the crisis of “overload” and governability’, Parliamentary Affairs 35, 4:421–435. Pieper, Ute, and Lance Taylor (1998) ‘The revival of the liberal creed: the IMF, the World Bank, and inequality in a globalized economy’, in Dean Baker, Gerald Epstein and Robert Pollin, eds, Globalization and Progressive Economic Policy, Cambridge: Cambridge University Press, pp. 37–63. Prasch, Robert E., and Falguni A.Sheth (2000) ‘What is wrong with educational vouchers?’ Journal of Economic Issues 34, 2:509–15. Rogin, Leo (1971) The Meaning and Validity of Economic Theory: A Historical Approach, Freeport, NY: Books for Libraries Press (originally published in 1956). Sasson, Helen, ed. (1999) Between Friends: Perspectives on John Kenneth Galbraith, Boston: Houghton Mifflin. Sen, Amartya (1999) ‘Galbraith and the art of description’ in Helen Sasson, ed., Between Friends: Perspectives on John Kenneth Galbraith, Boston: Houghton Mifflin, pp. 139–145. Stabile, Donald (1984) Prophets of Order: The Rise of the New Class, Technocracy and Socialism in America, Boston: South End Press. Stanfield, James Ronald (1991) ‘The dichotomized state’, Journal of Economic Issues 25, 3: 765–780. —(1996) John Kenneth Galbraith, Basingstoke: Macmillan. Stanfield, James Ronald, and Jacqueline Bloom Stanfield (1995) ‘Marc Tool’s social value theory and the family’, in Charles M.A.Clark, ed., Institutional Economics and the Theory of Social Value: Essays in Honor of Marc R.Tool, Boston: Kluwer, pp. 209–219. Tilman, Rick (1992) Thorstein Veblen and his Critics, 1891–1963, Princeton, NJ: Princeton University Press. —(1996) The Intellectual Legacy of Thorstein Veblen: Unresolved Issues, Westport, CT: Greenwood Press. Tool, Marc R. (1995) Pricing, Valuation and Systems: Essays in Neoinstitutional Economics, Aldershot: Edward Elgar. —(1996) ‘Choose equality’, in William M.Dugger and William T.Waller, Jr ed., The Stratified State: Radical Institutionalist Theories of Participation and Duality, Armonk, NY: M.E.Sharpe, pp 103–126. —(1998) ‘Instrumental inquiry and democratic governance’, in Sasan Fayazmanesh and Marc R.Tool, eds, Institutional Theory and Application: Essays in Honour of Paul Dali Bush, Volume 2, Cheltenham: Edward Elgar, pp. 1–29. Veblen, Thorstein (1983) The Engineers and the Price System, New Brunswick, NJ and London: Transaction Publishers (originally published in 1921).

94

Michael Keaney

—(1990) The Place of Science in Modern Civilization, New Brunswick, NJ and London: Transaction Publishers (originally published in 1919). —(1997) Absentee Ownership. Business Enterprise in Recent Times: The Case of America, New Brunswick, NJ and London: Transaction Publishers (originally published in 1923). Wolin, Sheldon S. (1960) Politics andVision: Continuity and Innovation in WesternPolitical Thought, Boston: Little, Brown. —(1989) The Presence of the Past: Essays on the State and the Constitution, Baltimore, MD: Johns Hopkins University Press.

6

From Veblen to Galbraith What is the essence of institutional economics? Geoffrey M.Hodgson1

What is institutionalism? On 11 November 1918, in the Forest of Compiègne in France, an armistice was signed between Germany and the Allies, ending hostilities in the First World War. A few days later, in December, across the Atlantic, at the annual meeting of the American Economic Association, the term ‘institutional economics’ was announced in a paper delivered by Walton Hamilton (1919). Thorstein Veblen and John Commons had already built the foundations of institutional economics in the late 1890s (Samuels, 1998). Works such as Veblen’s Theory of the Leisure Class had achieved a wide popular readership. Commons had advised the U.S. and Wisconsin state governments and had become the foremost authority on American labour organisation. Successive leading institutionalists such as Wesley C.Mitchell and John Maurice Clark had established prominent academic reputations. But until 1918 the term ‘institutional economics’ had not been used to describe their school. Earlier, in the summer 1918, the then president of the American Economic Association (AEA), Irving Fisher, had set up a Committee on Cooperation in Economic Research, with Hamilton as its secretary. Its chairman was Allyn A.Young, ‘an admirer of Veblen and an old friend of Mitchell’ (Dorfman, 1974:26). One of its members was Harold G.Moulton, a friend and co-thinker of Hamilton. One concern of this committee was to make economic theory relevant for policy. A prominent aim was to address the key problems of economic development after the First World War. One of its enduring by-products was the tentative creation of an identity for institutional economics in the interwar period. Moulton had already approached Veblen and Mitchell and adduced their support for an initiative to consolidate support in the AEA for the institutionalist cause. In his December address, Hamilton attempted to define the characteristics of this emerging paradigm. As Dorfman (1974:25–6) explained, the meeting ‘was a part of the general movement for reconstruction of economics that was demanded by advanced, liberal economists of all kinds, in order to cope effectively with the problems of the war and the subsequent peace’. Among others, Hamilton’s 1918 presentation drew the support of J.M.Clark and Walter 95

96

Geoffrey M.Hodgson

W. Stewart Institutionalism was thus launched as a movement Its concerns and debates dominated American economics, at least until the 1940s.2 The ‘old’ institutionalism was the dominant school of economics in American universities for much of the first half of the twentieth century. Mitchell became AEA president in 1924. He was followed in that position by institutionalists such asThomas S.Adams in 1927, J.M.Clark in 1935, Frederick C.Mills in 1940, Sumner H.Slichter in 1941, Edwin G.Nourse in 1942 and Albert B.Wolfe in 1943. Allyn A.Young, a critical sympathiser of institutionalism, was AEA president in 1925. Hence, from 1924 to 1943, eight out of the twenty AEA presidents were either institutionalists or sympathetic to institutionalism. Even when neo-classical economics became dominant in the US, the influence of institutionalism persisted. At least eight institutionalists have been elected President of the American Economic Association since 1945: Calvin B.Hoover in 1953, Simon Kuznets in 1954, Edwin E.Witte in 1956, Morris Copeland in 1957, George W.Stocking in 1958, Arthur F.Burns in 1959, Joseph Spengler in 1965 and John Kenneth Galbraith in 1972. Elected institutionalist sympathisers included Frank Knight in 1950, Kenneth Boulding in 1968 and Robert A.Gordon in 1975. In addition, the ‘old’ institutionalists Simon Kuznets and Gunnar Myrdal received Nobel Prizes in 1971 and 1974 respectively. However, despite—or because of—this wide support, the ‘old’ institutionalists not only failed to develop a systematic theory to rival the neo-classical textbooks, they also failed to agree on the central message of institutionalism itself. Even a self-proclaimed American institutionalist such as Edwin Witte (1954:132) was able to write: ‘there is a good deal of merit in the criticism that there is no such thing as institutional economics’. Several attempts to define the essence of institutionalism exist When he announced the term ‘institutional economics’, Hamilton (1919) listed a number of the perceived attributes of this rising school. Hamilton (1919:309–11) argued that ‘institutional economics’ is ‘economic theory’. It ‘alone meets the demand for a generalized description of the economic order. Its claim is to explain the nature and extent of order amid economic phenomena’. He claimed that institutional economics alone could unify economic science by showing how parts of the economic system related to the whole. Institutional economics was not defined in terms of any normative stance. Hamilton declared: ‘It is not the place of economics to pass judgements upon practical proposals’ (1919:313). However, its appeal as a theory was allegedly that it could be used as a basis for policy. Hence, recognising that ‘institutions are social arrangements capable of change rather than obstinate natural phenomena’, institutionalism could satisfy ‘a demand for an economics relevant to the problems of control’ (1919:314). More generally, according to Hamilton (1919:314–18), institutional economists recognised that The proper subject-matter of economic theory is institutions… Economic theory is concerned with matters of process… Economic theory must be based upon an acceptable theory of human behavior…

From Veblen to Galbraith

97

The last point was expanded by the following observations: neo-classical economics…neglected the influence exercised over conduct by the scheme of institutions… Where it fails, institutionalism must strive for success…it must discern in the variety of institutional situations impinging upon individuals the chief source of differences in the content of their behavior. (1919:318) Hamilton’s description of institutionalism in his 1919 manifesto was unelaborate, and required refinement, but in its essentials it has endured the test of time. It can be rephrased and refined in terms of the following five propositions: (a) Although institutional economists are keen to give their theories practical relevance, institutionalism is not itself defined in terms of any policy proposals. (b) Institutionalism makes extensive use of ideas and data from other disciplines such as psychology, sociology and anthropology in order to develop a richer analysis of institutions and of human behaviour. (c) Institutions are the key elements of any economy, and thus a major task for economics is to study institutions, and the processes of institutional conservation, innovation and change. (d) The economy is an open and evolving system, situated in a natural environment, effected by technological changes, and embedded in a broader set of social, cultural, political and power relationships. (e) The notion of individual agents as utility-maximising is regarded as inadequate or erroneous. Institutionalism does not take the individual as given. Individuals are affected by their institutional and cultural situation. Hence individuals do not simply (intentionally or unintentionally) create institutions. Through ‘reconstitutive downward causation’ institutions affect individuals in fundamental ways.3 Most of these points are direct elaborations of ideas from Hamilton’s (1919) text However, regarding point (c), although he hinted at the concept, Hamilton did not mention the words ‘open system’. The phrase did not become widely used until Ludwig von Bertalanffy (1950) and others developed it much later. Subsequently, institutional economists such as K.William Kapp (1968:8) and Shigeto Tsuru (1993:73) made the idea of the economy as an open system one of the defining characteristics of institutionalism. Furthermore, Hamilton did not use the words ‘evolving’ or ‘evolutionary’. Subsequently, it has often been said that institutional economists take an ‘evolutionary’ approach. Institutionalists are very fond of this word, even to the point of proclaiming it in the titles of their academic associations.4 Point (a) may prove controversial, so it will be discussed in more detail below. It is perhaps the only point that any institutionalist may wish to remove from the list Certainly, some institutionalists will wish to add to, or elaborate, the above

98

Geoffrey M.Hodgson

five points. The contention here is that they contain the ‘hard core’ of the institutionalist tradition. I further assert that the single most important defining characteristic of the ‘old’ institutionalism is proposition (e). Among other schools, the ‘new’ is distinguished from the ‘old’ institutional economics in these terms. The other criteria do not demarcate the ‘old’ institutionalism so readily. Other schools of economic thought also express some concordance with propositions (a) to (d). In contrast, proposition (e) is a guiding thread through the whole institutionalist tradition, from Veblen to Galbraith, and it is rarely acknowledged or developed elsewhere. I make this argument below. Let us first look at proposition (a). Subsequently, later sections of this essay will examine the common features of institutionalist theory and discuss some of the implications.

Is institutionalism defined by its policy pronouncements? In the wider world, economics is often perceived and judged in terms of its policy prescriptions. Keynesian economists, for example, are regarded as favouring higher levels of public expenditure. Monetarists such as Milton Friedman give support to free markets and private enterprise. Economics claims to be a science, but policy issues appear everywhere. Furthermore, those who adhere to the notion of a ‘value-free’ economic science are often the very same people who are keen to pronounce policies. Many economists have played ideological havoc with their ideas, even while simultaneously entertaining the questionable proposition of a value-free social science. But there is a dangerous, obverse error. Many critics of mainstream economics believe it is appropriate to evaluate theories primarily or wholly in terms of their alleged policy outputs, rather than their analytical content. Do we judge a theory by the policies that are linked to it? The institutional economist Gunnar Myrdal is well known for his emphasis on the unavoidability of value judgements in social science. He wrote: ‘Valuations are present in our problems even if we pretend to expel them. The attempt to eradicate biases by trying to keep out the valuations themselves is a hopeless and misguided venture’ (Myrdal, 1958:131). But does this mean that Myrdal was saying that positive and normative statements are epistemologically indistinguishable? In fact he implied the opposite: Values do not emerge automatically from the attempt to establish and collect the facts. Neither can we allow the individual investigator to choose his value premises arbitrarily. The value premises should be selected by the criterion of relevance and significance to the culture under study. Myrdal (1958:134) This passage clearly indicates that, for Myrdal, facts and values were not the same thing. Values do not ‘emerge automatically’ from facts, neither is the choice of

From Veblen to Galbraith

99

value premises an arbitrary matter. In short, Myrdal believed that Values are always with us’, but he did not make the mistake of treating values as equivalent to facts. Economic policies are very important Nevertheless, to convince and carry scientific authority, policies have to claim a theoretical basis. Whether from the political right or left, a policy in the modern world has to invoke to some theoretical justification. For reasons of legitimisation, if not logic, policy has to attempt to ground itself upon theory. Furthermore, in order to change the world it is first necessary to understand it We must discern its underlying structures and forces before we can appraise the set of feasible possibilities for policy. Theory, in this sense at least, has priority. It is not being suggested that the positive and the normative can be entirely separated, at least in the social sciences. Contrary to the ‘positive economics’ proposed in the neo-classical textbooks, it is impossible to separate completely (positive) judgements of fact from (normative) judgements of value. Statements of fact and value are typically intermixed. However, facts and values are not the same thing. Accepting that normative values are ‘always with us’ does not mean that we should always judge a theory primarily by its normative values. To accept a complex interrelationship between the positive and the normative does not mean that we abandon all aspects of the distinction. Statements attempting to explain what is are confused with statements about what ought to be. Yet knowing that many people in the world today are poor is not the same thing as saying that they should remain impoverished. While important, normative aspects of institutionalism are not very useful, nor sufficiently precise, as defining criteria, one can find a huge diversity of normative opinions within institutionalism, particularly on attitudes to socialism and central planning. There are prominent examples of fairly conservative institutionalists, such as Arthur F.Burns—a friend of, and collaborator with, Veblen’s student Wesley Mitchell—who advised President Eisenhower in the 1950s and went on to be Chairman of the Federal Reserve in the 1970s. Other institutionalists have socialist views. Others are closer to the political centre. Policy outputs do not tell us very much about the overall nature of institutionalism. Any attempt to define institutionalism in terms of policy outputs would run into severe difficulties. Consider some possible policies. Can institutionalism be defined, in part, in terms of a critique of market solutions to economic problems? Many institutionalists have criticised pro-market policies and have proposed various forms of economic intervention and planning. However, so too have neoclassical economists. (Neo-classical economics is defined as the type of economics developed by William Stanley Jevons, Alfred Marshall, Léon Walras, Philip Wicksteed and others, invoking the standard textbook principles of rationality, maximisation and equilibrium.) The problem of using a disposition towards planning and against markets to define institutionalism would be that many neoclassical economists would then be institutionalists.

100

Geoffrey M.Hodgson

Many of the pioneers of neo-classical economic theory, including Walras, Marshall and Wicksteed, were sympathetic to socialist or social-democratic ideas. By today’s standards, some of them would be leftist radicals. Walras, for instance, called himself a ‘scientific socialist’. His theoretical efforts in economics were motivated by a desire to demonstrate the economic advantages of price regulation and the public ownership of natural monopolies, including land. Marshall was concerned about the problems of poverty in Victorian Britain, and was sympathetic to worker co-operatives. Wicksteed also advocated land nationalisation and had sympathetic and personal links with the socialist and radical movement Several neo-classical economists have promoted radical, interventionist or socialist ideas. For example, Irving Fisher (the American neo-classical economist) advocated substantial reflationary measures during the Great Depression. Another group of neo-classical economists in the 1930s—led by Oskar Lange— used neo-classical economic tools to argue for the superiority of a version of socialist planning. Neo-classical theory was thus the theoretical weapon of the socialists, against pro-market critics of planning such as Ludwig von Mises and Friedrich Hayek. Still later, after 1945, leading neo-classical general equilibrium theorists Kenneth Arrow and Frank Hahn declared their sympathies for various interventionist and social-democratic economic policies. Indeed, Hahn and others have attempted to justify the whole general equilibrium theoretical project as an attempt to demonstrate the limits of the market mechanism. Even more recently, alleged ‘Marxists’ such as Jon Elster and John Roemer have explicitly embraced neo-classical tools of economic analysis, while retaining leftist political credentials. True, there are many conservative and pro-market neo-classical economists. But neo-classical theory spans the conventional political spectrum—from the extreme pro-planning left to the extreme pro-market right—and is thus not definable in terms of the policy stances of its adherents. Whatever its defects, neo-classical theory is a relatively adaptable and politically flexible creature. Can institutionalism be defined, in part, in terms of a concern for greater equality and wealth? Institutionalists do not have a monopoly on egalitarian sentiments. And there is nothing in the core of neo-classical theory that necessarily leads us to inegalitarian conclusions. Indeed, in the early part of the twentieth century, some economists saw neoclassical utility theory as supporting the policy prescription of income redistribution and greater equality. If generally there is a diminishing marginal utility of income, then overall utility can be increased under some conditions, by making incomes more equal. A loaf of bread would increase the utility of a poor person by far more than the amount of utility a rich person would lose from parting from the same item. Indeed, many people, including George Bernard Shaw, used neo-classical marginal utility theory to support such egalitarian policies. However, these egalitarian policies did not find ideological favour among many neo-classical economists and they adopted the Pareto criterion instead.

From Veblen to Galbraith

101

According to this criterion, a policy should not make anyone worse off. A policy of taking from the rich to give to the poor is not Pareto-efficient. The policy conclusions of neo-classical welfare theory were thus changed from egalitarian to conservative. The Pareto criterion is an auxiliary rather than a core assumption. The core presuppositions of neo-classical theory are in fact enormously flexible in policy terms, depending upon which auxiliary assumptions are chosen. True, neo-classical theory is based on the idea of the given individual. And the ideology of political individualism sits quite comfortably upon it. But the assumption of given, utility-maximising individuals does not itself contain any normative notion concerning the maximisation of human freedom or the minimisation of the role of the state. The analytical and the normative ideas may dovetail easily but the one does not flow logically from the other. The fact that neo-classical theory can readily be packaged as either pro-market or anti-market suggests that this theoretical approach does get to the essence of the phenomenon. Indeed, its doctrinal plasticity is a symptom of its failure to provide an adequate explanation of how markets work. It really concedes too much to neo-classical theory to suggest that it has an adequate theoretical foundation upon which to build any pro- (or anti-) market policy. Neo-classical theory is essentially neither pro-market nor anti-market. This is because it has no adequate theory of markets at all. Much modern research into the workings of real markets has been carried out well beyond the neo-classical paradigm (Abolafia, 1996; Swedberg, 1996). Instead of associating it with markets, it would be more accurate to say that neo-classical theory was blind to real markets, and consequently to their virtues or vices. Especially if we are concerned about policy, it is a serious mistake to dismiss mainstream economics on policy grounds. The mistake becomes more serious because it gives unwarranted credence to mainstream theory as a means to generate well-grounded policies. The dismissal of a theory because of its alleged policies unwittingly bolsters the theory, by giving it much more credit, as a viable policy engine, than it deserves. Furthermore, turning science into an ideology would disable any attempt to get better scientific explanations of social and economic outcomes we may wish to change. Instead of persuading the scientific community of the causes of poverty or unemployment, we simply take up an ideological posture against it. We thereby abandon our role and duty as scientists. Our ability to change and improve the world is diminished by some degree. In social science, statements about fact are always contaminated with values. But, to repeat, this does not mean that facts and values are equivalent. If they are, then we might as well pack our scientific bags and become political agitators instead. This does not mean that, as scientists, we can or should abandon any commitment to appropriate values. Normative issues are important They should not and cannot be ignored. Scientists, like others, have a duty to promote and defend what is morally right Nevertheless, in the practice of economic science, the explanation of economic phenomena must be the foremost priority. Any alternative approach to the mainstream must first stake its claim to be an

102

Geoffrey M.Hodgson

identifiable approach to economics on the basis of its incisive analysis of what is, rather than on its judgements of what ought to be.

Other criteria: interdisciplinarity, institutions, evolution and open systems We now consider three of the defining characteristics of institutionalism, as listed above, namely (b), (c) and (d). I argue that these are necessary, but far from sufficient, to define institutionalism. Consider the worthy attribute of interdisciplinarity. It is to its merit and enrichment that the ‘old’ institutional economics draws upon other disciplines such as anthropology, sociology, political science and psychology. However, neo-classical economics could also claim to draw on such disciplines. Chicago economists Gary Becker and Jack Hirshleifer have asserted that their economics makes use of insights from biology. Political science and sociology have been invaded by neo-classical approaches based on rational choice. The neo-classical economist can also be comfortable with some individualistic schools of thought in anthropology and psychology. Furthermore, not all interdisciplinary endeavours are worthwhile. Many disciplines contain individualist and other assumptions from which institutionalism would disassociate. A richer concept of the individual may also be found in anthropology or psychology, but we also find impoverished and unsuitable ideas in these disciplines. Institutionalists may be more thorough in their use of interdisciplinary resources. But interdisciplinarity does not define institutionalism. The ‘old’ institutionalism emphasises the importance of institutions in economic life, and attempts to understand their role and their evolution. Especially in the 1940–1975 period, the study of institutions was neglected by mainstream economics. But this is not the case today (Furubotn and Richter, 1997). Ever since Oliver Williamson (1975) announced the arrival of the ‘new’ institutional economics, mainstream economists have analysed institutions as outcomes of decisions of rational, maximising agents. By embracing rationality, their approach is essentially neo-classical. Austrian school economists have also promoted the study of institutions (Kasper and Streit, 1998). The ‘old’ institutionalists cannot claim to be the only school of economics to study institutions. Consider the idea that institutional economics is ‘evolutionary’. The nugget of truth here is that institutionalist writing is concerned with processes of structural transformation, emergence and change, which are often neglected in the mainstream literature. The problem, however, is that the word ‘evolutionary’ is extremely vague. It is now widely used, even by economists using neo-classical techniques. ‘Evolutionary game theory’ is highly fashionable. Even LéonWalras is described as an evolutionary economist (Jolink, 1996). Mainstream economists such as Paul Krugman (1996) have embraced the concept of ‘self-organisation’. Krugman and others have developed models with positive feedback mechanisms that are non-equilibrating, and exhibit processes similar to versions of circular or

From Veblen to Galbraith

103

cumulative causation. Above all, ‘evolutionary’ is now a voguish word that everyone is keen to use. In precise terms it signifies little or nothing. Some take it to mean the use of biological analogies. Other self-proclaimed ‘evolutionary economists’ see no value in them. A narrower and more precise meaning of ‘evolutionary’ that successfully demarcates institutionalism from other approaches has not yet been elucidated or adopted (Hodgson, 1993, 1999). We come to the institutionalist understanding of the economy as an ‘open system’. This is clearly an important insight of the ‘old’ institutional economics, at least in the sense that it is recognised that the economy is part of a natural environment, embodied in a system of social relations, and affected by technological and other changes. So far so good. The problem in using this as a demarcation criterion is that more substance needs to be given to the notion of a ‘system’, and more explanation is required of the characteristic of it being ‘open’ as opposed to ‘closed’. The idea of a system is an important but elusive concept It connotes some idea of a closely structured interaction between interdependent components. But the boundary of the system may be fuzzy and difficult to establish. What is an open system? Arguably it is a system that is open to flows of matter, energy or information across its boundary; a system in actual or potential interaction with its environment. Is a national economy engaging in trade with other countries an open system? If so, then standard neo-classical macroeconomics has also embraced open systems. Insofar as neo-classical economics deals with the environmental impact of economic activity, it might also be said to be dealing with an open system. Another definition of a closed system is different, and more restrictive. The critical realist philosopher Roy Bhaskar (1975:70) defined a ‘“closed system” simply as one in which a constant conjunction of events obtains, i.e. in which an event of type a is invariably accompanied by an event of type b’. A problem with this definition of a closed system is that it focuses on the level of events, rather than the structural and ontological characteristics of the system itself. For Bhaskar, all systems displaying event regularities are closed, even if they are in interaction with their environment. Using this critical realist approach, Tony Lawson (1997) censures the formal modelling of mainstream economics. Most models assume event regularities of a closed system. Hence they cannot deal with open systems. An ensuing problem here is that many institutionalists—rightly or wrongly— have also assumed event regularities. This is evidently the case with the type of statistical work carried out by Wesley Mitchell (1927) and Arthur F.Burns (Burns and Mitchell, 1946). Lawson’s critical use of the ‘closed system’ concept is so corrosive that it would seem to rule out all mathematical modelling and all econometrics.5 Although institutionalists use such methods much less than mainstream economics, institutionalism is not free of such accoutrements. Many institutionalists must plead guilty to using them. Hence an extreme version of the ‘open system’ doctrine would seem to rule out a significant fraction of the institutionalist literature, whereas a wider version

104

Geoffrey M.Hodgson

would also admit much of neo-classical theory. The open system doctrine is not a precise signifier of the historical boundaries of institutionalism. Until it receives further refinement, it is at best an important but imperfect criterion. In summary, the first four characteristics, (a) to (d), are important, but not sufficient to define the ‘old’ institutionalism. Taken separately, or together in any combination, they are not enough. We must turn to the fifth criterion.

The institutionalised individual The first task in this section is to identify a common theme that pervades institutionalism, from the writings of Veblen in the 1890s and after, to Galbraith and the present day. A notion that the individual is not given, but can be reconstituted by institutions, pervades the tradition of ‘old’ institutionalism from its predecessors in the historical school to its modern successors. For instance, Veblen (1899:190–1) wrote: The situation of today shapes the institutions of tomorrow through a selective, coercive process, by acting upon men’s habitual view of things, and so altering or fortifying a point of view or a mental attitude handed down from the past. For Veblen, this was a basis for a fundamental critique of mainstream economics. In 1909 he elaborated the argument more fully: Evidently an economic inquiry which occupies itself exclusively with the movements of this consistent, elemental human nature under given, stable institutional conditions—such as is the case with the current hedonistic economics—can reach statical results alone; since it makes abstraction from those elements that make for anything but a statical result. On the other hand an adequate theory of economic conduct, even for statical purposes, cannot be drawn in terms of the individual simply—as is the case in the marginal-utility economics—because it cannot be drawn in terms of the underlying traits of human nature simply, since the response that goes to make up human conduct takes place under institutional norms and only under stimuli that have an institutional bearing; for the situation that provokes and inhibits action in any given case is itself in great part of institutional, cultural derivation. Then, too, the phenomena of human life occur only as phenomena of the life of a group or community: only under stimuli due to contact with the group and only under the (habitual) control exercised by canons of conduct imposed by the group’s scheme of life. Not only is the individual’s conduct hedged about and directed by his habitual relations to his fellows in the group, but these relations, being of an institutional character, vary as the institutional scene varies. The wants and desires, the end and the aim, the ways and the means, the amplitude

From Veblen to Galbraith

105

and drift of the individual’s conduct are functions of an institutional variable that is of a highly complex and wholly unstable character. Veblen (1919:242–3) Likewise, in his manifesto for institutional economics, Hamilton (1919:318) wrote of the ‘most important’ defect of neo-classical economics: ‘it neglected the influence exercised over conduct by the scheme of institutions under which one lives and must seek his good’. Later he continued the same theme, seeing each institution as ‘imposing its pattern of conduct upon the activities of men’ in a manner consistent with the notion that institutions possess causal powers above that of individuals alone. Hamilton continued: ‘Institutions and human actions, complements and antitheses, are forever remaking each other in the endless drama of the social process’ (Hamilton, 1932:89). Writing in 1899, Commons (1965:3) saw institutions ‘shaping each individual’. Commons (1934:73–4) likewise made it clear that the individual with whom we are dealing is the Institutionalized Mind. Individuals begin as babies. They learn the custom of language, of cooperation with other individuals, of working towards common ends, of negotiations to eliminate conflicts of interest, of subordination to the working rules of the many concerns of which they are members. They meet each other… prepared more or less by habit, induced by the pressure of custom… In an early article, Mitchell (1910:203) made a similar point: Social concepts are the core of social institutions. The latter are but prevalent habits of thought which have gained general acceptance as norms for guiding conduct. In this form the social concepts attain a certain prescriptive authority over the individual. The daily use by all members of a social group unremittingly molds those individuals into common patterns without their knowledge, and occasionally interposes definite obstacles in the path of men who wish to act in original ways. In his study of the evolution of money as an institution, Mitchell (1937:371) emphasised how it changed human mentality and nature: Now the money economy…is in fact one of the most potent institutions in our whole culture. In sober truth it stamps its pattern upon wayward human nature, makes us all react in standard ways to the standard stimuli it offers, and affects our very ideals of what is good, beautiful and true. Likewise, Clarence Ayres (1944:84) explained: ‘wants’ are not primary. They are not inborn physical mechanisms and they are certainly not spiritual attributes. They are social habits. For every

106

Geoffrey M.Hodgson

individual their point of origin is in the mores of his community; and even these traditions have a natural history and are subject to modification in the general process of social change. No business man assumes that ‘wants’ are ‘given’. One of the axioms of business is that markets must be created. Similarly, sympathetic commentators on institutionalism, such as Robert A. Gordon (1963:124) recognised its central idea: Economic behavior is strongly conditioned by the institutional environment (in all its manifestations) within which economic activity takes place, and economic behavior in turn affects the institutional environment. Gordon (1963:124n) also noted that there is some similarity between institutional economics and Marxian economics, and argued that Schumpeter was an institutional economist. If we adopt a fairly broad definition of institutionalism, it is arguable that Karl Marx and Joseph Schumpeter may be included. The idea that individual tastes are not given, but shaped by institutional circumstances and by particular influences such as advertising, is a major theme in the writings of Galbraith. For instance, in his American Capitalism, originally published in 1952, Galbraith (1962:100) argued that: the purchaser is a ready subject of the advertiser and the salesman. He even allows himself to be influenced by imaginary or contrived virtues… In his bestseliing work The Affluent Society, Galbraith (1958) also made this the centrepiece of his analysis of modern capitalism. In the New Industrial State, Galbraith (1969:152) similarly insisted that individual ‘wants can be synthesized by advertising, catalysed by salesmanship, and shaped by the discreet manipulations of the persuaders’. The theme persists throughout his writings: Yet the evidence of producer influence on consumer response is hardly to be avoided. No effort is more visible; a huge industry is devoted thereto. Galbraith (1988:174) Indeed, no author has brought these ideas to the attention of the modern reader more clearly and resolutely than Galbraith. His analysis puts particular emphasis on the effects of advertising on individual wants. This is one version of the core institutionalist story. More generally, institutionalists recognise the potential influence of many institutions on individual habits, conceptions and preferences. In general terms, such ideas permeate and endure through institutionalism as a whole. Institutionalism is distinguished from both mainstream economics and the ‘new institutional economics’ precisely for the reason that it does not assume a given individual, with given purposes or preference functions. Instead of a bedrock of given individuals, presumed by the mainstream and ‘new’ institutional economics, the ‘old’ institutionalism holds to the idea of interactive and partially

From Veblen to Galbraith

107

malleable agents, mutually entwined in a web of partially durable and selfreinforcing institutions (Hodgson, 1988). No other criterion demarcates so clearly the ‘old’ institutional economics, on the one hand, from ‘new’ institutional and mainstream economics on the other. For example, in an influential collection of essays, Richard Langlois (1986:1) claimed to ‘identify a set of common themes’ found in the works of ‘new institutionalist’ authors. He listed three elements: a more flexible concept of rationality, a focus on ‘evolutionary’ processes, and a broadening of economic enquiry from prices and markets to institutions. However, as Uskali Mäki (1993:12) points out, ‘it is difficult to see why any old institutionalist could not accept them’. Consequently, Mäki shows that Langlois’s three demarcation criteria do not work. Note that the acceptance of the institutionalised individual does not immediately rule out the possibility that institutionalism and neo-classical economics may be complementary. Although Veblen wished to purge economics of classical and neo-classical errors, other institutionalists searched for some complementarity between neo-classical and institutional economics. They included leading institutionalists such as John Commons, Wesley Mitchell, J.M.Clark, Paul Douglas and Arthur F.Burns. They all saw institutionalism as compatible with aspects of Marshallian price theory. This passage from Commons is particularly revealing: Sometimes anything additional to or critical of the classical or hedonic economics is deemed to be institutional… [However] institutional economics …cannot separate itself from the marvellous discoveries and insight of the classical and psychological economists… Institutional economics is not divorced from the classical and psychological schools of economists. Commons (1931:648–56) This is a controversial position. But it shows that the complete exclusion of ‘classical’, neo-classical and ‘hedonic economics’ from institutionalism would rule out Commons and others from the institutionalist canon.

Upward and downward causation Having identified the most important common theme in ‘old’ institutionalist writings, it is necessary to enquire more deeply into its meaning. Despite their common core, several versions of this doctrine have surfaced over the years. It is also necessary to deal with some potential misunderstandings and rebuttals. Perhaps the most frequent attack on the notion that individual tastes and preferences are moulded by circumstances is the criticism that this leads to some kind of structural or cultural determinism. The individual, it is said, is made a puppet of social or cultural circumstances. Admittedly, such a view has been promoted by some ‘old’ institutionalists. When Ayres (1961:175) wrote that ‘there is no such thing as an individual’ he

108

Geoffrey M.Hodgson

was giving succour to such views (Miller, 1966; Rutherford, 1994:40–1). The danger is to see social order as a primarily ‘top down’ process in which individuals are formed and cajoled by institutions (Hill, 1989). Recognising this danger, it would be best if institutionalists avoided terms such as ‘methodological collectivism’ or ‘holism’ to describe their views. Although these terms can be defined in more satisfactory ways, their ready connotation of exclusively ‘top down’ explanations makes them open to abuse. The Ayresian version of institutionalism has been so prominent in the post-1945 era that many commentators take it to be representative of institutionalism as a whole. However, such predominantly ‘top down’ versions of the core institutionalist idea are not representative of institutionalism as a whole. This is clearly the case with bothVeblen and Commons. For instance, Veblen (1919:243) argues that institutions are the outcome of individual behaviour and habituation, as well as institutions affecting individuals: The growth and mutations of the institutional fabric are an outcome of the conduct of the individual members of the group, since it is out of the experience of the individuals, through the habituation of individuals, that institutions arise; and it is in this same experience that these institutions act to direct and define the aims and end of conduct. Writing in 1899, Commons (1965:6–8) wrote similarly of the dependence of institutions upon beliefs: Social beliefs…furnish the basis in the affections of each person which alone makes possible his responsiveness to the appeals of those with whom he must cooperate. The institution in which he finds himself is both the cause and effect of his beliefs… Common beliefs and desires are the vitalizing, active force within the institution. He thus recognised that changes in beliefs could lead to changes in institutions. Commons (1965:96) also accepted the dependence of institutions upon individuals: By an institution is meant an enduring social relation based upon one of the elementary psychic capacities of the individual. Being a social relation, its essential qualities are found in the kind of dealings with one another which the members of the institution carry on. Although some of these statements are insufficiently precise, they show a valid recognition of the ultimate dependence of institutions upon individuals, alongside emphasis on the way in which individuals are moulded by institutions. In the writings of Veblen and Commons there is both upward and downward causation; individuals create and change institutions, just as institutions mould and constrain individuals. Institutionalism is not necessarily confined to the ‘top down’ cultural and institutional determinism with which it is sometimes associated.

From Veblen to Galbraith

109

The great merit of the institutionalist idea that institutions shape individual behaviour is that it admits an enhanced concept of power into economic analysis. The philosopher Bertrand Russell (1938:35) noted that ‘influence on opinion’ was an important source of power over individuals, as well as by direct physical coercion and by punishments and rewards. Under the heading of ‘influence on opinion’ he included both propaganda and ‘creating desired habits in others’ by drill Lukes (1974) developed further the analysis of social power. He also considered the possibility that power may be exercised by ‘coercion, influence, authority, force or manipulation’ (1974:17) but these mechanisms do not necessarily involve changing individual preferences, purposes or values. For Lukes, the overemphasis on the coercive aspect of power ignores the way that it is often exercised more subtly, and often without overt conflict. Lukes (1974:23) thus wrote: To put the matter sharply, A may exercise power over B by getting him to do what he does not want to do, but he also exercises power over him by influencing, shaping or determining his very wants. Indeed, is it not the supreme exercise of power to get another or others to have the desires you want them to have—that is, to secure their compliance by controlling their thoughts and desires? Consider an example. If a criminal desists from crime, simply because he or she fears the risk of apprehension and punishment, then behaviour is being changed through the force of constraint and deterrence. On the other hand, if a prison education programme persuades the criminal that wrongdoing is evil, and that there are better ways of earning a living, then the released criminal will desist from crime, even if the constraints and penalties are ineffective. The preferences and purposes of the criminal will have been changed through immersion in a culture of learning and self-improvement In mainstream economics, preference functions are not subject to reconstitutive downward causation. This is so even when an attempt is made to ‘explain’ tastes. Becker (1996) tries to show that cultural and other influences can alter preferred outcomes. He does this by bringing cultural and other factors in the arguments of these functions. However, culture does not, in fact, alter the preference functions themselves. The problem with this analysis is that it cannot deal with the genuine evolution and fundamental development of the individual. It is a desperate attempt to make all explanations of social phenomena reducible to the given individual, but in doing so it has to make the individual preference function immutable. The preference function is already ‘there’, ready to deal with unpredictable and unknowable circumstances, For instance, it already ‘knows’ how to react to the technology and inventions of the coming decades. Miraculously, its parameter space already includes variables representing the ideas and commodities of the future. Mysteriously, it has already learned how to recognise them. The question is posed as to what does learning mean in such circumstances, when we already know essentially what is to be learned. Such a conception of learning must be sorely inadequate. There is nothing new to be

110

Geoffrey M.Hodgson

learned. What is learned is there already and is simply revealed. Genuine novelty is ruled out in such a world. Human evolution is absent. Learning typically takes place through and within social structures, and at least in this sense it is an important case of reconstitutive downward causation. Neoclassical economics has great difficulty in accommodating the notion of learning because the very idea of ‘rational learning’ is problematic. It treats learning as the cumulative discovery of pre-existing ‘blueprint’ information, as stimulus and response, or as the Bayesian updating of subjective probability estimates in the light of incoming data. However, instead of the mere input of ‘facts’ to given individuals, learning is a developmental and reconstitutive process. It is an adaptive and socially interactive process of problem-formulation and problem-solving, rather than the acquisition and accumulation—by social atoms—of given ‘bits’of information ‘out there’. Learning involves adaptation to changing circumstances, and such adaptations mean the reconstitution of the individuals involved. Furthermore, the means by, and manner in which, people adapt depend on the social context. Hence, institutions and cultures play a vital role in establishing the concepts and norms of the learning process (Hodgson, 1988). Accordingly, the reconstitutive nature of learning is partly a matter of reconstitutive downward causation. To put it bluntly: if we are to accept fully the notion of learning into social theory then the concept of reconstitutive downward causation must also be sanctioned.6

Conclusion It has been argued here that a concern for policy issues may be an attribute of institutional economics but it cannot be its defining characteristic. Necessary features of institutionalism include the recognition of the importance of insights from other disciplines, of institutions and of open and evolving systems. Nevertheless, the single most important characteristic of institutionalism is the idea that the individual is socially and institutionally constituted. The argument here is that all the ‘old’ institutional economists, from Veblen to Galbraith, embrace the notion that the individual is moulded by cultural or institutional circumstances. Within institutionalism, there are many variants of this view. Furthermore, as discussed further below, it is not exclusively confined to the ‘old’ institutionalist tradition. However, the notion of ‘reconstitutive downward causation’ is found neither in mainstream economics, nor in the ‘new’ institutionalism. The tradition there is to take the individual as given. His or her preference function, even if it includes cultural variables as arguments (Becker, 1996), is immanently conceived. The emphasis is on ‘rational choice’ with given preferences in specified circumstances. Welfare judgements are based on the assumption that the choice made by the individual is the ‘best’ one in the circumstances. The implications for abandoning this view and adopting the approach of the ‘old’ institutionalism are enormous. Conceptions of social power and learning can be placed at the centre of economic analysis. This means that institutionalism

From Veblen to Galbraith

111

is more able to address questions of structural change and economic development. It is more useful, for instance, in dealing with issues such as long-run economic development, the problems of less-developed economies, or the transformation processes in the former Soviet Bloc. On the other hand, the analysis becomes much more complicated and less open to formal modelling. In normative terms, the individual is no longer taken as the best judge of his or her welfare. This opens up the difficult question of the discernment and evaluation of human needs. While the criterion of reconstitutive downward causation serves as a useful dividing line between mainstream and institutional economics, it is not an exact boundary. The issues require further refinement before the line can be defined more clearly. Furthermore, it is clear that an idea of ‘downward causation’ appears in both Marxism and the German historical school. Even Marshall (1949:76) observed ‘the development of new activities giving rise to new wants’ Accordingly, a task for theoretical work is to further refine the notion of ‘reconstitutive downward causation’. This will involve (a) a clarification of what is meant by ‘reconstitutive’ and (b) the mechanisms of the process involved. Such work will draw on philosophy, psychology, anthropology, sociology and other disciplines.7 Without going into these issues in detail, we may briefly note that the concept of reconstitutive downward causation does not have to rely on new or mysterious types of cause or causality. As Roger Sperry (1991:230) rightly insists: ‘the higher-level phenomena in exerting downward control do not disrupt or intervene in the causal relations of the downward-level component activity’. This could usefully be termed Sperry’s Rule. Accordingly, at the level of the human agent, there are no magical ‘cultural’ or ‘economic’ forces controlling individuals, other than those associated with the actions and communications of human actors. People do not develop new preferences, wants or purposes because mysterious ‘social forces’ control them. What does happen is that the framing, shifting and constraining capacities of social institutions give rise to new perceptions and dispositions within individuals. Upon new habits of thought and behaviour, new preferences and intentions emerge. As Veblen (1899:190, emphasis added) observed: ‘The situation of today shapes the institutions of tomorrow through a selective, coercive process, by acting upon men’s habitual view of things’. For this reason, the concept of habit is central to the understanding of reconstitutive downward causation. Given the exclusion of the concept from much of twentieth century social science (Camic, 1986; Waller, 1988), thisVeblenian idea remains central to any revamped institutionalism. In conclusion, the central, essential, defining theoretical presumption in the ‘old’ institutionalism is that the individual is not taken as given. Unlike mainstream economists, institutionalists recognise that individual purposes and preferences are moulded and partly reconstituted by social institutions.

Notes 1.

The author is particularly grateful to Perry Bezanis, Michael Keaney, Stefan Kesting, Anne Mayhew, Julie Nelson and Malcolm Rutherford for

112

2.

3.

4.

5. 6.

7.

Geoffrey M.Hodgson

information, criticism and discussions. This article is a substantially extended version of Hodgson (2000). Hamilton (1916:863 n5) mentioned in a footnote that Robert Hoxie had described himself as an ‘institutional economist’, but this reference by Hamilton appears to be the first use of the term ‘institutional economist’ in print Following Hamilton (1919) the terms ‘institutional economics’ or ‘institutional approach to economics’ gradually came into common use. These concepts are discussed in more detail elsewhere. Sperry (1964, 1991) coined the useful term ‘downward causation’ in psychology. I added the word ‘reconstitutive’ (Hodgson, unpublished) to focus on cases where downward causation changes the nature and preferences of the human agent For example: the Association for Evolutionary Economics (USA), the European Association for Evolutionary Political Economy, the Japan Association for Evolutionary Economics, the Centre for Evolutionary Economics (Russian Academy of Sciences). Lawson is sometimes equivocal on this point, admitting that statistical techniques may be of limited use. See Hodgson (1995, 1999). In addition, reconstitutive downward causation is not confined merely to the ‘brainwashing’ of individuals, as Becker (1996:225) suggests. Becker is typical of many economists in that he recognises nothing in between ‘brainwashing’ on the one hand, and ‘free choice’ based on given preference functions, on the other. The truth is that most of social behaviour lies away from these two extremes. Learning is a case in point I have made a first attempt elsewhere (Hodgson, unpublished).

References Abolafia, Mitchel Y. (1996) Making Markets: Opportunism and Restraint on Wall Street, Cambridge, MA: Harvard University Press. Ayres, Clarence E. (1944) The Theory of Economic Progress, 1st ed., Chapel Hill, NC: University of North Carolina Press. —(1961) Toward a Reasonable Society: The Values of Industrial Civilization, Austin, TX: University of Texas Press. Becker, Gary S. (1996) Accounting for Tastes., Cambridge, MA: Harvard University Press. Bertalanffy, Ludwig von (1950) ‘The theory of open systems in physics and biology’, Science 111:23–29. Bhaskar, Roy (1975) A Realist Theory of Science, 1st ed, Leeds: Leeds Books. Burns, Arthur Frank, and Wesley C.Mitchell (1946) Measuring Business Cycles, New York: National Bureau of Economic Research. Camic, Charles (1986) The matter of habit’, American Journal of Sociology 91, 5:1039–1087. Commons, John R. (1931) ‘Institutional economics’, American Economic Review 21, 4 (December): 648–657. Reprinted in Warren J.Samuels, ed. (1988) Institutional Economics: Volume 1, Aldershot: Edward Elgar. —(1934) Institutional Economics: Its Place in Political Economy, New York: Macmillan. Reprinted in 1990 with a new introduction by M.Rutherford, New Brunswick, NJ: Transaction. —(1965) A Sociological View of Sovereignty, edited with an introduction by Joseph Dorfman, New York: Augustus Kelley. Originally published as John R.Commons

From Veblen to Galbraith

113

‘A sociological view of sovereignty’, American Journal of Sociology, 5, 1–3 (1899): 1–15, 155– 171, 347–366; 5, 4–6 (1900):544–552, 683–695, 814–825; 6, 1 (1900):67–98 Dorfman, Joseph (1974) ‘Walton Hamilton and industrial policy’ inWalton H.Hamilton (1974) Industrial Policy and Institutionalism: Selected Essays, with an introduction by Joseph Dorfman, New York: Augustus Kelley, pp. 5–28. Furubotn, Eirik G., and Rudolph Richter (1997) Institutions in Economic Theory: The Contribution of the New Institutional Economics, Ann Arbor, M I: University of Michigan Press. Galbraith, John Kenneth (1958) The Affluent Society, 1st ed, London: Hamilton. —(1962) American Capitalism: The Concept of Countervailing Power, revised ed, Boston: Houghton Mifflin (1st ed., 1952). —(1969) The New Industrial State, Harmondsworth: Penguin. —(1988) ‘lime and the New Industrial State’, American Economic Review (Papers and Proceedings) 78, 2 (May): 373–376. Gordon, Robert A. (1963) ‘Institutional elements in contemporary economics’, in Joseph Dorfman, Clarence E.Ayres, Neil W.Chamberlain, Simon Kuznets and Robert A. Gordon, eds. Institutional Economics: Veblen, Commons, and Mitchell Reconsidered, Berkeley, CA: University of California Press, pp. 123–147. Hamilton, Walton H. (1916) ‘The development of Hoxie’s economics’, Journal of Political Economy 24, 9 (November): 855–883. —(1919) ‘The institutional approach to economic theory’, American Economic Review 9, Supplement: 309–318. Reprinted inWalton H. Hamilton (1974) Industrial Policy and Institutionalism: Selected Essays, with an introduction by Joseph Dorfman, New York: Augustus Kelley. Hill, Lewis E. (1989) ‘Cultural determinism or emergent evolution: an analysis of the controversy between Clarence Ayres and David Miller’, Journal of Economic Issues 23, 2:465–471. Hodgson, Geoffrey M. (1988) Economics and Institutions: A Manifesto for a Modern Institutional Economics, Cambridge and Philadelphia: Polity Press and University of Pennsylvania Press. —(1993) Economics and Evolution: Bringing Life Back Into Economics, Cambridge, UK and Ann Arbor, MI: Polity Press and University of Michigan Press. —(1995) ‘The evolution of evolutionary economies’, Scottish Journal of Political Economy 42, 4:469–488. —(1999) Evolution and Institutions: On Evolutionary Economics and the Evolution of Economics, Cheltenham: Edward Elgar. —(2000) ‘What is the essence of institutional economics?’, Journal of Economic Issues 34, 2. —(unpublished) ‘Structures and institutions: reflections on institutionalism, structuration theory and critical realism’, University of Hertfordshire, mimeo, 1999. Jolink, Albert (1996) The Evolutionist Economics of Léon Walras, London and New York: Routledge. Kapp, K.William (1968) ‘In defense of institutional economics’, Swedish Journal of Economics 70:1–18. Reprinted in Warren J.Samuels, ed. (1988) Institutional Economics: Volume 1, Aldershot: Edward Elgar. Kasper, Wolfgang, and Manfred E.Streit (1998) Institutional Economics: Social Order and Public Policy, Cheltenham, UK and Northampton, MA: Edward Elgar. Krugman, Paul R. (1996) The Self-Organising Economy, Oxford: Blackwell. Langlois, Richard N., ed (1986) Economics as a Process: Essays in the New Institutional Economics, Cambridge: Cambridge University Press. Lawson, Tony (1997) Economics and Reality, London: Routledge. Lukes, Steven (1974) Power: A Radical View, London: Macmillan. Mäki, Uskali (1993) ‘Economics with institutions: agenda for methodological enquiry’, in Uskali Mäki, Bo Gustafsson and Christian Knudsen (1993) Rationality, Institutions and Economic Methodology, London: Routledge, pp. 3–42.

114

Geoffrey M.Hodgson

Marshall, Alfred (1949) The Principles of Economics, 8th (reset) ed., London: Macmillan (1st ed., 1890). Miller, David L. (1966) Individualism, Austin, TX: University ofTexas Press. Mitchell, Wesley C. (1910) ‘The rationality of economic activity. Part II’, Journal of Political Economy 18, 3 (March): 197–216. —(1927) Business Cycles: The Problem and its Setting, New York: National Bureau of Economic Research. —(1937) The Backward Art of Spending Money and Other Essays, New York: McGraw-Hill. Myrdal, Gunnar (1958) Value in Social Theory, New York: Harper. Russell, Bertrand (1938) Power: A New Social Analysis, London: George Allen and Unwin. Rutherford, Malcolm H. (1994) Institutions in Economics: The Old and the New Institutionalism, Cambridge: Cambridge University Press. Samuels, WarrenJ., ed. (1998) The Founding of Institutional Economics, London: Routledge. Sperry, Roger W. (1964) Problems Outstanding in the Evolution of Brain Function, New York: American Museum of Natural History. —(1991) ‘In defense of mentalism and emergent interaction’, Journal of Mind and Behavior 12, 2:221–246. Swedberg, Richard, ed. (1996) Economic Sociology, Aldershot: Edward Elgar. Tsuru, Shigeto (1993) Institutional Economics Revisited, Cambridge: Cambridge University Press. Veblen, Thorstein B. (1899) The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions, New York: Macmillan. Republished in 1961, New York: Random House. —(1919) The Place of Science in Modern Civilisation and Other Essays, New York: Huebsch. Reprinted in 1990 with a new introduction by W.J.Samuels, New Brunswick, NJ: Transaction. Waller, William J., Jr (1988) ‘Habit in economic analysis’, Journal of Economic Issues 22, 1: 113–126. Reprinted in Geoffrey M.Hodgson, ed. (1993) The Economics of Institutions, Aldershot: Edward Elgar. Williamson, Oliver E. (1975) Markets and Hierarchies: Analysis and Anti-Trust Implications: A Study in the Economics of Internal Organization, New York: Free Press. Witte, Edwin E. (1954) ‘Institutional economics as seen by an institutional economist’, Southern Economic Journal 21 (October): 131–140. Reprinted in Warren J.Samuels (1988) Institutional Economics: Volume 1, Aldershot: Edward Elgar.

7

The virtues of their defects and the defects of their virtues Reflections on John Kenneth Galbraith and Thorstein Veblen Douglas F.Dowd

As Veblen’s readers will remember, the phrasing found in the above title was one of his favourites; and, as readers of both Veblen and Galbraith will know, both Veblen’s style and content loom large among the fish swimming through Galbraith’s efforts: to the limited degree that Galbraith may be seen as anyone’s disciple, he was—discreetly—Veblen’s. Perhaps uniquely among economists, Veblen and Galbraith are seen as entertaining, with humour as the main device of the entertainment.1 That humour in turn is largely a matter of their witty turns of phrase. Veblen’s humour is frequently ironic, often harshly so, although it often feathers into whimsy; Galbraith’s humour is more often whimsical than ironic.2 Veblen and Galbraith have been among the best-informed as well as the most entertaining economists of their time; and both have reached the widest of audiences for economics in their own day. That is a virtue they share. Their mutual defect is a function of the qualities of that same virtue. We may begin by assuming that for both the habitual use of irony and whimsy signifies something more than a stylistic quirk. Their particular forms of humour (occurring in their typically intricate sentences) also allow one to infer that the resulting confusion among their readers is not entirely unintentional. Insofar as potential allies are as likely as potential enemies to be confused by what amounts to camouflage, however, such techniques are far from an ideal educational technique. This is not to say that humour should be excluded from serious social analysis—of course not. The problem here is that Veblen was celebrated at least as much for his wit as for the import of his analyses, and Galbraith seems to be known principally for his wit and charm. Among the predictable consequences of their styles is another and telling similarity: those who may be counted among their admirers, supporters, or followers’ represent substantially diverse views concerning both analysis and public policy3 Humour is desirable as a pleasant accompaniment to serious analysis, but beyond a certain point it serves to blur an analytical focus (especially when 115

116

Douglas F.Dowd

embedded in complicated sentences). That is so even for readers who are already substantially well-informed concerning the matters under discussion.4 That said, this essay will ultimately be concerned more with content than with style, and it will be argued that Veblen’s choice and treatment of content were and remain more suited to past or present needs than Galbraith’s. Veblen is never complacent, Galbraith often has been; Veblen’s reach is radically comprehensive, and is thus more illuminating not just about the past but as well for the future than does Galbraith’s. There is something else to be noted, which helps to understand the similarities in their writing styles: the way they wrote bore more than a casual relationship to their respective fears—and thus to their respective virtues and defects.5 Fears? That both Veblen and Galbraith may be seen as having muddied their analyses with protective coloration and convoluted sentences is not my interpretation alone. Thus, Max Lerner, a strong supporter of Veblen, had this to say in the excellent introduction to his selections from Veblen’s writings: there was passion in everything Veblen wrote. [But] it was the passion of a man whose sense of reality was so shattering that he had to turn aside from it and fashion for himself a mask of mockery and indirection. That mask was Thorstein Veblen’s style, as it was his life. Lerner (1948:49)6 On this matter of fear (which he calls ‘caution’) we are able to have Galbraith speak for himself. One occasion when he did so was in a letter to the Monthly Review, one of many they received and printed on the occasion of the 50th Anniversary of their ‘independent socialist magazine’ (founded in 1949 by Leo Huberman and Paul Sweezy). It was at Harvard in the years of the Great Depression that I first came to know Paul Sweezy. He was a dominant figure in our young community; no one took a stronger position on the then obvious and extremely painful failure of the system. To repeat, his was the dominant voice. Mine, that of an intrinsically more cautious figure, was much less influential. Paul was the evident leader. This leadership then became evident in the Monthly Review of which he was founder, editor, and permanent guide. I have been a reader for all these years; I have not always agreed—again the Galbraith caution—but I have always been informed. Accordingly my pleasure in sending my warm congratulations on this anniversary. Galbraith (1999:65)7 The analysis that now follows will conclude by contrasting the works and impact of both Galbraith and Veblen, not always favourably, with a concluding discussion of Robert A.Brady. Brady knew Veblen when both were in New York in the 1920s, and knew Galbraith when both were in Berkeley in the 1930s, Like Veblen, Brady was much influenced by and a friendly critic of Marx; like

The virtues of their defects and the defects of their virtues

117

Galbraith, he was much influenced by Veblen. Unlike Veblen and Galbraith, Brady was always fearlessly straightforward in his work.

Language as an obstacle course We begin with a marvellous and representative quote from Veblen on the U.S. slave trade. Drenched in irony, its sly chuckles (as so often for him) are proportionate to the seriousness of the matter at hand: But even though it may have been distasteful to one and another of its NewEngland men of affairs, and though there was always a suspicion of moral obliquity attached to the slave-trade, yet it had the good fortune to be drawn into the service of the greater good… Perhaps also it was, in some part, in this early pursuit of gain in this moral penumbra that American business enterprise learned how not to let its right hand know what its left hand is doing; and there is always something to be done that is best done with the left hand. Veblen (1923:171n) And here is the opening paragraph of Galbraith’s American Capitalism, his cheerful analysis concerning the power of the giant corporation in the United States: It is told that such are the aerodynamics and wing-loading of the bumblebee that, in principle, it cannot fly It does, and the knowledge that it defies the august authority of Isaac Newton and Orville Wright must keep the bee in constant fear of a crack-up. One can assume, in addition, that it is apprehensive of the matriarchy to which it is subject, for this is known to be an oppressive form of government. The bumblebee is a successful but an insecure insect. Galbraith goes on to note that this is a condition comparable to that of the U.S. economy, whose present organization and management are also in defiance of the rules— rules that derive their ultimate authority from men of such Newtonian stature as Bentham, Ricardo, and Adam Smith. Nevertheless, there are occasions—the decade following World War II was an example—when it works, and quite brilliantly. Galbraith (1952:1) Despite which, Galbraith adds, the fact that the economy nevertheless flourished has caused men to suppose that all must end in a terrible smash. And, as with the bee…this also leads to apprehension and insecurity.

118

Douglas F.Dowd

That opening chapter is entitled ‘The Insecurity of Illusion’. And the stated intent of the book and its concept of countervailing power was to show that, as with the bumblebee that such concerns ‘can be kept inoperative’. When we return to a discussion of this and others of his works, it will be seen just how ‘operative’, even intensified, such concerns came to be for the economy, if not for the bumblebee. As we now begin to examine and compare the content of Veblen and Galbraith, we shall see more generally how the stylistic means of both Veblen and Galbraith served to blunt, obfuscate, or enfeeble the meanings of their analyses, allowing amusement, confusion, or tranquility to mute deepened understanding.

The socioeconomy of the United States Galbraith and Veblen tended to focus on very much the same social processes and relationships, if also with some major differences; in this essay we shall be concerned only with their analyses of the U.S. economy, concerning which both wrote more than on any other subject.8 They wrote many articles and reviews (some of which have been collected as books); here we shall examine only their major books. Veblen wrote two books dealing directly with the U.S. economy: The Theory of Business Enterprise (1904) and Absentee Ownership: Business Enterprise in Recent Times (1923); Galbraith’s major works were American Capitalism: The Concept of Countervailing Power (1952), The Affluent Society (1958), and The New Industrial State (1967).9 Two additional prefatory notes should be made: (1) though both Veblen and Galbraith were of course thoroughly trained in mainstream economic theory, neither adapted that theory to their own writings (except, in some sense for Galbraith, Keynesian theory—itself no longer in the ‘mainstream’); (2) in his time, Veblen was probably more familiar than any other U.S. economist with Marx’s works. Although very much the ‘friendly critic of Marx’,10 Marx’s socioeconomic (though not his political) analyses were often integrated into Veblen’s—however much his writing style and choice of vocabulary (e.g. ‘underlying population’ rather than ‘working class’) permitted most of his readers to be unaware of that influence. Galbraith, although he notes Marx’s political impact, seems not to have taken Marx’s economic analysis seriously. He does comment systematically on Marx (e.g. in short chapters in his The Age of Uncertainty and in The Affluent Society) with some respect; but Marxian analysis does not intrude in his work. In consequence, and although both Veblen and Galbraith were consistently critical of U.S. capitalism, they were so with a qualitative difference. Galbraith may be seen as a sophisticated instance of New Deal liberalism at its best and most comprehensive; Veblen is consistently disdainful of the prospect of ‘reforming’ capitalism, if also vague as to what might take its place.11 We begin with Veblen, and the matter of competition. The earliest clear voice for an unfettered capitalist society was of course that of Adam Smith—not because he saw businessmen as benevolent; on the contrary, he saw them as

The virtues of their defects and the defects of their virtues

119

an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. Smith (1776:215) Nonetheless, Smith advocated a political economy absent of institutional controls of State or church over businessmen. Instead, and to transform the particular ‘private vice’ of businessmen into social well-being, Smith famously depended on ‘the invisible hand’ of market competition. For competition to serve that benign purpose, however, Smith (and in principle, if not in practice, those who see themselves as following in his footsteps) assume economic structures such that all individual firms are literally insignificant in their own markets; that is, powerless, ‘takers’ rather than ‘makers’ of market conditions. Tell that to AT&T, GM, GE, IBM, Microsoft, et al. As the eighteenth century ended, such a hope could be seen as realistic; as Veblen was writing The Theory of Business Enterprise harsher realities had prevailed. Half a century later, when Galbraith wrote American Capitalism, an economist who still believed in the benign rule of market competition as providing economic safeguards had to be bewitched by ideology, not responding to facts.12 For most of this century, not competition but rivalry has characterised the relationships among corporate giants, within and between sectors and nations; as a trend, acquisitions and mergers among and between them (within and between nations) is always accelerating, in number and dollar value.13 Unlike the ‘market competition’ of economic theory, however, market rivalry produces higher not lower overall costs and prices. They are the consequence of advertising, packaging, trivial product variation and policies of deliberate obsolescence that vastly increases the kinds and volume of waste, much assisted by their essential bedmate, consumerism. And instead of Smithian ‘normal profits’,14 in today’s corporate world, ‘normal’ profits would be those that economists used to classify as ‘excess’ and that are worrisome unless they are always rising. Modern production at the plant level is of course generally always more efficient; but the endless variations on the product itself and other costs noted above yield socioeconomic inefficiency and waste—much of it destructive—that might well be seen by Adam Smith as being at least on a par with that produced by the socio-political-economic corruption of his own day (and what Ricardo saw as the power-earned ‘rents’ of his own day).15 Already in 1904 Veblen had perceived continuous and always increasing waste as the inexorable outcome of the then existing and emerging structures and policies of business, both of which he saw as having taken root by the 1870s—that is, when modern industrial technologies had begun to take root. And he foresaw those roots as producing not only massive waste but other senseless or deadly consequences as the century unrolled: as noted, militarism, institutionalised irrationality and, although he did not call it so, a society frozen in its adolescence, moving towards infantilisation.

120

Douglas F.Dowd

After a prolonged analysis that gives central importance to the growth and importance of big business and its manifold powers,16 Veblen closes The Theory of Business Enterprise by asking: ‘What can be done to save civilized mankind from the vulgarization and disintegration wrought by the machine industry?’ And he goes on to posit that this is a question, not of what is conceivably, ideally, idyllically possible for the business community to do if they will take thought and act advisedly and concertedly toward a chosen cultural outcome, but of what is the probable cultural outcome to be achieved through business traffic carried on for business ends, not for cultural ends. It is a question not of what ought to be done, but of what is to take place. Veblen (1904:377) And he adds that the rule of corporate power, in order to avoid ‘the malady’ and ‘the evil consequence’ of competition, has created so comprehensive and rigorous a coalition of business concerns as shall wholly exclude competition, even in the face of any conceivable amount of new capital seeking investment. Veblen (1904:44) Throughout The Theory of Business Enterprise, and carried further in his Instinct of Workmanship (1914), Veblen puts forth his strong belief that left to itself the ‘natural outcome’ of industrial (as distinct from industrial capitalist) development would be tendencies towards ‘matter-of-fact’ attitudes, deepened democracy and widespread economic wellbeing. In these respects his views were both similar to and quite different from Marx’s. The major difference was that where Marx was optimistic regarding the response of the working class to capitalism, Veblen saw ‘the natural outcome’ as forestalled in a business—that is capitalist—society, under the influence of imaginative business power cum nationalism and the irrational tendencies it would stimulate. Thus, in the closing chapter of The Theory of Business Enterprise Veblen goes beyond the economic system per se to describe the main features of the likely ‘cultural’ outcome of this ‘businesslike society’, as regards (1) education (382 ff.),17 (2) the press, periodicals, and advertising (384 ff.), and among other matters, (3) politics and foreign policy: ‘…the direct cultural value of a warlike business policy is unequivocal’ (391 ff.). It is not a pretty picture; we need only to look around us today to perceive its evolution and meaning for our own world. But he also believed that business power would ultimately become self-destructive, used against its own self-interest Thus he put forth the then unique argument that insofar as the aggressive politics and the aristocratic ideals currently furthered by the business community are worked out freely, their logical outcome is an abatement of those cultural features that distinguish

The virtues of their defects and the defects of their virtues

121

modern times from what went before, including a decline of business enterprise itself. Veblen (1904:399–400) For Veblen, the main elements of that ‘decline’ would culminate in what later came to be called fascism. He pursued the argument subsequently and in further detail as regards both Japan and Germany,18 effectively (and uniquely) anticipating their descent into massive repression and militaristic expansion by a decade or more. He saw that lingering feudal institutions in both countries could be brought back to a vigorous existence to serve a ‘warlike business policy’ in modern clothing; no less important, he saw that such institutions would at the same time contain and defang the always more restive ‘underlying population’.19 Veblen also reasoned that in the same process the irrationalities necessarily associated with such a new society—even though organised business was its precipitating element—thus might well do in business itself: It seems possible to say this much, that the full dominion of business enterprise is necessarily a transitory dominion. It stands to lose in the end whether the one or the other of the two divergent cultural tendencies wins, because it is incompatible with the ascendance of either. Veblen (1904:400) So it became, in both Japan and Germany (and Italy),20 until they were brought back into the capitalist orbit after their military defeat. Veblen’s analysis of 1904 was updated in 1923 in his Absentee Ownership. In the intervening two decades, the United States had adopted and adapted the ‘technology of physics and chemistry’ that had been developed most fully in Germany, had moved toward becoming a modern state, had filled out the overseas expansions begun around the turn of the century in the Caribbean and the Pacific Ocean, had participated in the First World War—and was actively taking more than a few steps towards fulfilling Veblen’s expectations about the ‘cultural’consequences foreseen in the earlier book. How does Galbraith compare? His first major scrutiny of the U.S. economy, whose title accords with its analysis, was his American Capitalism: The Concept of Countervailing Power, from which we have quoted earlier, and will comment on below. That work and his later The New Industrial State (1967) have very much the same focus as Veblen’s Theory of Business Enterprise and Absentee Ownership, although with substantially different analyses, Galbraith’s book concerning the United States, The Affluent Society (1958), and written roughly midway between the two just cited, combines a brisk history of economic ideas (with more political than economic commentary on Marx) its main concern, the coexistence of ‘private affluence and public squalor’. That book will be discussed briefly, following the discussion of American Capitalism and The New Industrial State.

122

Douglas F.Dowd

Galbraith’s American Capitalism took it for granted that giant corporations, not small-scale enterprises, were the characteristic form of business organisation in 1952. Its thesis is contained in its subtitle: The Concept of Countervailing Power. As was seen in the earlier quotations from this book, the ‘bumblebee’ is his amusing metaphor for the U.S. economy; and it is the relationships of ‘countervailing power’, despite the absence of Smithian competition, that enable our ‘economic bumblebee’ to fly—indeed, ‘brilliantly’.21 The argument is put forth succinctly in Chapter IX: …private economic power is held in check by the countervailing power of those who are subject to it The first begets the second. The long trend toward concentration of industrial enterprise in the hands of a relatively few firms has brought into existence not only strong sellers, as economists have supposed, but also strong buyers as they have failed to see... In the typical modern market of few sellers, the active restraint is provided not by competitors but from the other side of the market by strong buyers. Galbraith (1952:111–12)22 In his Introduction to the 1993 edition, despite that ‘much has, indeed changed since the 1950s’, Galbraith puts forth an apt summary of the constituent elements of his original analysis. In addition to providing a thumbnail statement of his position, the long quote that follows is noteworthy because he sees that earlier argument as still holding: The core thesis that an established and effective answer to economic power is the building of countervailing power is, indeed, still valid. There is still the great supermarket chain as the answer to the market power of the big food companies. And to that of other producers. The trade union remains an equalising force in the labour markets. And cooperatives do survive. But one cannot doubt that, over all, the role of exploitive market power, that of the monopoly or trust with which countervailing power contends, has, for other reasons, also diminished. International competition—in fashionable modern reference, the globalisation of markets—has been a central factor. [And a bit later, he adds] More subtle, but I think more important, has been the progressive bureaucratisation, as perhaps it may called, of the great industrial enterprise. Once the great firm was respected and feared for its external power; now very often it is the victim of its own internal weakness. We now know that we may have less to fear from corporate power than from corporate incompetence. Competition and bureaucratic weakness have, in their turn, had a notable effect on the trade union, the classic example of countervailing power. To put the matter bluntly, strong trade unions require strong employers. Nothing so weakens a union as an employer who cannot afford to pay and is closing plants or going entirely out of business. This is what, in these last decades, has driven the unions into the shadows.

The virtues of their defects and the defects of their virtues

123

Countervailing power, the raison d’être of the trade union, requires that there be a power to countervail. Galbraith (1993:ix–x) There are numerous assertions in those sentences; here we attempt to examine only those concerning (1) ‘trade unions as an equalising force’, and (2) the centrality of globalisation in diminishing the exploitive market power of giant companies, together with the role of ‘corporate incompetence’ in the weakening of unions—‘driving them into the shadows’. One cannot adequately explore the contentions of either the original book or the later Introduction in a brief statement; what can be done here is to suggest the areas of analytical weakness of the concept of countervailing power, while also noting some broader questions that connect with it.

Trade unions Quite apart from any other considerations regarding trade unions (some of which will be dealt with below), by the time this book was originally written (1952) it should already have been clear that U.S. unions (aptly termed ‘business unions’), however essential they were and remain for protecting and advancing the wellbeing of workers, could not be counted upon to represent others than themselves. Thus, and although there has been (and usually would be) a beneficial ‘trickle down’ effect from strong unions to weaker unions and even to those not unionised as regards working conditions and the ‘social wage’ (pensions and health care, most importantly), there are also associated negative effects. Some of what is meant here was revealed in the outcome of the strike of the United Auto Workers against GM in 1948. The leader of the UAW was then Walter Reuther, not irrelevantly for the point to be made here, among the most honest and trusted of all union leaders at that time or since. One of the demands of the union—this in a time of justly feared inflation—was for pay increases (among other matters) without associated increases in car prices. However, in the strike settlement a key element was the ‘invention’ of the ‘COLA’—a cost of living adjustment for inflation—which soon became common in such agreements. Pleasing though that may have been for the union then (and still), a moment’s reflection suggests the consequent high probability of intensified tendencies towards inflation, unaccompanied by any such protection for the rest of the population. That is, ‘countervailing power’, even—perhaps especially—at its best would tend to place the strongest workers and the strongest companies in a coalition against the rest of the population—unintended and uneasy though such an effect may have been by for labour and/or business. The social impact of such an arrangement (apart from other influences) has been to add social lopsidedness. Desirable though it is to see organised industrial wage workers with comfortable incomes, their ‘countervailing power’ has contributed to a larger consequence: it has been one of the several levers for

124

Douglas F.Dowd

widening the income gap between the top one-fifth—to say nothing of the top 10, 5, and 1 percent—and the bottom three-fifths (with the remaining fifth pondering its fate)—a gap that has widened always more when the 1950s are compared with any decade (except the 1960s) to the present

Globalisation and market power Writing in the 1950s, as Galbraith was, one could be excused for not foreseeing what the globalisation that spread and deepened after the 1970s would mean. But the Introduction from which we quoted above was written in 1993. By that time the giant companies in the 1950s, whether of United States, Japan and Germany or elsewhere, had become giant transnational corporations (TNCs). Doubtless there is considerable rivalry (and some market competition) between these giants that roam the globe. Doubtless, too, many of their high echelon managers and CEOs have tremulous moments and enduring periods of fear and worry about the power, ongoing moves, and possible plans of their rivals. But to see that justifiable nervousness and its accompanying practices as translating into a source of assurance/insurance and ultimately of well-being for most of the people even of the major economic powers, let alone for those of the ‘emerging’ and weakest societies; to see ‘exploitive market power’ as taking its toll merely or mostly in prices and globalisation and as normally having a benign effect in those respects—to see that and not the much else soon to be noted, is to be analytically astigmatic: a characteristic Galbraith frequently identifies among mainstream economists, seeing the mote in their eyes, as he might put it, but not the beam in his own. Part of the ‘much else’ has to do with the weakening of organised labour in the powerful countries—not just the United States, but also in Britain, France, Germany, Italy and elsewhere. What does not seem to be noticed in Galbraith’s mention of the ‘shadows’ into which unions have fallen is that not only unions have been weakened in that process: the broader politics that organised labour might have created or supported have also fallen into those shadows. But such ‘shadows’ are a euphemism for what has occurred, whether the focus is the United States, Britain, Germany, Italy, or elsewhere. In the United States, the political weakness of organised labour has been integral to the rightward shift of government and politics at all levels (local, state and federal). In Western Europe, where organised labour historically has also formed itself into left political parties, the tendency is just as pronounced. Thus, as Clinton and the Democratic Party have moved into the Centre here, so have their close or distanced counterparts done so in Europe: Blair, Schroeder, and d’Alema (of Italy) are seen as doubles for Clinton in their own countries, with increasing frequency. In all cases, whatever remains of liberal or left politics is allowing itself or being forced to swallow—in some cases to embrace—conservative socioeconomic policies.23

The virtues of their defects and the defects of their virtues

125

That is, the market power of the giants is not to be measured mostly, let alone only, by their ability directly to control prices, jobs, and wages. Nervous they may be about their TNC rivals; but in all countries, most vividly and especially in the United States, they have learned how to arrange that both their narrow and their broader interests will be taken care of—through the direct or indirect purchase and control of the various dimensions of the media (including but going beyond commodity advertising), and the direct or indirect purchase of politicians and policies: again, at all levels. As noted earlier, Galbraith is among the best-informed of economists. Nonetheless, those ugly realities lay outside his vision both in 1952 and in the 1993 Introduction to American Capitalism. Such an oversight is all the more noteworthy, given (a) that his Affluent Society (1958) and his New Industrial State (1967), in their different ways, affirmed that, among other serious matters, the good cheer of the 1952 book was misplaced, and (b) that in two books bracketing the 1993 Introduction—The Culture of Contentment (1992) and The Good Society (1996)—he is clearly more concerned than cheerful about the socioeconomy of the United States, if in what may be seen as a patrician manner.24 The foregoing leaves unmentioned some of the specifics of giant corporations’ always growing influence over governmental policies: sitting at the dangerous centre among the latter are of course those affecting our environment Most of the harm done there occurs through the normal functioning of the automobile, chemical and petroleum industries. Not only are they the most powerful of industries (in sales and political clout), they also face the most powerful trade unions.Those industries (with little or no resistance—indeed support—from their unions) have shown their ability to weaken past and prevent future interference with what they see as their needs and rights. Along with others, those industries, in order to maintain their ‘health’, have been the major instruments creating not just a ‘culture of contentment’ for the few, but a culture of consumerism for the many and already worrisome levels of danger to our air, water, soil and bodies.25 The ongoing and accelerating consequences of their political and social power include (but are not limited to) the ravaging and already harmful consequences to the environment, here and globally. That kind of power, when set against ‘market power’ and its virtually exclusive emphasis on prices as seen by economists (including Galbraith) is an anachronistic way of viewing the harm already done by the giant corporation to the quality of our physical and social existence, with worse on its way.26 To repeat, it is not that Galbraith has never dealt with matters of power going beyond ‘market’ power; it is how he has dealt with such questions and how, after putting forth a rather ominous analysis, how he manages to conclude with a generally reassuring prospect That was epitomised in 1967, with The New Industrial State. Having recognised the social question characterised by the contrast between private affluence and public squalor in 1958, Galbraith in the 1967 book sees the Affluent Society (in his ‘Foreword’) as merely ‘a window’ of the ‘house of the industrial state’, and the larger powers possessed by the giant corporations that oversee it

126

Douglas F.Dowd

Early in The New Industrial State he states that he is concerned to show how ‘the forces inducing human effort have changed’: This assaults the most majestic of all economic assumptions, namely that man in his economic activities is subject to the authority of the market Instead, we have an economic system which, whatever its formal ideological billing, is in substantial part a planned economy. The initiative in deciding what is to be produced comes not from the sovereign consumer who, through the market, issues the instructions that bend the productive mechanism to his ultimate will. Rather it comes from the great producing organization which reaches forward to control the markets that it is presumed to serve and, beyond, to bend the customer to its needs. And, in so doing, it deeply influences his values and beliefs—including not a few that will be mobilized in resistance to the present argument. Galbraith (1967:6) The main thesis of that book (which takes the industrial sector as its main focus) is that ‘…the imperatives of technology and organization, not the images of ideology, are what determine the shape of economic society’ (1967:7). Galbraith goes on from there to posit that whatever may have been true in the past as regards who controls and directs the giant corporations and gives them their direction—mighty personalities such as a Carnegie or a Ford, or financial titans such as J.P.Morgan—control now (the 1960s) and in the future will be in the hands of a ‘technostructure’. Not that such would be decided upon, by leaders or owners or the State, but that the modern industrial system everywhere does and will require it. Characteristically, Galbraith makes his point whimsically: The great entrepreneur must, in fact, be compared in life with the male Apis mellifera. He accomplishes his act of conception as the price of his own extinction. The older entrepreneurs combined firms that were not yet technologically complex. [He goes on to discuss as regards steel, petroleum, tobacco, etc. Then] Technology, with its own dynamic, later added its demands for capital and for specialized talent with need for yet more comprehensive planning. Thus what the entrepreneur created passed inexorably beyond the scope of his authority. He could build. And he could exert influence for a time. But his creation, were it to serve the purposes for which it was brought into being, required his replacement. What the entrepreneur created, only a group of men sharing specialized information could ultimately operate. Galbraith (1967:88–9) That ‘group of men’ constitutes the technostructure. It all sounds reasonable. Veblen also pinned whatever hopes he had on ‘the engineers’ who, he thought, were they to rise to decision making power, could make the best not the worst out

The virtues of their defects and the defects of their virtues

127

of the industrial process. Although Galbraith (to my knowledge) never acknowledges Veblen as an inspiration for his own expectations, one may see that Veblen’s hopes became Galbraith’s expectations. A closer look at the realities achieved well before 1967, to say nothing of subsequently, shatters both the analysis and the hopes, whether of Veblen or Galbraith. Albert Einstein, in a letter written in 1917 saw considerably more clearly than either when he said: Our entire much-praised technological progress, and civilization generally, could be compared to an axe in the hand of a pathological criminal’.27 If there was any basis for Veblen’s hopes it lay in the twinned hope that the technologists would somehow snatch sufficient power from business.28 Galbraith appears to have believed that the knowledge of the technologists would in itself empower them—perhaps relying on the old saw that ‘knowledge is power’. He and Veblen were both wrong. That is not, of course, because technology has become less important since the 1960s; on the contrary. Thus, the main tendencies of recent ‘globalisation’ (assisted by the threat or reality of force provided by its also technologically enhanced military blood brother) simply could not have been realised had it not been for recent advances in the technologies of communication, transportation, and the miniaturisation and mobility of productive capital—and it should be added, their ramifications in the media. In their present combinations, such strengths did not coalesce until the 1980s. Even as Galbraith wrote, the melding of marketing and financial imperatives and possibilities dominated the leadership patterns of the giant corporation; by now, finance has come to rule, with marketing and technological advance still vital—of course—but no longer in the driver’s seat. Galbraith made it clear that the ‘subordination of belief to industrial necessity and convenience is not in accordance with the greatest vision of man. Nor is it entirely safe’ (1967:7). Notwithstanding, he found it possible to close his book on this note of good cheer. If, on the other hand, the industrial system is only a part, and relatively a diminishing part, of life, there is much less occasion for concern. Aesthetic goals will have pride of place; those who serve them will not be subject to the goals of the industrial system; the industrial system itself will be subordinate to the claims of these dimensions of life. Intellectual preparation will be for its own sake and not for the better service of the industrial system. Men will not be entrapped by the belief that apart from the goals of the industrial system— apart from the production of goods and income by progressively more advanced technical methods—there is nothing more important in life… The industrial system, in contrast with its economic antecedents, is intellectually demanding. It brings into existence, to serve its intellectual and scientific needs, the community that, hopefully, will reject its monopoly of social purpose. Galbraith (1967:399)

128

Douglas F.Dowd

A clouded crystal ball, if ever there was one, despite that the industrial sector has in fact statistically diminished as a percentage of GDP. But the other sectors that have expanded as industry has contracted—finance, the media (not least their TV component), advertising, you name it—have accompanied, one may say required, a diminution of ‘aesthetic goals’, and of ‘intellectual preparation for its own sake’, along with an enlargement of the ‘entrapment by the belief of men (and women and children) that ‘there is nothing more important in life but the production of goods and income by progressively more advanced technical methods’. That is, in the thirty years or so since 1967, the valuation of economic growth, far from diminishing, has become an icon; concomitantly, the consumerism upon which growth’s vitality becomes always more malignant— as regards (among other matters) astronomical levels of debt, and the spread of adolescent behaviour through all age levels and all sectors of society. Among the many offshoots of that set of developments is its spectacular manifestation in the behaviour of Wall Street, now characterised by the spirit, techniques and mentality of Nintendo games, utterly dominated by frenzied speculation (called, however, ‘investment’). All this goes on with the ‘technostructure’ Galbraith saw and anticipated alive and growing. However, those who sit at its desks—not just engineers and scientists, but also a large percentage of university faculties—are the wellpaid and calmly acquiescent servants of a basically irrational socioeconomic structure. Nor is it unimportant to note that its main working parts include a gigantic militaryindustrial (plus, now, a growing prison-industrial) complex: pace, Galbraith.29 The Affluent Society fell between American Capitalism and The New Industrial State. It seems fair to say that the failure of ‘countervailing power’ to allow a good society to evolve was a good part of what occasioned the analysis of this ‘midway’ book, with its concern for the ‘public squalor’ of the United States.30 To which it might be added that the 1967 book was in an important sense a means by which Galbraith’s dashed hopes (as expressed in American Capitalism) could be revived. A main element of that hope may be found in his repeated emphasis of statements like what follows below, from the chapter entitled ‘The Divorce of Production from Security’: We have seen that while our productive energies are used to make things of no great urgency—things for which demand must be synthesised at elaborate cost lest they not be wanted—the process of production continues to be of nearly undiminished urgency as a source of income. The income men derive from producing things of slight consequence is of great consequence to them. Galbraith (1958:223) To break that circle of dependence, Galbraith proposes (1) raising unemployment insurance to the level of the weekly wage, (2) providing alternative sources of income, unrelated to (industrial) production, and (3) some form of control over wages and prices to prevent inflation (1958:224–9).

The virtues of their defects and the defects of their virtues

129

Quite apart from any other problems with such a ‘programme’, it has in fact existed in the European nations noted above: the amounts and eligibility levels of unemployment insurance in those countries, despite differences among them, are all considerably higher and longer than in the United States; there are many alternative sources of income (in health care, education, etc.); inflation, when it has threatened, has been met by wage and price controls. In all those countries, however, economic growth cum consumerism are gaining the kind and degrees of support they have in the United States—and, as, in the United States, such attitudes always strengthen. Why is that—and other and related matters—so? Like the United States, all those countries are capitalist, if with great differences, including and going beyond those noted above. In the last twenty years or so, however, it may be said that all of them have become more like the United States—Americanised’—than have become like them. Thus, they too (even when, as noted earlier, their governments have Labour or Social Democratic pluralities or majorities) are emphasising ‘balanced budgets’ over ‘social balance’; they too are moving or have already arrived at points where they are cutting back on pensions, health care, education, and the like—and they too have made an icon of economic growth; that is, they and we have come to believe that quantitative change will translate into qualitative improvements.31 This essay has been both explicitly and implicitly critical of Galbraith’s works. This is not because he is not a man of goodwill and decency; clearly he is both. A reading of his 1996 The Good Society suffices to demonstrate that his goals are both inclusive of all in our society, and—were the appropriate politics to be developed—workable. The problem lies in his analysis and, as has been suggested, the manner in which he puts it forth. But the former is more important than the latter. For those who sense or believe that something is terribly wrong with our society (and our world) Veblen is more useful. His language all too frequently engenders confusion, but it is a confusion around an analysis that gets closer to the heart of the matter than Galbraith ever does—or, it seems, even seeks to do. The analysis needed is not a reformist but a radical one. To be sure it is mistaken to seek, let alone to expect, ‘Revolution Now!’ We cannot get from here to a better place in one grand leap—and not only because there is no revolutionary force existent here or elsewhere. But if we are to work for an appropriate schedule of reforms, we cannot do so unless we understand very well just how extensive and interlinked those reforms must be, and how continuous and how much effort their realisation must entail. In turn, that requires understanding how and why the existing capitalist system works. It is not sufficient to be opposed to the results of that system; it is essential to understand that the system itself is the problem, and that ‘left to itself both its characteristics and its results will inexorably continue, if in always changing forms, with society worsening along the way. Nor is it unimportant as a part of that understanding to include in its focus the damage done by our policies when (a) they are more or less voluntarily adopted

130

Douglas F.Dowd

by other industrial powers, and (b) through force and fraud’ (to adopt Veblen’s outlook) made to work in the ‘emerging’and poorer countries. Except rarely, Galbraith allows one to forget about conditions outside the United States. Quite apart from whatever else might be wrong with that, it scarcely suits an analysis of the global power in a ‘globalised world economy’, however benign the intentions of the analyst. In a world whose socioeconomic problems reach from serious to disastrous, within and outside the major powers, it behoves social analysts within those major powers to proffer analyses that face up to those problems; most especially those who live and work in the economically, politically and militarily most powerful nation in history. One who sought to do so, and who had learned much from Veblen, was Robert A.Brady. We now turn very briefly to examine instances of his work; in doing so, substantial differences between his work and that of Veblen and Galbraith will appear—not only in his analyses but in his manner of presenting them.

The scholar as citizen32 As noted earlier, Brady knew both Veblen and Galbraith, and saw himself as having learned much from Marx, as well as from Veblen. In this he was very similar to the sociologist C.Wright Mills; indeed, in their analyses Veblen, Mills and Brady may be seen as constituting a specifically U.S. brand of radicalism.33 Brady’s work was always consistent with that of Veblen, at the same time that it just as frequently went beyond him: in scope, detail and in his specifically radical analysis. Brady organised and pursued his own analyses around the main themes emphasised by Veblen: technology, social—especially business—power, the nature of our species, irrationality and the grip of the past upon the present, and both more gloomily and more hopefully than Veblen, the lingering bases for a future less calamitous than our past Marxian economic analysis tends to emphasise capital accumulation as a central process; Brady, though like Veblen influenced by Marx and anti-capitalist in outlook, emphasised power rather than accumulation in his work—as did Veblen. What many see as Brady’s most important work, Business as a System of Power reveals that emphasis in its title. In that work Brady sought to discover the main tendencies—economic, social and political—of the principal industrial capitalist nations: Britain, France, Germany, Italy, Japan and the United States.34 And what were those ‘main tendencies? They are encapsulated in the chapter headings of Part 3 of the book: (1) ‘Economic Policies: Monopoly, Protection, Privilege’, (2) ‘Social Policies: Status, Trusteeship, Harmony’, and (3) ‘Political Policies: Bureaucracy, Hierarchy, Totalitarianism’. Those tendencies added up to a coalescing movement towards fascism— ‘capitalism with the gloves off—as Brady saw it. As his book was published, fascism had of course emerged formally in Germany, Italy and Japan, and the

The virtues of their defects and the defects of their virtues

131

movement towards it in France had gone far enough before 1939 (when World War II erupted) as to produce what came to be called ‘Vichy France’—which, as a government, found little trouble in adjusting with the Nazi invasion.35 Of the six nations studied, only Britain and the United States had not succumbed to fascism by 1939—although there were active fascist movements in both countries, with significant popular, business and other forms of support. But Britain and the United States, among the six, were the ‘have’ rather than the ‘have not’ nations—where what was ‘had’ was some combination of adequate to rich resources at home and abroad, and the absence of any significant Communist movements.36 It has been suggested above that Brady went ‘beyond’ Veblen in scope and detail. Such was the case with technology, where Brady’s knowledge was on a par with many engineers and his studies of Germany.37 As for his fears (in comparison with those of Veblen and Galbraith), they were not for himself but for the future of life on this planet—as epitomised on the title page of The Spirit and Structure of German Fascism (quoting King Lear): If that the heavens do not their visible spirits Send quickly down to tame these vile offences It will come, Humanity must perforce prey on itself, Like monsters of the deep. That book was the first in English to concern itself with Nazi Germany; it remains the best. In 1938, the year after its publication, Brady was ordered to appear before the House Un-American Activities Committee to explain what came to be called his ‘premature anti-fascism’. Taken together, Brady’s books and articles constitute the most powerful critique by an established academic in the United States, before or since his time. Had there been more professors with his erudition and his political forthrightness, there would be less reason to fear, and more reason to have hope for the future of our species and our planet. Whatever their contributions to our understanding, Veblen and Galbraith fell short of that standard.

Notes 1.

2.

From his first book, Veblen ‘gained a reputation as the Oscar Wilde of economics’, whether as seen by admirers or critics (Jorgensen and Jorgensen, 1999:72). The Jorgensen work is more a biography of Veblen the person than the economist—although they give due weight to the latter. Because the focus here is on language, and because we live at a time in which words are systematically used so as to blur their meaning, it is pertinent to clarify key words such as ‘irony’ and ‘whimsical’. Herewith the definitions from Webster’s International Dictionary (1911):

132

Douglas F.Dowd

Irony: A sort of humor, ridicule, or light sarcasm, which adopts a mode of speech the intended implication of which is the opposite of the literal sense of the words, as when expressions of praise are used where blame is meant Whimsical: Odd, quaint, capricious, fanciful, fantastic. 3.

4.

This may be confirmed by a perusal of the Journal of Economic Issues, the ‘institutionalise journal seen by most as upholding the Veblenian tradition. Therein, virtually all of the contributors are seen as casual or serious followers of Veblen; and it may be seen that the differences among them are at least as great as the similarities. There is no ‘school’ of Galbraithians so far as I know, but he has had numerous admirers within and outside of economics, located in all but the far right and far left of the political spectrum. Much of what has been and will be said here concerning Veblen is repetitive of my small book on him (Dowd, 1966). I am as fond as any of Veblen’s humour, deliberately, however, in that book I placed much of his humour in a set of appendices, some examples of which follow below: It is of the nature of sales-publicity, to promise much and deliver a minimum. Suppresio veri, suggestio falsi. Worked out to its ideal finish, as in the promises and performance of the publicity-agents of the Faith, it should be the high good fortune of the perfect salesman in the secular field also to promise everything and deliver nothing. (1923:321–2) Many a business man…will rather use wool rather than shoddy at the same price. The officials of a railway commonly prefer to avoid wrecks and manslaughter, even if there is no pecuniary advantage in choosing the human course. (1904:42, note) Profits is a business proposition; livelihood is not (1904:276) Any politician who succeeds in embroiling his country in a war, however nefarious, becomes a popular hero and is reputed a wise and righteous statesman, at least for the time being. Illustrative instances need not, and indeed cannot gracefully, be named; most popular heroes and reputed statesmen belong in this class. (1917:22) As someone with a taste for slang and aphorism has said it, ‘In the beginning the Captain of Industry set out to do something, and in the end he sat down to do somebody’. (1923:113)

The virtues of their defects and the defects of their virtues

133

…competition as it runs under the rule of this decayed competitive system is chiefly between the business concerns that control production …and the consuming public…; the chief expedients in this business-like competition being salesmanship and sabotage. Salesmanship… means little other than prevarication, and sabotage means a business-like curtailment of output. (1923:78) …in the democratic commonwealth the common man has to be managed rather than driven… And it is pleasanter to be managed than to be driven. Chicane is a more humane art than corporal punishment. (1919a:127) …there are probably few courts that are in any degree corrupt or biased, so far as touches litigation of this class [involving property]. Efforts to corrupt them would be a work of supererogation, besides being immoral. (1904:282, note) All is fair in war and politics. It is a game of force and fraud. There is said to be honor among thieves, but one does not look for such a thing among statesmen. (1923:24) Representative government means, chiefly, representation of business interests… It seldom happens, if at all, that the government of a civilized nation will persist in a course of action detrimental or not ostensibly subservient to the interests of the more conspicuous body of the community’s business men. The degree in which a government fails to adapt its policy to these business exigencies is the measure of its senility. (1904:286–7) 5.

6.

7.

Although, in my view, their fears were differently based. Veblen, more radical than Galbraith, had reason to be nervous about his ability to get and keep an academic position. From the time he began to write and his last years, the United States was beset by anti-radicalism—from the years of its imperialist expansion at the turn of the century, into and beyond World War I and the ‘red scare’ that followed it Galbraith has never had reason to fear anti-radicalism, for he is not a radical. Rather, it has seemed to me, he has very much sought the broad popularity he has achieved. As will be seen when later we examine Robert A.Brady’s work, his views of reality were, if anything, more ‘shattering’ thanVeblen’s, but they led him to become more rather than less outspoken. It is both interesting and relevant to note that during World War II Galbraith and Sweezy worked together for a while (along with Paul Baran and Chandler Morse) as economists for the Office of Strategic Services

134

Douglas F.Dowd

(predecessor of the CIA). Based in London, their function was to evaluate the impact of Allied bombing on the German economy. (It is my understanding that the report’s conclusion was that the physical damage done by the bombing was offset to a substantial degree by the stiffening of resistance which the bombing of cities occasioned—most dramatically, the ‘firing of Dresden’ The latter, as some will know, was the focus of Kurt Vonnegut’s Slaughterhouse Five. The novelist was a U.S. prisoner-of-war in Dresden during its fire-bombing.) 8. Veblen’s analyses of developments outside the United States (e.g. his Imperial Germany and the Industrial Revolution (1915) and The Nature of Peace (1917)) were more numerous and, in my view, probed more deeply than Galbraith’s (e.g. the latter’s The Nature of Mass Poverty (1979)). Similarly, and although both were frequently concerned with human nature, Veblen (especially in his The Instinct of Workmanship (1914)) may be seen as having made more penetrating and lasting contributions than one finds in Galbraith’s many comments on our species. And although both were ongoing critics of mainstream economics, again the more profound arguments were made by Veblen (collected in The Place of Science in Modern Civilization (1919a)) when compared with, say, Galbraith’s Economics in Perspective (1987) or his Economics and the Public Purpose (1973). 9. Galbraith has, of course, written other books concerned with the United States alone, most recently and notably, The Anatomy of Power (1983), The Culture of Contentment (1992), and The Good Society (1996), to which some reference will be made; but they have been less noted than those previously mentioned. 10. As in his lengthy two-part essay ‘The Socialist Economics of Karl Marx’, in The Place of Science in Modern Civilization. 11. In his many articles (collected in books such as The Vested Interests and the Common Man) Veblen seems to lean towards (if not actually to propose) something like what in Britain was called ‘guild socialism’ (a highly decentralised worker-controlled system). But his general attitude seems well-represented by the comment related in the Jorgensens’ book ‘When questioned as to what he would put in place of the old, rotten, social structure, he remarked that no one asked what should be used as a replacement for cancer or a wart on the nose’. The authors are quoting a letter of Veblen’s adopted daughter, Becky Veblen Meyers (Jorgensen and Jorgensen, 1999:184–5). 12. It is worth interjecting here that whether in Smith’s hopes or those pinned on the abstract models of the ‘pure (or perfect) competition’ of mainstream economics, even were competition to be the reality rather than just the ideology of economists, the consequences would be anything but ‘benign’. Nor need we speculate on that question: The product markets most closely approximating such models existed for some time in the U.S. economy in much of the nineteenth and the early part of the twentieth centuries, most importantly in staple agriculture (grains, tobacco, cotton, etc.), in

The virtues of their defects and the defects of their virtues

13.

14.

15. 16.

135

bituminous coal, and in cotton textiles. The consequences, for all concerned—farmers, coal miners and operators, and textile workers and owners and, finally, the economy—were disastrous, as they were also for the natural resources involved and the larger environment. In all cases, farmers, workers, owners, and/or governmental agencies organised to end market competition and replace it by some combination of big agriculture plus farmer/business-pressured governmental regulation and subsidies, and/or one variety or another of giant corporate ownership and control (as when small coal mines came under the ownership of large chemical or steel companies). The first spectacular rush of mergers occurred in the years 1897–1905, during which over 5,000 firms came to be owned by 318 corporations. There were ‘ripples’ of mergers in the 1920s and then again (somewhat higher waves) in the 1930s. Then, in the late 1960s and early 1970s, the numbers and asset values of mergers exploded beyond belief; and those numbers doubled in the 1980s: the largest merger was that of 1984, when Standard Oil bought up Gulf Oil, at $13.4 billion. Peanuts, compared with the 1990s: already by 1998, with more on their way, there had been 125,000 global mergers and acquisitions, totalling over $1.6 trillion. Among the latter. Daimler-Chrysler ($40 billion), Exxon-Mobil ($83 billion), Travelers (having just merged with Salomon Smith Barney joined Citibank ($73 billion) to become Citigroup, BP-Amoco ($55 billion)—and so on (see Fortune’s ‘Global 500’, August 2, 1999). Those deals (and many more like them) were international as well as inter-sectoral. When, as is increasingly rare, there is an anti-trust suit, it is on behalf of rivalrous companies, not of consumers. A convenient source for this (as well as much other useful material) is Richard Du Boff, Accumulation and Power (1989). Defined as total revenue equalling total costs (including the ‘return to capital’ that equals the ‘natural rate of interest’, itself competitively determined. For an introductory discussion of contemporary waste, see my Waste of Nations (Dowd, 1989: Chap. 3). And doing so in ways that anticipate the analytical advances and broadening of the Marxian framework by Antonio Gramsci in the years (and in the fascist prison) of Mussolini. Most pertinent here is Gramsci’s notion of ‘the ideological hegemony of the bourgeoisie’. Like Galbraith and Veblen, Gramsci disguised his ideas with a terminology mixing convolution with euphemism. In his case, however, it was because all his writings were first going through the hands of the prison censor. Thus, ‘bourgeoisie’—not ‘capitalist’; ‘hegemony’—not ‘the dominance of our concepts of reality, tastes, morality, customs, and political principles’ (Gramsci’s extension of Marx’s famous epigram: ‘The ruling ideas of any era are the ideas of its ruling class’). An excellent introduction to Gramsci’s works is Quintin Hoare and G.N.Smith eds, Selections from the Prison Notebooks of Antonio Gramsci (1971).

136

Douglas F.Dowd

17.

Subsequently Veblen developed the ideas of those few pages into what became The Higher Learning in America: A Memorandum on the Conduct of Universities by Businessmen (completed in 1908, but not published until 1918). His original subtitle was A Study inTotal Depravity’. See ‘The Opportunity of Japan’, originally an article in The New Republic, June, 1917 (reprinted in Essays in Our Changing Order (1934)), and Imperial Germany (1915). Consonant with Veblen’s expectations, big business in Germany was among those supporting what became German fascism; as also, by the end of the 1930s some of those supporters turned to opposition (e.g. as withThyssen, the major steel company and—among others—as is better-known, more than a few members of the German General Staff, also early supporters of Hitler). Writing twenty years ago, the late Bertram Gross, in his Friendly Fascism: The New Face of Power in America (1980), pondered what he saw as the very real possibilities that the combination of economic (most especially those of consumerism), political, and sociocultural tendencies in the United States could carry us to another form of the irrational society—if, probably, without the need for jackboots and gas ovens. The new social formation of fascism appeared first in 1922, in Italy. Veblen seems not to have written anything concerning Italy, before or after Mussolini. He was fluent in French and German and the Scandinavian languages, but not in Italian. Be that as it may, except for two articles (one in 1925, the other in 1927) and his translation of The Laxdaela Sage from the Icelandic (1925), Veblen ceased writing after Absentee Ownership—probably, it is thought, because he had come to despair of any reversal of what he saw as the increasingly irrational tendencies of the early 1920s. See, for example, his article ‘Dementia Praecox’, published in 1922 (in Veblen, 1934:437–50), as well as the general tone of Absentee Ownership. American Capitalism was published first in 1952; subsequently it has been republished several times. I am using the Transaction Publishers edition of 1993 wherein the pagination is the same, though with a different introduction (1993:ix–xi). As Galbraith surely knows (and as he now and then indicates), that element among mainstream economists who spent some time doing empirical research in addition to (or instead of) thinking abstractly, did, after World War II, develop an analytical framework that dealt with ‘strong buyers’ Thus, in what was already the most important of ‘market structures’, those where a few sellers dominated the industry (as in autos, steel, petroleum and much else)—termed ‘oligopoly’—it was seen that there could similarly be a few buyers—‘oligopsony’—and that the market outcome would be notably different than that with only few sellers or only few buyers. But in none of that literature was it assumed that the benefits of such bargaining among the powerful would be turned to the benefit of the ultimate consumer. ‘Countervailing power’ there was, but not with the essentially benign effects anticipated by Galbraith. Joe S.Bain, Jr of the University of

18.

19.

20.

21.

22.

The virtues of their defects and the defects of their virtues

137

California (Berkeley) was one of the major participants of that work (and, while a graduate student, I was his research assistant). See his Industrial Organization (1968). 23. Thus, a report of August 2, 1999 in the New York Times, under the headline A Ragged Rip in Schroeder’s Party Is Becoming All Too Public’, with the internal headline ‘The Socialists, turning centrist, infuriate their left’. After noting the ‘increasingly harsh struggle that has erupted between Mr Schroeder, in his tailored Brioni suits, and workers who feel their party has abandoned them’ the report goes on to declare that ‘Mr Schroeder, after some hesitation, has decided to take the Social Democrats sharply toward the right…’. Later in the same report, a paper published jointly by Mr Schroeder and Tony Blair is recalled, ‘…in which they attempted to map out the essence of the Third Way—a Clintonian updating of Social Democratic values that attempts to place political movements formerly regarded as of the left firmly in the center of the political spectrum of modern societies’. The article closes with the assertion of Mr Schroeder that ‘the benefits of his action would be clear by 2002, when the next federal elections are to be held’. What kinds of benefits and to whom they would accrue were not specified. 24. Thus, and after noting the diverse problems and inequalities associated with the ‘culture of contentment’ of the United States, where—among other grim realities—about 20 percent of the population lives in conditions ranging from substantial comfort to obscene luxury while the other fourfifths live in conditions ranging from adequate to desperate, he takes the following position: But the [“contented”] people responsible cannot be condemned; a whole community cannot usefully be blamed or excoriated. The author of an essay such as this must, in some measure, use the method of the anthropologist, not that of the economist or political theorist. Examining the tribal rites of strange and different peoples, those, say, of a distant island in Polynesia, the scholar finds practices and ceremonials that, on occasion, seem personally distasteful and sometimes socially abhorrent They are to be observed but not censured; one does not effectively censure an established pattern of life… This is the case with the political economy of contentment with which I here deal…it is not a proper subject for indignation nor is it one in which reform can be seriously expected. (Galbraith 1992:11) Even though Galbraith was born in Canada, the United States (in which he has lived and worked most of his life) is not quite Polynesia for him, nor is he an anthropologist—nor, it may be added, does 20 percent equal ‘a whole community’. As he points out in this same book, he has been among the contented few. As for the large majority of the population, perhaps they might be more likely than he to be ‘indignant’, especially in these years,

138

25.

26.

27.

28. 29.

30.

31.

Douglas F.Dowd

when ‘private affluence’ has risen (or descended) to the obscene, while ‘public squalor’ both deepens and spreads, the triumphalism of American capitalism to the contrary notwithstanding. Nor is it without significance that the greatest legislative progress towards environmental safety measures (inadequate though they may have been) was accomplished in the years of Richard Nixon’s presidency. Whether with respect to clean air and water, occupational health and safety, pesticides, or other matters, a comparison between, say, the legislative status quo in these respects in 1980 with that of 1999, using words carefully, is frightening—made more so when one contemplates the probable legislative deterioration that awaits. The reference here is to the accepted needs of industries noted (among others) for always achieving more of the same: more autos per capita here and elsewhere, more use of petrochemicals in their various dangerous consequences (to the air, the soil, the water, inter alia). As quoted in Albert Einstein: A Biography, Albert Folsing (1997), and noted in ‘The Contradictory Genius’ by Alan Lightman, New York Review of Books, 10 April 1997. Veblen’s views in these respects are most efficiently viewed in a collection of his essays entitled The Engineers and the Price System (1921). As for the role of academics in all this, I am reminded of an incident in which I was present about 50 years ago, as it compares with today. At that time, I had just joined the faculties of both the School of Business Administration and the Department of Economics at the University of California (Berkeley). At a faculty meeting of the business school, where about 25 were present, a motion was put forth and voted upon that dealt with whether or not we should accept a corporate donation that would establish a Chair in its name. The vote against was 24 to 1, made after an outcry at the undue influence our acceptance would allow. It is safe to say that today the same motion would pass by the same ratio—if, that is, it were deemed necessary even to ask. Noteworthy in this connection is that such ‘squalor’ in Western Europe (Italy, Germany, France, and Britain, to say nothing of the Holland and the Scandinavian countries) was on balance considerably less than in the United States, even though their per capita GNP’s then were just as considerably lower than ours. That is, the access of the average inhabitants of those countries to health care, education and a comfortable old age— inadequate though it may have been then—was better than their counterparts in the United States. The gap in such matters widened after 1958, as economic expansion accelerated both in those countries and in the United States. How the peoples of the United States or elsewhere were ‘buffaloed’ into accepting (consciously or not) such notions is a complex matter unable to be fitted into this already long essay. Suffice it to say that Veblen, in his first book The Theory of the Leisure Class (1899) and subsequently—pointed to the

The virtues of their defects and the defects of their virtues

32.

33.

34. 35. 36.

37.

139

tendency of ‘the underlying population’ to emulate rather than to overthrow (as Marx had expected) those richer and more powerful than themselves. In doing so, he identified one of the major elements in whatever a fuller explanation would supply. I studied with (and ultimately was a colleague) of Brady at Berkeley; it was in his classes that I was introduced to Veblen’s work. Brady is considerably less well-known than either Veblen or Galbraith, very possibly because he was both less ‘entertaining’ and more radical than they were. He produced a substantial corpus of books and articles; hoping to expand his readership, I wrote an essay concerning him: Against Decadence: The Work of Robert A.Brady (1901–63)’ (Dowd, 1994). Much of what follows is based on that essay. I sought to make that argument as regards Veblen and Mills in the essay ‘Thorstein Veblen and C.Wright Mills: Social Science and Social Criticism’ (Dowd, 1964). What was said of them in that essay applies equally well to Brady. A major difference between Brady and them (as well as almost everyone else) is that, though from a farm family (in eastern Washington), his father had been a (white) slave—sold into de facto slavery after the Civil War, when hundreds of thousands of widows faced desperate conditions at the same time that black slavery had been ended. His father escaped slavery but never the bitterness that it implanted in him. There can be no doubt that this affected young Brady (and his siblings, four of whom committed suicide). See Brady (1943). The book’s story, of course, ends with its publication. It is good to report that it was republished by Transaction Publishers in 2000. In addition to the countries enumerated, Spain, Portugal and Hungary were also fascist. That there were such tendencies in the United States is illustrated by the creation in 1933 of the National Recovery Administration. ‘Recovery’ was seen to be made possible by what was called ‘self-government in business’, wherein the largest firms in each industry (of about 850 industries) would devise a ‘code of authority’ which set prices, geographic market quotas, and the like which had to be abided by for all firms in the industry. And those who did not? They would have committed a crime, to be tried and punished through federal courts. In 1934, a delegation arrived from Nazi Germany to study that innovation, for adoption at home. The NRA was headed by Hugh Johnson, General of the U.S. Army; one was supposed to shop only at stores displaying the ‘Blue Eagle’ of the NRA. The original idea for that programme was put forth in 1928 by the then head of General Electric. As can be seen, for example, in his Ph. D. dissertation, ‘Industrial standardization’ (1919), ‘Planning and technology’ (1950), and Organization, Automation, and Society (1961), and his two books on Germany, The Rationalization Movement in German Industry (1933) and The Spirit and Structure of German Fascism (1937).

140

Douglas F.Dowd

References Bain, J.S. (1968) Industrial Organization, New York: Wiley. Brady, R.A. (1919) ‘Industrial standardization’, New York Ph. D. Dissertation, Columbia University. —(1933) The Rationalization Movement in German Industry, Berkeley: University of California Press. —(1937) The Spirit and Structure of German Fascism, New York: Viking. —(1943) Business as a System of Power, New York: Columbia University Press. (Republished byTransaction Publishers, New Brunswick, NJ, 2000). —(1950) ‘Planning and technology’, Berkeley: Mimeograph, University of California, Berkeley Library. —(1961) Organization, Automation, and Society, Berkeley: University of California Press. Dowd, D.F. (1964) ‘Thorstein Veblen and C.Wright Mills: social science and social criticism,’ in Irving Louis Horowitz, ed. The New Sociology: Essays in Social Science and Social Theory in Honor of C.Wright Mills, New York: Oxford —(1966) Thorstein Veblen, New York Washington Square Press. (Republished by Transaction Publishers, New Brunswick, NJ, 1999). —(1989) The Waste of Nations: Dysfunction in the World Economy, Boulder, CO: Westview Press. —(1994) ‘Against decadence: the work of Robert A.Brady (1901–63)’, Journal of Economic Issues 28, 4:1031–1061. Du Boff, R.B. (1989) Accumulation and Power: An Economic History of the United States, Armonk, NY: M.E.Sharpe. Folsing, A. (1997) Albert Einstein: A Biography, New York: Knopf. Galbraith, J.K. (1952) American Capitalism: The Concept of Countervailing Power, Boston: Houghton Mifflin (Republished byTransaction Publishers: New Brunswick, N J, 1993). —(1958) The Affluent Society, Boston: Houghton Mifflin. —(1967) The New Industrial State, Boston: Houghton Mifflin. —(1973) Economics and the Public Purpose, Boston: Houghton Mifflin. —(1979) The Nature ofMass Poverty, Cambridge, MA: Harvard University Press. —(1983) The Anatomy of Power, Boston: Houghton Mifflin. —(1987) Economics in Perspective: A Critical History, Boston: Houghton Mifflin. —(1992) The Culture of Contentment, Boston: Houghton Mifflin. —(1996) The Good Society, Boston: Houghton Mifflin. Gross, B. (1980) Friendly Fascism: The New Face of Power in America, New York: M.Evans. Hoare, Q., and G.N.Smith eds (1971) Selections from the Prison Notebooks of Antonio Gramsci, London: Lawrence and Wishart Jorgensen, E.W, and H.I.Jorgensen (1999) Thorstein Veblen: Victorian Firebrand, Armonk, NY: M.E.Sharpe. Lerner, M. (1948) The Portable Veblen, New York: Viking. Veblen,T. (1899) The Theory of the Leisure Class, New York: Macmillan. —(1904) TheTheory of Business Enterprise, NewYork: Scribner’s. —(1914) The Instinct ofWorkmanship, New York: B.W.Huebsch. —(1915) Imperial Germany and the Industrial Revolution, New York: Macmillan. —(1917) An Inquiry into the Nature of Peace and the Terms of its Perpetuation, New York: Macmillan. —(1918) The Higher Learning in America: A Memorandum on the Conduct of Universities by Businessmen, New York: B.W.Huebsch. —(1919a) The Place ofScience in ModernCivilization, New York: B.W.Huebsch.

The virtues of their defects and the defects of their virtues

141

—(1919b) The Vested Interests and the Common Man (originally entitled…and the Industrial Arts), New York B.W.Huebsch. —(1921) The Engineers and the Price System, New York: B.W.Huebsch. —(1923) Absentee Ownership and Business Enterprise in Recent Times: The Case of America, New York: B.W.Huebsch. —(1934) Essays in Our Changing Order, ed. by Leon Ardzrooni, New York: Viking.

8

The economist and business David R.F.Simpson

After more than twenty years as an academic economist, I took a job as economic adviser to a life assurance company, in fact the largest mutual life assurance company in Europe. I have now been employed in that capacity for more than ten years, so that I feel reasonably well qualified to address the topic of this chapter. While the company employed a number of Economics graduates in mainly investment-related capacities, I was the first economist it had hired qua Economist. Although the Prudential had appointed its first economic adviser, Harold Rose, as long ago as 1948, economists in life companies were still quite rare at the time of my appointment in 1988. This prompted many people, both inside and outside the Company, to ask exactly what an economist in a life assurance company actually did. Without any experience, I was at a loss to know how to answer this question until a friend who was employed as economic adviser to a bank told me how he dealt with similar questions. The role of an economist in a bank, he would reply, is like the function of cavalry in mediaeval battle, namely to lend tone to what would otherwise be a vulgar and unseemly brawl. Needless to say, things are quite different for an economic adviser in a life assurance company. Economists who ply their trade in business and government invariably find that most of their non-economist colleagues believe that they know just as much, if not more, about how markets and the economy work as they do. Alan Peacock has written about the experiences of being a senior economic adviser in the British Government (Peacock, 1991) and David Henderson has lamented with equal eloquence the D-I-Y economics of such people (Henderson, 1998). In the case of a life company, most of one’s senior colleagues are actuaries, and their claims to understand the workings of financial markets better than economists have a somewhat stronger foundation, although their knowledge is based on apprenticeship and experience rather than on instruction. I therefore found that, fortunately for the Company’s policyholders, I was not required to offer investment advice. Instead, my services were required as an interpreter of trends and shifts in the increasingly complex external business environment in which the Company found that it was operating. This was and is a very wide remit which gave me considerable scope. I could fairly be described as a jack-of-alltrades, But perhaps a role which was of greater value to senior colleagues was that I had the licence afforded to a court jester. That is the opportunity to 143

144

David R.F.Simpson

articulate uncomfortable truths, which others, for reasons of prudence, might hesitate to do. Whatever benefits my experience may have conferred on my employers, it certainly stimulated my own thinking about economics, and caused me to reflect hard and long about economic theory and what it has to say about business. I think it is true to say that Galbraith’s fascination with the world of business and the behaviour of business people, which shines clearly through all his writings, arose from his first-hand experience of dealing with businessmen on behalf of the U.S. Office of Price Administration during the Second World War. On the other hand, many of those responsible for developing the economic theory of the firm in the post-War period, especially in its neo-classical variants, have had little or no such experience. The result is that at the present time a vast gulf of misunderstanding separates professional economists and thinking business people. It was not always so. Up to the Second World War, when economists still wrote their papers in plain English, it was possible for businessmen and economists to communicate with each other, and thus to learn from each other. They shared a common vocabulary and a common interest in topics like costs and productivity and in the working of markets. After the War, however, the mathematisation of economic theory purged it of elements like enterprise, innovation and profit, which most business people thought were quite important. For their part, economists were impatient with the lack of interest which business people showed in their new vocabulary and new models, and accordingly were dismissive of their views on questions of economic policy. Still, the new ‘scientific’ economics claimed to be able to predict the future, and the ability to do this was definitely of interest to businesses. They began to hire economists in large numbers. Not only were economists wanted in-house. As late as the mid-1970s huge fees were still being paid to forecasting organisations supplying businesses with predictions. When Data Resources International was sold to McGraw-Hill in 1979 by the academics who founded it for $103 million it employed more than 500 economists. But the demand for forecasts peaked in the early 1980s as businesses finally realised that economists could not after all predict the fluctuations in demand for the output of their own particular industries, let alone the national economy. The companies supplying such forecasts either disappeared or diversified into management consulting. Internally, businesses cut back on their economics departments. Citicorp, at that time the largest U.S. bank, employed almost one hundred economists in the early 1980s. In 1986, Chairman Walter Wriston dissolved the unit Around the same time other major companies including GE, Kodak, Xerox and IBM in the US, as well as Midland Bank and ICI in the UK, either eliminated or drastically reduced the size of their economics departments. Today, few non-financial corporations see the need to employ economists at all. Business leaders became disillusioned with the pretensions of neo-classical equilibrium theory sooner than the politicians. Only in the 1990s have fiscal and monetary policy making finally become detached from macro-economic theory, and the number of economists engaged in these tasks begun to subside. Frustrated

The economist and business

145

by the lack of helpful advice they received from economists, business people turned instead to business schools for ideas. While business schools address the same phenomena as do professional economists, they look at these phenomena from a different perspective. While economists tend to look at the interactions between firms, households and governments in the context of the whole economic system, business schools look at economic activity from the perspective of a single firm. Business schools have the advantage over economics departments in universities in that they address specific topics that are of concern to senior managers, and they do so in a language that is readily understandable to them. The problem for the business schools is that their behaviour seldom does them credit in the eyes of their academic colleagues. The latter look askance at the curriculum, teaching methods and research programmes of their business school colleagues and conclude, rather unfairly, that these are institutions of intellectual backwardness which provide vocational training for the upwardly mobile. There is thus in most business schools a continuing tension among the faculty between the desire for academic respectability and the need to satisfy the corporations who provide their funding, recruit their graduates and seek their advice. Behind this tension lies a fundamental division of opinion about the appropriate methods of teaching business or management as a subject. At one extreme there are those who believe that business activity defies theoretical analysis because it is subject to so many different influences and responses. This point of view lies behind the Case Study method of teaching made famous by the Harvard Business School. As its name suggests, this is a purely inductive method, which deliberately excludes any form of theorising. The widespread adoption of anti-theoretical approaches in business education has opened the way for promoters of thousands of quack remedies for all the ills of a business. These remedies succeed each other in a cycle of fashion. Scarcely has one become established as the latest ‘Big Idea’ than it is followed by another. These big ideas are often encapsulated in a few memorable phrases, the literary equivalent of the soundbite, such as Four Fs, Five Ss and so on. The authors of these ideas are usually management consultants or business school professors. The books are heavily promoted, and sell in surprisingly large numbers, their circulation being boosted by bulk purchases by the consulting companies which employ their authors. However, they are seldom read beyond the first few pages. Consequently, there is a ‘follow-up’ market in which the ideas are disseminated by itinerant lecturers who give presentations round the world. These presentations are distinguished by the style in which they are delivered, a style reminiscent of sermons delivered by evangelical preachers. (In this connection it is worth remembering that Galbraith compared the position of business in twentieth century America to that of the Church in mediaeval Europe.) The ideas themselves are of variable quality. They range from genuinely creative insights offered by distinguished thinkers of the calibre of Peter Drucker, Alfred Chandler, W.E.Deming and Charles Handy to platitudes of stunning banality. Sometimes a simple diagram is presented, garnished with dogs, cows and stars. More recently, it has been suggested that business communications

146

David R.F.Simpson

will receive more attention if they are conveyed in unusual formats, with abundant use of eccentric fonts, colours, punctuation, (exclamation marks), and lower case lettering where the normal conventions would suggest upper case.1 However stimulating such presentations might be, they add to the suspicion that these ideas are no more than passing fads, and that this cannot be a serious approach to the study of business. A quite different approach to the study of business has been taken by economists who have specialised in studying management behaviour. They assume that the behaviour of firms and their managers is just as legitimate a subject for academic research as any other type of human behaviour. If the literature emanating from business schools is generally of poor quality then, so the argument runs, that is because the study of business is still in its infancy from the point of view of the application of scientific method. Once a scientific approach is systematically applied to business studies, then, it is said, genuine progress will be made in understanding how businesses work. This managementas-a-science approach involves looking at business activity as if it were something that takes place at the other end of a microscope. In comparison, the traditional business school approach is to find out what is happening by, as it were, climbing onto the slide, interrogating the specimens, and then trying to help them solve what they perceive to be their problems. Some management economists believe that by applying neo-classical equilibrium theory to behaviour within and between firms, they will make discoveries which will ultimately prove beneficial to businessmen themselves. However, despite twenty or thirty years of trying, not a single useful prescription has come out of this activity. But the practitioners of management economics have not given up. One of the most prolific and influential writers belonging to this school of thought is John Kay (Kay, 1993, 1996). His stated view is that the study and practice of management today is in much the same pre-scientific state as medicine found itself two hundred years ago. At that time, doctors peddled universal remedies for all ailments, and prescribed treatments such as bloodletting, which very often did more harm than good, in complete ignorance of the scientific principles which underlay their subject. Subsequent progress in medicine came about not only from careful observation of the subjects, but, above all, from the development and application of fundamental knowledge drawn from scientific disciplines related to medicine like physics, chemistry and biology. In the same way, Kay argues, future progress in understanding what makes for good management practice will come about through the application and advancement of our knowledge about economics, sociology and psychology, subjects which he believes play a similar role in relation to management as physics, chemistry and biology in relation to medicine. This seems like a plausible analogy, but it suffers from at least two major limitations. First of all the nature of knowledge in the natural sciences such as physics, chemistry and biology is different from knowledge in the social sciences like economics, sociology and psychology. One major difference is that most of the phenomena being studied in the natural sciences are unchanging, or changing

The economist and business

147

very slowly, while in the social sciences the data is continually evolving in a historical process which is not reversible. Secondly, physics and chemistry deal with the behaviour of inanimate objects, while the social sciences deal with the behaviour of human beings, behaviour which is made more complicated by the phenomena of human reasoning and motivation. These are two of the principal reasons why in the natural sciences there exists a broadly agreed body of knowledge which every competent practitioner must acquire, whereas in the social sciences there does not This should make us cautious about the prospects for rapid progress in understanding business through the application of knowledge drawn from the social sciences. The second criticism of the ‘management science’ prospectus is that what may seem to enthusiasts as being advances in knowledge in the social sciences and in their application to management, may seem to others as representing a step backward. Take for example some recent developments in neo-classical theorising about business. In the neo-classical theory of the firm, each business in the economy is represented as a simple decision making unit. Given the assumption of perfect information, the choice to be made is, in principle, a simple one. It is to choose that combination of technologies and other inputs which will result in maximum profits for the firm. In order to make the optimal choice, there is no need to know anything about such things as the culture of the firm, its internal organisation or even its size. All that is required is to know the prices of all the inputs, and their technical performance specifications, as well as the price of the output. As all these things are assumed to be known to the firm with certainty, there is no scope for human judgement to enter the firm’s decision. The calculation could be done by a computer. In this theory, only when uncertainty is admitted into the picture is there any scope for human decision making and human judgement. Of course, once the possibility of human judgement is recognised, there is scope for nonoptimising behaviour. Survival of the business may well be preferred as an objective to profit maximisation. But once these possibilities of uncertainty and truly human behaviour are admitted, outcomes are unpredictable and the theory breaks down. As it stands, however, neo-classical theory treats the firm as a ‘black box’, in which nothing is known, or needs to be known about what goes on inside the firm. This is evidently an unsatisfactory state of affairs, and over the last twenty years various attempts have been made to open the box very slightly without disturbing the conventional equilibrium framework. The possibility of imperfect information is explicitly recognised, but the nature of the missing information is assumed to be known with certainty as is the cost of acquiring it. Indeed, all transactions have costs that are known with certainty in advance. As Kay admits, these ideas have hitherto been expressed in rather abstruse mathematics, ‘even further removed from the day-to-day concerns of practical people running a business’.2 But he believes that what he calls these insights can eventually be translated into everyday business language, and when that happens

148

David R.F.Simpson

business studies will have taken a further step in the direction of being a respectable scientific discipline. This is an illusion. The trouble with these developments is that the comparative static equilibrium method to which they cling is both too limited and too ahistorical to explain all but a tiny proportion of business behaviour. Minimising transaction costs in a given context ignores entirely the processes of growth within the firm, specifically the way in which new choice sets evolve. It also fails to comprehend the interaction over time between organisation and technology, a relationship that is critical to understanding the long-run development of most firms. As Mark Casson has observed, while transaction cost economic theory has succeeded in explaining where the boundaries of the firm might be drawn, it has nothing to say about the much more interesting question of how these boundaries relate to what goes on inside the firm (Casson and Rose, 1997). All such developments can be characterised as being limited modifications of the basic neo-classical theory, where the new assumptions have been tailored to fit the requirements of the analysis. As Galbraith observed, ‘to accommodate assumptions not to reality but to the requirements of technique will be thought a rather dubious scientific procedure’ (Galbraith, 1967). A few economists have been bold enough to let go of the neo-classical paradigm and to begin their analysis with assumptions which seemed to them to correspond with what actually happens in the world of business. Amongst those who made this break in the late 1950s and 1960s were Edith Penrose, Robin Marris, William Baumol, and, of course, Galbraith himself. While the work of the first three secured the respect, if not the interest, of professional economists, Galbraith did not attempt to conceal his disdain for his academic colleagues, a feeling which was warmly reciprocated.3 Although he was much more interested in the customs and behaviour of businessmen than he was in the ideas of economists, Galbraith never ignored the latter, as a careful reading of his work reveals. Galbraith set out most clearly his theory of the firm in his The New Industrial State. He recognised, correctly, that the overriding determinant of the behaviour of the corporation in a modern economy is not profit maximisation but survival. To this end, the typical firm has two primary goals, to obtain what he called ‘a secure level of earnings’, and to achieve the maximum level of growth of the firm consistent with attainment of the first goal. The firm has two secondary goals: to achieve ‘technical virtuosity’ and a rising dividend rate. When, and only when, these four goals have been secured can the firm pursue a lesser set of goals, like helping to promote a better community, or making political contributions. These lesser goals, which may be quite diverse, often serve to support the primary or secondary goals. Unlike neo-classical theorists, Galbraith does not lose sight of the role of the corporation in society. Indeed, these links are absolutely critical to his theory. The growth of the firm serves one of the main social objectives of society, namely the growth of the economy as a whole. Indeed, Galbraith asserts that a

The economist and business

149

continuously rising level of real earnings (profits) is a measure of the firm’s social contribution to the community. Conversely, having first adapted their personal beliefs to suit the material interests of their corporation, senior managers use the influence of the corporation to shape social attitudes in a way that is favourable to corporate goals. But corporations lobby against regulatory restrictions not so much to protect their profits but to protect their autonomy. This is a very different view of the firm from that of neo-classical theory. For one thing it is much richer, and it contains ideas—notably the overriding urge for survival, the importance of adaptation and the interactions between corporations, governments and social attitudes—which go to the heart of the nature of the modern economy. Galbraith’s method and style of writing are also a refreshing contrast to the arid formalism with which students of neo-classical economics have to contend. On the other hand, to an observer of the contemporary economy, the analysis has a slightly dated air. Most striking is the absence of any real competitive constraints, either from innovation in the product market or from threats of takeover in the capital market Galbraith’s preoccupation with the common interest of the state and the large corporation in securing the latter’s survival may well have been true of the wartime and early Cold War era, when the U.S. Government could not afford to let any large corporation fail because of the consequences for its defence programme. That world has long gone. To say this is not to criticise Galbraith but to recognise the reality that the phenomena of the world of human affairs are subject to continuous change, and any useful analysis must be context-specific. If two rival companies are operating within exactly the same business environment, why does one company do better than another? For students of business, this is one of the most fundamental questions of all, but the neo-classical model and its derivatives cannot address it. Neo-classical theory assumes that all firms behave in the same way whereas all the evidence is that different firms behave differently even when operating in the same environment The reasons why similarly circumstanced companies behave differently include each company’s distinctive capabilities (what it can do that others cannot), how far these capabilities fit into the ever-changing needs of the market, and the extent to which they can be imitated by competitors. The idea that a company’s performance can be largely influenced by its distinctive capabilities is now receiving considerable attention in the business literature, under the guise of sustainable competitive advantage or ‘core competences’ (Hamel and Prahalad, 1994). Its origins can be traced to Edith Penrose’s famous work The Theory of the Growth of the Firm (Penrose, 1959), now also enjoying a revival amongst professional economists. Following from the neo-classical paradigm, there is a tendency to believe that excellence in business performance is something for which there must exist an ascertainable formula of universal applicability. Once implemented, the formula can be maintained indefinitely. In fact, the observed fluctuations in the performances of large companies may more plausibly be accounted for by the

150

David R.F.Simpson

proposition that the ever-changing environment at some periods favours their peculiar intrinsic strengths, while at other periods it requires aptitudes or competences which they lack. Only very rarely do large companies possess as a ‘core competence’ the ability to adapt quickly to almost any environment. Mechanical models, by their nature, cannot take account of the fact that each company has a unique identity, with a life and culture of its own. The sheer diversity of company behaviour eludes the crude classification offered by these models. Once we recognise that each company may be a unique entity with a life and character of its own, then we must consider whether biological rather than mechanical analogies might not offer a better understanding of economic activity. Biological analogies have a long history in economics and business. Alfred Marshall, the great English economist whose working life spanned the last two decades of the nineteenth century and the first two decades of the twentieth century, was fond of drawing an analogy between the position of firms in an industry and the position of trees in a forest. Business theorists also frequently have recourse to biological metaphors to get their points across. For example, Gary Hamel, a professor at London Business School, recommends increasing the ‘genetic variety’ of a firm by recruiting senior managers from a range of different backgrounds. In 1950 Armen Alchian attempted to introduce evolutionary thinking into the orthodox theory of the firm, but this was severely criticised by Penrose (Alchian, 1950; Penrose, 1952). More recently, the evolutionary approach to economic theorising has been revived by the work of Kenneth Boulding (Boulding, 1981), Richard Nelson and Sidney Winter (Nelson and Winter, 1982), Geoffrey M. Hodgson (Hodgson, 1993), and others. Meanwhile in the business literature, a major contribution has been made by Arie De Geus in his recent book The Living Company (De Geus, 1998). It is perhaps significant that De Geus trained as an economist before embarking on a career in which he spent almost forty years in a range of line management tasks, ending as Head of Group Planning at Shell. In this capacity he commissioned and directed an empirical study of the ‘life expectancy’ of large firms. This study showed that the average ‘life expectancy’ of Fortune 500 firms was only forty to fifty years. This was a very short span in comparison to some of the longer-lived firms in the study, some of which had survived for well over a hundred years. The oldest, the Swedish paper company Stora, was more than six hundred years old. Pondering the reasons for these differences, De Geus found himself thinking of the companies as if they were living organisms. He thought that there was a link between the low life expectancy and poor corporate ‘health’, by which he meant they were unable to adapt to the business environment which was changing around them. In his terms, these ‘unhealthy’ companies were suffering from ‘learning disabilities’ The study also concluded that the healthy companies, that is, those that lived the longest, shared four principal characteristics: •

They were sensitive to changes in their external environment, i.e. they had the ability to learn and to adapt

The economist and business

• • •

151

They had a strong sense of corporate identity, a sense of cohesion Their corporate culture was one which was ‘tolerant’ at the margins, i.e. there was a considerable degree of decentralisation They followed conservative principles of finance.

These insights also revealed the contrasts between two analogies. The company as a living system, and the company as a machine—the metaphor of neo-classical theory. In the mechanical metaphor the objective is an optimum of some kind, whereas in the biological metaphor it is survival. Optimisation is achieved by means of satisfying conditions of equilibrium, while survival depends on adaptation. The mechanical system represents a system which is capable of precise control, whereas the outcomes of biological systems depend in large part on decentralised and context-specific influences. To illustrate this last point, De Geus presents an analogy within an analogy: the story of pruning rosebushes. If you are an amateur rose grower keen to win a prize for the best rose in the local summer flower show, you would be welladvised to prune your rosebushes in the Spring. The more aggressively the bushes are pruned, the greater the chances of achieving a prize-winning bloom, since all the plant’s resources are concentrated on a few stems. On the other hand, this procedure makes the plant more vulnerable to destruction by pests, roving deer, or even a late frost. If your objective is the survival of the roses, it would be better to prune more tolerantly. You will probably never win a prize, but you will have a better chance of having roses in future years. The implication for corporate management is clear: profit maximisation may not be the best strategy to follow if what is desired is the long-run survival of the firm. In a large organisation like a modern business corporation there is always a tension between tolerance and control. While in a small organisation, it is possible to imagine that the chief executive has at his immediate disposal all or most of the relevant information which is required to run the company, it is no longer possible that this can be true of a large organisation, particularly in the modern world where everything is changing so quickly. No single person could possibly acquire a sufficient understanding of all the relevant details in every aspect of the company’s business to produce the ‘right’ responses to changes in the external environment at all times. At the same time, if one were to decentralise decision making to take advantage of the fact that most of the relevant necessary knowledge resides at the periphery of the business, there is an obvious danger of lack of co-ordination leading to contradictions and ultimately anarchy. How is this dilemma to be resolved? De Geus refers to another metaphor, popular with those senior executives who believe that control can and should reside at the top. That is the metaphor which likens the business corporation to a sailing ship at sea. Although the ship is periodically driven off course by unpredicted storms and currents, it is the function of the captain to steer the ship towards the chosen destination. He will act on information passed to him by members of the crew, and may even seek the advice of some of his more senior colleagues from time to time, but his principal

152

David R.F.Simpson

responsibilities and functions are quite clear: to set the course and steer the ship. These strategic decisions must be his. De Geus rejects this metaphor as being mechanistic and therefore inappropriate. In a ‘living company’, that is, one which wishes to survive for a long time, he asserts that no one is steering. Furthermore, there is no destination and therefore no course to be steered. Instead, the living company takes one step at a time. Each decision is followed by an action, and then new observations about the effect of that action, and then another step tomorrow. Before taking each new step, the company looks up and decides where to put its foot in the light of the conditions of the moment There are no admiralty charts and no final destination except death. De Geus (1998:155) Then who makes the strategic decisions? According to De Geus, ‘The company as a whole should scan the environment, decide on the next step, determine where to set a foot and when to do so’ (De Geus, 1998:157). The function of senior management should be to ‘set the context…within which the maximum of the organisation’s available brain capacity engages in continuous learning’, and ‘strategy is simply the development of the organisation’s ability to learn’. While one can agree with De Geus’ general proposition that an ‘organisation’s ability to learn faster (and possibly better) than the competition becomes its most sustainable competitive advantage’, this description of the role of senior management is unconvincing, and seems to weaken the rest of his argument. The reason it is unconvincing, I think, is because he is imprisoned within a biological analogy. He has borrowed the idea of corporate learning from learning in groups of animals. He cites evidence that birds which flock together learn faster than those which are solitary. If De Geus is to be believed, then his argument would appear to lead to the conclusion that corporate behaviour is analogous to flocking behaviour in birds or shoaling behaviour in fish. Within each of these groups a co-ordinated response is achieved to periodic threats and opportunities by each individual following certain simple rules. And there may well be learning behaviour within the group over time. But the crucial point is that no central direction or control is exercised either within the group or from outside the group. Fortunately, the underlying ideas may be rescued from the straitjacket of the biological analogy. Although a biological analogy for the firm is a better one than a mechanical analogy, its major defect is that it does not recognise that human behaviour is in some important respects different from animal behaviour. These differences are particularly important in the area of human social activity including business activity. What distinguishes human beings from other living creatures is their capacity to form systematic expectations, to reason and therefore to form and implement strategies. This is not to deny that other living creatures can do these things, but the difference in degree is so enormous that it constitutes a completely different situation. For example, human beings, by using these

The economist and business

153

differential characteristics are about to alter the whole course of natural biological evolution. (Whether for good or ill is another question.) More than thirty years ago F.A.Hayek pointed out that all phenomena can be located in a hierarchy according to their complexity (Hayek, 1967). The simplest phenomena of all are those of the physical world. Their behaviour is governed by the relatively simple laws of matter. At the next level up in the hierarchy are biological phenomena, and above that the most complex of all are the phenomena of human social behaviour. A central idea of this hierarchy is that all entities located in it must observe all the laws pertaining to lower level phenomena as well as their own. Thus, the behaviour of human beings must conform to the laws of physics and biology as well as to the laws relating to human behaviour. The theory of complex phenomena was further developed some ten years later by John Holland and others (Holland, 1975). Holland proposed a theory of what he called ‘non-linear adaptive networks’. These became better known as complex adaptive systems (Anderson, Arrow and Pines, 1988; Arthur, Durlauf and, Lane 1997; Gell-Mann, 1994; Waldrop, 1992). A very wide range of entities can usefully be categorised as complex adaptive systems, both biological and human systems. (Physical systems can be complex, but are not adaptive.) Amongst these are human social groups such as business firms and economic systems. Complex adaptive systems have a number of properties, but the most important ones are that they exhibit self-organisation and are evolutionary. Selforganisation means that non-linear interactions between the individual members of the group result, not in anarchy or chaos, but in the emergence of patterns or regularities at the level of the group. Amongst these regularities is co-ordination of the behaviour of the individual members of the group. Evolutionary behaviour in human groups is not Darwinian but Lamarckian. Acquired characteristics can be transmitted through processes of learning. It is important to understand that when we speak of firms as being complex adaptive systems we are speaking of a theory, not an analogy. If we regard a firm as a human complex adaptive system, then we can include all of De Geus’ essential ideas, but we can escape from the limitations of the biological analogy. We can recognise, with De Geus, the self-organising nature of corporate behaviour, but we can also admit the additional and distinctively human elements in such behaviour. So, while there is indeed organisational learning, there is also the possibility of direction-setting and steering as well. It might be argued that firms which engage in formal attempts at the development and implementation of strategy are simply deluding themselves and putting their long-run survival at risk. I do not believe that this is necessarily so. Indeed, I think that in the increasingly complex business environment in which all firms are obliged to operate, the application of distinctly human powers of reasoning to realising the objective of the survival of the firm are more valuable than ever. This is what I would call ‘doing strategy’. I would distinguish strategy from the other operations of management by saying that the latter can be characterised as ensuring that the company is doing

154

David R.F.Simpson

things right, whereas strategy is about doing the right things. These are, of course, complementary activities: both are necessary for commercial survival. How does a company discover what are the ‘right things’ to do in any given context. The answer, a strategy, comes from trying to match what the market wants (or what it is perceived to want) with the company’s distinctive capabilities, also known as sustainable competitive advantages or ‘core competences’ (Hamel and Prahalad, 1994). The identification of what the market wants and of a company’s core competences are both tasks to which the professional economist can make a contribution. Of course, the economist must bear in mind Schumpeter’s observation that an economist can no more predict the future than a doctor can say when one of his patients will have a road accident and what his injuries will then be (Schumpeter, 1954). The impossibility of making predictions of detail is another characteristic of complex adaptive systems. But Schumpeter also recognised that trend prediction may be possible, even although at any time an identified trend in human social affairs may disappear or even reverse itself. Although many still try to do it, it is not possible for a professional economist to predict precisely what the rate of inflation in the UK will be in twelve months, time. It is, however, quite possible to state with some degree of confidence that a low inflation environment is likely to persist in the UK for the next five years, and to give reasons to support this ‘pattern’ prediction. How can an economist contribute to the identification of a firm’s core competences? It should be remembered that core competences can be defined as things which the company is good at and which cannot easily be imitated by competitors. Both parts of this definition are essential. In the case of most companies, core competences are nearly always to be found to reside in abstract and intangible characteristics which are related to the corporate culture, something which has evolved over many years. Consequently, identification of these competences is largely a matter of subjective judgement. It is not self-evident that this is a task for which economists are peculiarly well-qualified, but the fact remains that the formation of corporate strategy is the area of modern business where economists are usually to be found.

Notes 1.

2. 3.

This last idea drew a response from a correspondent to the Financial Times who remarked that, having served for many years on the complaints committee of a regulatory authority, he and his colleagues had learned to discard all letters couched in such formats as they were invariable written by ‘sad no-hopers who had no idea what was going on’ (Financial Times, December 2, 1999). John Kay, ‘Know Your Place’, Financial Times, June 27, 1997. In his Economics, Peace and Laughter Galbraith (1971:12n) noted wryly that George Stigler had complained that more people had read The Affluent Society

The economist and business

155

than had read The Wealth of Nations. Galbraith continued that he suspected that what really troubled Stigler was that no one at all had read Stigler.

References Alchian, A.A. (1950) ‘Uncertainty, evolution and economic theory’, Journal of Political Economy 58:211–221. Anderson, P.W., K.J.Arrow, and D.Pines, eds (1988) The Economy as an Evolving Complex System, Reading, MA: Addison-Wesley. Arthur, W.B., S.N.Durlauf, and D.A.Lane, eds (1997) The Economy as an Evolving Complex System II, Reading, MA: Perseus Books. Boulding, K.E. (1981) Evolutionary Economics, Beverly Hills, CA: Sage. Casson, M., and M.Rose (1997) Institutions and the Evolution of Modern Business, Ilford: Frank Cass. De Geus, A. (1998) The Living Company, Boston: Harvard Business School Press. Galbraith, J.K. (1967) The New Industrial State, Boston: Houghton Mifflin. Gell-Mann, M. (1994) The Quark and the Jaguar, London: Little, Brown. Hamel, G., and C.K.Prahalad (1994) Competing For The Future, Boston: Harvard Business School Press. Hayek, F.A. (1967) ‘The theory of complex phenomena’, in Studies in Philosophy, Politics and Economics, Chicago: University of Chicago Press, Henderson, D. (1998) The Changing Fortunes of Economic Liberalism, Occasional Paper 105, London: The Institute of Economic Affairs. Hodgson, G.M. (1993) Economics and Evolution, Cambridge: Polity Press. Holland, J.H. (1975) Adaptation in Natural and Artificial Systems, Ann Arbor: University of Michigan Press. Kay, J. (1993) Foundations of Corporate Success, Oxford: Oxford University Press. Kay,J. (1996) The Business of Economics, Oxford: Oxford University Press. Nelson, R.R., and S.G.Winter (1982) An Evolutionary Theory of Economic Change, Cambridge, MA: Harvard University Press. Peacock, A.T. (1991) ‘Economic Advice and Economic policy’, in D.Greenaway et al., eds, Companion To Contemporary Economic Thought, London: Routledge. Penrose, E.T. (1952) ‘Biological analogies in the theory of the firm’, American Economic Review 42:804–819. Penrose, E.T. (1959) The Theory of the Growth of the Firm, Oxford: Oxford University Press. Schumpeter, J.A. (1954) History of Economic Analysis, New York: Oxford University Press. Waldrop, M. (1992) Complexity, New York: Simon and Schuster.

9

Galbraith, uncertainty and the modern corporation Stephen P.Dunn1

The role of planning in the modern industrial society remains only slightly appreciated. Galbraith (1967:41)

Post-Keynesian economists are typically associated with the study of uncertainty and the salient institutions of the ‘real’ world. However, a moment’s reflection reveals a general neglect of the concept of uncertainty in post-Keynesian writings on the firm. While many post-Keynesians acknowledge the pivotal role of money as an institution for coping with uncertainty, they have written little on the fact that the firm is also an institution that deals with, and provides for a flexible response to, uncertainty.2 The next task for post-Keynesians, if they are to elaborate a coherent and comprehensive analytical schema, is to develop an approach to the firm that elaborates how fundamental uncertainty affects: a firm’s organisational structure, its pricing strategy, its size, its area of business, its range of products, its relationship to labour and capital markets, its investment procedures, its approach towards technology, its attitude and inter-firm co-operation and the motivation of its owners and so on.3 In short, post-Keynesians must articulate what a firm dealing with uncertainty looks like. This is a big task and one which will undoubtedly occupy post-Keynesian minds for some time to come.4 This paper begins this process by reconsidering Galbraith’s (1967) much neglected conceptualisation of the firm which occupies a pivotal role within The New Industrial State. In this paper I re-visit Galbraith’s discussion of the modern corporation and argue that it serves as a useful starting point for future research into how the relationship between uncertainty and the firm should be viewed. The outline of this chapter is as follows. In the next section I outline some reasons why Galbraith’s contribution to the theory of the firm is generally neglected. I argue that Galbraith is typically viewed as a great synthesiser, and system builder, and not as a theorist of the firm. The following sections outline in more detail the general view of the firm advanced in The New Industrial State, paying particular attention to Galbraith’s discussion of how the firm deals with uncertainty especially with regard to a firm’s activities and boundaries. I then argue that Galbraith is an original theorist of the firm who considers many of the 157

158

Stephen P.Dunn

key issues raised by Coase and Penrose among others. In the final section I outline how Galbraith’s approach to the firm under uncertainty needs to be refined and developed if a truly post-Keynesian theory of the firm is to be advanced.

A neglected theorist? A large part of Galbraith’s professional career has been devoted to examining modern industrial society and the large firms that dominate it (see Galbraith, 1936, 1938, 1947, 1952a, 1952b, 1954, 1957, 1958a, 1958b, 1958c, 1959, 1967, 1970a, 1973a, 1973b, 1988, 1991).5 The modern corporation occupies a pivotal role in Galbraith’s theorising in general, and The New Industrial State in particular. It is thus perhaps surprising that Galbraith’s contribution to the theory of the firm has almost disappeared from view. While theorists like Coase (1937), Penrose (1955, 1959) and Richardson (1959, 1960, 1964, 1972) have seen a resurgence of interest in their respective theories of the firm, Galbraith’s contribution is hardly mentioned. Galbraith is without a doubt a neglected theorist of the firm, ignored by economists of all schools.6 There are several possible interrelated reasons for this oversight. Perhaps the main reason for this neglect of Galbraith lies in the fact that he has generally been associated with the managerialist theories of the firm that grew out of the recognition by Berle and Means (1932) that large firms were no longer controlled and dominated by their owners, but instead by their managers (see also Chandler, 1962).7 Managerial theories of the firm were rigorously developed by Baumol (1959), Williamson (1964), Marris (1964) and Cyert and March (1963) and were firmly established by the time that Galbraith published The New Industrial State in 1967 (see Gordon, 1968). Moreover, the fact that Galbraith was clearly influenced by these theories, and keen to utilise their insights, appears to underscore this fact.8 However, Galbraith’s approach, while emphasising the separation of ownership from control, outlines a view of the modern corporation that is more complex and subtle than he has generally been given credit for. Indeed Galbraith (1967:136) himself observed that while managerial theorists of the firm had gone on to provide explanations of managerial behaviour that appear consistent with the separation of ownership and control, these contributions ‘are still subject to the mystique of the market; were they to accept the full significance of the abandonment of profit maximization they would go on, as here, to examine the modern corporation as an instrument of planning that transcends the market’. We shall deal with some aspects of this innovative approach below in our examination of the relationship of the modern corporation’s strategic decision makers to uncertainty and the market process. In any case Galbraith was no newcomer to the study of the large firm. He had long mused on the role and salience of the large corporation in advanced industrialised economies (Galbraith, 1936, 1938, 1947, 1952a, 1952b, 1954, 1957, 1958a, 1958b, 1958c, 1959).9 An

Galbraith, uncertainty and the modern corporation

159

initial draft of The New Industrial State had been produced by 1961. Only an ambassadorial appointment postponed its revision (Galbraith, 1967).10 A second reason for this neglect of Galbraith is his caustic and irreverent popu-list rhetorical style (Solow, 1967; Gordon, 1968). Since he eschewed the mathematical elegance of more orthodox treatments by Baumol, Williamson and Marris, theorists of the firm have generally viewed Galbraith’s contribution as a less rigorous, literary expression of the managerialist approach and have thus tended to ignore it (cf. Marris, 1968; Demsetz, 1974; Galbraith, 1970b: Chap. 2). 11 Marris’s (1968:240) comments are typical of the general attitude to Galbraith: ‘for the professional economist it is important to recognise at the outset that Galbraith is dealing in loose but not necessarily unreal concepts, of whose descriptive value he seeks to convince by a mixture of literature and some logic based on casual observation, induction, and selected evidence’. This, however, points to the different methodological approach which is employed by Galbraith, an approach which broadly falls within the post-Keynesian and Insitutionalist traditions (Sharpe, 1973; Stanfield, 1996; cf. Dunn, 2000b). As we shall see below Galbraith begins by first identifying the salient ‘stylised facts’ upon which to call for explanation and proceeds to theorise about them (cf. Lawson, 1989, 1997). The third reason for the neglect of Galbraith relates to the widely held perception that, while he is a great synthesiser and an ambitious system builder, he is not wholly original (Solow, 1967; Allen, 1967). Gordon (1968:637) concludes that the ‘Galbraithian view of the modern economy has innumerable antecedents’. Marris, in a review of the New Industrial State, similarly remarked that ‘these conclusions are not exactly new, but they have not previously been drawn in the same way or from so broad a general picture: Galbraith does deserve to be judged on his total effect, and to be given credit for the sweep of his analysis’ (Marris, 1968:245). Economists generally view the New Industrial State as an exercise in social philosophy rather than as an original contribution to economics in general, or the theory of the firm specifically (Gordon, 1968; Friedman, 1977). Marris (1968:240), for example, suggests that Galbraith’s objectives are ‘wider than those of traditional “political economy”…he aspires to contribute as much in the field of political science as in what is now regarded as the proper field of economic science’. The old adage about Marx: that philosophers think Marx a bad philosopher but a good political scientist and economist; that political scientists think Marx a bad political scientist but a good philosopher and economist; that economists think Marx a bad economist but a good philosopher and political scientist; is more than apt for Galbraith. The cumulative effect of all these factors has been that Galbraith’s vision of the modern corporation has not attracted the attention of contemporary theorists of the firm. We aim here to redress this neglect.

The new industrial state Galbraith (1967:21–5) begins The New Industrial State by outlining six relatively uncontroversial key ‘stylised facts’ which warrant further investigation and

160

Stephen P.Dunn

elaboration.12 The first ‘stylised fact’ is the increasing technologically sophisticated nature of the production process (cf. Galbraith, 1952b:89–99). The second visible trend is the undoubted growth and development of the corporate form of organisation, with its associated divorce of ownership from control (cf. Galbraith, 1952b:35–52). The third fact that Galbraith draws our attention to is the dramatic increase in the extent of state activities in social and economic life, especially since the Keynesian revolution (cf. Galbraith, 1958c). The fourth stylised fact is the massive growth in the apparatus of ‘persuasion and exhortation’ and the expansion in the promotion of products by advertising and sophisticated marketing (cf. Galbraith and Black, 1935; Galbraith, 1952b). The fifth fact to be explained is the ‘beginning of the decline of the trade union’ (cf. Galbraith, 1952b, 1955). The final fact to be explained is the large, although uneven and underfunded, expansion in the higher education sector. Galbraith then proceeds to outline a theory of the firm and of the New Industrial State that can explain such developments in an organic and integrated manner.13 Galbraith’s thesis is that the imperatives and nature of advanced technology necessitate the organisation of modern industry (see also Galbraith, 1952b). An oligopolistic market structure is the inevitable counterpart to advanced technology. Modern technology inevitably involves detailed specialised knowledge, effective group decision making and the need for large capital commitments to be conducted and co-ordinated in terms of money-denominated contracts over long periods of time. It is ‘the increased use of technology and the accompanying commitment of time and capital…[which force] extensive planning on all industrial communities’ (Galbraith, 1967:41). Planning enables the mitigation of the impact of unforeseen events and the successful organisation of production. Planning is an inescapable consequence of advanced technology and the extended, highly specialised, division of labour that is called forth to manage it Galbraith identifies six key consequences of this technology: First. An increasing span of time separates the beginning from the completion of any task… Second. There is an increase in the capital that is committed to production aside from that occasioned by increased output The increased time, and therewith the increased investment in goods in process, costs money. So does the knowledge which is applied to the various elements of the task… Third. With increasing technology the commitment of time and money tends to be made ever more inflexibly to the performance of a particular task… Fourth. Technology requires specialised manpower. To foresee the future in all its dimensions and to design the appropriate action does not necessarily require high scientific qualification. It does require ability to organise and employ information, or capacity to react intuitively to relevant experience… Fifth. The inevitable counterpart of specialisation is organisation. This is what brings the work of specialists to a coherent result If there are many specialists, this co-ordination will be a major task…

Galbraith, uncertainty and the modern corporation

161

Sixth. From the time and capital that must be committed, the inflexibility of this commitment, the needs of large organisation and the problems of market performance under conditions of advanced technology, comes the necessity for planning. Galbraith (1967:32–5) Modern technology requires extensive planning because such large investments of time, money, specialised knowledge and organisation cannot be left to whim, chance and the vagaries of the market Galbraith (1952 b:91) maintains that ‘modern industry of a few large firms [is] an almost perfect instrument for inducing technical change’. This is due to the fact that large firms are ‘admirably equipped for financing technical development’ and that such ‘development is costly’ (Galbraith, 1952b:91). The costs of failure are great and must be avoided at all costs. Avoiding failure means avoiding the vagaries and hazards of the market. Modern technology requires highly specialised investment in capital and labour over a long period of time. Thus, those involved and responsible for such investments are of necessity highly committed to ensuring its success.

Planning and the technostructure In the New Industrial State Galbraith argues that a key effect of modern technology and the specialised knowledge that is called forth to bear upon it, is that the locus of power has passed from land and capital to organised intelligence (Galbraith, 1967:72–3; see also 1952b:90–5). It is the nature of modern technology that it requires detailed technical knowledge, a range of problem-solving talents, extensive planning and, ultimately, its effective co-ordination (Galbraith, 1967:77–8).14 Galbraith refers to such groups, which possess the requisite knowledge of the production process, as the technostructure.15 It is the knowledge embedded in the planning routines of the organisation, and not given atomised entrepreneurial individuals, to which power has passed (Galbraith, 1967:75; see also 1973a, 1973b).16 The character of technology, planning and the associated size and growth of the firm enables it to pursue a range of objectives other than profit maximisation.17 A key facet of the size of the large corporation is that as long as the technostructure ensures that revenues are above some acceptable conventional minimum, which facilitates its continued growth and reproduction, it is unlikely to attract any unwarranted attention.18 For any organisation, as for any organism, the goal or objective that has a natural assumption of pre-eminence is the organisation’s own survival. This, plausibly, is true of the technostructure (Galbraith, 1967:175). Attempting to mitigate the uncertainties that threaten the technostructure is thus of paramount importance. Such talent that is to be brought to bear on the process of production inevitably must be assembled into groups. It embodies technical expertise, seasoned experience, tacit knowledge and intuition and finds expression within a highly interdependent and organic, social process (Galbraith, 1967:76).19 Such group

162

Stephen P.Dunn

decision making represents a sensible response to complex uncertain processes; it ‘enables members to pool information under circumstances which allow, also, of immediate probing to assess the relevance and reliability of the information offered. Uncertainty about one’s information or error is revealed as in no other way’ (Galbraith, 1967:79). Galbraith outlines an organic, socialised view of the knowledge process upon which corporate success is founded. 20 It is not individuals who know how to build cars, computers or airplanes, it is corporations and the groups that comprise it: ‘No one person has more than a fraction of the knowledge necessary for the design, production or marketing of a new automobile model, missile or detergent. It follows that no one can decide whether one of these should be designed, developed, produced or can be sold… These matters must be resolved by groups’ (Galbraith, 1973b:100; see also 1967:75–76). The comparative advantage of the modern corporation depends upon the differing capabilities of the incumbent technostructures and the successful application of its embedded routines and planning procedures. Planning and the market Galbraith views the firm as an institution that co-ordinates production and shelters it from the inherent uncertainties that are endemic to the market. Planning, in the Galbraithian system, which embodies both conscious decision and human agency, represents an important means of allocating resources that replaces the market.21 ‘The most celebrated feature of the market is that it equates supply with demand at a price… Planning has within itself, as noted, no similar equilibrating mechanism. The planner must deliberately ensure that planned supply equals planned use. If he fails there will be surpluses or deficits’ (Galbraith, 1967:58). Planning, however, is not just about co-ordination; it is also about preparing for unforeseen events. It is a portmanteau concept: ‘planning consists in foreseeing the actions required between the initiation of production and its completion and preparing for the accomplishment of these actions. And it consists also of foreseeing, and having a design for meeting, any unscheduled developments, favourable or otherwise, that may occur along the way…it [also] consists of replacing prices and the market as the mechanism for determining what will be produced, with an authoritative determination of what will be produced and consumed and at what price’ (Galbraith, 1967:43). As noted above, planning and the organisation of production are linked in essence due to the unreliable nature of the market system and the complex, uncertain nature of modern technology (see also Gruchy, 1984). ‘If, with advancing technology and associated specialisation, the market becomes increasingly unreliable, industrial planning will become increasingly impossible unless the market also gives way to planning… Much of what the firm regards as planning consists in minimising or getting rid of market influences’ (Galbraith, 1967:43–5). If the uncertainties that surround large commitments of time and money are to be mitigated then the firm must either supersede the market or subordinate it to the requirements of planning:

Galbraith, uncertainty and the modern corporation

163

Technology and the companion commitments of capital and time have forced the firm to emancipate itself from the uncertainties of the market. And specialised technology has rendered the market increasingly unreliable. So the firm controls the prices at which it buys materials, components and talent and takes steps to ensure that the public, other producers or the state take the planned quantities at these prices. So far from being controlled by the market, the firm, to the best of its ability has made the market subordinate to the goals of its planning. Galbraith (1967:122, italics added) Thus the Galbraithian view of the firm is that it emerges in response to the increasingly treacherous and uncertain nature of markets. Rather than viewing the firm as resulting from a purely instrumental choice of economising on transaction costs between alternative modes of contracting, Galbraith sees it as an institution for coping with, or getting rid of, market uncertainties.22 It is the large size of the modern corporation that enables the technostructure to engage in more effective planning and to cope with, and absorb, uncertainty. This, according to Galbraith, is a primary reason explaining the observed growth of the large firm. The most obvious requirement of effective planning is large size. This… allows the firm to accept market uncertainty where it cannot be eliminated; to eliminate markets on which otherwise it would be dependent; to control other markets in which it buys and sell; and it is very nearly indispensable for participation in that part of the economy, characterised by exacting technology and comprehensive planning, where the only buyer is the federal government. Galbraith (1967:89) According to Galbraith the exploitation of economies of scale or the exercise of monopoly power only partly explain the growth of the large firm. Economists have anciently quarrelled over the reasons for the great size of the modern corporation. Is it because size is essential to reap the economies of large-scale production? Is it, more insidiously, because the big firm wishes to exercise monopoly power in its markets? The present analysis allows both parties to the dispute to be partly right. The firm must be large enough to carry the large capital commitments of modern technology. It must also be large enough to control its markets. But the present view also explains what the older explanations don’t explain... [why does General Motors] produce things as diverse as aircraft engines and refrigerators, which cannot be explained by economies of scale; and why, though it is large enough to have the market power associated with monopoly, consumers do not seriously complain of exploitation. The size of General Motors is in the service not of monopoly or the economies of scale but of planning. And for this planning—control

164

Stephen P.Dunn

of demand, provision of capital, minimisation of risk—there is no clear upper limit to the desirable size. Galbraith (1967:90–1, italics added) Galbraith outlines five main strateg ies which are utilised by the technostructure for dealing with the uncertainties that surround the market process. The firm can either ignore market uncertainty or absorb it via diversification and agglomeration or, more typically, it can mitigate the impact of the market, by superseding it, controlling it, or suspending it via a network of contracts (Galbraith, 1967:44–5). We elaborate each of these strategies in turn below. Firstly, if an item is relatively unimportant in terms of the production process then a firm may disregard the market uncertainties that surround its price, availability and quality. Clearly General Motors has little need to control the supply of the paper clips; to its total activity its expenditure upon paper clips is small and their importance in the production of cars is peripheral. General Motors can ignore such uncertainties that surround the supply of paper clips. Another approach to market uncertainty is to absorb that uncertainty which cannot be ignored by combining size with diversification. Producing for several different unrelated markets allows the uncertainties associated with any one particular market to be spread across several markets. As Galbraith (1967:45) notes, ‘We have here a partial explanation of the origins of one of the more notable corporate developments of recent times, the growth of the conglomerate corporation. It combines great size with highly diverse lines of manufacture. Thus it can absorb the adverse consequences of uncertainty that cannot otherwise be eliminated’.23 This is the scale analogue of the maxim ‘you can’t put all your eggs in one basket’. The more common strategies for dealing with the uncertainties of the market concern its replacement, control or suspension.24 For example, the most common strategies for replacing the market relate to what is typically referred to as horizontal and vertical integration (cf. Williamson, 1971). Horizontal integration allows the firm to reduce the amount of price competition that it is subject to and facilitates detailed planning: ‘unless a firm has a substantial share of the market it has no strong incentive to undertake a large expenditure on development’ (Galbraith, 1952b:92). Similarly placing successive stages of production and distribution under the authoritative determination of one centre of control enables the modern corporation to appropriate the profit margin of intermediaries and to secure the sources of supply: The planning unit takes over the source of supply or the outlet a transaction that is subject to bargaining over prices and amounts is thus replaced with a transfer within the planning unit… To have control of supply—to not rely on the market but on its own sources of supply—is an elementary safeguard. This does not eliminate market uncertainty; rather the large and unmanageable uncertainty as to the price of ore or crude is replaced by the

Galbraith, uncertainty and the modern corporation

165

smaller, more diffuse and more manageable uncertainties as to the cost of labour, drilling, ore transport and yet more remote raw materials. Galbraith (1967:44–5) In short, vertical integration represents a means to mitigate uncertainty. The ‘elimination of the market converts an external negotiation and hence a partially or wholly uncontrollable decision to a matter for purely internal decision. Nothing…better explains modern industrial policy in regard to capital and labour than the desire to make these highly strategic cost factors subject to purely internal decision’ (Galbraith, 1967:46).25 For example, the large capital commitments necessitated by modern technology must not be subject to the vagaries of the market and must be protected. ‘Control of the supply of savings is strategic for industrial planning. Capital use is large. No form of market uncertainty is so serious as that involving the terms and conditions on which capital is obtained. Apart from the normal disadvantages of an uncertain price, there is danger that under some circumstances supply will not be forthcoming at an acceptable price.’ (Galbraith, 1967:55). With the firm less dependent upon the capital markets for funds, its investment activity is likely to be relatively uninfluenced by the market rate of interest. ‘If one of the motives for developing internal sources of savings is to free the firm from the uncertainties of the interest rate, it is evident that the decision on this saving will not be affected by the rate of interest. Having contracted out of the money market it will not be affected by the money market’ (Galbraith, 1967:58–9; see also Dugger, 1987).26 Obtaining the control of markets represents a fourth route for mitigating uncertainty: ‘This consists in reducing or eliminating the independence of action of those to whom the planning unit sells or from whom it buys… At the same time the outward form of the market, including the process of buying and selling remains formally intact. This influence and control over markets is the counterpart of large size and large size in relation to the particular market’ (Galbraith, 1967:46). This involves the large firm attempting to manage the consumption of its products at the prices that it controls—part of what Galbraith (1967:216–23) refers to as the revised sequence. This ‘need to manage consumer behaviour…arises from the circumstances of modern industrial life—sophisticated technology, large commitments of capital, long-term planning in product development and production and, in consequence, large, inflexible and vulnerable organisation. These lead, in turn to the need to control as many as possible of the parameters (costs, prices, demand costs and risks of technical innovation) within which the firm operates’ (Galbraith, 1970:58).27 The firm must ensure that what is produced is bought and to this end it must manipulate the desires and wants of the consumer (see Hodgson, 2001). If the large capital outlays on advanced technologies are to be recouped then the response of the consumer must be managed. This explains the growth in expenditure upon advertising: The purpose of demand management is to ensure that people buy what is produced—that plans as to the amounts to be sold at the controlled prices are fulfilled in practice’ (Galbraith, 1967:208).28

166

Stephen P.Dunn

The fifth strategy for coping with uncertainty concerns the use of long-term, money-denominated contracts (see also Davidson, 1972; Rotheim, 1999). While vertical integration offers the prospect of controlling the price and supply of strategic factors, so too does the contract. The firm can enter into large long-term contracts as a strategy for dealing with uncertainty (cf. Davidson, 1972). Contracts and their enforceability are a major source of stability and security for the modern corporation.29 In ‘an economy where units are large, firms can eliminate market uncertainty for each other. This they do by entering into contracts specifying prices and amounts to be provided or bought for substantial periods of time… In a world of large firms, it follows, there can be a matrix of contracts by which each firm eliminates market uncertainty for other firms and, in turn, gives to them some of its own’ (Galbraith, 1967:48). The nexus of moneydenominated contracts occupies a pivotal role in protecting prices and costs and safeguarding the sales and supplies at these prices and costs. As production takes time and planning, money-denominated contracts represent the means by which uncertainties about the future may be mitigated (Davidson, 1972:149). A large and extensive web of money-denominated contracts, cascaded hierarchically downwards, greatly facilitates the future planning and stability necessitated by advanced technology.30 To quote Galbraith at length: The contract can be thought of as extending the security which the large… firm has in its own markets…throughout the planning system, and to the common advantage of all concerned… [The large firm] enters into contracts with suppliers and they in turn with their supplies extending down through many layers of sub-contracts. These sub-contracts assure the prime contractor on prices and supply. At the same time they give the subcontractor similar assurance on his price and sales; they allow him to make commitments and otherwise undertake the planning requisite to fulfilling his contract… [T]he more technical the process and product, the longer the period between the original decision to produce and the emergence of the final product in remunerative quantity. And also the more technical the product, the more unlikely that the market can supply either the components, materials or labour that goes into its manufacture. With advancing technology, therefore, contracts increase in importance both for according protection over the longer period between initial decision and pay-off and for ensuring the planning that will, in turn, ensure that needed materials, components and manpower are available when needed. Galbraith (1973b:141–2) Thus, according to Galbraith the problems of market uncertainty can either be ignored or absorbed via diversification, or the firm can replace, control or suspend it. The strategies of supercession, control and suspension all ‘require that the market be replaced by an authoritative determination of price and the amounts to be sold or bought at these prices’ (Galbraith, 1967:45). It should also be clear that the different strategies available for the mitigation of uncertainty are

Galbraith, uncertainty and the modern corporation

167

inextricably bound up with size (which also gives rise to a series of problems—see below). ‘The large organisation can tolerate market uncertainty as a smaller firm cannot. It can contract out of it as the smaller firm cannot Vertical integration, the control of prices and consumer demand and reciprocal absorption of market uncertainty by contracts between firms all favour the large firm’ (Galbraith, 1967:49).

Galbraith and the theory of the firm Galbraith (1967:140) quotes with approval that the ‘most famous definition of an organization’ is of a ‘system of consciously co-ordinated activities or forces of two or more persons’. There are many parallels in the theoretical framework outlined above with a radical re-evaluation of Ronald Coase (Coase, 1937; see Cowling and Sugden, 1998). According to Coase, markets and firms are alternative means of co-ordination.31 Coase drew attention to the fact that a distinction can be made between co-ordination through a decentralised price mechanism and coordination by hierarchical centralised decision making. To quote Coase (1937:332–3): For instance, in economic theory we find that the allocation of factors of production between different uses is determined by the price mechanism. The price of factor A becomes higher in X than inY. As a result, A moves from Y to X until the difference between the prices in X and Y, except in so far as it compensates for other differential advantages, disappears. Yet in the real world we find that there are many areas where this does not apply. If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so. Coase’s approach can be interpreted as emphasising the co-ordinating role of the entrepreneur (Cowling and Sugden, 1998; see also Dunn, 2000a).32 As we have seen Galbraith’s discussion of the firm emphasises the strategic co-ordinating role of managers, interest groups and other specialists within the firm, that is, the technostructure and their associated need to plan in an uncertain environment.33 Such themes are also evident in Edith Penrose. Let me stress an obvious fact, but a fact of central importance for the growth of firms: Successful expansion must, in the usual case, be preceded by planning on the part of the firm. Firms do not grow automatically, but in response to human decisions. And if firms act on the basis of plans it follows that they have some degree of confidence in these plans. The question therefore arises how a firm obtains the required degree of confidence. Unless it is assumed that knowledge is perfect and that uncertainty is absent—assumptions that are useless and inappropriate in this context—it is clear that a body of knowledge sufficient to sustain rational plans for action

168

Stephen P.Dunn

must be developed within the firm. What may broadly be characterised as managerial research will be necessary for the purpose. Consequently, some part of the managerial and entrepreneurial services of the firm must be available to work on the requisite plans whenever expansion is considered. Penrose (1955:532) Coase, and his more orthodox followers, do not contemplate the control of markets as a strategy for minimising uncertainty, as in the Galbraithian tradition (cf. Dunn, 2000a, 2000d). Galbraith’s approach to the firm should not be thought of as a variant of the transaction cost-type story, such that the firm replaces the market on account of its capacity to minimise the uncertainties and thus the transaction costs that engulf markets. Rather, Galbraith’s argument is that firms and markets possess different capabilities that cannot be broken down and decomposed into their constituent elements: The small firm cannot be restored by breaking the power of the larger ones. It would require, rather, the rejection of the technology which since earliest consciousness we are taught to applaud. It would require that we have simple products made with simple equipment from readily available materials by unspecialised labour. Then the period of production would be short; the market would reliably provide the labour, equipment and materials required for production; there would be neither possibility nor need for managing the market for the finished product. If the market thus reigned there would be, and could be, no planning. Galbraith (1967:50) Moreover, in his discussion of the technostructure Galbraith directs our attention to situations where decisions and power meet, concentrating on the particular processes and structures of decision making (cf. Dugger, 1980, 1985, 1988). A much-neglected aspect of Galbraith’s contribution is that the locus of power and decision making is divorced from the formal hierarchy of the firm (cf. Baran and Sweezy, 1966; Cowling and Sugden, 1998). This represents an important qualification and contribution by Galbraith and should be disentangled from the managerial thesis that it has come to be associated with. The divorce of ownership from control is clearly distinct, although related, to the divorce of hierarchy from control. ‘Group decision-making extends deeply into the business enterprise. Effective participation is not closely related to rank in the formal hierarchy of the organisation…decision [s] will require information. Some power will then pass to the person or persons who have this information. If this knowledge is highly particular to themselves then their power becomes great’ (Galbraith, 1967:80). Group decision making is not just related to hierarchy, as we might infer from aWilliamsonian-type approach, but to specialised (tacit) knowledge and peer review. Similarly, Galbraith’s discussion of the relationship between technology and organisation clearly predates (see above), and has many parallels with, Williamson’s (1975, 1981, 1985, 1996) recognition of the importance of asset

Galbraith, uncertainty and the modern corporation

169

specificity in the study of organisations. Williamson’s discussion of asset specificity refers to the extent to which an asset is specialised and dedicated to a particular task and thus (conversely) can be re-deployed to alternative uses without a reduction in its productive value. According to Williamson, asset specificity is critical in that once an investment has been undertaken the buyer and seller become locked into a transaction for a considerable period thereafter, a situation which is referred to as one of ex post bilateral dependence. This dependence, according to Wiiliamson, is exacerbated by problems of information impactedness that arise in light of the complexity and opportunism that surround transaction-specific investments. However, while Wiiliamson uses this notion to elicit a transaction cost rationalisation of the modern corporation, as discussed above, Galbraith argues that asset specificity necessitates the need for planning: From the time and capital that must be committed, the inflexibility of this commitment, the needs of large organisation and the problems of market performance under conditions of advanced technology comes the need of planning. Tasks must be performed so they are right not for the present but for that time in the future when, companion and related having also been done, the whole job is completed. And the amount of capital that, meanwhile, will have been committed adds urgency to this need to be right. So conditions at the time of completion of the whole task must be foreseen, as must developments along the way. And steps must be taken to prevent, and to insure that what is ultimately foreseen eventuates in fact Galbraith (1967:35) To reiterate, Galbraith’s argument is that the imperatives of modern technology and the associated commitments of time, capital and specialised labour in an uncertain environment entail that planning supersedes the market’Planning exists because this [market] process has ceased to be reliable…[the firm] must replace the market with planning’ (Galbraith, 1967:41). Galbraith’s is not a Williamsonian argument that ‘in the beginning there were markets’, but rather one that ‘in the beginning there was an absence of a need for extensive planning as technology was not that sophisticated!’ Low levels of technology, according to Galbraith, do not require extensive organisation or large firms.34 Galbraith’s modern corporation is an organisation which plans to mitigate and engage the uncertainties that surround advanced technological development

Some problems Galbraith (1976:64) reiterates the conventional wisdom that in a competitive environment there is no power, no strategy, no control, in effect no choices. Inasmuch as the conventional wisdom recognises power, its locus in large firms is derived from the ownership of capital (cf. Galbraith, 1970a, 1973a). As noted above, Galbraith argues that this view masks the important development that the

170

Stephen P.Dunn

centre of power in the modern corporation has passed to a new ‘factor of production’, the technostructure, to those responsible for planning. However, Galbraith has not fully thrown off the shackles of the conventional wisdom (cf. Dunn, 2000a and his criticisms of Cowling and Sugden, 1998). The links to the orthodox structure-conduct-performance view of firm power and discretion are clear. The power associated with the technnostructure is clearly aligned to its size in relation to the market Galbraith appears to accept the conventional wisdom in competitive models that change originating from the producer is spontaneous and not the result of deliberative human agency and intentionality. Galbraith (1970a:54–5) appears to suggest that there is no need to plan in competitive contexts.35 Thus in emphasising the role of planning and the co-ordinating role of the technostructure in production, Galbraith unnecessarily restricts his discussion of the modern corporation to situations in which product markets are not typically competitive (cf. Galbraith’s (1973b) distinction between the planning system and the market system). It would seem that Galbraith’s discussion of the modern corporation is quite inappropriate for the study of the competitive sector or earlier, more competitive, periods of capitalism. Galbraith’s concept of planning appears to be linked to the structure of the market and the resultant discretion permitted in the conduct of firms and the objectives of the technostructure. Indeed it is this embeddedness within the structure—conduct—performance paradigm, which partially explains the fact that he is widely associated with managerial theories of the firm (see above). Galbraith’s system seemingly suggests an unnecessarily restrictive concern with non-competitive product markets and large firms.36 One of the main criticisms of Galbraith from a post-Keynesian point of view is that large size per se is but one strategy for mitigating uncertainty. Large firms, while possessing an array of capabilities that can permit a flexible response to unanticipated events, may in some instances be quite inflexible and cumbersome in dealing with other unanticipated aspects of the uncertain future. A priori one cannot rule this out.37 Although Galbraith proposes a historically specific analysis, an understanding of the technical nature of historical time, referred to in the post-Keynesian literature as non-ergodicity, would permit a significant extension and refinement of the concept of planning and extend the domain of validity of the theoretical framework (Davidson, 1991, 1996; also Dunn, 1999, 2000a).38 In linking planning to non-ergodicity, the concept acquires substantive content. Even competitive firms plan. Planning represents a flexible response to an uncertain future. And remember some small firms plan and, sometimes, grow into big firms. And what makes sense in one period need not (necessarily) make sense in another. In an uncertain world decisions have to be made and if one is to mitigate its uncertainties then sensible agents attempt to devise institutions that recognise this fact and ameliorate its impact and facilitate growth. Agents have to plan how they approach the future. Making flexible provision for this precarious future represents a sensible response by economic agents.

Galbraith, uncertainty and the modern corporation

171

If…the concept of uncertainty involves important non-ergodic circumstances, then there currently does not exist information (complete, incomplete, distorted or other wise) that will aid human beings to discover the future. Instead human beings will have to invent or create the future by themselves by their actions within evolving and existing organisations. Davidson and Davidson (1984:329–30, emphasis added) From this perspective, planning refers to the process by which the technostructure attempts to mould the future while mitigating its uncertain impact, that is, by attempting to control for as many factors as possible that impinge on the process of buying and selling and of production. This is clearly distinct from even a radical interpretation of Coase in that this conception of planning entails external and not just internal considerations. The practice of planning is the practice of dealing with uncertainty. Linking Galbraith’s concept of planning to a technical definition of uncertainty links the agency of the technostructure to the nature of the environment, of time, and not to ‘market structure’. Planning and the taking of crucial decisions are inevitable consequences of a non-ergodic environment. Market structures may indeed affect the responses of strategic decision makers to an uncertain environment, given that size, both absolute and relative, helps to mitigate the impact of uncertainty on the firm (see above). However, in a world of uncertainty (non-ergodicity), competitive markets do not remove the need for planning. Competition, structural or behavioural, in an uncertain environment cannot force a course of action, a strategic decision to be made, that ex post is consistent with loss avoidance or the maximisation of any from a range objective functions we may wish to choose (cf. Dunn, 1999, 2000b, 2000c).39 If we do not know what the future will bring or is likely to bring, history will not tell us what to do. Agents have to create the future through their own intentional actions (Lawson, 1997). The firm allows clusters of economic agents to collectively create structures that allow the uncertainties of the future to be broached. The firm is a reasonably enduring institutional structure which is dependent upon the inherently transformative practices of the agents that comprise it (although it cannot be decomposed into its component parts).

Concluding comments As we have seen, Galbraith offers an approach to the modern firm that is thoroughly post-Keynesian—Institutionalise existing in historical time, and links technology, capital, money contracts and planning to the problems of uncertainty (Dunn, 2000a, 2000d.; cf. Davidson, 1972, 1996). Galbraith’s corporation, existing in historical time, represents an enduring institutional response to an uncertain future specifically designed to mitigate its impact Galbraith presents a rich taxonomy that captures the main strategies open to the firm for coping with uncertainty. Moreover, it anticipates many of the more recent theoretical developments in the transaction cost and knowledge-based approaches to the

172

Stephen P.Dunn

firm. It represents one of the few attempts to examine the nexus between the firm and uncertainty and serves as a useful starting point for future research into this relationship. Hopefully, Galbraith’s theoretical contributions to the theory of the firm will cease to be neglected.

Notes 1.

2.

3.

4.

5.

I would like to thank Philip Arestis, Charley Clark, Paul Downward, Peter Earl, Mark Groom, Geoff Hodgson, John King, Thorbjoern Knudsen, Fred Lee, Andrew Mearman, Huascar Pessali and Malcolm Sawyer for their comments on earlier versions of this work. I would also like to thank Michael Keaney who kindly gave me the opportunity to contribute to a volume in honour of someone who has influenced me greatly. In what follows I make no excuse for extensively relying upon Galbraith’s own prose. It is infinitely preferable to the alternative and surely appropriate to a volume in his honour. The usual disclaimer applies. Harcourt and Kenyon (1976)—see also Eichner (1976)—represent one of the few post-Keynesian attempts to explicitly embed the firm in history, as opposed to equilibrium (to paraphrase Joan Robinson). However, they still do not fully explore the import of the Keynesian concept of uncertainty within their schema. In many respects Kay (1984) could be considered as one of the first attempts to integrate radical uncertainty into the theory of the firm (although see Dunn, 1999, 2000d for some caveats). Kay’s contribution, in a manner not too dissimilar from Galbraith (see section two), has also escaped many post-Keynesians (and institutionalists). As Lee points out ‘post-Keynesians have devoted little energy towards articulating a consistent and realistic microfoundation and have largely ignored ‘micro’ themes and issues, such as the business enterprise, pricing, the organisation, the nature of competitive activities, co-ordinations of economic activity, and innovation and technical change. As a result, there exists no well-grounded cohesive body of economic analysis that could be referred to as post-Keynesian microeconomics’. (Lee, 1994:304–5). This represents a big challenge to post-Keynesianism and one to which it must rise if it is to present itself as a viable alternative to the conventional wisdom. In a recent series of articles I have attempted to address this neglect and establish the foundations of a post-Keynesian approach to the theory of the firm that is consistent with its conceptualisation of uncertainty (Dunn, 1999, 2000a, 2000c, 2000d). I have argued that the essence of the modern corporation lies in its co-ordination of production from one centre of strategic decision making under conditions of fundamental uncertainty (Dunn, 2000a). See also Bruce (2001) who highlights the intellectual impact of Henry Dennison on Galbraith’s theorising. Bruce draws our attention to two monographs written with Dennison (one as a ghost writer) both of which

Galbraith, uncertainty and the modern corporation

6.

7. 8.

9. 10.

11.

12.

173

examine the role and relevance of big business for practical policy (see Dennison and Galbraith, 1938; Dennison, Filene, Flanders and Leeds, 1938). Of those that commented upon earlier drafts of this chapter, many took issue with this claim. It was felt that as Galbraith is the most widely read economist after Marx, it was hard to argue that he is neglected. As I pointed out in my defence Galbraith is generally viewed as a social theorist (see the third reason below) and not as a theorist of the firm. I cannot stress the italics enough—Galbraith’s contribution to the theory of the firm per se is generally minimised. Even when Galbraith is considered it is generally peripheral to the discussion. The term itself entered popular parlance with Burnham (1941). Galbraith in Chapter 10 of The New Industrial State draws heavily on the work of Baumol (1959), Marris (1964), Downie (1958) and Kaysen (1957, 1965) that discusses the managerialist revolution and the separation of ownership from control See also Galbraith’s 1966 BBC Reith lectures published in The Listener and the subsequent rejoinder by Allen (1967). By Galbraith’s own admission he revised this draft extensively. From a history of thought point of view it would be interesting to investigate whether this manuscript still survives and the change and continuity between this first draft and its subsequent publication. However, many of the themes that were later emphasised in The New Industrial State were also emphasised much earlier in American Capitalism (1952b). As Sharpe (1973:1–2) points out, Galbraith’s concern is with the lower economics—with the economics of the real world: ‘the lower economics referred to in the title of this book was suggested by a figure of speech once used by Galbraith. He pictured the prestige structure of economic as a hollow pyramid or cone. At the base the sides are transparent and have many openings to the outside. As one approaches the apex, the side become increasingly opaque and impermeable. Economists dealing with practical matters dwell at the base, and they have easy communication with the outside world. Their economics is adulterated by foreign admixtures of politics, moral judgements and sociology. The practitioner at this level merits little esteem. In contrast, economists dealing with pure theory can be found near the top of the pyramid. They are protected from outside influence. Their work is formal and mathematical. It has little or nothing to do with reality, and is very highly regarded by the profession. Galbraith’s mockery makes it perfectly clear where he thinks the valuable work in economics is being done. He himself occupies a position near the base of the pyramid and practises the lower economics, which, far from being a term of opprobrium, must in this view be considered an accolade’ (cf. Solow, 1967). It is interesting to note that by 1967 these stylised facts were largely uncontroversial. As I indicate by alluding to his earlier work, Galbraith had attempted to draw to the attention of the economics profession such trends

174

Stephen P.Dunn

long before the publication of The New Industrial State. 13. As Galbraith (1967:23–4) notes These changes or most of them have been much discussed. But to view them in isolation from each other, the usual practice is greatly to minimise their effect They are related to each other as cause to consequence. All are part of a yet larger matrix of change. In its effect on economic society this matrix has been more than the sum of its parts’. 14. As Galbraith (1952b:37–8) pointed out in American Capitalism, which contains many of the themes that were later to resurface in The New Industrial State, modern ‘firms also acquire—a point somewhat neglected by economists—the economies of experience. The development of an industrial enterprise is a fairly intricate task in organisation and administration. It can only be accomplished easily when it is accomplished slowly—when there is the opportunity to search for talent, to try new men out a few at a time, and when there is leisure to reassign, promote to innocuousness, or detach with regrets the inevitable mistakes… As a result, in an established industry, where the scale of production is considerable, there is no such thing as freedom of entry. On the contrary, time and circumstances combine to bar the effective entry of new firms’ 15. There are many parallels between Galbraith’s technostructure (see also 1952b) and Veblen’s soviet of engineers (cf. Gordon, 1967) and Berle and Means’ technocracy (1932:356). 16. The socialised and routinised nature of such organised intelligence emphasised by Galbraith should not, however, be overlooked. Typically theorists of the firm neglect this fact. 17. As Galbraith (1967:122) points out, ‘The goal of these planning decisions could still be the greatest possible profit. We have already seen that a high and reliable flow of earnings is important for the success of the technostructure. But the market is no longer specifying and enforcing this goal. Accordingly profit maximisation—the only goal that is consistent with the rule of the market—is no longer necessary. The competitive firm had no choice of goals. The monopoly could take less than the maximum; but this would be inconsistent with its purpose of being a monopoly. But planning is the result not of the desire to exploit market opportunity but the result among other factors, of the unreliability of markets. Subordination to the market, and to the instruction that it conveys, has disappeared. So there is no longer, a priori, reason to believe that profit maximisation will be the goal of the technostructure.’ 18. It is impossible in a complex and uncertain environment to ascertain what a profit-maximising level of output or prospective yield on an investment is likely to be (see Dunn, 2000b). As Rotheim (1999:93) points out ‘when the prospective yield on capital assets cannot be known in the future for both epistemological and ontological reasons, entrepreneurs…must rely on social convention to assess the confidence they have in their predictions of the prospective yield on capital assets’

Galbraith, uncertainty and the modern corporation

175

19. Organisation ‘is the arrangement by which specialists combine their information to make decision—decisions that require knowledge, experience or intuition of several or many persons’ (Galbraith, 1973a:100). 20. As Galbraith (1967:151) notes, somewhat pre-empting the recent ruminations on the knowledge economy (cf. Hodgson, 1999): ‘Specialised knowledge and its coordination have now, as we have seen, become the decisive factor in economic success. This requires that men work in groups. And power passes to these groups’. 21. See Dugger (1987) who attacks the ‘myth of market automaticity’ and presents an insitutionalist theory and typology of planning. 22. The parallels with Knight (1921) should be obvious. Knight can be considered as an institutionalist who studied the ramifications of uncertainty for economic theory in general, and the theory of the-firm in particular (see Hodgson (2000a), who highlights how Knight was part of the institutionalist tradition). Davidson (1996) notes, however, that it is far from clear whether Knight’s famous distinction between risk and uncertainty echoes the post-Keynesian distinction between ergodic and non-ergodic processes. However, for reasons of time and space such linkages are not pursued further here. 23. One should compare this account withWilliamson’s discussion (1975:155– 7; see also 1981:1558–60. Cf. Dugger, 1983). 24. Thus there is a sense in which Galbraith anticipated much of the themes evident in Chandler (1977, 1990) and Lazonick (1991). 25. To this end one can view the mechanisation and routinisation of the production process as further mitigating uncertainties that encompass production: ‘to see mechanisation and automation purely as a problem in comparative cost is greatly to minimise their role—and to pay further for the error of confining economic goals, and economic calculation, to profit maximisation. The technostructure, as noted, seeks technical progressiveness for its own sake when this is not in conflict with other goals. More importantly, it seeks certainty in the supply and price of all the prerequisites of production. And a large blue-collar labour force, especially if subject to the authority of a union, introduces a major element of uncertainty and danger. Its cost is not under the control of the technostructure. Who can assess the likelihood, the costs and consequences of a strike? In contrast, mechanisation adds to certainty. Machines do not go on strike. Their prices are subject to the stability which…is inherent in the contractual relationships between large firms’ (Galbraith, 1967:239). This explains the emergence of one of the more recent stylised facts that ‘at least in developed capitalist countries, wages are certainly no longer the prime cost of production. Services may come closer to 50 percent threshold, but in the relevant manufacturing sectors, wages may make up no more than 20 percent of overall production costs’ (Rotheim, 1999:91).

176

Stephen P.Dunn

26. Moreover, Galbraith, unlike many latter day theorists highlights the relationship of the technostructure and the firm to the wider economy as it impacts on saving and investment (cf. Baran and Sweezy, 1966). ‘The nature of such saving must not, however, be misunderstood. The decisions which provide three-fifths of the community’s supply of savings are made not by individuals but by authority, in the main by the managements of a few hundred corporations. And from these savings comes the major wherewithal for the growth of the economy’ (Galbraith, 1967:57). 27. ‘Price stability also serves the purposes of industrial planning. Prices being fixed, they are predictable over a substantial period of time. And since one firm’s prices are another’s costs, so costs are also predictable. Thus on the one hand, stable prices facilitate control and minimise the risk of a price collapse that could jeopardise earnings and the autonomy of the technostructure... [Prices] must be subject to the authority of the planning unit; otherwise there is risk of loss from uncontrolled price movements and there is no reliable number by which units of product and input can be multiplied to get projected income and outlay. If these estimates are not available in reliable form, there is a large random element in decisions as to what to produce, and with what and by what means, and there is total uncertainty as to the outcome—whether there will be profit or loss and in what dimension. Such error is the antithesis of effective planning. A moment’s thought will suggest not only how nearly impossible it would make modern industrial performance but how remote, in practice, such uncontrolled prices are from real life’ (Galbraith, 1967:200–3). 28. Galbraith does not believe all advertising is directed to this end: ‘a certain amount of advertising, that of the classified ads and the department store displays, has no great purpose beyond that of conveying information—of advising the public that a particular person or enterprise has a particular item for sale and at what price. Such advertising is seized upon to show that the function of advertising in general is merely to convey information although, as I have noted on other occasions, only a gravely retarded citizen can need to be told that the American Tobacco Company has cigarettes for sale’ (Galbraith, 1967:208; see also 1952b:101–13). 29. The enforceability of contracts ultimatefy requires the contracting party to make a nominal compensation to the other party if the first party does not ‘choose’ to live up to its real contractual commitment (cf. Davidson, 1972). 30. This clearly echoes the post-Keynesian view of contracts. As Davidson (1981:165) has pointed out in ‘all modern market-orientated production economies, production is organised on a forward money-contracting basis… Since production takes time, the hiring of factor inputs and the purchase of materials to be used in any productive activity must precede the date when the finished product will be at hand. These hiring and materialpurchase transactions will therefore require forward contracting if the

Galbraith, uncertainty and the modern corporation

31.

32.

33.

34.

177

production process is to be efficiently planned. The financing of such forward production-cost commitments…requires entrepreneurs [or strategic decision makers] to have money available to discharge these contractual liabilities at one or more future dates before the product is sold and delivered, payment received, and the position liquidated’. Firms represent the internal supersession of the market mechanism by command. As markets and firms are alternative mechanisms for resource allocation, a choice is offered. The allocation of resources by planning or command as opposed to movements in the structure of relative prices is conditional on the fact that the use of the price mechanism is costly. Command, with one party obeying the direction of another, reduces the need for costly continual renegotiation and reformulation of contracts. Firms succeed where markets fail, i.e. ‘in the beginning there were markets’. Cowling and Sugden (1998) return to the notion of strategy while reflecting on developments in the theory of the firm stemming from Coase (1937). They return to Coase’s original starting point, the notion of economic planning, and provide an alternative approach and definition of the firm, as a ‘means of co-ordinating production from one centre of strategic decision making’. While Cowling and Sugden’s contribution is novel, it is not without problems, I have proposed an extension to this definition of the firm that encompasses the fact that centres of strategic decision makers co-ordinating production operate under conditions of fundamental uncertainty (Dunn, 2000a, 2000d). I argue that this extension re-inforces many of Cowling and Sugden’s central conclusions and extends and clarifies their underdeveloped notion of strategic decision making. This approach is consistent with a view of the firm as an institution for mitigating uncertainty. Emphasising the co-ordinating role of the firm may introduce a degree of imprecision in delineating the boundaries (as opposed to the essence) of the firm. As Sawyer (1979:11) notes ‘For example a holding company which owns several units could, under this approach, be regarded as many firms if the holding company did not co-ordinate the activities of its various units and, whilst providing supervision of them, essentially allowed them to operate in an independent manner. Elements of fuzziness would be introduced if the holding company allocated capital between the units but otherwise did not allocate resources between them, or if there was some trading between the units with the prices determined by the holding company. An example from the other end of the spectrum would be where one firm is the major or sole customer of another, and the power of the one firm over the other is such that in many respects resources within the two firms were allocated centrally, even though they were nominally under separate ownership’. Cowling and Sugden (1998) propose that this latter situation be thought of as coming under the ambit of the single firm. Clearly, however, higher levels of technology can allow complex tasks to be handled by one or a few people. Computer software is the obvious example in this regard.

178

Stephen P.Dunn

35. One should note that Meade (1968) made a similar criticism, that Galbraith should distinguish between planning for the market and planning that replaces the market In the second edition Galbraith (1967:18) acknowledged that the ‘difference was not clear in the first edition’ and sought to rectify this lack of clarity. 36. As Galbraith (1973b:9) acknowledged in the preface to Economics and the Public Purpose, ‘The New Industrial State pictures the world of the large corporation as the outgrowth of the neo-classical world of monopoly and oligopoly. At least by implication what was left behind was the world of the competitive market’. Economics and the Public Purpose sought to rectify this deficiency by elaborating more fully the market system and its nexus to the planning system. 37. To argue otherwise might be construed as invoking a Friedmanite-type Darwinian selection process such that only those organisations that successfully mitigated the impact of uncertainty survived. 38. In writing for the lay audience Galbraith would perhaps be less inclined to use this distinction. However, it is instructive in clearly demarcating the domain of validity of the Galbraithian firm and helps avoid semantic obfuscation. 39. Galbraith sometimes slips into the maximise-minimise-optimise vernacular that characterises ergodic theorising. For instance, Galbraith (1967:43, n3) quotes with approval Marris’s (1964) suggestion that ‘In practice [business management]…aims to minimise uncertainty, minimise the consequences of uncertainty, or both’. Adopting the technical framework utilised by postKeynesians would help avoid an ambiguity.

References Allen, G.C. (1967) Economic Fact and Fantasy: A Rejoinder to Galbraith’s Reith Lectures, Institute of Economic Affairs Occasional Paper No. 14, London: IEA. Baumol,W. (1959) Business Behaviour, Value and Growth, London: Macmillan. Berle, A., and G.C.Means (1932) The Modern Corporation and Private Property New York: Macmillan. Baran, P.A., and P.M.Sweezy (2001) Monopoly Capital: An Essay on the American Economic and Social Order, Penguin: Harmondsworth, 1968. Bruce, K. (2001) ‘The making of a heterodox economist the impact of Henry S. Dennison on the economic thought of John Kenneth Galbraith’, in Michael Keaney, ed. Economist with a Public Purpose: Essays in Honour of John Kenneth Galbraith, London: Routledge. Burnham, J. (1941) The Managerial Revolution, New York: John Day. Chandler, A.D. (1962) Strategy and Structure, Cambridge, MA: MIT Press. —(1977) The Visible Hand: The Managerial Revolution in American Business, Cambridge, MA: Harvard University Press. —(1990) Scale and Scope: The Dynamics of Industrial Capitalism, Cambridge, MA and London: Harvard University Press. Coase, R.H. (1937) ‘The nature of the firm’, Economica, 4 (new series): 386–405. Reprinted in: G.J.Stigler and K.E.Boulding, eds (1953) Readings in Price Theory: Selected by a Committee of the American Economic Association, London: George Allen and Unwin.

Galbraith, uncertainty and the modern corporation

179

Cowling, K., and R.Sugden (1998) ‘The essence of the modern corporation: markets, strategic decision-making and the theory of the firm’, The Manchester School 66, 1 (January): 59–86. Cyert, R.M, and J.G.March (1963) A Behavioral Theory of the Firm, Englewood Cliffs, NJ: Prentice-Hall. Davidson, P. (1972) Money and the Real World, London: Macmillan. —(1981) ‘Post Keynesian economies’, in D.Bell and I.Kristol, eds, The Crisis in Economic Theory, New York: Basic Books. —(1991) ‘Is probability theory relevant for uncertainty? A post Keynesian perspective’, Journal of Economic Perspectives 5:129–143. —(1996) ‘Reality and economic theory’, Journal of Post Keynesian Economics 18:479–508. Davidson, P., and G.S.Davidson (1984) ‘Financial markets and Williamson’s theory of governance: efficiency versus concentration versus power’, in Money and Employment: The Collected Writings of Paul Davidson, Volume 1, London: Macmillan, 1990. Dennison, H.S., and J.K.Galbraith (1938) Modern Competition and Business Policy, New York: Oxford University Press. Dennison, H.S., L.A.Filene, R.E., Flanders, and M.Leeds (1938) Toward Full Employment, New York: Whittlesley House. Demsetz, H. (1974) ‘Where is the new industrial state?’, Economic Inquiry, March. Downie, J. (1958) The Competitive Process, London: Duckworth. Dugger, W.M. (1980) ‘Corporate bureaucracy’, Journal of Economic Issues 14, 2:399–409. —(1983) ‘The transaction cost analysis of Oliver E.Williamson: a new synthesis’, Journal of Economic Issues 17, 1:95–114. —(1985) ‘The continued evolution of corporate power’, Review of Social Economy 43: 1–13. —(1987) ‘An institutionalist theory of economic planning’, Journal of Economic Issues 21, 4: 1649–1675. —(1988) ‘An institutional analysis of corporate power’, Journal of Economic Issues 22, 1:79–111. Dunn, S.P. (1999) ‘Bounded rationality, ‘fundamental’ uncertainty and the firm in the long run’, in S.C.Dow and P.E.Earl, eds, Contingency, Complexity and the Theory of the Firm: Essays in Honour of Brian Loasby, Volume Two, Cheltenham: Edward Elgar. —(2000a) ‘Uncertainty, strategic decision-making and the essence of the modern corporation: extending Cowling and Sugden’, The Manchester School. Forthcoming. —(2000b) ‘Wither post Keynesianism?’, Journal of Post Keynesian Economics. Forthcoming. —(2000c) ‘Fundamental’ uncertainty and the firm in the long run’, Review of Political Economy, Forthcoming. —(2000d) ‘A post Keynesian approach to the theory of the firm’, in S.C.Dow and J.Hillard, eds. Post Keynesian Econometrics and the Theory of the Firm: Beyond Keynes, Volume One, Cheltenham: Edward Elgar. Eichner, A.S. (1976) The Megacorp and Oligopoly: Microfoundations of Macro Dynamics, Cambridge: Cambridge University Press. Foss, N.J. (1997a) Resources and Strategy: A Reader, Oxford: Oxford University Press. —(1997b) ‘The resource-based perspective: an assessment and diagnosis of problems’, Danish Research Unit for Industrial Dynamics Working Paper M, 97–1. Friedman, M. (1977) From Galbraith to Economic Freedom, Institute of Economic Affairs, London. Galbraith, J.K. (1936) ‘Monopoly power and price rigidities’, Quarterly Journal of Economics 50, 3:456–475. —(1938) ‘Rational and irrational consumer preference’, Economic Journal 48, 190: 336–342. —(1943) ‘Price control: some lessons from the first phase’ (in’Price Control’), American Economic Review (Papers and Proceedings) 33, 1:253–259. —(1946a) ‘Discussion’ (in ‘New Frontiers in Economic Thought’), American Economic Review (Papers and Proceedings) 36, 2:139–153.

180

Stephen P.Dunn

—(1946b) ‘Reflections on price control’, Quarterly Journal of Economics 60, 4:475–489. —(1947) ‘The Disequilibrium System’, American Economic Review 37, 3:287–302. —(1948) ‘Discussion’ (in ‘Problems of Timing and Administering Fiscal Policy in Prosperity and Depression’), American Economic Review (Papers and Proceedings) 38, 2: 443–451. —(1949) ‘Appraisal of marketing research’ (in ‘Commodity Marketing—Going Where?’), American Economic Review (Papers and Proceedings) 39, 3:415–416. —(1952a) A Theory of Price Control, Cambridge, MA: Harvard University Press. —(1952b) American Capitalism: The Concept of Countervailing Power, London: Hamish Hamilton. —(1954) ‘Countervailing power’, American Economic Review (Papers and Proceedings) 44, 2:1–6. —(1955) Economics and the Art of Controversy, Rutgers, NJ: Rutgers University Press. —(1957) ‘Market structure and stabilization policy’, Review of Economics and Statistics 39, 2: 124–133. —(1958a) ‘Galbraith on market structure and stabilization policy: comment’, Review of Economics and Statistics, 40, 2:168. —(1958b) ‘A comment on market structure and stabilization policy: reply’, Review of Economics and Statistics 40, 4:415–416. —(1958c) The Affluent Society, Harmondsworth: Penguin, 2nd ed. —(1959) ‘Mr. Hunter on countervailing power: a comment’, Economic Journal 69, 273: 168–170. —(1964) ‘The balance of payments: a political and administrative view’, Review of Economics and Statistics 46, 2:115–122. —(1967) The New Industrial State, Harmondsworth: Penguin, 2nd ed., 1972. —(1969), ‘Professor Gordon on ‘The close of the Galbraithian system’, Journal of Political Economy 77, 4 (Part 1): 494–503. —(1970a) ‘Economics as a system of belief (in ‘Economics in the Industrial State: Science and Sedative’), American Economic Review (Papers and Proceedings) 60, 2: 469–478. —(1970b) Economics, Peace and Laughter, Penguin: Harmondsworth. —(1973a) ‘Power and the useful economist’, American Economic Review 63, 1:1–11. —(1973b) Economics and the Public Purpose, Penguin: Harmondsworth. —(1973c) ‘Controls or competition—what’s at issue? A comment’, Review of Economics and Statistics 55, 4:524. —(1988) ‘Time and the New Industrial State’, American Economic Review 78, 2:373–376. —(1991) ‘Economics in the century ahead’, Economic Journal 101, 404:41–46. Galbraith, J.K., and P.A.Baran (1947) ‘Professor Despres on “Effects of Strategic Bombing on the German War Economy”’, Review of Economic Statistics 29, 2:132–134. Galbraith, J.K., and J.D.Black (1935) ‘The quantitative position of marketing in the United States’, Quarterly Journal of Economics 49, 3 (May): 394–413. —(1936) ‘The production credit system of 1933’, American Economic Review 26, 2:235–247. —(1938) ‘The maintenance of agricultural production during Depression; the explanations reviewed’, Journal of Political Economy 46, 3:305–323. Gruchy, A.G. (1984) ‘Uncertainty, indicative planning, and industrial policy’, in M.R. Tool, ed. An Institutionalist Guide to Economics and Public Policy, Armonk, NY: M.E.Sharpe. Harcourt, G.C., and P.Kenyon (1976) ‘Pricing and the investment decision’, Kyklos 29: 449–477. Reprinted in C.Sardoni, ed, On Political Economists and Modern Political Economy: Selected Essays of G.C.Harcourt, London: Routledge, 1992. Hodgson, G.M. (1999) Economics and Utopia: Why the Learning Economy is not the End of History, London: Routledge.

Galbraith, uncertainty and the modern corporation

181

—(2000) ‘Frank Knight as an institutional economist’, in Steven Medema, John Davis and Jeff Biddle, eds, Warren Samuels Festschrift. —(2001) ‘From Veblen to Galbraith: what is the essence of institutional economies’, in Michael Keaney, ed. Economist with a Public Purpose: Essays in Honour of John Kenneth Galbraith, London: Routledge. Kaysen, C. (1957) ‘The social significance of the modern corporation’, American Economic Review 47, 2. Kaysen, C. (1965) ‘Another view of corporate capitalism’, Quarterly Journal of Economics 79, 1. Kay, N. (1984) The Emergent Firm: Knowledge, Ignorance and Surprise in Economic Organisation, London: Macmillan. Lazonick, W. (1991) Business Organisation and the Myth of the Market Economy. Cambridge: Cambridge University Press. Lawson, T. (1989) ‘Abstraction, tendencies and stylised facts: a realist approach to economic analysis’, Cambridge Journal of Economics 13, 2 (March). —(1997) Economics and Reality, London: Routledge. Lee, F.S. (1994) ‘From post Keynesian to historical price theory, Part I: facts, theory and empirically grounded pricing model’, Review of Political Economy 6, 3. Marris, R. (1964) The Economic Theory of ‘Managerial’ Capitalism, London: Macmillan. —(1968) ‘Review of The New Industrial State’, American Economic Review 58, 1:240–247. Mason, E.S., ed. (1959) The Corporation in Modern Society, Cambridge, MA: Harvard University Press. McFadzean, F. (1968) Galbraith and the Planners, Strathclyde: Strathclyde University Press. —(1977) The Economics of John Kenneth Galbraith, London Centre for Policy Studies. Meade, J.E. (1968), ‘Is The New Industrial State inevitable?’, Economic Journal 78:372–392. Penrose, E. (1955), ‘Research on the business firm: limits to the growth and size of firms’, American Economic Review 45:531–543. —(1959), The Theory of the Growth of the Firm, London: Macmillan. Richardson, G.B. (1959) ‘Equilibrium, expectations and information’, Economic Journal, 69, 223–237. —(1960) Information and Investment, Oxford: Clarendon Press, 2nd ed., 1990. —(1964) ‘The limits to a firm’s rate of growth’, Oxford Economic Papers 16:9–23, —(1972) ‘The organisation of industry’, Economic Journal 82:883–896. Rotheim, R. (1999) ‘Post Keynesian economics and realist philosophy’, Journal of Post Keynesian Economics 22:71–104. Rothschild, K.W. (1947) ‘Price theory and oligopoly’. Reprinted in G.J.Stigler and K.E. Boulding, eds, Readings in Price Theory: Selected by a Committee of the American Economic Association, London: George Allen and Unwin, 1953. Sawyer, M.C. (1979) Theories of the Firm, London: Weidenfeld and Nicolson. Sharpe, M.E. (1973) John Kenneth Galbraith and the Lower Economics, London: Macmillan. Simon, H.A. (1957) Models of Man: Social and Rational, New York: Wiley. Solow, R.M. (1967) ‘The New Industrial State, or son of affluence?’, The Public Interest, 9. Stanfield, J.R. (1996) John Kenneth Galbraith, London: Macmillan. Williamson, O.E. (1964) The Economics of Discretionary Behavior, Englewood Cliffs, NJ: Prentice-Hall. —(1970) Corporate Control and Business Behavior, Englewood Cliffs, NJ: Prentice-Hall. —(1971) ‘The vertical integration of production: market failure considerations’, American Economic Review 61:112–123. —(1975) Markets and Hierarchies: Analysis and Anti-Trust Implications: A Study in the Economics of Internal Organisation, New York: Free Press.

182

Stephen P.Dunn

—(1981) ‘The modern corporation: origins, evolution, attributes’, Journal of Economic Literature 19:l537–1568. —(1985) The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, London: Macmillan. —(1989) ‘Transaction-cost economies’, in R.Schmanesee and R.D.Willig, eds, Handbook of Industrial Organisation, Volume I, Elsevier Science. —(1996) The Mechanisms of Governance, Oxford: Oxford University Press.

10

Progress denied The unravelling of The New Industrial State1 William M.Dugger

This chapter analyses the New Industrial State and its fall. The era of the New Industrial State lasted from the end of the Second World War through the middle of the 1970s. The era was an optimistic one. With the exception of the weakening labour movement, economic changes experienced during the era of the New Industrial State and the growing optimism of the youthful times promised increased economic equality and stability (Galbraith, 1967; Dugger, 1992). However, in the 1980s and 1990s retrenchment unravelled the New Industrial State. Its promises were not fulfilled.

The New Industrial State What was the New Industrial State? New Deal reforms and the growth of government in the Second World War set the stage for the long economic expansion and cultural awakening of the 1950s and 1960s in the United States. (A comparative study is in Groenewegen, 1997.) This was not a golden age, for the McCarthyism of the 1950s and the Cold War were harsh realities. The civil rights movement was weak, and the women’s movement did not come on strong until the middle of the 1960s (Halberstam, 1993). The labour movement peaked out and began declining during the era of the New Industrial State. In 1970 only 28 percent of the workforce in the US was in a union. Representation has fallen by nearly half since then—14.1 percent were in unions in 1997 (Statistical Abstract of the United States, 1981:411; 1998:445). Nevertheless, two of the rough edges of earlier capitalism were blunted during the era of the New Industrial State—the insistence on unrestricted profit and on unrestrained markets. The giant corporations began placing less emphasis on profit and capital and more on production and technology. They began stabilising their activities by substituting internal planning for market bargaining. The central government had begun taxing corporate profits and also had begun stabilising aggregate demand in the national economy. A large portion of the economy had become a collective capitalism where the collectivity was the private corporation. The founding entrepreneurs of private 183

184

William M.Dugger

corporations largely had been replaced by organisations staffed by professional managers—the famous technostructure described by John Kenneth Galbraith (Galbraith, 1967). The government played an active role in the economy, adding to the collective nature of the New Industrial State. The corporation itself was nestled in and supported by a whole network of public/state institutions. Government-sponsored collective bargaining, business unionism, and McCarthyism submerged the threat of a radical labour movement. Public education provided an adequate flow of educated employees. Government funding of basic science provided a flow of new knowledge. Infrastructure was provided free, and subsidies generously supplied where needed. Federal spending on the Cold War provided an enlarged flow of new aggregate demand and real wages rose steadily (see Tables 1 and 2). In addition, two capitalism-dampening characteristics emerged. The first new characteristic was closely related to changes in the relation between the ownership and the control of the large corporation. The ownership of the corporation had become separated from its control (Berle and Means, 1967). As the founding entrepreneur passed away and as the estate left to his heirs was spent or re-invested in other ways, the ownership of a corporation took less and less interest in the actual management of the corporation. The owners became absentee owners. Professional managers, who did not have to own large blocks of stock, were engaged to run the corporation on behalf of the owners. Eventually, the ownership of the corporation became so diffused that the numerous owners no longer controlled the corporation. It gradually slipped into the control of management. This separation of ownership from control allowed for more managerial discretion. Managers put more emphasis on increased sales revenue and production volume than on profit. A professional cadre of managers arose and the autonomy of this technostructure became a defining characteristic of the New Industrial State. Most significantly, the rise of managerial discretion meant a blunting of the capitalist profit motive (also described as the ‘agency problem’ in neo-classical literature). With their increased discretion, managers (technocrats) could spend less on the shareholders and more on themselves, on growth and on new technology. The technostructure stood between the capitalists and their profit. While the manager’s hand had been strengthened relative to the owner’s hand by the separation of ownership from control, the government treasury’s hand had been strengthened by the need for taxes to finance the Second World War and then the Cold War. So new, non-capitalist claims on profit had been made good—one claim by professional managers and another by government revenue agents. (See Tables 3 and 4 relating to profits.) The second capitalism-dampening characteristic of the New Industrial State was the managerial push for internal planning and stabilisation. (Related views of the same movement are in Chandler, 1977 and Williamson, 1985.) A step away from the unbridled market took place. The technostructure erected by professional managers required more stable prices and assured supplies than the swings of the open market could provide. So wherever the power and the opportunity existed, market bargaining was replaced by corporate managing or

Progress denied

185

by long-term contracting. Relatively stable administered prices replaced more volatile market prices. The most uncontrollable market factor, the element least subject to planned stabilization by the corporate technostructure, was aggregate demand. Here, public planning and stabilization were required. Keynesian theory provided the stabilisation took and war spending the outlet for public stabilisation of the New Industrial State. The military industrial complex became the spender of last resort The Federal government complemented the internal planning of professional managers. It became the extender of private planning by the planning of aggregate demand. Another significant step away from the unbridled market had been taken. (Further insights are provided by Eichner, 1980.) The New Industrial State contained the potential for economic democracy (Gruchy, 1972; Dugger, 1987). The government and the technostructure had both stepped in between capital and its profit. Furthermore, the technocracy’s internal planning and the government’s external planning had both reduced the free play of the market

Where was the New Industrial State going? In the New Industrial State, Cold Warriors and technocrats were changing capitalism with taxes and planning. Individual capitalists were being rendered less powerful, relative to the earlier captains of industry. The society itself had also become less focussed, even aimless. The dying-off of the leading entrepreneurial capitalists, of the Henry Fords and Thomas Edisons, left behind a less driven residual of heirs and of hired managers (technocrats). The technocrats sought new technology and growth. But they had no compelling view of where the technology and growth should take us. The Cold Warriors sought containment of the communist menace, but after containment they had no compelling view of where we should go, either. The higher circles had no vision of where the changes being wrought in capitalism should lead. But the lower circles did. New goals began coming from the people at the bottom and at the margins of the system, from those who felt excluded (Dowd, 1997). These included many workers, many women, most African Americans, many students, and a number of other groups such as gay people and Native Americans. Their new goals entered the public arena, usually unexpectedly, as demands from their growing social movements. The loudest voices came from civil rights activists, peaceniks, feminists and students, also from members of the American Indian Movement and of the Gay Rights Movement. Each movement was different, but at least one common thread was woven through them all. The common thread was the demand for inclusion. People wanted to participate as equals with those in the higher strata. For a while, at least, the lower orders had become uppity. In addition to full citizenship, African-Americans wanted an end to segregated and unequal schools and an end to job discrimination. Women wanted an equal rights amendment to help them remove their homebound status. Students wanted

186

William M.Dugger

freedom of speech and assembly. Gay people wanted out of the closet, and American Indians wanted back their land, religion, pride and sovereignty. All wanted peace (Miller, 1987; Students for a Democratic Society, 1990). Except to demand an end to harsh boarding school practices imposed on the children of a number of tribes and except to demand a return of artifacts and remains looted by European American scientists from Native American sites, most Native American groups did not focus their demands on the scientific and educational estate (Means, 1995). Nevertheless, the other marginalised groups did Of particular importance to them was an end to exclusionary educational practices. Since the technocracy needed an ample supply of highly educated recruits and an ample supply of new basic scientific knowledge, the educational demands of most of the marginalised groups and one important need of the New Industrial State coincided. With the exception of Native Americans, they all wanted improved public education. Women, African Americans, students, and gay folks were all good candidates for higher education and then for recruitment into the technocracy. But in spite of their shared interests in the educational and scientific estate, the technostructure and the social movements did not get together. Why? The answer is the Great Retrenchment.

The Great Retrenchment The Great Retrenchment: the U.S. context Although its roots go back even further, retrenchment began in the United States in the early 1970s. I call it the Great Retrenchment. It began as a backlash against the demands of the social movements of the 1960s. It became a reactionary tidal wave with the long and anguished defeat of American forces in the Indo China War. The final defeat and withdrawal came at last in 1975. The defeat ushered in an era of angry scapegoating of those in American society who had supported the original social movements. They were blamed for the defeat. The defeat in Indo China made the Great Retrenchment both a revolution in reverse and a cultural cleansing. The cleansing was of all those who had been uppity, and who subsequently were deemed to be the cause of America’s loss in the war. Although the cultural cleansing was not as violent as ethnic cleansings often are, some deaths did result A number of leading political figures were assassinated; National Guardsmen shot a number of students at different campuses; a number of Black Panthers were killed in confrontations with police; and capital punishment was re-introduced in a number of different states. Retrenchment also took place in other European countries, but the military defeat of the US made its retrenchment particularly severe. Although aimed at putting down the protestors, the cultural cleansing of the Great Retrenchment had an unexpected result—it contributed to the unravelling of the New Industrial State. The retrenchment came to involve both a cultural

Progress denied

187

and an economic dimension. (Further discussion of retrenchment is in Dugger, 1984, 1992; and Ehrenreich, 1987.) Economic retrenchment The economic retrenchment was deep and broad. The long expansion of the 1950s and 1960s turned into the long contraction of the 1970s, 1980s, and early 1990s. The retrenchment was characterised by declining real wages, a squeeze on the middle class, and by rising inequality (Peterson, 1994). It involved five elements: (1) Releasing the Monetarists and inducing Depression, (2) deregulating the market, (3) retrenching the welfare state, (4) giving back the profit, and (5) infecting the rest of the world. Element 1: Releasing the Monetarists and inducing Depression. Fate was doubly unkind to the United States. Not only did it hand the US a defeat in Indo China, but also, at almost the same time, it slapped the US with a severe case of inflation from higher OPEC oil prices. Attempts were made, but with the ongoing backlash against liberal economics, US policy makers were unable to construct an effective programme of wage-price controls. Instead, the old quantity theory of money— already retrofitted into Monetarism—was used to fight the oil price inflation. Monetarism helped start what Wallace Peterson has dubbed The Silent Depression (Peterson, 1994). Tightening up the money supply did not cure inflation, but unemployment soared and, continuing a trend, union strength sagged. Furthermore, interest rates soared and high interest rates intensified the struggle for corporate control. A market for corporate control emerged as the techniques of corporate-raiding and conglomerate-building were perfected in the high-interest rate and high-pressure financial environment that evolved in the 1980s (see Appendix, Tables 1 and 2). The discretion of professional managers narrowed as ownership groups in many giant corporations used the new raiding and conglomerating techniques to tighten up their own control and to push up their own profits (Dugger, 1989, 1991:171–82). The gap formerly separating ownership from control was narrowed. Retrenchment (corporate downsizing) thinned the lower ranks of the technostructure, even while the higher technocrats, allied with the newly resurgent ownership factions, did quite well. Element 2: Deregulating the market. Federal anti-trust actions against mergers and acquisitions did little to retard corporate merging and downsizing. Federal deregulation extended through transportation, telecommunication, energy and financial sectors. The results of deregulation were decidedly mixed, with deregulation of Saving and Loan Associations ending in financial fiasco. In spite of the mixed results of deregulation, the Federal government’s decidedly proactive approach to the economy in the New Industrial State was replaced by a far more laissez faire one. Element 3: Retrenching the welfare state. From the very beginning of the Great Retrenchment, the welfare system had been subjected to constant attack (Ehrenreich,

188

William M.Dugger

1987, Glennerster and Midgley, 1991). Fortunately for the poor, however, drastic retrenchment of welfare was delayed until well into President Clinton’s second term of office. The Clinton retrenchment of the late 1990s essentially ended the Federal welfare system. Lifetime benefits were strictly limited and most discretionary power was handed over to the fifty state governments. Many of the poor thrown off welfare by its retrenchment were saved from complete destitution, but only by the falling unemployment rate finally enjoyed by the late 1990s. Since no comprehensive studies have been made, the fate of the rest of the poor is largely unknown. The safety net, an important automatic stabiliser, was in tatters. Element 4: Giving back the profit. The New Industrial State was characterised by high taxes on corporate profits. In the decades of the 1960s and 1970s profit taxes took 40 and then 41 percent of corporate profits (Table 3). In the 1980s and 1990s, profit taxes took 36 and 32 percent (Table 3). Furthermore, corporate taxes contributed 21 and 15 percent of Federal government revenues in the 1960s and 1970s, and then 9 and 10 percent in the 1980s and 1990s (Table 4). Through a whole series of legislative tax changes and court decisions, the U.S. Treasury was directed to give back more and more corporate profits. The merger movements of the 1980s and 1990s forced the technostructure to give back more and more corporate profits. In a merger, the new ownership downsized the technostructure directly. Even in the absence of an outright merger, the fear of one did virtually the same thing. Element 5: Infecting the rest of the world. In their own versions of retrenchment, many of the formerly centrally planned economies from the Soviet bloc developed a new form of capitalism: gangster capitalism—so-called because violent and corrupt groups were able to gain ownership of and control over former state enterprises (Amsden et al., 1994). Such groups became the new capitalists. During the Great Retrenchment, exchange rates and international capital flows were deregulated. The resulting currency crises and renewed rivalry among nations dealt setbacks to the development of wide areas of Latin America, Africa and South Asia. Not even the currencies of the much-touted Asian Tigers were spared. In the international equivalent to corporate downsizing, their currencies fell like dominoes to the attacks of international raiders. Then after the fall, many millions were pushed into unemployment and despair. The International Monetary Fund and World Bank were of no help. Their efforts usually made things worse for the countries adopting their rescue plans. In the New Industrial State, the International Monetary Fund and the World Bank had operated to stabilise the rivalry between national economies. The World Bank provided financing for projects intended to develop the potentials of Third World countries so that they could participate in growing world prosperity. The International Monetary Fund provided foreign currency loans to countries which had agreed to stabilise the exchange rates of their currencies so that panic would be avoided. Furthermore, the competitive devaluations of the 1930s that had promoted the devaluing country’s trade at the expense of others were

Progress denied

189

suppressed. But by the 1980s the World Bank and International Monetary Fund were doing little more than making the international money markets safe for free capital movements. Competitive devaluations resumed. Furthermore, international money markets opened up to currency raiders, exposing most currencies to the disruption caused by their speculative attacks. In sum, the economic elements of the Great Retrenchment destabilised the system and harmed hundreds of millions of workers and poor people. Inside the United States, inequality and instability rose significantly. Outside the United States gangster capitalism replaced the Soviet system. Currency crises and competitive devaluations destabilised the underdeveloped economies. Capitalism was triumphant, but it was Dead End Capitalism: ‘Dead End’ because instead of less, it involves more intolerance, instability and inequality.

Cultural retrenchment While the economic part of the Great Retrenchment was wreaking havoc across a wide range, the cultural part of the Great Retrenchment dramatically increased intolerance of minorities and of dissent Heavy damage was inflicted on the scientific and educational estate. Cultural retrenchment involved a great backlash against beliefs and practices labelled as unAmerican by culture cops such as Allan Bloom (Bloom, 1987). It included an ugly resurgence of anti-intellectualism and intolerance. At the highest educational levels in the United States, academic tenure was increasingly questioned and increasingly absent, particularly from the growing ranks of part time and contract faculty. Faculties are not the only ones to suffer. Continued cultural retrenchment has meant reactionary attacks against student activism, Black studies and women’s studies. Attempts to increase minority participation, to enlarge student rights and to include more women and minorities in all the activities of colleges and universities have met with such reactionary contempt that they have degenerated into objects of ridicule (political correctness). At the lowest levels of the educational system, white flight from the public school system of most large American cities is making the continuation of the American system of public education increasingly problematic Urban public education has become predominantly black, brown and poor. Much of the public rhetoric pouring out in support of education does little more than promote vocational training and internet surfing. The Great Retrenchment has made education unAmerican. It has initiated the dumbing of America. Students, women, and African Americans have been punished for the 1960s protests, but crucial government support for education has been seriously weakened, as well.

What did the Great Retrenchment do to the New Industrial State? First, as described above, the technostructure lost the vibrant educational and scientific estate that it needed.

190

William M.Dugger

Second, the technostructure lost its own autonomy, its managerial discretion and its stable, planning horizon. Cultural retrenchment squelched the independence of students and faculty. Economic retrenchment brought the technocrats to heel. Freed from regulations and from anti-trust restraints, corporate raiders struck wherever they could. The control of ownership was reestablished and the technostructure downsized. The new locus of corporate control has increased the pressure for more capital gains and faster profits. Patience and prudence have been thrown to the winds, along with the financial stability needed by the technostructure. Currency volatility made it impossible to maintain a stable horizon for the international planning of costs and revenues. The technostructure has lost long-term stability on both fronts: domestically the takeover specialists have shortened the time horizon and internationally the currency raiders have done the same. Those technocrats not downsized cannot plan their corporation’s activities in the new economic world where prices, costs and ownerships can change without a moment’s notice.

Dead End Capitalism Dead End Capitalism has replaced the New Industrial State. It is still a collective capitalism, but with the short time horizon of speculators grafted onto it and with the legitimation once provided by liberalism’s welfare state removed from it. It is a dead end because it generates growing inequality and instability.

The return of economic instability Capitalism is inherently unstable, and has generated business cycles all along (Sherman, 1992). Dead End Capitalism is particularly unstable for three reasons. First, at the enterprise level, its time horizon has become very short At its helm, the speculators and raiders have replaced investors and technocrats. Second, at the macro level, its stability has been undermined. Automatic Keynesian stabilisers of aggregate demand (steeply progressive income taxes, high profit taxes, generous unemployment benefits and massive public works spending) have been removed, the welfare system retrenched, and basic social regulation weakened. Third, at the international level, stable exchange rates have given way to unstable ones. Gangster capitalism, competitive devaluations, and currency crises have destabilised most of Eastern Europe, Latin America, South Asia and Africa. The growing instability and rivalry are taking place in a context of growing global interdependence. Corporate raiding and deregulating that let speculators take control of American corporations have put pyromaniacs in charge of the domestic sector. The Cold War policy of supporting anybody in place of a Communist helped put reckless gangsters in charge of many of the economies of Eastern Europe. Retrofitting the IMF and World Bank into facilitators of free capital movements

Progress denied

191

has handed out free matches to currency raiders and mercantilists in the international sector. Trusting U.S. monetary policy to a gnome at the Federal Reserve System replaced the smoke alarm with a monetary soothsayer. Abandoning Keynesian fiscal policy turned off the sprinkler system. Retrenching the welfare system removed the fire escape.

The return of inequality Franklin D.Roosevelt’s New Deal, the veterans’ housing, education and health benefits coming out of the Second World War, and Lyndon Johnson’s War on Poverty were all government policies aimed at reducing inequality that contributed to the Affluent Society that was produced by the New Industrial State. In his study of inequality, Charles M.A.Clark estimated that the median income of the lowest one-fifth of American families rose by 58.7 percent in constant dollars over the period 1959–69. The New Industrial State had even been good to the upper onefifth of American families, boosting their median family income by 37.3 percent in constant dollars over the period 1959–69. Even though it had been successful, this was the last hurrah for the New Industrial State. Over the three periods 1969– 79, 1979–89 and 1989–93 the median income of the lowest one-fifth of American families fell by 1.0, 3.7, and 10.9 percent, respectively. The Great Retrenchment significantly reduced the money incomes of the poor, and this loss in money income does not include the retrenchment of their welfare benefits. While the Great Retrenchment hurt the poor, it helped the rich. Although it was not as kind to the rich as the New Industrial State, over the three periods 1969–79, 1979–89, and 1989–93, the median family income of the upper one-fifth of American families rose by 8.0, 23.3, and 2.9 percent in constant dollars. Clark concluded that for much of the period of the Great Retrenchment, ‘The real income flow shifted the most toward those who needed it the least’ (Clark, 1996:205–6). The Great Retrenchment reversed the economic progress made by the lowest one-fifth of American families and returned the U.S. economy to a path of increasing inequality.

The return of intolerance The late 1960s and 1970s were the high-water mark for the progressive social movements of the New Industrial State Era. Participants in the social protest movements began voicing a new-found optimism that peace, tolerance and equality were immediately possible. Some real progress was made against all three ‘isms’: jingoism, racism and sexism. But then much of it was taken back during the retrenchment U.S. jingoism, its war against non-aligned Third World countries, was challenged. The war in Indo China was finally stopped. The bombs fell no more. But during the Great Retrenchment, the U.S. war with uppity Third World nations resumed. The bombs fell again, this time on Libya,

192

William M.Dugger

Panama, Iraq, Kenya and Yugoslavia. Jingoism returned. During the era of the New Industrial State, racism and sexism were openly challenged. Finally, basic civil rights and women’s rights were enforced. But then the Equal Rights Amendment failed, white parents took their children out of integrated schools. Sexism and racism also returned. This time, the three ‘isms’ are much more sophisticated than before. The earlier progress made against them inoculated them against criticism. American jingoism marches under new banners—humanitarian intervention inYugoslavia, the war against drugs in Panama, save Kuwait in Iraq. Racism and sexism march under the banners of ‘reverse discrimination’ and ‘political correctness’. All the new banners make those who march under them appear to be noble and socially minded, instead of vicious and self-centred. (Further discussion is in Cohen, 1998.)

Conclusion Few of the ideals of the 1960s social protest movements remain in the mainstream of U.S. culture. The Great Retrenchment unravelled the New Industrial State. As a result, the new U.S. economy is a dead end one and, so too is the new U.S. culture. The scapegoating of students, peaceniks, feminists, African Americans, gays and uppity Third Worlders has resulted in a return of intolerance and war. The retrenching of the economy has resulted in a return of instability and inequality. No new vision of a better future has pushed its way into the public arena. Worst of all, a wide swath of the rest of the world is infected with the same retrenchment We are all Dead End Capitalists, for the time being. At least for now, capital’s profit is being de-taxed and de-planned, markets are being deregulated, tolerance is being de-constructed, peace is being decommissioned, and the devil is taking the hindmost

Note 1.

Howard Sherman provided helpful comments on an earlier draft Pauline J.Dugger helped with the tables.

References Amsden, Alice H., Jacek Kochanowicz, and Lance Taylor (1994) The Market Meets Its Match: Restructuring the Economies of Eastern Europe, Cambridge MA: Harvard University Press. Berle, Adolf A., and Gardiner C.Means (1967) The Modern Corporation and Private Property, rev. ed, New York: Harcourt Brace Jovanovich, Bloom, Allan (1987) The Closing of the American Mind, New York: Simon and Schuster. Chandler, Alfred D., Jr (1977) The Visible Hand: The Managerial Revolution in American Business, Cambridge, MA: The Belknap Press of Harvard University Press.

Progress denied

193

Clark, Charles M.A. (1996) ‘Inequality in the 1980s: An Institutionalist View’, in William M.Dugger, ed., Inequality: Radical Institutionalist Views on Race, Gender, Class, and Nation, Westport, CT: Greenwood Press, pp. 197–222. Cohen, Mark Nathan (1998) Culture of Intolerance: Chauvinism, Class, and Racism in the United States, New Haven, CT: Yale University Press. Dowd, Doug (1997) Blues for America: A Critique, a Lament, and Some Memories, New York: Monthly Review Press. Dugger, William M. (1984) An Alternative to Economic Retrenchment, Princeton, NJ: Petrocelli Books. —(1987) ‘An institutional theory of economic planning’, Journal of Economic Issues 21, 4: 1649–1675. —(1989) Corporate Hegemony, Westport, CT: Greenwood Press. —(1991) Underground Economics: A Decade of Institutionalist Dissent, Armonk, NY: M.E. Sharpe. —(1992) ‘The Great Retrenchment and the New Industrial State’, Review of Social Economy 50, 4:453–471. Ehrenreich, Barbara (1987) ‘The New Right attack on social welfare’, in Fred Block, Richard A.Cloward, Barbara Ehrenreich and Frances Fox Piven, eds, The Mean Season: The Attack on the Welfare State, New York: Pantheon Books, pp. 161–195. Eichner, Alfred S. (1980) The Megacorp and Oligopoly, White Plains, NY: M.E.Sharpe. Galbraith, John Kenneth (1967) The New Industrial State, Boston: Houghton Mifflin. Glennerster, Howard, and James Midgley, eds (1991) The Radical Right and the Welfare State: An International Assessment, Savage, MD: Barnes and Noble Books. Groenewegen, John (1997) ‘Institutions of capitalisms: American, European, and Japanese systems compared’, Journal of Economic Issues 31, 2:333–347. Gruchy, Allan G. (1972) Contemporary Economic Thought: The Contribution of Neo-Institutional Economics, Clifton, NJ: Augustus M.Kelley, pp. 133–176. Halberstam, David (1993) The Fifties, New York: Villard Books. Means, Russell, with Marvin J.Wolf (1995) Where White Men Fear to Tread: The Autobiography of Russell Means, New York: St Martin’s Press. Miller, James (1987) Democracy is in the Streets: From Port Huron to the Siege of Chicago, New York: Simon and Schuster. Peterson, Wallace C. (1994) Silent Depression: The Fate of the American Dream, New York: W.W. Norton. Sherman, Howard J. (1992) The Business Cycle: Growth andCrisis Under Capitalism, Princeton, NJ: Princeton University Press. Students for a Democratic Society (1990) The Port Huron Statement, Chicago: Charles H. Kerr (originally published in 1962). Williamson, Oliver E. (1985) The Economic Institutions of Capitalism, New York: The Free Press.

194

William M.Dugger

Appendix Table 1. Rates, 1950–74, selected years

Definitions and Sources for Table 1: The unemployment rate is in per cent and is for civilian workers. The source is the Council of Economic Advisers, The Economic Report of the President, Washington, DC: U.S. Government Printing Office, 1999, p. 376. The inflation rate is in per cent and is for year-to-year changes in the consumer price index. The source is the same as for the Unemployment Rate, p. 400. The poverty rate is in per cent and measures the persons in the population with incomes below the official poverty level. The source is the Statistical Abstract of the United States, Washington, DC: U.S. Government Printing Office, various years. The wage rate is in 1982 dollars and is the average hourly earnings for the private sector. The source is the same as for the unemployment rate, p. 382. The interest rate is on high-grade corporate bonds. The source is the same as for the unemployment rate, p. 412.

Progress denied Table 2. Rates, 1975–98, selected years

Definitions and Sources: Same as Table 1. (P) is preliminary.

195

196

William M.Dugger

Table 3. Corporate profits and corporate profit taxes, 1960–98 (in US$ billions)

Sources and definitions for Table 1: Profits are corporate profits with inventory valuation and capital consumption adjustments. The source is the Council of Economic Advisers, The Economic Report of the President, Washington, DC: U.S. Government Printing Office, 1999, p. 431. Taxes are corporate profits tax liability. The source is the same as for profits, p 431. The last column contains the author’s calculations.

Progress denied

197

Table 4. Corporate profit, taxes and Federal receipts, 1960–98 (US$ billion)

Sources and definitions for Table 1: Total receipts are for on and off budget items by fiscal year for the United States Government Taxes are corporation income taxes by fiscal year. The source is the same as Table 3, p. 421. The last column contains the author’s calculations.

11

Galbraith, globalism and the good life Making the best of the capitalist predicament David Donald and Alan Hutton

In a series of celebrated books published between the 1950s and the early 1970s John Kenneth Galbraith developed an account of American capitalism in the Fordist era reaching its most complete statement in Economics and the Public Purpose (Galbraith, 1974). The social, economic and political world has undergone major changes in the intervening years. Do we still have anything to learn from his considerations of how things worked in his America? We argue that we do. We identify in his ‘image’ a programme and approach which is realist yet humane and democratic. This remains valuable in our changed world: it suggests both a more accurate account of our recent origins and an approach to coping with our present predicaments. And Galbraith has continued to debate these issues. The last quarter of the twentieth century has witnessed what the ‘new right’ interprets as a revival in the standing and use of free market vision through what they perceived and promote as an extension and deepening of a purer form of market capitalism. A significant element of this ‘great capitalist restoration’ is the accelerating process of the ‘globalisation’ of economic life. This we contend is used to promote certain interests and to erode the quality of life for others. We argue that, despite many of the directions of technological and institutional development in the last 30 years (especially given the coexistence of a diversity of capitalist forms both in national systems of production and within firms) Galbraith himself did not adequately acknowledge, Galbraith’s vision, and in particular his realist and candid analysis of the operations of the system against which he counterposes the idealist, unrealistic legitimating ‘ideology’ of textbook economics, still has much to offer for the understanding of capitalism at the beginning of the new century.

Galbraith’s image: the misinterpretation and misrepresentation of capitalism? Galbraith’s attempt, in a series of works from 1938 to the present, to apprehend, chart and characterise the complexity of and changes in, the capitalist order in the twentieth century is heroic—and thus, predictably, incomplete. But it has the great merit of providing a heuristic image against which to evaluate arrangements at the 199

200

David Donald and Alan Hutton

start of the twenty-first century. What does Galbraith lead us to look at, in what ways and to what ends? Above all he has attempted realist analysis and synthesis. Arguing that twentieth century capitalism has been misinterpreted and misrepresented,1 and in pursuit of the true nature of the capitalism of the America of his times, he perceived a ‘new industrial state’ dominated by an ‘industrial system’ This operated in ways quite divergent from those predicted by the rules of the economic game as promulgated by the professors of economics and adumbrated in the textbooks. He suggested that the technical analysis of these textbooks provided ideological smoke that concealed an economic world of misallocation and maldistribution in which consumer sovereignty was subverted and markets structured to accommodate ‘the needs and convenience of business organisations’ (Galbraith, 1967:vii). Like all successful ideologies this ‘economic ideology’ was stoked by the ‘true believers’. In this case the guardians were the high priests of the economics profession and their numerous acolytes. The auxiliaries were a band of fellow travellers composed of supporters in the mass media, small businesses, political parties, interest groups and certain sections of the public. Together they conflated prescriptive intent and explanatory purpose in a public discourse of ‘positive economics’. Their models suggested boundaries of low permeability between the private and the public. And they equated ‘the private’ with freedom, efficiency and morality and ‘the public’ with constraint, inefficiency and corruption. They promoted the benefits of a laissez, faire system and, for the most part, asserted that the U.S. ‘free enterprise’ economy was such a system. Counter to this tale of misrepresentation Galbraith offers another narrative. He asserts that amongst the real players of the game—the diverse corporations and firms and their bureaucracies—there was much greater consciousness of the true operation of the developed economy and within it of the power of the large corporation. And the great industrial manufacturing corporations were the most significant of these players. They were wholly aware of the importance to their operations of the state: conversely the state was aware of the importance of the firms. The ‘industrial system’ that had developed owed little to the simplistic model of a capitalist economy represented in the textbooks. And the most significant divergences lay in the ways in which choices were made in an economic sphere which could never quite be distinguished in practice from the political. No ‘black box’ theory of the firm would capture the important variables in the decision processes of the large corporations which were the heart of the industrial system. Models of ‘entrepreneurship’, still used in the textbook, whether ascribed to individual proprietors or the capitalists of Wall Street were inappropriate ‘in the mature industrial enterprise’ (Galbraith, 1967:82). ‘Consumer sovereignty’, used in the textbooks to explain and legitimate a range of the powers of the large corporation did not reflect reality. In what he called ‘The Revised Sequence’ Galbraith advances the notion that, at the heart of the modern capitalist economy the giant corporation seeks to manipulate the consumer and for the most part does. Corporations, more or less self-consciously, attempt to allocate values and frequently succeed in their endeavours in relation both to the public (state and political values) and to the

Galbraith, globalism and the good life

201

private (individual and social values). But what was the firm and corporation in relation to this impressive power? An educated and skilled core occupied the strategic roles in the large bureaucratic corporations which dominated the industrial system. This group formed a patterned set of decision-making arrangements which he labelled the ‘technostructure’. It was this which articulated the various components of the system and provided the economic and technical intelligence required for the core activity of the corporation—industrial planning. Planning was necessary to the operation of an industrial economy. The vagaries of the market (both consumer demand and producer supply) must be conquered. The control of prices—both final prices to consumers and costs of supply—through corporate planning was central to the system. Such planning could not effectively be undertaken by the states—whether capitalist or socialist. Nor, if it were to be effective, could it be allowed to be subverted by shareholders or entrepreneurial owners. Under normal conditions enterprises were able to dominate this function. Autonomy of the decision-making structure was perhaps the most significant of the conditions sought by the mature corporation. Profits provided the flow of the capital necessary to defend and secure its autonomy from investors and entrepreneurial owners and profit performance and output protected it from governmental interference. But close relationships between the corporations and the state constrained governmental interventions and whilst ensuring the maintenance of a congenial environment for business. Not the least feature of such an environment was the provision of educational facilities which reproduced and developed the capacities of the technostructure. But this was, potentially, a threat of which the technostructure and its allies should be aware: here Galbraith saw a growing source of potentially autonomous power—‘the educational and scientific estate’. ‘Qualified manpower is decisive for the success of the industrial system’, he says. Yet ‘(t)he education on which it depends is provided mostly in the public sector of the economy’ (Galbraith, 1967:298). It had been characterised by huge expansion and potentially attracted high status. But some of its values were threatening and unsafe for the purposes of the technostructure. Nevertheless, such tensions were largely under control. Identity of interest between state and corporation led to the corporation having easy access to the state and acting as ‘an extension of the arm of the bureaucracy’ (Galbraith, 1967:318). And education was a lubricant of this arrangement.2 He painted a picture of the great American giant corporations as wholly integral to the American way. Thus a ‘new industrial state’ was at the heart of his explanation of economic life, social attitudes and political arrangements and outcomes.

The ‘great capitalist restoration’ How well does Galbraith’s vision stand the test of time? Firstly, we should concede that he saw this state of affairs as a stage in a process of continuous development. The set of arrangements which he mapped and explained was not immutable and was certainly not some ‘highest final state’:

202

David Donald and Alan Hutton

…to suppose that the industrial system is a terminal phenomenon is, per se, implausible. It is itself the product, in the last sixty years, of a vast and autonomous transformation. Galbraith (1967:395–6) His central purpose was to hold out the possibility of progressive change and to create a world more suited to humane human purposes. The directions of development which Galbraith thought possible—‘planning, government control, state support and socialism’ (Galbraith, 1967:396) were not, however, those being taken by capitalism in the late twentieth century. Socialism was proclaimed dead and ‘globalisation’ seemed—at least to some including significant politicians—to be revealing the true nature of the rules of capitalism. A revolution was underway. The influence of Wall Street could be less easily dismissed than it was by Galbraith. In retrospect, the policies and interpretations of Reagan/ Thatcher were being justified as a foresighted and necessary accommodation to circumstance. Now, at the start of the twenty-first century, ‘globalist’ images are very influential and are being woven into a widely promoted ideology3 of ‘liberal globalism’. ‘Predicament’ is used to reify an idealist vision of global laissez faire. ‘There is no alternative’ is the implication of much political rhetoric. Thus liberal globalists and their followers present themselves as new realists. The USA is held to be closest to the model of the ‘New Economy’ and Europe and the Pacific must engage in ‘catch-up’. The component policy imperatives of the drive to liberalism are clear. Enterprise, innovation and flexibility are necessary and the main ways of achieving them are all in the liberal canon. ‘Entrepreneurialism’, they aver, is central to survival let alone development. Small companies are the ‘main engines of job creation’ and a major source of innovation. The role of the state has to be directed particularly to securing these ends: education, welfare, research and development, regulatory policies and infrastructural investment are less ends in themselves and more supports for ‘enterprise’—itself the means to well-being. According to this view, the dominance of the large corporation—with its imperatives to planning and its need of national state supports—is to be distrusted. Mobile capital, speed of decision, flexibility of contracts (especially, but not exclusively, with regard to labour) are held to be necessary to secure rapid change and speed in changing world market conditions. These are the variables of the new equations.4 Like all ideologies globalism has a theory of history. The control and distortion of the market by a coalition of large bureaucratic corporations with the state is now, in retrospect, represented as the product of a limited era of corporatist forms. The nation states which most fully embraced these forms are presented as the sites of the most painful but most necessary adjustment Education is tamed (or is being tamed) and is more subservient to the needs of manufacturing and of a burgeoning service sector—which has arrogated to itself the style ‘industry’. Oldfashioned notions such as education for ‘professions’, for ‘democracy and citizenship’ can be devalued: and ‘academic freedom’ seems to be of less moment5

Galbraith, globalism and the good life

203

‘Small businesses’, ‘enterprise’ and ‘entrepreneurialism’ are equated and celebrated. Capitalism is restored.6 And capitalism appears impressive. Since The Affluent Society in 1958 (Galbraith, 1999) world production has soared. Since the publication of The New Industrial State (Galbraith, 1967) the capitalist order has impressed in several ways. Firstly, contrary to Galbraith’s suggestions, it has survived in recognisable form. Quite what it has survived ranges across doubts amongst its supporters, criticisms from those who would have seriously reformed it, competition from the ‘Soviet super state’ and the threatened creation of a post-materialist counter-culture. And although business cycles still—from time to time—provide a bumpy ride, economic progress always appears to triumph. The path eventually turns out to lead up the mountain. The prospect of stable, high and desirable standards of living—of a good life—is provided for ‘the haves’ and proffered to the ‘have nots’. Thus, rather than be reformed or replaced as so many commentators thought likely, capitalism, it seems, has been rejuvenated. Notions and practices once thought to be dead or dying have been revived. The rhetoric of Victorian liberalism has regained respectability and the ‘welfare state’ is under serious question: and ‘charity’ is back on the agenda. This last is a respectable alternative to the restructuring of economic arrangements and generous provision of welfare through the state. Self-help (personal provision) and individual responsibility are advocated over communal (or corporate) provision for the economic and social security of families. Above all the ‘realities’ of the labour contract are revealed.‘Flexibility’ is paramount. The right of ’managers to manage‘ through the radical restructuring of working time (often through individual negotiation) to meet the needs of the firm is re-established. The increasing employment of non-standard female workers and the increase in all forms of part-time, contracted and casual labour is seen as beneficial. This better serves the needs of the system as outlined above—from cost control for competitive advantage, through industrial discipline, to flexible innovation. The reformation of a ‘more pure’ form of labour market is a major component of restored capitalism. And the alternative to restored capitalism as a way of organising the modernised world is now proved completely deficient. The collapse of the Soviet Communist alternative finally revealed the spuriousness of its whole conception and of its aspirations. The legitimacy of the thought which underpinned it and the thought associated with it (which provided both a critique of capitalism and an ever-present standard for comparison and accountability) is quite undermined. Now explanations and imperatives that can only be understood in the context of a discourse in which liberalism and capitalism are conjoined. This discourse threatens to monopolise policy debates and public values—especially in the AngloAmerican sphere of influence but that means, to a considerable extent, throughout the developed world. Critics can be dismissed: Nothing showed this change better than the opening rant by Nicole Fontaine, the President of the European Parliament. The summit’s conclusions made her call to curb takeovers and ‘the ruthless pursuit of

204

David Donald and Alan Hutton

profit at the expense of working men and women’ sound like the outpouring of a 1960s student revolutionary. Such ideas still have a following. But the board of Europe Inc. made it clear this week that they should no longer interfere with the business of business. Financial Times (2000) It is the Anglo-American world which has led this revival of neo-liberal thought and has been the main site of the outcomes which are held to demonstrate the vitality and viability of ‘restored capitalist’ practices. But the last two decades or so have seen the practices and ideological supports associated with capitalism both deepen and widen. The further industrialisation of the Far East has occasioned an explosion of productive power and potential. Led by Japan, but with others in close pursuit, wealth accumulated, living standards increased, and the general quality of life—including consciousness of the advantages of a pollution sensitive environment, satisfactory health and nutrition, levels of education and so on—has improved. Similarly, Europe developed as an economic zone and Germany has been a particularly powerful economic performer. Now Western Europe provides a capitalist bastion from which, by contagion, proselytising and investment, the former sphere of influence of Soviet communism is in ‘transformation’ to capitalist forms. Misguided pre-‘capitalist restoration’ thinkers may suggest that these successes were engineered in a manner rather different from that prescribed by the Anglo-American capitalist credo7—by some form of corporatist or Rhine capitalism. But that view is held by ‘restorationists’ to be mistaken: two answers are given to it. Firstly, where Asian and Rhine capitalisms departed from the accepted model they probably inhibited what would have been even more impressive performances. Secondly, the world has globalised and the real motors of human progress—now liberated—will discipline national capitalisms. The rather specific and special circumstances which allowed the maintenance of barriers (of various forms) behind which Scandinavians, Germans, Austrians, French, Japanese and Asian ‘tigers’ were able to circumvent the rules of the game no longer obtain. The forms they developed were merely special versions of the limited era of the Keynesian Welfare State. Reality can only be denied at the cost of regression and decline. A more candid form of capitalism emerges with the logic of globalised capital. And, so this line of thought contends, consideration of the less developed world must surely indicate the advantages of restored capitalist ways. For the developmental model prescribed by ‘restored capitalism’ must provide for Third World aspirations. As in the case of the transformational economies of the former Soviet-influenced territories, the development path is relatively clear. Here, so liberal globalists contend, as in the reforming First World economies, the general rules for economic arrangements can be denied—but only at the cost of relative, and probably catastrophic, failure. Many indicators can be assembled to demonstrate the success of the model advanced in the great capitalist restoration (e.g. see Galbraith, 1999:vii). One in particular is very telling. Long life is inexorably tied to living the good life.

Galbraith, globalism and the good life

205

Mortality statistics—as Amartya Sen (1998) has shown—are a good proxy for other indicators of welfare. And in the capitalised areas of the world we live longer. The western version of a ‘good life’ combines freedom and choice with the justice of returns to effort and imagination. Capital accumulation and private unencumbered opportunities for investment and entrepreneurship, so this argument goes, provide the motivations for advance. It is this system of restored capitalism which is delivering increasing levels of prosperity for an increasing proportion of the world’s increasing population.

Restoration fallacies: explanations, ends and means, and processes If this capitalist vision is so successful, and therefore attractive, why quibble? Has not this restoration in the theory and practice of capitalism confounded the corpus of critical works and alternative practices of the twentieth century? Does it not give greater credence to those who were always skeptical and dismissive of the Galbraithian image of the system? We have three broad reasons for questioning the restored capitalist vision: we reject as deficient, defective and disruptive the essentially liberal explanations and explanatory categories used by its proponents; we reject significant elements of the image of the ‘good life’—the goals—which can be inferred from the images projected—promoted as the outcomes of policy prescriptions; and we reject the description (observations and measurements) of the contemporary world which it offers.

Explanation: how does the economic world work? So our first concern is essentially intellectual but with practical ramifications. The concepts and categories (mostly the tools of neo-liberalism and mainstream economics) used by its proponents to apprehend the wondrous system of the new capitalism are not convincing and thus we are dissatisfied by their explanations of how it works, how it was achieved and how it is sustained. In particular, mainstream explanations, relying on a spurious individualism, fail to apprehend (and thus to specify) the requirements for the governing, coordinating and steering mechanisms which are vital to tackle central issues which are probably the most pressing of our times. And this neglect of the social and the political leads to a self-contradiction at the centre of the neo-liberal’s explanatory account. Much of the achievement they claim for their system has been realised by (or is being realised on the foundation of) a form of arrangements which the prescriptions of their system condemns.8 The ‘Fordist’ era was hardly Nirvana in the eyes of progressive thinkers. But with its attendant Keynesian welfare state arrangements, it secured the basis of impressive capital accumulation (including educational and attendant technological advances) whilst also providing a level of welfare which secured a relatively stable set of arrangements for social security. The evolution of these arrangements, though

206

David Donald and Alan Hutton

often supported by political ‘progressives’, was heavily influenced and legitimated by conservative thought with its emphasis on the desirability of social and economic order.9 So we have been here, or in similar circumstances, before. In successive waves, and in different ways at different times and in different economic and political systems, the forces of change which are celebrated as progressive, liberating and inevitable have created disruption—and often misery. And subsequently, forces of conservatism have been aroused as powerful interests (elite and mass) see their gains, advantages and security threatened. Karl Polanyi is a graphic reporter of the circumstance: Nowhere has liberal philosophy failed so conspicuously as in its understanding of the problem of change. Fired by an emotional faith in spontaneity, the common-sense attitude toward change was discarded in favour of a mystical readiness to accept the social consequences of economic improvement, whatever they might be. The elementary truths of political science and statecraft were first discredited, then forgotten. It should need no elaboration that a process of undirected change, the pace of which is deemed too fast, should be slowed down, if possible, so as to safeguard the welfare of the community. Such household truths…were erased from the thoughts of the educated by the corrosive of a crude utilitarianism combined with an uncritical reliance on the alleged self-healing virtues of unconscious growth. Polanyi (1957:33) Alternatives to liberalism offer other approaches which make use of human experience. They do not deny progress and change. But they steer it. For obvious reasons such experience is best sought amongst late developers where ‘catch up’ was induced and the disruption of change most threatening. Slow evolvers are wont to perceive modes of change through naturalistic imagery: those in haste seek and perceive proactivity and artifice.10 The conceptual tools and practices of successful and relatively recent transformations should be regarded as a basis for further progressive development not as impediments to ‘development’ and threats to ‘survival’. Arrangements conceded as conditions for stable development in the more or less liberal democratic states (and the imperatives which motivated their evolution) still operate. The German and Japanese approaches and similar variants—examples of ‘Rhine capitalism’—were not aberants: they represent important stages in a transformation to new circumstances—to post-Fordist forms. The systemic firm, inter-firm, state, labour and public accommodations demonstrated in these systems reveal the significant variables which influence the operation of the polity and economy in a highly complex world economy. Their relative success in late capitalism tells us more about the operation of our political economy than does the false rhetoric of restored capitalism. The conditions for stability and order which are still pre-requisites for the good life (and assured production) are dependent on the recognition and manipulation of these variables. And an acknowledgement of ‘true history’ and the diversity of

Galbraith, globalism and the good life

207

economic and political circumstance are part of that Present transitions, we will argue, are inherently unstable and imperatives to provide more satisfactory forms of economic and social security as pre-requisites for social order are evident. Various contemporary indicators suggest the emergence of the ‘new politics of the firm’ which will require a reconsideration of the impoverished methods of contemporary mainstream economic explanation.

Values goals and norms: what is an economy for? Our second concern relates to the notion of ‘successful’ economic performance which is implicit in restored capitalism’s project. We reject the prospect of life which restored capitalism offers—the goals and values which it projects and protects—as a representation of an attractive ‘good life’. The capabilities of humankind and the distributive capacity of the economic order hold more promise than that. It is not simply that the good life for some is sustained at the expense of others less fortunate:11 rather it is that, given human capabilities and our realised command over world resources, what is presented as the ‘good life’, is frequently, in many respects vacuous, less than fulfilling and indeed destructive. History has not ended. We do not expect the disappearance of movements which mobilise alternative value systems to neo-liberalism: it would not be surprising if they proved to have increasing appeal. A world political economy of citizenships allowing for diversity of interests, identities and values seems a more likely prospect than the idealist vision of consumerism conquering all. Accommodating public policy to the goals of such citizenships requires a reconsideration of the values of the political economy and how they are established. And values are embedded. Diversity will compete strongly with convergence. Well-being will compete with efficiency. And competition will be fierce. The notion that the state ‘should no longer interfere with the business of business’ (Financial Times, 2000) is absurd. A new politics of regulation is bound to emerge from the aspiration for the ‘unencumbered firm’ (Donald and Hutton, 1998).

Descriptions of outcomes: indicators of success And thirdly, following from its explanatory failure and its impoverished value system, we are concerned that the picture of liberal capitalism’s success to date (as presented by its proponents) is severely distorted. Outcomes of the restored capitalist system are—of course—measured using the explanatory concepts which it advances. Thus the economic overwhelms the social and the political. Economic outputs are, erroneously, assumed to have fulfilled social goals. Political, and especially democratic, ends are neglected:12 a political economy of citizenship is discounted by default. The goals of obtaining or maintaining lasting human relationships are scorned—in education, in professional services, at work and in local communities. Many unfortunate consequences flow from this but two of note

208

David Donald and Alan Hutton

are the issues of social exclusion (reversed to be a policy concern with ‘inclusion’) and the environment. Restored capitalism underrates the significance and import of the excluded—for the excluded themselves and for the social order and thus for the included. Despite many years’ experience of their impracticality the logic and values of the U.K. Poor Law Amendment Act of 1834 are resurrected and advocated for both domestic and international contexts.13 The interests of the poor, it is argued, are best pursued by rewarding the rich and making poverty even less congenial.14 And capitalism continues to neglect ecological concerns, as recently highlighted by Galbraith (1999). The major indicators of the ‘success’ of restored capitalism always underrate these essentially relational variables. When there is no such thing as society there is no such thing as humanity. The description of process is particularly false. Large firms are ubiquitous and their reach is increasing. State intervention and regulation are considerable and necessary.‘Political considerations’ are increasingly a concern of corporations. These concerns with explanation, values and the measurement of success are of course intimately linked. Neo-liberal ‘capitalism’ is not a neutral explanatory framework: those who explain the world in its terms are, as Galbraith has always asserted, ideologists. It is prescriptive and promotes sectional interests. It promulgates mythical explanations as ambitions for the operation of the socioeconomic world. And, wherever possible, it seeks to close debate and suggest that there are no feasible alternatives to the policy prescriptions it provides and the value systems which it projects. Its most recent guise is the emerging ideology of ‘globalism’. It resurrects the old variables and imperatives and presents them as inescapable aspects of the contemporary predicament Analysis of the globalist image promotes an awareness of a false ends/means distinction which we think has considerable importance for the conceptualisation of the standard of living and the quality of life. We have an essentially conservative perception that the performing of functions is the living of life. Outcomes, not outputs, are the measure of value. This has special valance in a world in which predicament is the reality for most participants. Powerful structures inhibit action to transform circumstance. Contrary to neo-liberal interpretations, consent and volition have limited leverage for the individual. By weight of circumstance, and for the sake of social order, most of us are obliged to lead the lives ascribed to us. We must make the best of our location in the capitalist predicament But the idealist premises of neo-capitalist—globalist— liberalism make the realisation of good lives in a variety of circumstances unlikely. To make the best of our predicament we must understand it—not mythologise it To undervalue the efforts of those whose devotion to their functions sustains the system is potentially destabilising. To celebrate the rental ‘earnings’ of top ‘salary’ executives, speculators and opportunists is to fuel crisis. Undermining community in favour of commodity confuses means and ends.16 As outcomes in the real world depart further from the image of the legitimating ideologies of democracy and liberalism prevailing power relationships are likely to change. The vision of increasing exclusion and public parsimony is confirmed by a recent Central Intelligence Agency description of the USA:

Galbraith, globalism and the good life

209

The onrush of technology largely explains the gradual development of a ‘two-tier labour market’ in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get pay raises, health insurance coverage, and other benefits. The years 1994–97 witnessed moderate gains in real output, low inflation rates, and a drop in unemployment below 6%. Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical costs of an aging population, sizable trade deficits, and stagnation of family income in the lower economic groups. Central Intelligence Agency (1999) Presentiments of the critique we have offered are to be found throughout Galbraith’s work. At many points his observations confirm the concerns which contemporary critics advance in response to the over-globalised conception of economy, polity and society. Thus we review some central tenets of Galbraith and consider them against what is frequently seen as the major development in contemporary capitalism—globalisation.

The continuing centrality of the large corporation At the heart of the Galbraithian industrial system was the large corporation and its most significant function was planning. For this it required autonomy—especially from intervention by external agencies and in particular states, trade unions and capital (the owners). Steered in practice by a ‘technostructure’ of individuals who were in possession of information necessary to successful decision making, with the entrepreneur as figurehead and the management as facilitators, the scale and complexity of the type of corporations dominating this order required a highly articulated system of intelligence collection and diffusion. To assemble and combine the resources necessary for its purposes it required to weld this intelligence to a highly articulated structure which it could direct and maintain or defend. For these purposes it needed the capacity to render its environment as predictable as possible. It had to plan—and, as far as was possible, subvert ‘markets’ by the ‘control of supply, control of demand, provision of capital, minimization of risk…’ (Galbraith, 1967:87–8). All of this Galbraith saw in the U.S. economy. That economy he saw as influential and as exemplifying the future of other economies. Ethnocentricity might well be a justified charge but some of the features of the large corporation transcend specific national location. Galbraith was most persuasive when he was explicating the true nature of capitalist arrangements. Applying the two broad themes of his expose to contemporary circumstance is instructive. Firstly, there is the realist analysis of the genesis, structures and operation of the economic order. And secondly, there is an appreciation of how it has been legitimated by a public philosophy (underpinned by orthodox economics17) which promotes an idealist analysis supportive of the contemporary order. The ‘myths of the market economy’

210

David Donald and Alan Hutton

enshrined in this narrative and its discourse are (he argues convincingly) supported and re-inforced by the ideology and doctrines implicit yet embedded in mainstream economics and its methods. Applying this Galbraithian critique of the second half of the twentieth century to the circumstances of the early twentyfirst century requires little translation. Indeed, certain observations and contentions are rendered more significant by the current climate of ‘globalist’ idealist ideologies. Throughout his work, but particularly in The New Industrial State (1967), the growing valence of the large corporation or firm is asserted. He considers the ways in which the existence and actions of these legally constituted aggregations of interests and power are legitimated and thus tolerated. His insights confirm the observations of others and suggest some highly plausible alternatives to neo-liberal characterisations of both the nature and role of large corporations in the shaping of social outcomes. His image of the nature of the economies in which they operate is also perceptive (especially with regard to the modelling of the market). The scope, scale and organisational arrangements of the contemporary corporation—now less clearly solely dominated by the U.S. variant and more inclined to be more transnational in character—makes it even more Galbraithian. It is highly effective in the pursuit of interest and often openly perceived and acknowledged as a hegenomic force in the contemporary capitalist world. But, we argue, its nature and role are still often misrepresented and understated. Accountability and responsibility for the allocative and distributive power that it exercises (and particularly for the values generated, transmitted and reinforced by these cross-national actors) is a pressing issue. And the question of what is to ‘countervail’ of even more significance.

New formations of corporate capitalism In hindsight it is apparent that, even as Galbraith was writing, other versions of the industrial state were becoming powerful competitors to the might of American manufacturing industrial system. In particular, we can see that, to secure competitive advantage over the U.S. dominance of mass-produced specialist flow line production, other industrial states and their manufactures—and especially the Japanese and the Germans—were evolving systems based on forms of flexible production to create ‘diversified quality’ outputs (Streeck, 1992). At the centre of what Hollingsworth (1997) calls ‘Social Systems of Production’ were large and powerful aggregations of interests. Single large corporations were important but were less autonomous than their American counterparts. Alliances of various kinds were significant. In Japan the keiretsu was a more or less informal grouping of industrial, financial and commercial interest (Gerlach, 1992). It was but one aspect of a set of formal social networks that provided economic articulation and intelligence. In Germany an elaborate social structure linked banks as channels of capital finance in a decision-making structure encompassing firms and to a degree labour, the state and state action supported these arrangements in a complex set of ways. These systems, in their different ways, accommodated more

Galbraith, globalism and the good life

211

effectively to the trading and manufacturing circumstances which economies faced than did their Anglo-American competitors. Consciousness of their effectiveness has been a major stimulant to change in capitalist economies in general. We would do well to consider the forms of alliances and combinations which characterise modern capital. They are the big fish around which the ‘feeder fish’ of small companies cluster. Developments in technology, in particular information and communications technology (ICT) have been written on top of the twentieth century capitalist economy. Galbraith’s technostructure does not disappear in this circumstance: it reforms, becomes more inclusive and more significant Strategic planning becomes, for the large company, of even greater import. And if the market used to end where the firm begins then the nexus of treaties now stretches beyond the firm to cover alliances which further subvert markets as they are represented in the text book.

The Galbraithian ethos and the new globalise predicament We have argued that from his 1938 volume with Henry Dennison onwards (Dennison and Galbraith, 1938) Galbraith has developed a more or less consistent set of themes. In the years since the publication of Modern Competition and Business Policy, capitalism, as practised, has undergone significant changes. But, as the corpus of Galbraith’s work has grown, central elements of his critique remain constant and pertinent. His general approach to change has attractions. He could never be accused of being an idealist revolutionary. His work embodies a spirit of ‘making the best’ of the contemporary political economy. He is reformminded but a self-avowed realist. This is a relatively conservative stance. Accommodation to the least transient aspects of predicament seems a more valid and feasible reaction than the advocacy of comprehensive transformation. It is a particularly attractive approach to the forming of ambitions for those who seek the progressive development of capitalism at the beginning of the twenty-first century. Ameliorative progress seems the most appropriate tactic in a circumstance (as asserted above) where notions of the ineluctability of contemporary socio-economic circumstances and arrangements are widespread and appear to have considerable support. Such notions of ‘predicament’, we have suggested, are woven into the evolving ideology of ‘globalism’ which are essentially liberal, idealist and right wing. In this Alice in Wonderland representation of the world, political accommodation to the re-inforcement of privilege is presented as ‘modernisation’ which in turn is taken as being self-evidently desirable—indeed necessary. The relatively unencumbered advancement of the privileges of the powerful is held to be in the best interests of all. The defences offered against the social disruptions and deprivations incurred are castigated as ‘conservative’. In such a climate the mobilisation of political supports for any change in economic arrangements is particularly difficult—and the reconstituting of systems through major and rapid transformations seems like a remote possibility. In any event, as Galbraith has suggested in recent work, and as we are

212

David Donald and Alan Hutton

willing to concede, aspects of life for some seem enviably good and thus worth defending. There has been progress and there is much that should be conserved. Thus, superficially, contemporary circumstances and the prevailing climate of opinion make any attempt to leverage discontents amongst the powerful—mass or elite—seem an unlikely vehicle with which to change the circumstances of the dispossessed and excluded. A ‘culture of contentment’ (Galbraith, 1993) is still pervasive—but there are increasing signs of uncertainty. The dispossessed seem powerless in the contemporary predicament: they must rely on the charity (uncoerced giving) of the more fortunate. In these circumstances the tactics for change are critical—yet this is perhaps the weakest element of the Galbraithian corpus. A coalition linking ‘people of good will’ and ‘the excluded’ (Galbraith, 1996) seems an improbable foundation on which to base the reformation of contemporary orders. A relatively recent statement of this strategy by Galbraith (written in the mid-nineties) fails to convince: Let there be a coalition of the concerned and the compassionate and those now outside the political system, and for the good society there would be a bright and wholly practical prospect. The affluent would still be affluent, the comfortable still comfortable, but the poor would be part of the political system. Their needs would be heard, as would the other goals of the good society. Aspirants for public office would listen. The votes would be there and would be pursued…the good society fails when democracy fails. With true democracy, the good society would succeed, would even have the aspect of inevitability. Galbraith (1996:143) And yet some aspirations of ‘the new democracy’ may be realistic if combined with other factors. An appeal directed at those who ‘have’—and have the power to defend what they have—to give any substantial element of it away does seem less than likely to succeed. And defending their privileges and assuring them that their current position is protected is a very attractive strategy for office holders. Can government appeal to their better selves? If not how might the ‘true democracy’ desired by Galbraith be induced? One successful tactic for the advancement of change, and necessary condition for the operation of revealing preferences in true democracy, has always been exposure to the experience of the true nature of arrangements. In conjunction with this Galbraithian tactics offer us more hope. Is the new economy sustainable and the current ideology of globalism a credible structure in which to debate the future of humankind? Firstly, it fails to acknowledge the political importance of the forms of exclusion we have noted above. The knowledge economy, with its undoubted benefits, so far includes a small minority of the world’s people and continues to monopolise the vast majority of the world’s resources. Relationships amongst the trading states and emerging blocks of the developed world are far from satisfactory. Balance of payments and currency valuation issues simmer: track wars are not necessarily a thing of the past And as U.S. balance of payments deficits continue

Galbraith, globalism and the good life

213

and British politics begins to reflect growing problems in the face the weak euro and the strong pound middle class interests may be less willing to talk the language of globalism. Domestic reconsideration of this predicament is likely to realign interests and new terms of discourse will be sought to mobilise these new coalitions. The language of nationalism is not dead and industrial, commercial and financial interests are not all congruent Distributional issues are of increasing significance. It may be that the poor and the near-poor can be regulated—2 million Americans in jail are one element in that effort—but discontents are likely to become more widespread. John Gray sees a middle America under stress: America is no longer a bourgeois society. It has become a divided society, in which an anxious majority is wedged between an underclass that has no hope and an overclass that denies any civic obligations. In the United States today the political economy of the free market and the moral economy of bourgeois civilisation have diverged—in all likelihood permanently. Gray (1998:111) And the major interests of the international economy may also be threatened. International finance capital with its rapid ICT mediated flows, its ‘off-shore’ locations in minimally regulated regimes and its random and volatile fluctuations is one of the most characteristic elements of the new economy. For many of those involved the means of money has become the end and the major value extracted is from changes in the prices of capitalism and speculations on these changes as electronic book entries run round the world and buyers and sellers move in and out of financial markets. Values and flows are hard to predict—indeed often random. Yet elements of real production and significant stores of value—from personal pensions to corporation and national reserves—depend upon them. The attractions of playing football with neither rules nor a referee are likely to prove illusory. Business will seek regulation. The business of business requires it. It needs it more than ever in a globalised world. And the true productive output of the world is not digital bits. It is tangible products and tangible services. Electronic information—like money—confers power and enables the command over resources. But it is essentially a means. ‘In this model do the workers eat?’ a famous critical economist is reported to have asked of a tyro model builder. So what of consumption and effective demand? Can great corporations or small companies exist without customers for their products? And allusions to ‘over capacity’ in major industries seem to be somewhat at odds with an under-developed world on the one hand and underinvestment and ‘scarce resources’ in infrastructure, education, health, provision for the elderly and other desirable goods and services in the developed world. In a recent contribution Manuel Castells identifies these pressures: the dangers of implosion of global financial markets; the stagnation caused by relative shrinkage of solvent demand in proportion to the extraordinary productive capacity created by technological innovation,

214

David Donald and Alan Hutton

organisational networking, and mobilisation of capital resources; the social, cultural, and political rejection by large numbers of people around the world of an Automaton whose logic either ignores or devalues their humanity. Castells (2000:67) It is our contention that the emergence of demands for new policies (including new institutions) is inevitable and that ‘new policies create new politics’ (Schattschneider, 1960).18 A central aspect of this new politics is likely to be a challenge to the current ideological discourse of ‘Globalism’. This presents new opportunities for progressive politics and the work of Galbraith provides some guidance. In pursuit of order and the restoration of political community the consideration of the large corporation and the ‘new technostructure’ is highly significant. In a Galbraithian spirit realist analysis which attacks the idealist legitimating ideologies must encompass the new dimensions and refrain from producing alternative idealist solutions. That spirit is abroad: Sceptics about globalisation are right to point to the ideological role of these fantasies. They reinforce the belief that national governments nowadays have no real options. (But l)ike the hyperglobalizers, whose Utopian fantasies they effectively criticise, globalisation sceptics are trading in illusions. They cannot accept that globalisation has made the world economy today radically different from any international economy that has existed in the past… Gray (1998:64, 67) The fight back is on.19 We must live with capitalism but that brings the need to analyse it honestly and bend it to human and humane purposes. A challenge to the harsh discourse of ‘there is no alternative’ globalism with its baggage of neo-liberal presumptions (e.g. see Keaney and Donald, 2000) is required. In particular the ‘educational estate’ must be defended and the power of ICT used both to that end and to promote a deliberative democracy. Plutocracy must be resisted. And not simply for moral reasons but for quite practical purposes. Galbraith has continuously contributed to those ends and it is fitting to conclude with a quotation from him which is a reminder and a warning: And let us be fully aware of another circumstance: the survival of the modern market system was, in large measure, our accomplishment. It would not have so survived had it not been for the efforts of the social left Capitalism in its original form was an insufferably cruel thing. Only with trade unions, pensions for the old, compensation for the unemployed, public health care, lower cost housing, a safety net for the unfortunate and the deprived and public action to mitigate capitalism’s commitment to boom and slump did it become socially and politically acceptable. Let us

Galbraith, globalism and the good life

215

not be reticent: we are the traditions of a political tradition that saved classical capitalism from itself. Galbraith (1997:5) The challenge is to rehabilitate the humane values of the good life in changed circumstances. The potential is for the creation of world which allows for greater human fulfilment than ever in the past. To that end the work of John Kenneth Galbraith exposes past failings but is essentially optimistic.

Notes 1.

2.

3.

4.

5.

6.

Of course, he was not alone in taking this stance. A range of radical critics, notably but far from exclusively Marxists, observed (and continue to observe) similar features of the economic world and challenged standard interpretations. Galbraith used the ‘best case’ arena of the defence industry to pursue these issues but makes allusions to a range of other economic arenas where his contentions apply. We cannot pursue the notion of ideology within this short chapter. But we view the notion less as an articulated and consistent belief system held by individuals but shared by others and more as a discourse. ‘…a shared vocabulary, figures of speech, standards of argument, criteria of coherence and verification, a certain range of assumptions and problems, and so on… A discourse is not located in people’s minds; it is a set of linguistic events and the conventions they embody, which exist in a social space shared by the members of the ideological community’ (Schull, 1992:731). Among the useful sources to chart the main elements of this ideological agenda are the reports on the Lisbon Summit of the European Union in March, 2000 (the so-called dot.com Summit). For example, see Crooks (2000). Indeed ‘professions’ and ‘universities’ with their notions of self-governance and peer group accountability do not sit well with notions of ‘management’ and have been the target of ‘modernisers’. This awakens many old controversies relating to accountability, responsibility and the ethics of public and professional groups. As models of business behaviour are celebrated and promulgated, issues of regulation and the control of greed, avarice and the abuse of power re-emerge in these ‘membership’ organisations where professional socialisation has been a major element of accountability. See Simon (1947: Chap. 3) and his discussion of Brady (1943), Gordon (1945), and Ruml (1945). See also Ruml (1943). There is some irony in this ‘globalist’ version of affairs. The Galbraithian image of the economy was not well received by the fathers of neo-liberalism when it was presented to them. Their own history now suggests that

216

7. 8.

9. 10.

11.

12. 13.

14.

15.

16. 17.

18.

David Donald and Alan Hutton

restructuring and restoration of liberal values was necessary to reform a regime which seems remarkably like the New Industrial State. For reviews of two rather different approaches to alternative accounts of Japanese success, see Donald (1998a, 1998b). As Hodgson (1999:12) points out in its abstraction, universalism and insensitivity to real institutional forms ‘mainstream economics really is the economics of nowhere’ (emphasis in original). Order is usually viewed as necessary for economic processes and accumulation. Paradoxically liberals most frequently adopt mechanical analogies and stress voluntarism and rationality and yet warn of the perils of ‘intervention’ in the ‘natural’ (mystical) balance of the system. Conservatives who incline to organic analogies are more prone to pragmatic, common sense human action to preserve cultures which they present as evolved rather than designed. To preserve the desirable features of the plant one must ‘culture’ it. ‘Natural’ growth leaves many hostages to fortune. In his introduction to the new edition of The Affluent Society Galbraith confesses that he underestimated the likely growth of poverty and inequality and the strength of its legitimation in America (Galbraith, 1999). John Gray (1998) contends that democracy and free markets are competitors not partners. This raises one of the anomalies referred to in the previous note. A paradox of practice is that policy on poverty, disability and unemployment has followed the tradition of ‘welfare to work’ and thus ‘outdoor relief, owing more to Speenhamland than to its amendment. Employers are subsidised. Education and training are paraded as the vehicle for inclusion: but as Galbraith (1996) points out this formula can only succeed when circumstances have created jobs. Here is another paradox of liberal rhetoric. In suggesting that ‘there is no alternative’, that we must ‘go with the flow’ it nevertheless centres its claim to legitimacy on notions of consent and volition. According to liberals we find ourselves where we are by virtue, if not entirely of our choices, at least of our acquiescence. Us being where we are then allows them to claim implied consent. We have developed a number of these points more fully in Donald and Hutton (1995, 1998). It is instructive to consider the gulf between the economic world of the economics textbook and the business world of the management science textbook. Elsewhere we allude to Schattschneider (1960) in our pursuit of the paradox of the ‘unencumbered firm’—that deregulation and privatisation create a ‘new politics of the firm’ (Donald and Hutton, 1998). His notion of the ‘contagion of conflict’ and his observations on conditions for the realignment of interests and politics of the mobilisation of bias all seem

Galbraith, globalism and the good life

217

highly relevant to the ‘On the Edge’ (Hutton and Giddens, 2000) circumstances of the world of the early twenty-first century. 19. Publications which re-assess the ‘global laissez faire’ agenda begin to multiply. For example, see Giddens and Hutton (2000), Gray (1998), Boyer and Drache (1996).

References Boyer, Robert, and Daniel Drache, eds (1996) States and Markets: The Limits of Globalization, London and New York: Routledge. Brady, Robert A. (1943) Business as a System of Power, New York: Columbia University Press. Castells, Manuel (2000) ‘Information technology and global capitalism’, in Will Hutton and Anthony Giddens, eds, On the Edge: Living with Global Capitalism, London: Jonathan Cape, pp 52–74. Central Intelligence Agency (1999) CIA World Factbook 1999: USA, Economy, http://www. odci.gov/cia/publications/factbook/us.html. Crooks, Ed (2000) ‘Target dates lend weight to aspirations’, Financial Times, 25–26 March. Dennison, Henry S., and John Kenneth Galbraith (1938) Modern Competition and Business Policy, New York: Oxford University Press. Donald, David (1998a) ‘Japan: Who governs? The rise of the developmental state— Chalmers Johnson’, Economic Journal 108, 448:899–902. —(1998b) ‘The Japanese Civil Service and economic development catalysts of change— H.K.Kim, M.Muramatsu, andT.J.Pempel’, Economic Journal 108, 448:899–902. Donald, David, and Alan Hutton (1995) Participation and Hierarchy in Firms and Other Organisations: A Communitarian Opportunity. Papers in Comparative Political Economy, Glasgow: Policy Analysis Research Unit, Glasgow Caledonian University. —(1998) ‘Public purpose and private ownership: some implications of the ‘Great Capitalist Restoration’ for the politicization of private sector firms in Britain’, Journal of Economic Issues 32, 2:457–464. Financial Times (2000) ‘A corporate plan for Europe Inc.’, 25–26 March. Galbraith, John Kenneth (1967) The New Industrial State, Boston: Houghton Mifflin. —(1974) Economics and the Public Purpose, London: Deutsch. —(1993) The Culture of Contentment, London: Penguin. —(1996) The Good Society: The Humane Agenda, London: Sinclair-Stevenson. —(1997) ‘Preface’, in Special Issue: Globalisation and the politics of resistance, New Political Economy 2, 1:5–9. —(1999) The Affluent Society, London: Penguin. Gerlach, Michael L. (1992) Alliance Capitalism: The Social Organization of Japanese Business, Berkeley and Los Angeles: University of California Press. Giddens, Anthony, and Will Hutton (2000) ‘Fighting back’, in Will Hutton and Anthony Giddens, eds, On the Edge: Living with Global Capitalism, London: Jonathan Cape, pp 213–223. Gordon, Robert Aaron (1945) Business Leadership in the Large Corporation, Washington, DC: Brookings Institution. Gray, John (1998) False Dawn: The Delusions of Global Capitalism, London: Granta Books. Hodgson, Geoffrey M. (1999) Economics and Utopia: Why the Learning Economy is Not the End of History, London and New York: Routledge. Hollingsworth, J.Rogers (1997) ‘Continuities and changes in social systems of production: The Cases of Japan, Germany, and the United States’, in J.Rogers Hollingsworth and

218

David Donald and Alan Hutton

Robert Boyer, eds, Contemporary Capitalism: The Embeddedness of Institutions, Cambridge: Cambridge University Press, pp. 265–310. Hutton, Will, and Anthony Giddens, eds (2000) On the Edge: Living with Global Capitalism, London: Jonathan Cape. Keaney, Michael, and David Donald (2000) ‘Time for democracy: a radical perspective on the nature and purpose of social inquiry’, Glasgow: Glasgow Caledonian University (mimeo). Polanyi, Karl (1957) The Great Transformation, Boston: Beacon Press. Ruml, Beardsley (1943) Government, Business and Values, New York and London: Harper & Brothers. —(1945) Tomorrow’s Business, New York: Farrar & Rinehart Schattschneider, Elmer Eric (1960) The Semisovereign People; A Realist’s View of Democracy in America, New York: Holt Rinehart and Winston. Schull, Joseph (1992) ‘What is ideology? Theoretical problems and lessons from Soviettype societies’, Political Studies 40, 4:728–741. Sen, Amartya K. (1998) ‘Mortality as an indicator of economic success and failure’, Economic Journal 108, 446:1–25. Simon, Herbert A. (1947) Administrative Behavior: A Study of the Decision-Making Process in Administrative Organization, New York: Macmillan. Streeck, Wolfgang (1992) Social Institutions and Economic Performance: Studies of Industrial Relations in Advanced Capitalist Economies, London: Sage.

12

The New Deal and ‘domesticated Keynesianism’ in America Roger J.Sandilands

John Kenneth Galbraith has held up the ‘almost unique unreadability’ and ‘fascinating obscurity’ of much of John Maynard Keynes’s General Theory of Employment, Interest and Money as a major reason for its success. It created a need for translators and proselytizers to explain its deep meaning to government officials, students and the public at large; and ‘as with the Bible and Marx, obscurity stimulated abstract debate’ (Galbraith, 1971:44). Unlike much of the preceding theoretical literature on depression economics, Keynes’s General Theory was not a theory of the business cycle but rather a theory of the chronic tendency of the free-enterprise economy to depart from full employment, with no automatic tendency, under realistic institutional assumptions, to return to full employment. It is a general theory of disequilibrium or, rather, it explains why there is a multiplicity of possible equilibria, most of them suboptimal, and each one prone to unpredictable shift through the vagaries of businessmen’s ‘animal spirits’. It called for the visible hand of government to supplement the invisible hand of the market Though a difficult book, Keynes’s General Theory is a model of clarity compared with modern ‘general equilibrium theory’ that purports to explain how ‘free’, fully flexible markets unencumbered by government may keep the economy close to a unique, optimal full-employment equilibrium. Perhaps for this reason exegesis of the latter now easily displaces Keynesian theory in prestige and classroom time. Where does this leave Galbraith? His vision of the proper role of government is to sustain not merely high and rising levels of output and employment but a ‘better’ composition of that output between private consumption and public investment, and to ensure that it be equitably distributed among social classes. In this sense he is an unreconstructed New Dealer Mark I and Mark II. The former embraces theVeblenian activism of the early (Mark I) New Deal, 1933–36, with its focus on the countervailing power of the state to tackle abuses of monopoly and monopsony. The latter (Mark II) New Deal followed hard on the shock of the 1937–38 recession (after several years of sustained recovery). This galvanised support for ‘Keynesian’ fiscal activism against the orthodox view that an economy cannot be in balance unless the government’s budget is also in balance. Galbraith’s own transparent style leaves less scope for the army of professional interpreters and obscurantists that has sustained and formalized Keynesianism 219

220

Roger J.Sandilands

and anti-Keynesianism. Furthermore, discussion of power relations, the ethics of advertising, and judgments on the respective value of bullets, butter and ballet— other than as revealed in their market price—smacks too much of elitism and too little of formal science to be safe subjects for economics classes or journals. But Galbraith can look back with satisfaction at the impact he has had on the economic, political, social and cultural life of our world through his fearless iconoclasm. He has stood out as an inter-disciplinarian who, in the rich American institutionalist tradition, has not shirked a duty, as scientist and citizen, to engage in the great issues of our times and expound his view of democracy and the social interest.1 For this his books are read with profit by a wide public audience and, somewhat furtively and uncomfortably, by many academic economists too. Few economists are entirely content with the increasing formalism and abstraction of our discipline, and a weekend with Galbraith offers escape from unreality Never was there a greater need to question orthodoxy than when Galbraith was starting out as a student of economics in the early 1930s. Some of Galbraith’s recollections of these years are recorded in his interview with David Colander and Harry Landreth in The Coming ofKeynesianism to America (1996) and in his autobiography, A Life in Our Times (1981). As a Ph. D. student at Berkeley, 1931– 34, he was fed the mainstream view that the Depression was an exceptionally severe manifestation of the business cycle, that it would correct itself in time, and that activist government policy, especially a deliberate unbalancing of the budget, would be unsound, even immoral.2 But other voices did intrude. He read Veblen who held that business was chronically repressed by the type of control exercised by profit-minded managers rather than technically minded engineers. He was also introduced to pre-General Theory Keynes. And there was the view that Depression was caused by the monopolistic practices of Big Business and should be tackled through more vigorous enforcement of anti-trust laws and a restructuring of the business corporation. Armed with his Ph. D. and a dissertation on the economics of bee-keeping Galbraith found a summer job in Howard Tolley’s office at the Agricultural Adjustment Administration, an emergency New Deal agency within the Department of Agriculture under Henry Wallace. His work involved advice, unfortunately largely unheeded, on how tax-reverted land could usefully be kept in the public domain. In the autumn of 1934 he entered Harvard as an instructor in agricultural economics under John D.Black’s direction but retained his links with the Department of Agriculture, a regular commuter between Boston and Washington. As recounted by Galbraith, in the summer of 1936 he was hired by the unorthodox businessman, Henry Dennison, to help with the manuscript of a book on the causes of the Depression. Dennison held that depression was caused by the non-spending of income. Galbraith held that it was due to the prevalence of Chamberlinian monopolistic competition that was restricting output and raising prices, Dennison was told that his ideas were unsound. No reputable economist would endorse them. Shortly thereafter, Keynes’s General Theory fell into Galbraith’s hands. To his consternation Galbraith realised that Dennison

The New Deal and ‘domesticated Keynesianism’ in America

221

had an ally in the greatest of modern economists. His task then was to restore Dennison’s dented self-confidence. Dennison went on to serve as an adviser to the National Resources Planning Board in 1938. ‘By the autumn of 1936’, wrote Galbraith (1981:67), ‘Keynes had reached Harvard with tidal force’. A majority of the prominent American Keynesians interviewed by Colander and Landreth were connected with Harvard at that time or slightly later. Three of them—Robert Bryce, Lorie Tarshis and Walter Salant— had spent some time in Cambridge, England where they had attended Keynes’s lectures on a Monetary Theory of Production, which became the General Theory. On their arrival at Harvard (or, in Tarshis’s case, to nearby Tufts) in 1935 they organized an informal seminar series on Keynes’s economics for graduate students and younger faculty (including Galbraith). Paul Sweezy was a prominent member. He had taken his B. A. at Harvard (1932) and then spent a year at the London School of Economics (LSE) before returning to Harvard. Sweezy and Walter Salant had both studied Keynes, Dennis Robertson and Ralph Hawtrey’s views on money and the cycle in John Williams’s popular class in Money and Banking. Williams’s assistant was Lauchlin Currie, and his students included Sweezy, Walter and William Salant, Emile Despres, Albert Hart, Martin Krost and Moses Abramovitz, all of whom were to play a role in New Deal and/or wartime Washington. Paul Sweezy’s older brother Alan, a history major, had been to Cambridge on a fellowship and on his return to Harvard in the early 1930s began graduate work in economics. Later he recalled that Currie had already been advocating expansionary monetary and fiscal policies in his writing and teaching as an economics instructor at Harvard before coming to Washington in the summer of 1934… Like Keynes, Currie was impatient with the negative attitude of so many of his professional colleagues. Early in 1934 he persuaded five of us who were then instructors in economics at Harvard to join him in sending an open letter to President Roosevelt endorsing the main features of the New Deal recovery program. Sweezy (1972:117) This letter coincided with the publication of The Economics of the Recovery Program (Brown et al., 1934) that several of Harvard’s senior faculty, the ‘Seven Wise Men’, had put together and which offered no support for Roosevelt’s policies. This may explain why Currie’s letter stated that ‘we wish to single out for special commendation that which has received more criticism perhaps than any other at the hands of our professional colleagues—namely, your monetary policy’. The letter praised the departure from the gold standard as essential for Roosevelt’s expansionist policies—‘one of the rare occasions since the war when a government both foresaw danger and took action to avoid it’—and warmly supported the policy of increased government expenditures. Unsurprisingly, none of the signatories received tenure. The chairman of the department, Harold Burbank, had already sharply reprimanded Currie for straying into the field of fiscal policy

222

Roger J.Sandilands

in his classes on money and banking. When Treasury Secretary Henry Morgenthau Jr requested that Harvard extend Currie’s summer leave of absence to become Jacob Viner’s assistant, the request was refused. Galbraith describes the fuss when Alan Sweezy and Raymond Walsh (both signatories of the 1934 letter to Roosevelt) were singled out for termination in 1937. One of their main rivals was Seymour Harris. Paul Samuelson recalls (Colander and Landreth, 1996:155) that when he asked his Chicago professors in 1935 which graduate school he should attend, he was warned by Lloyd Mints that at Harvard Seymour Harris was an inflationist. ‘This is interesting’, said Samuelson, ‘because if you read The Economics of the Recovery Program, 1934, you’ll see that Harris, not yet having tenure at Harvard and still under the influence of Harold Hitchings Burbank, is a stout reactionary. Lloyd Mints must have had some keen sense of smell, because after Harris did get tenure he became a flaming Keynesian’. Currie later remarked sourly that he converted only when it was safe to do so. As Galbraith (1977:220) put it: ‘In economics one should not be right too soon. The shrewd scholar always waits until the parade is passing his door and then steps bravely out in front of the band.’ When Galbraith was seeking tenure in 1939 he was interviewed for a post at Princeton, confident this would be a catalyst to promotion at Harvard. Instead, at dinner in the home of the chairman of the Princeton economics department he was handed a telegram from Burbank. It stated that he had just come from a meeting with president James Bryant Conant; that his Harvard prospects were very dim; and that he would be advised to take any post that was offered by Princeton. Returning to Paul Sweezy’s role in what Galbraith has described as the coming of Keynes to America by way of Harvard (and, as we shall see, by way of the Federal Reserve Board also), it should be noted that despite his exposure to John Williams’s undergraduate class he had been more heavily influenced by Gottfreid Haberler. Thus when he arrived at the LSE in 1932 he was initially very impressed (as was his friend Abba Lerner) by the Austrian theory as expounded by Hayek and Robbins. But the LSE radicalised him. On his return to Harvard in 1933 he had Joseph Schumpeter as his supervisor and was his teaching assistant from 1935 to 1937. Though Schumpeter was intensely jealous of Keynes and abhorred Marxism, Sweezy was receptive to the activist Keynesian message that Robert Bryce brought over from Cambridge in 1935, as well as to the Marxist theory for which he would later be a famous exponent. His close friend Richard Goodwin claimed (Sandilands, 1990:26–27) that he and Sweezy (both from banking families) were the models for Schumpeter’s prognosis, in the famous ‘crumbling walls’ chapter in Capitalism, Socialism and Democracy (1943): that capitalism was (regrettably) doomed because the sons of the bankers and entrepreneurs upon whom the system depended, would, while enjoying the comfort and security their fathers had provided, be rebels seeking different challenges. Capitalism would be a victim of its own success. But a simpler explanation for the embrace of socialism during the 1930s, in Harvard, in Cambridge, England and elsewhere (notably at Berkeley, Galbraith’s other alma mater3), was not the success but the very evident breakdown of the

The New Deal and ‘domesticated Keynesianism’ in America

223

free enterprise capitalist system, the misery caused by that breakdown, its pervasiveness and persistence, and the absence of convincing explanations and solutions from the economics establishment. At Harvard the Austrian School was powerfully represented by Haberler and Schumpeter. Schumpeter had been the Austrian finance minister at a time of hyperinflation. Perhaps chastened by that experience he now sided with Hayek and Robbins in the ‘neutral money’ doctrine that welcomed declining prices as a reflection of rising productivity. The exceptional deflation of 1929–33 (when the general price index fell by around 25 percent) was held mainly to reflect and compensate for the irresponsibly inflationist policies of the ‘roaring’ 1920s. These had produced misleading price signals that encouraged excessive, speculative investments and associated ‘maladjustments’. Deflation was a necessary, unavoidable purgative. Some relief, however, might be afforded by greater wage flexibility. Galbraith has remarked that Schumpeter’s ‘political and business misfortunes had left him with a deep distaste for practical affairs, and he condemned as intellectually debased economists who presumed to advise on practical questions’.4 Lauchlin Currie, who was also Schumpeter’s assistant in the early 1930s, recalls that he did once put his theories into practice: believing in wage flexibility as a cure for depression he supported Harvard’s decision to cut the wages of the support staff. Professors’ salaries were not altered and as prices fell Schumpeter enjoyed a rising real income. This accorded with his pronouncement that ‘a gentleman cannot live on less than $50,000 a year’ (Sandilands, 1990:25–6). Currie was later to play a leading role in bringing Galbraith back to Washington. First, in 1938, as chief technician on the fiscal and monetary committee of the National Resources Committee under Frederic A.Delano (with Galbraith’s old friend Henry Dennison also on the board), Currie arranged for Galbraith to direct a large review (with Griff Johnson, an assistant of Currie’s at the Federal Reserve Board) of the impact of public works expenditures from the early days of the New Deal to the present (Galbraith, 1975:230). This meant that Galbraith could again commute between Washington and Harvard where Keynes’s General Theory was now the centre of attention. In 1937 Alvin Hansen had been appointed to a chair at Harvard. Though he had previously been highly sceptical, by 1938 he had revised his opinion of the General Theory and became one of its most vigorous champions. Galbraith and a galaxy of bright students and eminent visitors from Washington attended the famous fiscal policy seminar that Hansen had organized with John Williams, and it was now in full swing (Salant, 1998). From this seminar group Currie recruited not only Galbraith but also Richard V.Gilbert, George Jaszi and Emile Despres for work in Washington.5 In fact Currie was soon running a one-man recruitment agency for Keynesian economists from the White House, having been appointed as a Roosevelt aide in June 1939 after five years as assistant to Marriner Eccles at the Federal Reserve. In a session at the 1971 American Economic Association meetings organised by Galbraith (the Association’s president that year), Currie (1972:141) recorded:

224

Roger J.Sandilands

By 1939 I had become the first economist in the White House and we were becoming a formidable group. I had recruited Dick Gilbert and his group— V.L.Bassie, Rod Riley and the rest—for Harry Hopkins at Commerce, which gave support to Bob Nathan, long a lone outpost in hostile territory. I had turned my post at the Federal Reserve over to Emile Despres. I was, I am happy to say, responsible for bringing Ken Galbraith to Washington and for getting Gerhard Colm placed in the Bureau of the Budget, now moved to the Executive Office of the President Waiter and Bill Salant, Griff Johnson, Alan Sweezy, Arthur Gayer, Malcolm Bryan, George Eddy, Albert Hart and Martin Krost were my former students or associates and were occupying key posts. Our position in the Treasury was getting stronger as Harry White [Currie’s Harvard classmate6] gained influence, and we had close working relations with Gardiner Means and Tom Blaisdell in the NRPB and the members of the Board, and with [Mordecai] Ezekiel and Louis Bean in Agriculture, with Isador Lubin in Labor and, of course, with Leon Henderson and Jerome Frank in the SEC. Hansen was winning converts outside. We didn’t sleep much, but when we did, the General Theory kept working. With the Works Financing Act of 1939 and our long discussions on a major revision of the Social Security System, Roosevelt finally acquired a firm grasp of the theory. I think, therefore, that even if the war had not intervened, victory was assured. The second occasion on which Currie recruited Galbraith for work in Washington was in the summer of 1940, a few days after the fall of France. Leon Henderson had just been placed in charge of prices in the National Defence Advisory Commission, but was more prominent as a trust-busting (‘Mark I’) than a Keynesian (‘Mark II’) New Dealer. Currie wanted a reliable disciple to be on hand. Galbraith fitted the bill and went on to assume wartime responsibility for price control. Currie had been impressed by the work of Galbraith and Griff Johnson for the National Resources Committee on the impact of public works expenditure. Their eventual report (published late 1940) conceded that ‘the view that depressions will correct themselves if left alone is by no means dead’. But they expressed grave doubt that this view was likely to become again the basis of public policy. The tone of the report was unmistakably Keynesian: ‘Unemployed men and materials are the normal or equilibrium situation in the modern economy… [T]he construction of public works, so financed as to offset otherwise idle saving, represents one of the devices for escaping a persistent low level of private investment and a persistently high level of unemployment’ (Galbraith and Johnson, 1940). This was very much in accord with the rationale given by Currie in his draft of the 1939 Works Financing Bill, on behalf of his then boss, the activist chairman of the Federal Reserve Board, Marriner Eccles. The bill was presented to Congress in July by Senator Alben Barkley. It was framed in such a way that a major spending programme would be financed outside of the regular budget

The New Deal and ‘domesticated Keynesianism’ in America

225

This was intended to placate the budget balancers but also to make it possible to conduct some compensatory policy without the need for new legislation and appropriations. It was known as the ‘Lend-Spend Bill’ and met with fierce opposition. Congress saw through the balanced budget ruse and rejected it This showed how strong was the opposition that the Keynesians faced even at this relatively late stage. It confirms that the triumph of Keynesian ideas for policy purposes owed relatively little to the New Deal as compared with the dramatic demonstration effect of the war years: massive expenditures put idle machines and millions of men back to work. There was a huge increase in the production of military equipment, without any cut in the production of consumer goods. All this was achieved with relatively modest inflation, though monetary control remained imperfect. It was also imperfect monetary control that had precipitated the Great Contraction of 1929–33. Galbraith’s acclaimed study of The Great Crash (1972) placed the spotlight on the speculative frenzy leading up to Black Thursday, October 24, 1929, and he has regarded this as the key causal factor and more than just a mirror that provided an image of the underlying economic situation. One can, however, reconcile Galbraith’s diagnosis with the monetary diagnosis made famous by Friedman and Schwartz’s (1963) monumental study—but very similar to the thesis expounded by Currie in his Harvard classes and publications in the early 1930s7—by noting how preoccupied were the monetary authorities with the movement of the stock market in 1929. That is to say, with financial rather than industrial circulation. So much so that as stock prices rose they took their eyes off the real economy, which had begun to turn down quite sharply in the summer of 1929. Interest rates were raised to 6 percent in August Despite the general stampede to buy stocks in the months up to October 24 (little deterred by the high interest rates on margin buying), there was still considerable selectivity, with the prices of more profitable sectors rising faster than others; and the price-earnings ratio (17.1 at its peak) was not exceptional by later standards, for example at the time of the stock market crash in October 1987. The great difference between 1929 and the bursting of subsequent bubbles lies in the response of the monetary and fiscal authorities. The 1929 crash led to mass liquidations and member banks were forced to borrow from the reserve banks as deposits were withdrawn. Over the next two years open market purchases by the Federal authorities were far too modest to replace member banks’ lost reserves, and the banks’ repugnance to indebtedness led them to contract their own lending to the public. They simply used any new reserves to reduce their own debt The fiscal position ‘deteriorated’ too, in the sense that declining business led to declining tax revenues at the same time as modest increases in federal expenditures were made—reluctantly and as emergency humanitarian measures rather than as deliberate, intellectually respectable, counter-cyclical policy. If the authorities had acted with sufficient vigour to relieve bank indebtedness, the experience of similar episodes (such as 1987) suggests that the banks would have been able and willing to maintain their loan portfolio and so prevent the collapse

226

Roger J.Sandilands

of the money supply and spending. In fact the money supply did contract drastically, by about a third between late 1929 and mid-1933. At the same time the perceived loss of financial wealth, following the collapse of stock and real estate prices, had increased the propensity to save as households and businesses attempted to increase their liquid balances. The demand for money (cash plus demand deposits) rose as a percentage of declining income. This measured decline in income velocity aggravated the impact of monetary deflation. Temin (1976) emphasized that in real terms the money supply was rising slightly because prices were falling faster than the money supply during the first two years of Depression. But it makes little sense to regard monetary conditions during this period as ‘easy’ when it was these very declines in prices that were so discouraging to business and that were persuading consumers to delay purchases. The fall in output was accompanied by a fall in incomes, and the adverse income and expectations effect on spending considerably outweighed any positive real balance effect from falling prices or stimulus to investment from the fall in interest rates (nominal terms only). This was evident to Currie from his reading of Keynes’s Treatise on Money and Hawtrey’s monetary theory of the cycle (Hawtrey, 1929, 1932), both of whom drew activist monetary conclusions from the American experience after 1929 (Laidler, 1999:225). Hawtrey in particular believed it possible to arrest and reverse the contraction with monetary policy alone, had it been vigorous enough, but did not eschew fiscal deficits as a vehicle for achieving the requisite expansion of money. Much of this was reflected in Currie’s Harvard Ph. D. thesis (1931) and in his classes as Williams’s assistant. In January 1932 Lauchlin Currie, P.T.Ellsworth and Harry Dexter White wrote a thirty-three page memorandum from Harvard (see note 6) that began by noting that the Depression had already cost the American people more than the Great War and had engendered a loss of confidence in American leadership and American institutions that was becoming more marked as the Depression lengthened. They deplored the failure of the monetary authorities to provide the reserves the banks needed to get out of debt, following the loss of reserves due to a flight into cash. Furthermore, whenever individuals or corporations saved by purchasing bonds or paying off a loan to the banking system their deposits were not re-lent and spent, but were, instead, used to reduce member bank indebtedness (currently $800 million) to the reserve banks. Thus, more and more purchasing power (means of payment in the form of demand deposits) was being wiped out and banks were closing. It was urgent that this purchasing power be put back into the system through a vigorous (billion dollar) open-market purchasing policy.8 They also advocated fiscal deficits. These should be financed by borrowing not from individuals, but from the reserve and other banks, in order to use deposits that have been newly created and not diverted from individuals. In this way a net increase in spending would be achieved, both directly and through secondary and subsequent rounds of spending which ‘would stimulate recovery in other lines in ever widening circles’ They urged the relaxation of gold reserve

The New Deal and ‘domesticated Keynesianism’ in America

227

requirements that were constraining such action at that time. And they urged tariff reductions and devised a plan for the relief of the reparations and interallied debt problem that were depressing world demand. They addressed and dismissed various objections to activist policies: that such measures would interfere with the ‘natural’ operation of market forces; that the Depression should be permitted to run its course because it is the vehicle for the wholesome purging of inefficiency from the industrial system; that deficits would undermine business confidence (the memorandum argued the opposite, because confidence depended on the state of aggregate demand); that deficits would saddle the nation with a burdensome national debt (an argument also dismissed by pointing to the fallacy of treating the debt of a nation in the same way as a debt of an individual); and that monetary expansion and fiscal deficits would be inflationary. The memorandum answered the latter fear thus: It is only after much of the present enormous slack in our economic system has been taken up that the danger of inflation becomes real Before that point is reached, the production of goods and services will have greatly increased. This additional production in answer to an increased demand is just what is wanted; it is the very goal of our economic system. As Keynes has so aptly said, ‘To bring up the bogy of Inflation as an objection to capital expenditures at the present is like warning a patient who is wasting away from emaciation of the dangers of excessive corpulation’ As the Depression persisted and deepened Currie became more and more aware that monetary policy alone could not bring about recovery. The demand for loans by business was at a very low ebb as falling income and expenditure caused inventories of consumer goods to pile up, and as excess capacity made investment spending unnecessary and unprofitable. Banks were no longer in debt but they were now unable to find credit-worthy private sector borrowers, and the federal deficit (and associated issue of new government debt) was too small to compensate. It was imperative that the latter be boosted to get the economy moving again. These ideas later earned Currie a reputation as an early ‘Keynesian’, though his published writings up to 1934 stressed the ‘perverse elasticity’ of the banking system and the pro-cyclical nature of monetary policy (Currie, 1934). As Laidler (1999:243–4) observed: Though Currie’s views on what had caused the depression and what might have been done to offset it during 1929–32 did not change with the passage of time, his opinion on what monetary policy was capable of achieving in dealing with contemporary circumstances did change, and radically so, as the 1930s progressed… After 1934, Currie became a vigorous proponent of income redistribution as a means for bringing about increased consumer expenditure, and of fiscal deficits as a means of providing a ready supply of securities for the banking system to purchase, thereby mobilizing their large and steadily growing stock of excess reserves. The first set of measures

228

Roger J.Sandilands

would in due course become associated with Keynesian economics, and so to a degree would the second, though it is worth noting that Currie’s particular version of the case for deficit finance bore a closer resemblance to the possibility which Hawtrey (1925) had broached, albeit briefly and purely hypothetically, as a means for breaking a credit deadlock that would not succumb to open-market operations, than to anything that Keynes would propose in the 1930s. As Simon Kuznets, Willard King and Morris Copeland’s early estimates of U.S. national income became available, Currie was able to conduct the first estimate of the income velocity of circulation of the nation’s money stock (previous estimates were of the transactions velocity which was much less relevant, indeed misleading, for policy). He was also the first to compute a money supply series, defining money as means of payment—currency plus checkable demand deposits now known as M1). His calculations of the movement in income velocity showed that it rose fairly steadily from 2.82 in 1921 to 3.48 in 1929. It fell thereafter, seriously aggravating the effects of the decline in the money stock.9 Prior to Roosevelt’s inauguration on March 4, 1933, a new crisis developed. The resources of the Reconstruction Finance Corporation, established in 1932, were inadequate to prevent more and more bank failures in the absence of more vigorous open market purchases by the reserve banks. When Roosevelt assumed office in March 1933 he immediately declared a bank holiday. More than 3000 banks never opened their doors again and while their reserves remained frozen yet more of the nation’s money supply, hence monetary expenditure, was extinguished. Thereafter the first phase of Roosevelt’s New Deal began. His original ‘brains trusters’, Rexford Tugwell, Raymond Moley and Adolf Berle of Columbia University, concentrated on the abuses of big business and attempted to curb profiteering through price and quantity regulations, profits taxes, and moves towards comprehensive national planning. The ill-starred National Industrial Recovery Act (NIRA) was signed into law on June 16, 1933 but struck down as unconstitutional in May 1935 by a Supreme Court that had no sympathy for the structuralist measures that the National Recovery Administration (NRA) had been promoting. A positive short-term effect of the NRA was that work-sharing provisions caused nearly two and a half million workers to be re-employed between June and October 1933 (Barber, 1996:4). Other measures included ‘codes of fair competition’ submitted by trade and industrial associations, minimum wage laws, output restrictions and price fixing. Similar schemes in farming were instituted through the Agricultural Adjustment Administration. There were bitter disputes, both inside and outside the administration, between those who favoured price ceilings (to help consumers) versus those who wanted price floors (to help business); and between those who favoured higher wages to help labour versus those who argued that this would raise costs above prices, squeeze profits and hinder recovery.

The New Deal and ‘domesticated Keynesianism’ in America

229

On the macroeconomic front Roosevelt had campaigned in 1932 on a budget-balancing platform but in office pushed hard, on pragmatic and humanitarian grounds, 10 for appropriations for the Works Progress Administration. The NIRA included a peacetime record appropriation of $3.3 billion, to be allocated at the discretion of the WPA administrator. Though a record figure, this was still very modest in relation to need. As Currie (1978:545) later remarked, ‘It took too little to keep people alive’; and Barber (1996:37) remarked that ‘Honest’ Harold Ickes, the WPA administrator, ‘stood firm against authorizing projects before their long-run social utility had been clearly demonstrated. These qualities were not well calculated to produce timely action. Ickes’s posture, however, was congenial to a president who was then not persuaded that public works spending could be a pump primer and who stood for budget balancing in the normal operations of government’. The Budget Director, Lewis W. Douglas, emphasized that these expenditures were of an extraordinary and emergency character and that the administration’s commitment to budget-balancing would not be compromised. And he insisted that soundness required new revenues, from taxes on business, to cover the service charges ($220 million per year) on the debt issued to finance the public works programme. The ubiquitous Yale monetary theorist Irving Fisher proposed a self-liquidating ‘stamped scrip issue’ to finance the annual service charges, but his proposal was rejected. Fisher was no fan of public works as a re-employment device. He preferred to see the private sector creating jobs, and believed this could be accomplished via monetary stimuli to counteract ‘debt deflation’ (the burden on debtors as prices fell) that he thought was at the root of the Depression. He was one of the voices, along with Cornell agricultural economist George Warren, who had argued for a rise in the price of gold through a gold purchase programme. This was implemented between September 1933 and January 1934 and the price of gold rose from $29 to $35 an ounce. The aim was to increase the money supply and so raise commodity prices to their pre-Depression levels. However, despite strong monetary growth over the next four years (further boosted by flight of gold from a troubled Europe to a haven in the United States) prices recovered relatively little (from an index of 75 in 1933 to about 83 in 1937, with 1929=100). Galbraith (1975:210–1) remarked that another of Warren’s aims was that by manipulating the gold price he believed that a great deal of other public and reformist action, including most of the New Deal farm program, could be avoided. He was one of the first in a long line of monetary reformers extending to Professor Milton Friedman…who have hoped that their changes would make other and more comprehensive government action unnecessary. They are monetary radicals because they are political conservatives. The same is probably true of Irving Fisher.

230

Roger J.Sandilands

As Barber (1996:50) has observed: The designs of both the structuralists and the monetarists shared a price orientation in their diagnoses of and prescriptions for the economy’s ills. The structuralists were preoccupied with price behavior in specific sectors: Thus, AAA’s policies sought to raise the prices of farm outputs deemed to be ‘basic’, and the NRA codes sought to stabilize the prices of manufactured goods and to banish ‘destructive’ price wars. The gold purchase program, on the other hand, was intended to raise the general price level. There was much tension between the supporters of these two strands of the early New Deal, but neither was ‘Keynesian’ in the sense of offering a coherent intellectual (as opposed to humanitarian) rationale for deficit spending to maintain the flow of aggregate demand at the full employment potential level of output. The structuralists were pre-occupied with relative prices to achieve full employment through allocative efficiency; the monetarists thought all this could best be achieved through the stabilisation of the general price level at its preDepression level. However, by the time Roosevelt had assumed office it had become clear to some that though monetary policy (and traditional monetary theory) may be relevant in normal times and normal cycles, the times now were far from normal. Monetary measures alone would therefore now have very weak effects. From the end of 1933 the expansion of money coincided with a big increase in commercial banks’ holdings of reserves in excess of their legal requirements. They were scarred by the wave of bank failures and were also experiencing difficulty finding credit-worthy customers in the depressed private sector. Interest rates were falling to unprecedentedly low levels. Faced with what Ralph Hawtrey had diagnosed as a rare ‘credit deadlock’— what Keynesians refer to as a ‘liquidity trap’11—the most articulate champions of deficit finance were to emerge from a surprising quarter. Galbraith (1971:48) has remarked that ‘Not often have important new ideas entered a government by way of its central bank. There is not the slightest indication that it will ever happen again’. In June 1934 Eugene Black resigned as governor of the Federal Reserve Board and President Roosevelt was looking for a successor. Earlier in 1934 Marriner S.Eccles, an unorthodox millionaire Mormon banker from Utah had joined the U.S. Treasury as an adviser to the newly appointed Treasury Secretary Henry Morgenthau Jr. On the urging of Rexford Tugwell and other leading members of the Roosevelt administration who were impressed by Eccles’s bold advocacy of deficit spending, Morgenthau was persuaded, against his own conservative instincts and despite the evident clash of personalities that was to worsen over the years, to appoint him as a special adviser in the re-organisation of the Treasury Department. Most bankers shared Morgenthau’s strong commitment to ‘fiscal responsibility’ without which, they claimed, there could be no business confidence, hence no recovery. Eccles challenged these nostrums. Though untrained in economics he was a very successful practical banker and

The New Deal and ‘domesticated Keynesianism’ in America

231

businessman who took pride in the fact that none of his bank’s depositors had lost a cent, despite the wave of failures affecting other banks in the early 1930s.12 At the Treasury he met and teamed up with Lauchlin Currie who was at that time preparing a report for Jacob Viner. His remit was to devise ‘the most perfect monetary system for the United States’ without immediate attention to political considerations. He developed a 100% reserve plan that would enhance monetary control by insulating the nation’s supply of money from the lending of money, from shifts between cash and deposits, and from the holding of excess reserves (Phillips, 1995, Chap. 8). When Eccles met Roosevelt in November to discuss the terms on which he might become head of the Federal Reserve, he took with him a memorandum prepared by Currie that outlined desirable reforms of the system. Roosevelt promised his support and Eccles began his long tenure at the Fed, taking Currie with him. He immediately drafted legislation to strengthen the powers of the Fed to conduct discretionary counter-cyclical open market operations and to vary reserve requirements (but stopping well short of the 100% reserve plan), with a shift in the locus of control from New York to Washington to create a central bank for the first time in U.S. history. There was fierce opposition to the new banking bill from those who still believed that the primary duty of a central bank was to monitor the quality of bank credit (loans)—the pro-cyclical real bills approach to monetary policy favoured by Senator Carter Glass, the father of the 1913 Federal Reserve Act— rather than the quantity of money (means of payment). In his testimony to the House Banking Committee in February 1935 Eccles nonetheless expressed his view that at that time recovery depended not on monetary policy per se but on fiscal deficits financed by government borrowing. An activation of idle balances was required rather than an expansion of money, since the latter would merely create more excess reserves and store up a potentially excessive expansion of loans and money at a future date. Monetary policy was asymmetric; it being easier to stop an expansion than to end a severe contraction. So long as there was an unwillingness to borrow, monetary expansion would be ‘like pushing on a string’. This was a much-quoted phrase first introduced by Congressman Goldsborough in support of Eccles, echoing Hawtrey’s concept of a ‘monetary deadlock’ and anticipating Keynes’s ‘liquidity trap’. Eccles himself, however, was more influenced by the under-consumptionist thinking of William Foster and Waddill Catchings (with its emphasis on income distribution and the low purchasing power of workers) than of Keynes whom he had never read except in small extracts (Eccles, 1951:132). He relied on Currie to draft his more formal speeches in defence of the ‘Keynesian’ polices he had thought through for himself on somewhat different grounds. Senator Carter Glass fought hard and long in the Senate to block the new legislation (details are in Meltzer, 2000: Chap. 6). As Barber (1996:94–5) writes: In the end, Eccles got the essentials of what he wanted, but not without a fight. Professional opinion among economists and alleged monetary ‘experts’ was sharply divided about the merits of the bill. James P.Warburg,

232

Roger J.Sandilands

a New York banker and sometime consultant to the administration in 1933, was out-spokenly hostile. He rejected the theory underlying the structure of the bill, which he characterised as Curried Keynes, ‘for it is in fact a halfcooked lump of J.Maynard Keynes—the well-known British economist whose theories find more support in this country than in his own—liberally seasoned with a sauce prepared by Prof. Laughlin [sic] Currie’. During the turbulent months during which the Banking Act, signed in August 1935, was passing through Congress the economy was beginning to recover from the depths of the Depression. But there was a long way to go before output and employment could recover their 1928–29 levels. A combination of shell-shock from earlier failures and sluggish demand for loans meant that banks were accumulating substantial excess reserves rather than seeking potential investors as gold flowed in from Europe. Interest rates were at historically very low levels and since there were still fears that inflation could resume (prices rose by 8% in 1936), with nominal interest rates following suit, it was understandable (even before Keynes presented his formal analysis of the ‘speculative motive’ for holding idle balances) that banks would be reluctant to exploit their full ability to increase their earning assets. 13 Under these circumstances Eccles and Currie realised that greater emphasis would need to be placed on measures to stimulate public and private spending through direct fiscal means, even though this meant a turf war with the Treasury and repeated clashes with Secretary Morgenthau whose main prescription for recovery was ‘to boost confidence’ by balancing the budget. The power given by the 1935 Banking Act to vary reserve requirements was to prove highly controversial. As excess reserves piled up there was widespread anxiety (shared by John H.Williams, Lauchlin Currie, Irving Fisher and others) that as the economy continued to recover there would be an increase in loan demand, interest rates would pick up from the current floor, and banks would be able to expand deposits without check.14 The required reserve ratio was increased by 50 percent in August 1936. This reduced excess reserves by $1.5 billion, but this still left nearly $2 billion excess. There was no adverse effect on interest rates, money supply continued to increase, and the economy continued its upward course.15 But there were worrying developments arising from a growing tendency to mark up commodity prices following increased unionisation and associated wage increases. Wholesale prices rose by about 7 percent in 1936. This, together with anticipation of labour market strife and further wage increases, was encouraging large inventory accumulations that posed a danger of recession if sales did not keep pace and excess stocks were worked off at the expense of current production. Nevertheless, in January 1937 the Board announced a second increase in reserve requirements, effective March 1, followed by a final increase on May 1. Excess reserves remained high because of a continuing inflow of gold, though the Treasury sterilised much of this in late 1936. The rapid growth in the stock of money slowed, and halted in March. These measures were all designed to be ‘precautionary’ rather than

The New Deal and ‘domesticated Keynesianism’ in America

233

restrictive. It was believed that since excess reserves were ‘redundant’ or superfluous, the mopping up would have no effect on recovery. However, beginning around June 1937 recovery turned rapidly into a deeply alarming recession. Real GDP would fall by 18% over the next thirteen months (Meltzer, 2000:125). At the time few people blamed the monetary measures, though the slight increase in bond yields, from an all-time low of 2.46 percent in early March to 2.8 percent in early April (after which they declined again), had angered Treasury Secretary Morgenthau (though it was the Treasury that took the decision to sterilise gold inflows from December). His main concern was that a rise in interest rates would increase the financial cost of the deficit, and he kept pressing Roosevelt to trim government spending and balance the budget Eccles agreed that higher interest rates were undesirable and he supported the Federal Open Market Committee’s decision in April to engage in compensatory open market purchases. There is no evidence that the banks were suddenly denying requests for loans by business or government, or imposing stricter conditions as a result of the increased reserve requirements. Thus the almost exclusive modern focus on a supposedly inept monetary policy as the cause of the sharp downturn in 1937 seems misplaced (e.g. Steindl, 1995, in support of Friedman and Schwartz’s influential 1963 study). Meltzer (2000), however, offers a more eclectic explanation, and another exception is Romer and Romer (1989:131–2) who emphasise two non-monetary forces acting to decrease output in 1937: the fiscal downturn and the way in which the Wagner Act led to large inventory accumulations in anticipation of labour market strife that did indeed occur in 1937, coinciding with an end to inventory accumulations. They also note that the behaviour of reserve holdings ran counter to Friedman and Schwartz’s interpretation, in that there was no discernible change in the behaviour of reserves as a fraction of deposits until December 1937, seventeen months after the first increase in reserve requirements was announced and after the declines in money and industrial production were largely complete. In a note to the writer, August 2, 1988, Currie admitted that probably the reserve requirements would not have been raised if the recession of 1937 had been accurately forecast But he wrote that ‘this is a different matter than holding the raising responsible for the recession. For that the very sharp, even drastic, reduction in the fiscal cash deficit is the more convincing explanation of the sharp decline in the rate of growth in sales and the consequent piling up of inventories’. He also noted that ‘few theorists would expect an immediate impact on incomes and sales to result from the small decline in deposits that took place, especially as there is such an other more convincing explanation of the causation of the rise in aggregate demand’. By the fall of 1937 it was clear to all that the economy was in decline. Morgenthau infuriated Eccles (a tireless advocate of public spending) by declaring that this was proof that deficits cause recessions through their adverse effect on business confidence. He placed his faith in the driving force of private enterprise. By contrast, Barber (1996:111) states that the recession was a conversion

234

Roger J.Sandilands

experience for Alvin Hansen who had reacted adversely when the Keynes’s General Theory first appeared. In a paper to the Academy of Political Science, November 1937, before the depth of the recession could be fully appreciated, he began to rethink his position. He wrote: We are currently witnessing a rapid shift in income-creating expenditures both public and private. The props which have been lifting the level of consumption are being withdrawn. The automobile boom has tapered off. We are moving toward a saturation point in installment sales. The government stimulus to consumption is in the process of being completely withdrawn in a dramatic reversal from a plus of three billion to a minus of four hundred million dollars within a single year. The full force of this sudden change upon our recovery has perhaps not been adequately appraised. (Hansen 1938:66) In fact the fiscal stance had been subjected to detailed and continuous scrutiny for its net income-creating effect ever since 1934. While still at the Treasury, and encouraged by Jacob Viner, Lauchlin Currie began work with Martin Krost, a brilliant student whom he had brought with him from Harvard, to develop a monthly series initially known as a ‘pump-priming deficit’. These figures adjusted the government’s official budget statement of revenues and expenditures to reflect the varying effectiveness of different categories on the circular flow of income and expenditure, making allowance for those expenditures that were for currently produced goods and services and those that were merely transfers, or that merely changed savings. In a memorandum entitled Federal Income-Increasing Expenditures, 1933–35, written in late 1935 (reprinted in Currie, 1978), Currie and Krost reported that any similarity between the ‘net contribution’ and the reported cash deficit was purely coincidental. The reported budget could be in balance while the net contribution was in heavy deficit. Thus, there was no necessary conflict between those who wanted a balanced budget in the official sense and those who wanted the federal government to provide a big stimulus to business: ‘By selecting incomeincreasing types of expenditure and non-income-decreasing methods of raising revenue, it is conceivable that a balanced budget could be maintained and at the same time a considerable stimulus given to business’. Investment subsidies, for example, could have a powerful stimulatory effect while a tax on undistributed profits might have only a small negative effect But there was no doubt in Currie’s mind that the conditions prevailing in the mid-1930s called for much more than a balanced expansion of taxes and spending. The size of the required deficit, whether in its explicit or ‘net contribution’ form, was calculated according to the size of potential, full-employment income (based on 1928 with adjustments for population and productivity growth) and the size of the leakages from that income that would need to be offset The 1935 Currie—Krost memorandum can be seen to have anticipated not only the full-employment budget concept but also a rudimentary version of the

The New Deal and ‘domesticated Keynesianism’ in America

235

‘balanced-budget multiplier’ idea. However, Currie never thought that the algebraic version that was later developed as a theorem had any relevance for policy purposes (Sandilands, 1990:74–8). The theorem assumed a constant marginal propensity to consume and given money supply. This implies that velocity adjusts passively to support higher incomes. But if individuals and firms are subject to higher taxes their initial portfolios are disturbed. When they get their money back (in practice not immediately) they may use some of it to restore their depleted cash balances. Thus the marginal velocity (corresponding to the marginal propensity to consume) could fall in the next round and reverse the initial stimulus. The net impact on spending would in any case be much smaller than if increased government spending were financed by borrowing. So even if there were a positive balanced-budget multiplier effect, the economic boost required in the 1930s would have called for a non-feasible tax-and-spend package. Samuelson (in Colander and Landreth, 1996:166–7) hails the balanced-budget theorem without addressing its realism. In this respect Currie’s adherence to period or sequence analysis of pre-General Theory monetary theory, and his detailed studies of the demand for and supply of money in explaining the flow of aggregate expenditure was superior, for policy purposes, to Keynes’s instantaneous multiplier analysis. Patinkin (1976:1101) noted that Currie was one of the first economists to subject Keynes’s investment multiplier to empirical test, finding that it was highly variable in the short term. But Blaug (1991:174) has maintained that it was precisely the rigour and simplicity of Keynes’s static, single-period equilibrium approach that explains the appeal of the General Theory and why the Keynesian revolution took hold so quickly. Due to the intense passion aroused at that time by the very word deficit, the term ‘pump-priming deficit series’ was soon dropped in favour of the ‘Federal net income-increasing expenditures series’. It was also realised early on that in the prevailing conditions, more than a one-shot priming of the pump would be required and that deficits would probably need to be sustained for some time. According to Alan Sweezy (1972:118–19) the new title was ‘a semantic triumph of the first magnitude. It brought out the common element in all the government’s fiscal operations. No one used to thinking in terms of the net contribution could advocate promoting recovery by increasing public works spending while at the same time cutting government salaries and raising tax rates’. The figures were never published (the Federal Reserve Board’s director of research, E.A.Goldenweiser, blocked this and similar publications on the grounds that ‘it might cause trouble’16) but mimeographs circulated widely in New Deal circles. The income-increasing expenditure series was to assume considerable significance in diagnosing the causes of the 1937–38 recession. The outlines of what Barber (1996:125) has called a ‘domesticated Keynesian’ analysis of recovery and relapse was contained in a prescient pre-General Theory memorandum to Eccles from Currie, April 13, 1935, entitled ‘Recovery! The stress is on the importance of contra-cyclical fiscal measures to combat a ‘deadlock’, with

236

Roger J.Sandilands

monetary policy assuming a passive role at such times.17 After analysing the prospects in various fields, Currie concluded that [I]n each important outlay for construction and equipment expenditures which we have considered, the conclusion is the same: increased expenditures wait on increased demand and increased demand waits on increased expenditures… The most feasible way in which this deadlock may be broken is for the Government through its expenditures to increase incomes, and hence demand for goods, sufficient to create conditions making it profitable to increase the production of new capital. This, very simply, is the theory of pump-priming operations… As incomes and the demand for goods increase it is to be expected that the operations of one industry after another will approach a point where it appears profitable to invest in new plant and equipment Similarly, in one town after another the rise in rents will make it profitable to build houses. The ideal, which it is admittedly difficult for a government to achieve, would be to vary the rate of expenditures in such a way as to insure a steady and uninterrupted growth in demand. This, more specifically, would require a slower rate of expenditure during the inventory buying upswings we have been experiencing in recent years, and then a greatly accelerated rate of expenditure when such buying decreases. When non-federal expenditure for equipment and construction increase, the Government may taper off its expenditures. As economic recovery faltered in 1937 it became evident that ‘pump-priming operations’ had not been sufficiently vigorous or steady. Fiscal policy was now operating in a perverse direction and Currie began to send increasingly urgent memoranda to Eccles. In February he condemned the 1937 Social Security Act because of the deflationary implications of building up a large reserve fund,18 especially when in 1937 there was nothing to replace the large pay-out of veterans’ bonuses (passed by Congress over the president’s veto) in 1936. In his memorandum ‘Comments on Business Prospects’ (September 28, 1937) Currie emphasised the rapid advance in building costs (hourly wages in the construction industry had increased by 16 percent in little over a year, and building materials prices by 13 percent) relative to the increase in rents, and residential contracts awarded had been declining since June. In ‘The Decline in the Federal Contribution to the Growth in Community Expenditures’ (October 19), he showed that in the three years 1934–36 the net federal contribution had been $3.2 billion, $3.1 billion, and $4.0 billion. These were sizable fractions of the growth of national income in those same years: $7.8 billion, $5.4 billion and $8.8 billion respectively. In the nine months to September 1937, the CurrieKrost series showed that the net contribution had fallen to only $810 million ($90 million a month and still falling) compared with $3,080 million ($342 million a month) in the same period of 1936. He warned that the government’s contribution to buying power, already insufficient to offset the slowdown in private expenditures, may well turn negative in the near future.

The New Deal and ‘domesticated Keynesianism’ in America

237

On a Keynesian interpretation of the downturn in 1937–38, this fiscal reversal was a crucial causal factor. By comparison, variations in the degree of excess liquidity in the banks were of secondary importance. By cutting the federal deficit there was a fall in the supply of safe earning assets that the banks had previously relied on. They could not easily or quickly replace them with private sector lending, for the decline in government spending and the increase in tax and social security receipts were depressing demand for private sector output. This naturally reduced private sector loan demand. These factors, rather than the raising of reserve requirements, may account for some diminution of demand deposits and the continued high level of excess reserves. That the Fed resumed the purchase of government securities after April 1937 gives some credence to this view. On November 8 WPA administrator Harry Hopkins and his economic adviser Leon Henderson, together with Lauchlin Currie and Isador Lubin, Commissioner of Labour Statistics met with the president in an unprecedented four-hour session (Lash, 1988:317–27). The New York Post reported the next day that ‘the four advisers minced no words in giving Roosevelt a hard-boiled review of economic conditions and with equal bluntness and vigor they told him that a disastrous recession can only be averted by a resumption of big-scale Government spending’. The group laid a report before the president that showed how, for the first time since 1931 the government took more out of the income stream than it poured back in. ‘If the Government takes taxes away from workers or corporations and uses these in bookkeeping items, such as old age reserve accounts, gold purchases, debt retirement, etc., and the amount exceeds what is paid for men and materials, then there is a deficit That is what is happening now.’ It is noteworthy that here they used the term ‘deficit’ to refer to a deficit of overall spending, not the budget deficit. The deficit in the income stream had to be reduced by increasing the federal contribution; that is, by increasing the budget deficit.19 But in a speech the very next day (November 10) Secretary Morgenthau declared that the latter deficit was excessive. A balanced budget was needed to restore business confidence. As Stein (1969: Chap. 6) put it, the Keynesians and the budget-balancers were now locked in a furious ‘struggle for the soul of FDR’. The report that the Keynesians placed before the president stated that if the government continued to take out more than it puts in then’ (1) prices will not adjust quickly enough, (2) budget balancing will be pursued too far and deflation will result, (3) unemployment will increase, (4) buying power will be impaired, and (5) things will get out of hand’. The large increase in production in 1936 should have led to a vigorous increase in retail business in 1937. Instead, a combination of costinduced (as distinct from demand-induced) price increases and cuts in government spending meant that the large increase in production could not be taken off the market because purchasing power was not large enough. Cost advances in the key construction sector were also highly damaging and needed to be offset by reduced financing charges. The report continued:

238

Roger J.Sandilands

A part of the deficit was filled by increase in installment buying, which merely means that future buying power is already spent. All this talk about production creating its own purchasing power is absurd when prices increase. Then inventories pile up and real purchasing power stays the same. Some experts believe this is merely a lull, catching up with the frantic inventory buying which took place when prices were going up last winter and that when these stocks are worked off, business will resume as usual. It is far from certain that the matter is so simple as just overloading of inventories. It is difficult to see where additional purchasing power is to come from, that is, large and effective quantities of it, such as are needed if we are to move forward vigorously. Farm income is at its peak. Steel will hold its prices up too long. Automobiles will run into sales difficulties. There is little hope for big volume in textiles. Men’s clothing and all garment selling is having trouble. Rayon yarn production for the first time in months is being reduced. Auto tire companies and many others are slowing down production. Regardless of whether this decline is temporary or whether it is the beginning of a major depression, there is urgent need to keep a close watch on things. In fact the economy was in a tail spin. In a speech to Congress a few days after his ‘Keynesian’ seminar, he asked: ‘What does the country ultimately gain if we encourage businessmen to enlarge the capacity of American industry to produce unless we see to it that the income of our working population actually expands sufficiently to create markets to absorb the increased production’. But Roosevelt initially sided with Morgenthau. Disaster followed (Brinkley, 1995:28); and not until April 14, 1938, after the worst period of his long tenure in the White House and after a strong letter from Keynes in February, did Roosevelt at last ask Congress (over the continuing objections of the Secretary of the Treasury) for more than $3 billion of spending or lending in the immediate future for relief, public works, housing and assistance to state and local governments (Barber, 1996:114). Shortly afterwards, Roosevelt delivered a ‘Monopoly Message’ to Congress, April 29, in which he proposed an appropriation of $500,000 to fund an exhaustive investigation into the concentration of economic power that led to the setting up of the Temporary National Economic Committee (TNEC) that was to generate some thirty volumes of testimony over the next three years. This inquiry had been mooted for over a year. In a letter to Eccles, March 23, 1937, Currie wrote: ‘Friday I attended a meeting of the Industrial Committee of the National Resources Committee… They are planning to recommend to the President that a national conference on productivity be called… Most of the emphasis was placed on the removal of restrictions on output of various kinds and I suggested that some emphasis be placed on the problem of securing full and continuous employment, since our greatest waste of resources in the past has been attributable to depressions’ It was with this in mind that Currie arranged for Galbraith to conduct a review for the National Resources Planning Board of the impact of

The New Deal and ‘domesticated Keynesianism’ in America

239

public works (see above). He also persuaded Leon Henderson and Jerome Frank at the Securities and Exchange Commission (SEC), the main instigators of theTNEC, to include the study of macroeconomic policy as well as the study of monopoly and industrial concentration. Stein (1969:168; see also Brinkley, 1995:128–136) observed that theTNEC hearings turned out to be mainly a showcase for Keynesian economics, with Lauchlin Currie and Alvin Hansen the star witnesses, having teamed up, as ‘Mr Inside and Mr Outside’ (Tobin, 1976:33) to present complementary presentations in May 1939 of the theoretical and empirical case for compensatory fiscal policy. Hansen used the occasion to elaborate on the ‘mature economy’ and ‘secular stagnation’ theme he had first presented as his presidential address to the American Economic Association in December 1938. To theTNEC he registered his ‘growing conviction that the combined effect of declining population growth, together with the failure of any really important innovations of a magnitude sufficient to absorb large capital outlays, weighs very heavily as an explanation of the failure of the recent recovery to reach full employment’. It was clear that public investment on a very considerable scale would be needed to supplement private investment. To drive the point home, Currie (1939) then explained and presented charts showing the ‘income-producing expenditures that offset savings’ Barber (1996:124) summarises his argument thus: As savings were withdrawals from the income stream, the economy was doomed to a chronic state of underemployment unless these withdrawals were ‘offset’ by capital spending by business, outlays for residential housing construction, lending abroad, or loan-financed expenditures by government. As a shortfall in the private sector’s capital spending was expected, government’s role as a spender would be crucial. Under questioning, Hansen and Currie acknowledged that tax reductions might pay dividends in stimulating private spending. But their central argument held that government could better manipulate aggregate demand by other means. Barber concluded that the Hansen-Currie line of analysis amounted to a domesticated Keynesian perspective on the performance of the economy. It was Hansen’s belief, however, that it was the war rather than the 1937–38 recession that finally shifted opinion to accept the practical applications of Keynesianism in terms of employment policy (Colander and Landreth, 1996:104–6). There was violent opposition to Hansen’s views on the public debt: ‘The American economists were all dead against it’, and he singled out Henry Moulton, the president of the prestigious Brookings Institution. ‘There was practically nobody in the United States who accepted Keynesianism up to and as we got into the war.’ (See also Evsey Domar’s interview in Colander and Landreth, 1996:187– 8.) Currie too, in an unpublished memoir (1951:92), wrote: Those of us who pioneered in the field of forecasting and in advocating policies of adjustment not only received little credit but actually were

240

Roger J.Sandilands

subjected to a good deal of criticism and abuse. I was somewhat protected from the latter by the fact that nearly all of my work was carried on inside the Government, though I was regarded with suspicion by many of the academic economists and certainly by many business men. Alvin Hansen, however, was abused and ridiculed and even accused of something like lack of patriotism for daring to suggest that there might be too much saving or that there were limits to the possibilities of profitable private investments of savings. I doubt very much if he would have been offered a chair in economics in Harvard if those views had been known in advance. Keynes was for years regarded as the Archpriest of economic unsoundness and few people were the target of so much criticism from the professional economists of the United States. On the other hand, no criticism was meted out to those professional economists who through this tragic decade betrayed their trust and continued to talk nonsense about balancing the budget and restoring confidence. Such attitudes help explain the defeat, as late as 1939, of the Works Financing Bill even though this was framed in such a way that a major spending programme would be financed ‘outside the budget’, in hopes of appeasing the budget balancers. Nonetheless, Roosevelt was by then less reticent about spending as a way out of recession and the federal net contribution nearly doubled in 1939 to around $3.6 billion. The New Deal of course was about much more than the size of public spending. However, in the absence of macroeconomic balance relatively little could be expected of microeconomic reforms. Gardiner C.Means continued to insist that laissez faire was played out and that detailed industrial planning was called for to eradicate the malevolent influence of administered prices and the outputsuppressing propensities of producers with market power (Barber, 1996:126; Lee, 1990). By 1938–39, however, the stress was on spending first, structural reform second. The spenders thought that monopoly was as much the consequence as the cause of Depression. Expansion of the market, domestic and foreign, would offer opportunities for greater competition from new firms and products. In fact, the greatest expansion of markets would come from the demands of war. Yet, as Galbraith has emphasized, for the United States the Second World War was the cheapest in history in terms of the squeeze it imposed on nonmilitary production. So great was the slack in the system that it was possible, with substantially the same capital equipment as existed in 1940, to wage a mighty war on two fronts, equip the allies, put 12 million men in the armed forces, and at the same time increase the civilian standard of living. Nevertheless, the refusal of Congress to pass the 1939 Works Financing Bill, for example, meant that the United States entered the war with much less addition to railroad and electricity generating capacity and improved highways than, as the war showed, it was capable of producing. Naturally, however, there were many specific bottle-necks

The New Deal and ‘domesticated Keynesianism’ in America

241

and shortages in the transition to a war economy. Also, too little was done to apply the logic of Keynesianism to wartime, and close an excessive deficit by raising taxes. It was left to Galbraith, in his capacity as the ‘czar of prices’, to subject price and wage advances to close scrutiny and to fight the profiteers. The lasting legacy of the theoretical, empirical and practical experience of the Depression and war years was the February 1946 Employment Act and the creation of the Council of Economic Advisers. Its passage through Congress was stormy, and the original bill that Alvin Hansen drafted in August 1944 was much watered down. Nevertheless, a statute that affirmed governmental responsibility for ‘maximum employment, production and purchasing power’ was a significant advance, for Keynesians, over the much more limited mandate for government that, for example, was preferred by Irving Fisher and the Chicago School with their rules-based price stability goal for monetary policy, and with fiscal policy aimed at low-level balanced budgets. The war itself accustomed people to higher and more progressive rates of taxation and government spending and these were only partially retrenched in peacetime. This introduced a much greater degree of built-in stability by effectively reducing the savings rate at full employment income, relative to the offsets. Nonetheless, with Roosevelt’s death in April 1945 the liberal establishment that had surrounded him was rapidly replaced by a more conservative power elite, and the potential peace dividend was squandered for forty years on a futile Cold War and several nasty hot wars. Unlike in the 1941–45 war when vast underused resources could be mobilised, in the era of full employment the military-industrial complex (Galbraith’s term) has sucked resources and talent away from education, health, housing and the arts. The challenge of the ‘mature economy’ has turned out to be not Hansen’s stagnation thesis, but the challenge of public squalor, crime and incivility amidst unprecedented but unequally distributed private affluence, much of it due to the unearned increments of land values and to inadequate competition and mobility. In the affluent society what matters for economic and social welfare is not the size of GDP but its composition and distribution.

Notes 1.

2.

See Mehrling (1997) for an excellent recent account of the American institutionalist tradition, as exemplified by Allyn Young, Alvin Hansen and Edward Shaw, in keeping alive an awareness of the ever anxious relations between finance and democracy, between the money interest and the public interest Compare with Galbraith’s Economics and the Public Purpose (1973). This was also the dominant view coming out of Harvard at that time, as David Laidler (1999:215–9) records. Gottfried Haberler and Joseph Schumpeter based their policy nihilism on the ideas of the Austrian school: depressions were the natural and necessary remedy for the maladjustments, built up during preceding periods of prosperity, between the production of consumer goods and increasingly ‘roundabout’ capital. This at least had a

242

3.

4. 5.

6.

7.

8.

9.

Roger J.Sandilands

semblance of theoretical coherence. Their nihilistic conclusions were shared, but without any coherent theoretical support, by their Harvard colleagues, Seymour Harris, Edward Chamberlin, Edward Mason and others (Brown et al., 1934). All of them opposed monetary and fiscal easing, either because that would make matters worse, or at best be useless. Galbraith (1981:23) noted that at Berkeley ‘we all looked up especially to Gregory Silvermaster [a Berkeley Ph.D. in economics]…[who] later moved on to Washington and was much celebrated by Whittaker Chambers as a leader of the Communist underground in that city’. Galbraith (1981:48). In 1949 he also recruited Richard Musgrave, another member of Hansen’s seminar group, as the tax expert on a World Bank mission to Colombia. Currie teamed up with Alvin Hansen to present evidence on the impact of public spending before the Temporary National Economic Committee (TNEC) in 1939. Musgrave records his experience at Harvard, 1934–42, in Colander and Landreth (1996). White wrote his Harvard Ph. D. dissertation under Frank Taussig on the operation of the international gold standard. He worked at the U.S. Treasury from 1934 to 1946, rising to Assistant Secretary. Like Currie he was an early advocate of activist monetary and fiscal policy. See L.B.Currie, P.T.Ellsworth and H.D.White, ‘Memorandum’, January 1932. File 29, The Papers of Harry Dexter White, Seeley G.Mudd Library, Princeton University. This memorandum is discussed below. Friedman and Schwartz were later criticised by Humphrey (1971), Patinkin (1981) and Laidler (1993) for ignoring the contributions of non-Chicago economists, especially Currie, to monetary theory and statistics. Humphrey stated that ‘Currie was the only American monetary theorist in the early 1930s to have held the Federal Reserve responsible for precipitating the Great Depression’. Friedman later offered an explicit mea culpa (Laidler, 1993:1077–8). When this little-known memorandum was brought to the attention of David Laidler by the present writer in November 1999, he was struck by its similarity to the famous Harris Foundation manifesto sent to President Hoover a few days later. That manifesto was drafted by John H.Williams (Currie’s Harvard Ph. D. superviser), Irving Fisher, Alvin Hansen, Charles Hardy, Henry Schultz and Jacob Viner. See also Laidler (1993:1091) for a note on Currie’s influence on John Williams at this time. Friedman and Schwartz (1963:640) define ‘money’ to include time deposits, or M2, but they calculate velocity for M1 and M2. Their chart shows M2 velocity falling slightly during the 1920s while it was rising for M1. Only the M1 measure is consistent with their claim that velocity tends to move pro-cyclically. Interest-bearing time deposits would increase with an increase in the savings rate over time. Lending financed out of savings can grow rapidly with no threat to inflation. Thus the narrower definition (means of payment) is a better series for the monitoring of total

The New Deal and ‘domesticated Keynesianism’ in America

10.

11.

12.

13.

14.

15.

243

expenditures (as opposed to their composition). In the 1920s the authorities only monitored ‘credit’, or the quantity of bank loans and their ‘quality’ (short-term versus long-term, ‘productive’ versus ‘speculative’). These characteristics of FDR (and the even greater human qualities of his wife Eleanor) have been affectionately portrayed by Galbraith in his most recent book (1999). The term was first used by D.H.Robertson. For a discussion of the subtle but important distinction between a credit deadlock and a liquidity trap see Laidler (1999:285–7). In the latter case a ‘speculative’ demand for money at low rates of interest on long bonds renders monetary policy impotent Hawtrey (and Currie), however, doubted the existence of a speculative demand for money—based on a desire for liquidity when long bonds are too risky—because there are plenty of liquid assets (with capital-value certainty) other than ‘money’ proper that can satisfy demand for liquidity. Hawtrey believed a credit deadlock—in which a loss of business confidence halts bank borrowing and destroys deposits—could usually be counteracted through vigorous open-market bond purchases; but he did not reject money-financed deficits as a last resort Some 9,000 banks, with $6.8 billion of deposits failed between 1930 and 1933 (Wheelock, 1992:4). In 1936 Currie undertook a study of closed banks as part of a WPA ‘make-work’ scheme for unemployed white collar workers (Sandilands, 1990:80). The results revealed that the loss of deposits attributable to the panic withdrawal of small depositors was a negligible factor in causing bank suspensions. Before lines formed outside banks it was typically the large depositors, well connected and informed by bank directors, who accounted for the bulk of withdrawals. The rise in the cash-deposit ratio and associated loss of bank reserves went largely uncompensated by Federal Reserve action. See Friedman and Schwartz (1963:454–5) for data on interest rates. In 1936 interest rates continued to fall. This increased Eccles’s concern that if banks did increase their lending they could suffer large losses in a future inflation. This was a decisive factor in his decision in July 1936 to support a ‘precautionary’ increase in the reserve requirement ratio (Eccles, 1951:289; Meltzer, 2000: Chap. 6). Friedman and Schwartz (1963:526) and Meltzer (2000) both make the reasonable point that if there were no desire to cause a current restrictive effect the authorities should have waited until there was such need. They argue that the effect was in fact highly restrictive, and that the availability of the reserve requirement instrument caused excess reserves to be reduced by far more than the authorities would have dared to engineer via traditional open-market operations. This view is shared by Cole and Ohanion (1999). They also doubt that the 1933 bank failures could explain why the low level of lending relative to industrial output persisted so long, especially in view of the reassurance given by federal deposit insurance (effective July 1934). It can be argued that

244

Roger J.Sandilands

increased output was spurred not by increased liquidity, but by the influence of government spending on private incomes and spending. However, Cole and Ohanion ignore the fiscal position and blame the slowness of recovery on NIRA codes that encouraged cartelisation and high industrial wages that led to a fall in labour inputs. Based on a neo-classical growth model, they calculate the effect of this supply shock on output. The demand side is ignored. The Keynesian revolution is far from complete! 16. Letter, Lauchlin Currie to Jacob Viner, September 23, 1935, in Jacob Viner Papers, Princeton University. 17. This analysis calls into question Steindl’s (1998) view that the inattention to data on money by almost all economists and policy makers (including Currie) after 1933 contradicts Kuhn’s hypothesis that old paradigms (in this case a crude quantity theory) are only rejected when an alternative paradigm has emerged. Steindl bases this judgment on the fact that the General Theory was not published until 1936 and absorbed only some time later. He considers Currie’s position particularly puzzling, because of the stress he had placed on money in his diagnosis of the 1929–32 contraction. But when the facts change a consistent focus has no merit. Also, see Laidler (1999) for an excellent survey of the pre-General Theory intellectual arguments for counter-cyclical public works. 18. Leon Keyserling states that pressure for this legislation originally came from Senator Robert F.Wagner (Colander and Landreth, 1996:223–4). Currie states that it was not until April 1940, during lengthy discussions in Warm Springs on how to put social security on to a pay-as-you-go basis, that Roosevelt finally understood the fallacy of composition in moving from individual to national accounting (Sandilands, 1990:102; Stein, 1969:129). Progress on these reforms was aborted as FDR moved from ‘Dr. New Deal’ to ‘Dr. Win-the-War’ (Lash, 1988:463). 19. Paul Samuelson and Tibor Scitovsky (in Colander and Landreth, 1996:170, 211) highlight the important statistical work by Richard Gilbert, Robert Nathan and Simon Kuznets in calculating potential GDP. In 1941 people wanted to know if it was possible to have both guns and butter (Lash, 1988:455). Samuelson records that while Keynes was in Washington in 1941, Richard Gilbert, then at the Office of Price Administration, argued, controversially, that there was big room for expansion. Keynes was asked his opinion. He asked how much higher was 1929 real output over 1913? He was given the numbers and said, ‘Well that was a 15-year period and it’s been 12 years since 1929. So, let’s take 12/15 of that increment, and I think that would be a reasonable goal for potential GNP’. This figure coincided with Gilbert’s calculation, and wartime GNP indeed matched it. References Barber, William J. (1996) Designs within Disorder: Franklin D.Roosevelt, the Economists, and the Shaping of American Economic Policy, 19 33–1945, Cambridge: Cambridge University Press.

The New Deal and ‘domesticated Keynesianism’ in America

245

Blaug, Mark (1991) ‘Second thoughts on the Keynesian Revolution’, History of Political Economy 73, 2:171–192. Brinkley, Alan (1995) The End of Reform: New Deal Liberalism in Recession and War, New York: Vintage Books. Brown, D.V. et al. (1934) The Economics of the Recovery Program, Cambridge, MA: Harvard University Press. Colander, David C., and Harry Landreth (1996) The Coming of Keynesianism to America, Cheltenham: Edward Elgar. Cole, Harold L., and Lee E.Ohanion (1999) ‘The Great Depression in the United States from a neoclassical perspective’, Federal Reserve Bank of Minneapolis Quarterly Review 23, 1 (Winter). Currie, Lauchlin B. (1934) The Supply and Control of Money in the United States, Cambridge, MA: Harvard University Press. Reprinted in 1968 by Russell & Russell, New York. —(1939) ‘Savings and investment’, Investigation of Concentration of Economic Power. Testimony before the Temporary National Economic Committee (May 16, 1939), Washington: United States Government Printing Office. Part 9: pp. 3520–3538. —(1951) ‘The New Deal’, Unpublished Memoir. Mimeo, Chap. 3. —(1972) ‘The Keynesian revolution and its pioneers: discussion’, American Economic Review, 62 (May): 139–141. —(1978) ‘Comments and observations on “Federal Income-Increasing Expenditures, 1933–35”, History of Political Economy 10, 4:507–548. Eccles, Marriner S. (1951) Beckoning Frontiers, New York: Alfred A.Knopf. Friedman, Milton, and Anna Jacobson Schwartz (1963) A Monetary History of the United States, 1867–1960, Prince ton: Princeton University Press. Galbraith, John Kenneth (1971) ‘How Keynes came to America’, in Economics, Peace and Laughter, London: André Deutsch, pp. 43–59. —(1972) The Great Crash, 1929, 3rd ed., Boston: Houghton Mifflin. —(1975) Money: Whence it Came, Where it Went, London: André Deutsch. —(1977) The Age of Uncertainty, London: BBC/André Deutsch. —(1981) A Life in Our Tmes, Boston: Houghton Mifflin. —(1999) Name-Dropping: From FDR On, Boston: Houghton Mifflin. Galbraith, John Kenneth, and G.Griff Johnson (1940) The Economic Effects of the Federal Public Works Expenditures, 1933–38, Washington DC: National Resources Planning Board. Gilbert, Richard V. et al. (1938) An Economic Program for American Democracy, New York: Vanguard Press. Hansen, Alvin H. (1938) ‘The consequences of reducing expenditures’. Proceedings of the Academy of Political Science 17, 4 (January): 466–478. Hawtrey, R.G. (1925) ‘Public expenditure and the demand for labour’, Economica 5 (March): 38–48. —(1929) ‘The monetary theory of the trade cycle’, Economic Journal 39 (December): 636–642. —(1932) The Art of Central Banking, London: Longman Group. Reprinted 1962 by Frank Cass, London. Humphrey, Thomas (1971) ‘The role of non-Chicago economists in the evolution of the quantity theory in America, 1930–50’, Southern Economic Journal 38 (July): 12–28. Laidler, David (1993) ‘Hawtrey, Harvard and the origins of the Chicago Tradition’, Journal of Political Economy 101 (December): 1068–1103. —(1999) Fabricating the Keynesian Revolution, Cambridge: Cambridge University Press. Lash, Joseph (1988) Dealers and Dreamers, New York: Doubleday. Lee, Frederic M. (1990) ‘From multi-industry planning to Keynesian planning: Gardiner Means, the American Keynesians, and national economic planning at the National Resources Committee’, Journal of Policy History 2, 2:186–212. Mehrling, Perry G. (1997) The Money Interest and the Public Interest: American Monetary Thought, 1920–1970, Cambridge, MA and London: Harvard University Press.

246

Roger J.Sandilands

Meltzer, Allan (2000) A History of the Federal Reserve: Volume 1, 1913–51, Chicago: University of Chicago Press (forthcoming). Patinkin, Don (1976) ‘Keynes and econometrics: on the interaction between the macroeconomic revolutions of the interwar period’, Econometrica, 44, 6:1091–1123. —(1981) ‘Keynes and Chicago’, in Essays on and in the Chicago Tradition. Durham, NC and London: Duke University Press. Phillips, Ronnie J. (1995) The Chicago Plan and New Deal Banking Reform, Armonk, NY: M.E. Sharpe. Romer, Christina D., and David H.Romer (1989) ‘Does monetary policy matter?’ National Bureau of Economic Research Macroeconomics Annual 4:121–170. Salant, Walter S. (1998) ‘Harvard’s fiscal policy seminar’, in O.F.Hamouda and B.B. Price, eds, Keynesianism and the Keynesian Revolution in America, Cheltenham, UK and Northampton, MA: Edward Elgar, pp. 32–39. Sandilands, Roger J. (1990) The Life and Political Economy of Lauchlin Currie: New Dealer. Presidential Adviser, and Development Economist, Durham, NC and London: Duke University Press. Stein, Herbert (1969) The Fiscal Revolution in America, Chicago: The University of Chicago Press. Steindl, Frank G. (1995) Monetary Interpretations of the Great Depression, Ann Arbor, MI: University of Michigan Press. —(1998) ‘The decline of a paradigm: the quantity theory and recovery in the 1930s’, Journal of Macroeconomics (Fall). Sweezy, Alan (1972) ‘The Keynesians and government policy, 1933–1939’, American Economic Review 62 (May): 116–123. Temin, Peter (1976) Did Monetary Forces Cause the Great Depression? New York: W.W.Norton. Tobin, James (1976) ‘Hansen and public policy’, Quarterly Journal of Economics 90:32–37. Wheelock, David C. (1992) ‘Monetary policy in the Great Depression: what the Fed did, and why’ , Federal Reserve Bank of St. Louis Review 74, 2 (March–April): 3–28.

13

Adam Smith on the mercantile system The unnecessary loss of America? Andrew S.Skinner

I had the pleasure of meeting John Kenneth Galbraith on a number of occasions, all of which belonged to a single event—the Symposium on Adam Smith which was organised by Kirkcaldy Town Council in 1973. The transactions were published by the Council in the following year, in the form of a complete transcript, which makes the volume something of an historical curiosity. Having been advised to become an ambassador in the interest of the furtherance of one’s academic career, members of that audience will no doubt also recall the incredible multiplication of lecterns which were necessary to accommodate the ‘full size’ man. Professor Galbraith’s lecture also contained some interesting thoughts on the American situation in the eighteenth century, recording as he did, that Smith, unlike Hume, deplored separation and in fact wanted ‘full union, full and equal representation of the erstwhile colonies in Parliament, free trade within the Union, equal taxation along with…equal representation and the prospect that…the capital would be removed from London to some new Constantinople in the West’ (Galbraith, 1974:69). Smith’s dramatic hopes were dashed, although that did not cause him any real despair. Writing in the aftermath of Saratoga, Sir John Sinclair of Ulbster complained that, ‘If we go on at this rate the nation must be ruined’. Smith replied: ‘Be assured, my young friend, that there is a great deal of ruin in a nation’ (Galbraith, 1974:71; Corr: 262n).1 In a sense, the following argument is a commentary on these two positions. While it builds upon Skinner (1996) this version has a quite different focus. The earlier analysis was largely concerned with an attempt to understand the structure of Smith’s critique of the colonial relationship with America and to explore the extent to which the whole treatment can be regarded as an ‘essay in persuasion’ (cf. Koebner, 1961). To an extent, this interpretation is supported by a passage which Smith added to the third edition of WN (in 1783, the year of peace), where he noted that: ‘It is unnecessary, I apprehend, to say anything further, in order to expose the folly of a system which fatal experience has now sufficiently exposed’ (WN IV, viii 15). But the events of 1783 certainly had not exposed the faults of the mercantile system. 247

248

Andrew S.Skinner

The present argument is more straightforward. The first major section reviews the range of debate with which Smith would have been familiar during his residence in London. The second section deals with Smith’s review of the colonial relationship and suggests that his solution to the long-run problems presented by the restrictions imposed upon colonial manufactures, namely Union, would also solve the more immediate difficulties which were of a more political nature. The next section outlines Smith’s position as of 1778 and his bleak review of the options open to the British Government The concluding part of the argument contrasts the positions adopted by Smith and Sir James Steuart, and confirms that some American opinion was more favourable to the latter, than to the former.

The immediate issues Smith left Edinburgh for London on April 16, 1773 and the delay in publication of WN was attributed by some, notably David Hume, to his growing preoccupation with the unfolding crisis with the colonies (Corr: 185). There were two sides to the problem as they might have been seen by Smith. The first is represented by the terms of the quarrel, and this Smith largely ignored in a formal sense—perhaps because had he addressed such issues in WN his work would appear as ‘too much like a publication for the present moment’ (Hugh Blair, in Corr: 188). The second area, which Smith addressed at length in WN, Book IV, Chap. 7, is concerned with the nature of the colonial relationship as defined by the Acts of Trade and Navigation; an analysis which suggested that in the long run the relationship between the colonies and the mother country must change, thus exposing the fundamental contradictions of the mercantile system. There may indeed be a rhetorical dimension here, but there is also a closely reasoned case in one of Smith’s great set-piece debates. But for the student of Smith as an institutionalist, the two sides of the debate are not unconnected. Smith must have been well informed about American Affairs. He had been consulted by Shelburne on his return from France in 1766 and also by Charles Townshend, who had been responsible for Smith’s appointment as tutor to the young Duke of Buccleuch (1764–66). Townshend died six years before Smith’s return to London in 1773, but no doubt knowledge of the problems which he confronted, and to which he had contributed, would be familiar to Smith. In the period 1773–76 Smith was also in contact with Alexander Wedderburn, Solicitor General, and a friend of thirty years’ standing; the man responsible for the hostile examination of Benjamin Franklin before the Privy Council in 1766. Hume was moved to remark that Wedderburn’s treatment of the distinguished colonist had been ‘most cruel’ (Corr: 171). Morris (1970:36) has suggested that the experience turned Britain’s foremost imperial statesman into an implacable enemy’. Franklin himself was in London for the last two years of Smith’s sojourn in the city. Smith met him frequently, and would be familiar with the needs of the British government, the current legislative programme, and of the Colonial

Adam Smith on the mercantile system

249

reaction to that programme. Smith would have understood the economic logic behind such contentious legislation as the Sugar Act (1764), the Stamp Act (1766) and the Townshend Revenue Acts (1767). But three features of the general strategy are likely to have attracted his attention. First, there was the question of taxation and consent. The point was aptly illustrated by Franklin’s evidence before the House of Commons in 1766 when he stated the view of his colleagues in these terms: They understood it thus; by the same charter and otherwise, they are entitled to all the privileges and liberties of Englishmen…that one of the privileges of English subjects is, that they are not to be taxed without their common consent (Morris 1970:85) The point was repeated in John Dickinson’s Letters from a Farmer in Pennsylvania to the Inhabitants of the British Colonies. The argument was further supported in the Declaration of Colonial Rights and Grievances (1774), which followed upon the Boston Tea Party of December 16, 1773, and which rejected ‘every idea of taxation, internal or external, for raising a revenue on the subjects of America, without their consent’ (Morris, 1970:132). The point was accepted by William Pitt, and by Adam Smith. Secondly, the critic of the mercantile system would note that the regulating acts which were so marked a feature of mercantile policy and which were regarded by Smith as unjust violations of natural liberty, were not at the time seen in this light by the colonists themselves. As Franklin pointed out in his examination before the House of Commons: The authority of Parliament was allowed to be valid in all laws, except such as should lay internal taxes. It was never disputed in laying duties to regulate commerce. As David Stevens has noted: Even when the First Continental Congress convened in 1774, the delegates, whom Dr Johnson was to call ‘croakers of calamity’ and ‘demigods of independence’, showed little opposition to the old system. In Resolve No 4 of the Suffolk Resolves, Stevens continued, it was stated, that: We cheerfully consent to the operation of such acts of the British parliament as are bona fide, restrained to the regulation of our external commerce, for the purpose of securing the commercial advantage of the whole empire to the mother country, and the commercial benefits of its respective members, excluding every idea of taxation internal or external, for raising a revenue on the subjects without their consent (1975:213)

250

Andrew S.Skinner

It is interesting to observe in this connection that neither the Declaration of Colonial Rights and Grievances nor the Declaration of Independence, which included a comprehensive indictment of British policy, contained any critical reference to the acts of trade and navigation. As Oliver Dickinson has pointed out, colonial objections to British policy after 1763 were ‘not because they were trade regulations but because there were not laws of that kind’ (1951:295). This brings us to the third aspect of the current situation which may have attracted Smith’s attention. ‘Imperialism not mercantilism…was the first cause of the eventual rupture’ (Andrews, 1924:122, 128–9). These assessments reflect contemporary American opinion, as illustrated by the text of the Continental Association of 1774 whose members found that: the present unhappy situation of our affairs is occasioned by the ruinous system of colony administration, adopted by the British ministry about the year 1763, evidently calculated for enslaving these colonies, and with them the British Empire. Morris (1970:135) The Olive Branch Petition of July 5, 1775 made the same point. The colonists were alarmed by a new system of statutes and regulations adopted for the administration of the colonies, that filled their minds with the most painful fears and jealousies, and, to their inexpressible astonishment, perceived the dangers of a foreign quarrel succeeded by domestic dangers, in their judgment, of a more dreadful kind. Morris (1970:164) It is noteworthy that the appeal was made to the King (Livingston, 1990:144). From a Parliamentary point of the view, the problem is aptly demonstrated by the terms of the Declaratory Act of 1766. This Act accompanied the repeal of the Stamp Act but took the opportunity to state, despite the repeal, that the King in Parliament: had, hath, and of right ought to have, full power and authority to make laws and statutes of sufficient force and validity to bind the colonies and people of America, subjects of the Crown of Great Britain, in all cases whatsoever. Morris (1970:87) It can be suggested that the state of conflict with America confirmed a contradiction inherent in the dogma of parliamentary sovereignty which was to Britain affirmation of her freedom from arbitrary power and to America, confirmation of her subjection to it Smith might not have been dismayed by the discovery that the colonists did not currently object to mercantile regulations. He quite evidently believed that the

Adam Smith on the mercantile system

251

contradictions in the system as applied to the Colonies would manifest themselves not immediately but over time. But he may well have realised that his proposed solution to a future problem, namely union, could also solve the immediate difficulties which both the colonies and the mother country confronted. Nor was the solution of union fanciful at the time of writing. The first continental Congress (1774) debated and narrowly defeated Joseph Galloway’s plan for a maritime union and this was essentially a modification of Franklin’s Albany Plan of 1754— a plan which gave a good deal of authority to the Colonies and to the Crown. Franklin himself proposed a plan of confederation at the Second Congress (1775) while the British tried, too late, to revive a version of the original Albany Plan, after Bourgoyne’s surrender at Saratoga in 1777.

The long-run economic problem This brings us to the core of Smith’s published commentary in WN, Book IV, Chapter 7, where he attacked the mercantile system at what he believed to be its strongest point: the colonial relationship with the thirteen colonies. It was Smith’s belief that the link with America had brought the mercantile system a degree of ‘splendour and glory which it could never otherwise have attained to’ (WN, IV, vii c. 81). The true purpose of Smith’s argument taken as a whole, was to demonstrate the dangers of regulation in so far as it involved distortion in the use of resources, while also affecting the rate of economic growth: No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord. (WN IV, ii 3) In Smith’s eyes, regulation is liable to ‘the general objection which may be made to all the different expedients of the mercantile system; the objection of forcing some part of the industry of the country into a channel less advantageous than that in which it would run of its own accord’ (WN IV, v a. 24). It was his emphatic belief that, All the different regulations of the mercantile system, necessarily derange more or less this natural and most advantageous distribution of stock’ (WN IV, vii c. 89). The language recalls that of the Lectures on Jurisprudence, where Smith drew attention to the point that intervention with the economic system must disturb the ‘natural balance of industry’ and the ‘natural connection of all trades in the stock’ (LJB: 233–4). But inWN, the critique of regulation is now supported by a distinctive (and questionable) argument. As Leo Rogin pointed out:

252

Andrew S.Skinner

Smith provides us with a theory of natural economic development which he imposes as a norm on the historical career of nations since the emergence from the feudal era. This theory of a natural economic development is implicitly invoked in the entire range of the discussion of economic history and policy, and in the criticism of economic doctrines to which the bulk of The Wealth of Nations is devoted. Rogin (1956:76) There are, in fact, two sides to the argument In Book III of WN?, Smith chose to provide a historical analysis of the origins of the exchange economy but also a statement of the thesis regarding the natural progress of opulence which illustrates one aspect of the critique of the mercantile system which was to follow. A second thesis had already been advanced in Book II (Chap. 5) where Smith contended that the four main fields of investment which were mentioned in his macro-economic model of ‘conceptualised reality’ (Jensen, 1984) would support, directly or indirectly, different quantities of productive labour. It was in this context that Smith emphasised the superior productivity of agriculture. This was to become a key feature of his treatment of the colonies and their economic prospects. Both theses were employed by Smith in his critique of the mercantile links with America, and soon attracted critical attention: Thomas Pownall, former Governor of Massachusetts, made a perceptive point in noting that Smith gave prominence to theses or ‘propositions’ regarding the productivities of areas of investment (established in Books 2 and 3) in advancing his analysis as contained in Book 4: ‘I will beg to arrest your steps for a moment, while we examine the ground whereon we trade: and the more so, as I find these propositions used in the second part of your work as data; when you endeavour to prove, that the monopoly of the colony trade is a disadvantageous institution’ (1776:23; Corr: 354).

The Regulating Acts In describing the objectives of colonial policy, Smith concentrated mainly on its economic aspects and duly reported on the extensive range of restrictions which Britain had imposed on trade and manufactures, domestic as well as American. To begin with, the regulating acts of navigation required that trade between the colonies and Great Britain had to be carried on in British ships, and that certain classes of commodities were to be confined initially to the market of the mother country. These, so-called ‘enumerated’ goods were of two types: those which were either the peculiar produce of America or were not produced in Britain, and those goods which were produced in Britain but in insufficient quantities to meet domestic demand. Examples of the first type were molasses, coffee and tobacco; of the second, naval stores, masts, pig-iron and copper. The first broad category of goods was not of a kind which could harm British industry, and here the object of policy, as reported by Smith, was to ensure that British merchants could

Adam Smith on the mercantile system

253

buy cheaper in the colonies with a view to supplying other countries at higher prices, and at the same time establish a useful carrying trade. In the second case, the objective was to ensure essential supplies and, through the careful use of duties, to discourage imports from other countries ‘with whom the balance of trade was supposed to be unfavourable’. Smith also took notice of another feature of British policy, namely, that the production of the more ‘advanced or more refined manufactures’ was discouraged in the colonies (WN, IV, vii, v. 40). Thus woollen manfactures were forbidden, and although they were encouraged to export pig-iron, the colonists were prevented from erecting slitt-mills which might have led ultimately to the development of manufactures competitive with those of Great Britain. There was a certain ingenuity in these arrangements in that the colonial relationship could be seen to benefit both parties at least in the short run. For example, the relationship with the colonies, as defined by the regulating acts, had the effect of creating a self-supporting economic unit whose main components provided complementary markets for each others’ products, and in addition helped to minimise gold flows abroad (WN, IV, vii 15). By the same token, the colonial relationship gave Britain access to strategic materials, and also contributed to national defence, through the encouragement given to her mercantile marine. Smith also argued that there were considerable opportunities for economic growth within the framework of the colonial relationship. In this connection, he placed most emphasis on the American experience, and drew attention to three factors which contributed to explain her rapid rate of expansion. First, Smith isolated what may be described as ‘institutional’ forces in pointing out that the colonies possessed political institutions derived from the British model, which encouraged economic activity by guaranteeing the security of the individual (WN, IV, vii b. 51). In the same way he pointed out that the colonists had brought to an underdeveloped territory the habit of subordination and a ‘knowledge of agriculture and of other useful arts’ (WN, IV, vii b. 2); the legacy of the more developed economies from which they had often come. Smith also emphasised that certain features were absent from the colonies, of a kind which contributed to slow up the rate of growth in Europe: for example, high rents, tithes and taxes, together with legal arrangements such as laws of entail which hindered the sale of lands to those whose object was to improve them. Secondly, he drew attention to the economic situation of the colonial territories in pointing out that A new colony must always for some time be more understocked in proportion to the extent of territory, and more under-peopled in proportion to the extent of its stock, than the greater part of other countries’ (WN, I, ix 11). This meant that the rates of both wages and profits were likely to be high, thus contributing to a level of activity which explained the ‘continual complaint of the scarcity of hands in North America. The demand of labourers, the funds destined for maintaining them, increase, it seems, still faster than they can find labourers to employ’ (WN, I, vii 23). Thirdly, Smith argued that the legislative arrangements governing trade with the mother country had contributed most materially to colonial development even

254

Andrew S.Skinner

though this had not always been the motive behind them. In this connection he drew attention to the fact that ‘the most perfect freedom of trade is permitted between the British colonies of America and the West Indies’, thus providing a ‘great internal market’ for their products (WN, IV, vii b. 39). In addition, the relative freedom of trade in non-enumerated commodities provided a further market for the primary products involved, while Britain also gave preferential treatment to American products which were confined to her own domestic market. Again, Britain provided a large European market (albeit indirectly) for the enumerated items—for example, goods like tobacco which were largely re-exported. Taken as a whole, the colonial policy had the effect of encouraging what Smith described as Agriculture…the proper business of all new colonies; a business which the cheapness of land renders more advantageous than any other’ (WN, IV, vii c. 51). This point is of great importance, since on Smith’s argument that the proposition that agriculture was the most productive of all forms of investment, capable of generating large surpluses which could sustain further growth was accepted. He even argued that the restrictions imposed on the introduction of manufactures had benefited the colonies by ensuring that they bought from the cheaper European markets and therefore avoided diverting any part of the available capital into less productive employments. He concluded: Unjust, however, as such prohibitions may be, they have not hitherto been very hurtful to the colonies. Land is still so cheap, and, consequently, labour so dear among them, that they can import from the mother country, almost all the more refined or more advanced manufactures cheaper than they could make them for themselves. Though they had not, therefore, been prohibited from establishing such manufactures, yet in their present state of improvement, a regard to their own interest would, probably, have prevented them from doing so. (WN, IV, vii 44) As Donald Winch (1978) has pointed out, the experience of America is one of the rare examples where the actual and the ‘natural’ progress of opulence actually coincide. There is no doubt as to the buoyancy of Smith’s tone in describing the growth rate of North America: a country where the benefits available, natural, artificial and accidental, were such as to prompt the conclusion that ‘though North America is not yet so rich as England, it is much more thriving, and advancing with much greater rapidity to the further acquisition of riches’ (WN, I, viii 23). At the same time, it cannot be said that Smith minimised the benefits to Britain from the standpoint of economic growth. In this connection he pointed out that Britain (together with her neighbours) had as a matter of fact acquired, through the control of the colonies, a ‘new and inexhaustible market’ which had given occasion to ‘new divisions of labour and improvements of art’. Indeed, it can be said that Smith’s assertion of benefit accruing to Great Britain as a result of the colonial relationship simply reflects his own grasp of the gains from trade (WN, IV, i. 31).

Adam Smith on the mercantile system

255

Smith’s argument seems designed to suggest that the colonial relationship had both contributed to, and proved compatible with, a relatively high rate of growth in both the colonies and the mother country.

Contradictions and solutions The relationship between the mother country and the colonies is thus represented as beneficial to the two parties, both as regards the politico-economic objectives of the regulating acts and the stimulus given to economic growth. But at the same time Smith evidently believed that there were contradictions inherent in the colonial relationship which must begin to manifest themselves over time. For example, while Smith took pains to emphasise the great stimulus given to the growth of the colonies, he also pointed out that the high and rapid rate of growth which they had attained must ultimately come in conflict with the restrictions imposed on colonial trade and manufactures: restrictions which could be regarded as the ‘principal badge of their dependency’ (WN, IV, vii c. 64) and as a ‘manifest violation of one of the most sacred rights of mankind’. He also pointed out that: ‘In their present state of improvement, those prohibitions, perhaps, without cramping their industry, or restraining it from any employment to which it would have gone of its own accord, are only impertinent badges of slavery… In a more advanced state they might be really oppressive and insupportable’ (WN, iv, vii b. 44). Smith quite clearly considered that in the long run some change must come in the colonial relationship for the reasons just stated, although he did place most emphasis on the more immediate problems faced by Britain herself, as providing the stimulus for change. As far as Great Britain was concerned Smith contended that although the colony trade was ‘upon the whole beneficial, and greatly beneficial’ (WN, IV, vii c. 47), still the rate of growth was necessarily lower than it would have been in the absence of the regulating acts. He quite clearly believed that, ‘If the manufactures of Great Britain…have been advanced, as they certainly have, by the colony trade, it has not been by means of the monopoly of that trade, but in spite of the monopoly’ (WN, IV, vii c. 55). Smith advanced a number of points in support of this contention. First, he suggested that the monopoly of the colony trade had inevitably increased the volume of business to be done by a relatively limited amount of British capital and, therefore, the prevailing rate of profit. In this connection he argued that high rates of profit would affect the improvement of land (WN, IV, vii c. 578) and the frugality of the merchant classes (WN, IV, vii c. 61), while ensuring that available capital would be partly drawn, and partly driven, from those trades where Britain lacked the monopoly (i.e. drawn by the higher profits available in the colony trade, and driven from them by a poorer competitive position). But Smith especially emphasised that the pattern of British trade had been altered in such a way that her manufactures, ‘instead of being suited, as before the act of navigation, to the neighbouring market of Europe, or to the more

256

Andrew S.Skinner

distant one of the countries which lie round the Mediterranean sea, have, the greater part of them, been accommodated to the still more distant one of the colonies’ (WN, IV, vii c. 22). Smith’s point was that the existing legislation had drawn capital from trades carried on with a near market (Europe), and diverted it to trade carried on with a distant market (America), while forcing a certain amount of capital from direct to indirect foreign trade: with the consequent effects, he alleged, on the rate of return, the employment of productive labour, and, therefore, the rate of economic growth. Smith added that the pattern of British trade had been altered in such a way as to make her unduly dependent on a single (though large) market Her commerce, instead of running in a great number of small channels, has been taught to run principally in one great channel. But the whole system of her industry and commerce has thereby been rendered less secure; the whole state of her body politick less healthful, than it otherwise would have been. In her present condition, Great Britain resembles one of those unwholesome bodies in which some of the vital parts are overgrown, and which, upon that account, are liable to many dangerous disorders scarce incident to those in which all the parts are more properly proportioned. (WN, IV, vii c. 43) But Smith’s account of the problem facing Great Britain is largely dominated by that of fiscal need. In Smith’s opinion Britain’s needs seemed to be growing more rapidly than her resources, and he noted in this connection that by January 1775 the national debt had reached the then astronomical figure of £130 million (absorbing £4.5 million in interest charges), much of which was due to the acquisition of the colonial territories. This was a matter of some moment since it meant that a country whose rate of growth had been adversely affected by the colonial relationship had to face a large and probably growing tax burden which would itself affect the rate of economic expansion, and thus compound the problem. Smith thus concluded that Great Britain must in the course of time either solve the fiscal problem or abandon it, in the latter case accommodating ‘her future views and designs to the real mediocrity of her circumstances’ (WN, V, iii 92). But Smith believed that Great Britain both could and should tax the colonies, partly as a means of relief from the growing burden of the national debt and partly as a means of making the colonies pay for benefits received from the imperial connection. It is not contrary to justice that both Ireland and America should contribute towards the discharge of the publick debt of Great Britain. That debt has been contracted in support of the government established by the Revolution, a government to which the protestants of Ireland owe, not only the whole authority which they at present enjoy in their own country, but every security which they possess for their liberty, their property, and

Adam Smith on the mercantile system

257

their religion; a government to which several of the colonies of America owe their present charters, and consequently their present constitutions, and to which all the colonies of America owe the liberty, security, and property which they have ever since enjoyed. That publick debt has been contracted in the defence, not of Great Britain alone, but of all the different provinces of the empire; the immense debt contracted in the late war in particular, and a great part of that contracted in the war before, were both properly contracted in defence of America. (WN, V, iii 88) Smith concluded that the British government should retain the right of assessment but extend the British system of taxation to all the colonies. He added that such a change of policy would require a form of union which would give the colonies representation in the British parliament and in effect create a single state: This, however, could scarce, perhaps, be done, consistently with the principles of the British constitution, without admitting into the British Parliament, or if you will into the states-general of the British empire, a fair and equal representation of all those different provinces, that of each province bearing the same proportion to the produce of its taxes, as the representation of Great Britain might bear to the produce of the taxes levied upon Great Britain. (WN, V, iii 68) Indeed, Smith believed that: there is not the least probability that the British constitution would be hurt by the union in Great Britain with her colonies. That constitution, on the contrary, would be completed by it, and seems to be imperfect without it. The assembly which deliberates and decides concerning the affairs of every part of the empire, in order to be properly informed, ought certainly to have representatives from every part of it. (WN, IV, vii c. 77) As to the colonists: Instead of piddling for the little prizes which are to be found in what may be called the paltry raffle of colony factions; they might then hope, from the presumption which men naturally have in their own ability and good fortune, to draw some of the great prizes which sometimes come from the wheel of the great state lottery of British politicks. (WN, IV, vii c. 75) Scarcely an endearing assessment in the eyes of the American readers.

258

Andrew S.Skinner

What Smith had in mind was an incorporating union of the kind introduced by the Act of 1707 and which was later extended to Ireland. But the union which Smith envisaged was distinctive in that he foresaw the eventual transfer of power from Westminster to the former colonies. It was Smith’s view that America’s progress ‘in wealth, population and improvement’ had been, and would continue to be, so rapid that ‘in the course of little more than a century, perhaps, the produce of America might exceed that of British taxation. The seat of empire would then naturally remove itself to that part of the empire which contributed most to the general defence and support of the whole’ (WN, IV, vii c. 79). The belief that America would in the long run prove to be the dominant influence also attracted a good deal of support Thomas Pownall, for example had already noted that America would become the major partner in his proposed ‘grand marine dominion’ and so too had his friend Benjamin Franklin, both in his Observations and in correspondence with Lord Kames: Scotland and Ireland are differently circumstanced. Confined by the sea, they can scarcely increase in numbers, wealth and strength, so as to overbalance England. But America, an immense territory, favoured by Nature with all advantages of climate, soil, great navigable rivers, and lakes, etc must become a great country, populous and mighty; and will, in less time than is generally conceived, be able to shake off any shackles that may be imposed on her, and perhaps place them on the imposers. Ross (1972:340–1)

The state of the contest with America The Memorandum, dated February 1778, was written by Smith for the benefit of Alexander Wedderburn who sought advice as to the options open to the British Government in the aftermath of Saratoga (Stevens, 1977). One of the options which Smith discussed in this document was an incorporating Union but he recognised that an opportunity had been lost long before the military setback: ‘We, on this side of the water, are afraid lest the multitude of American representatives should overturn the balance of the constitution’, he wrote, while those ‘on the other side of the water are afraid lest their distance from the seat of government might expose them to many oppressions’ (WN, IV, vii c. 78). His tone had hardened further in the Memorandum: ‘[I]n their present elevation of spirits’, he advised Wedderburn, ‘the ulcerated minds of the Americans are not likely to consent to any union even upon terms the most advantageous to themselves’ (Corr: 381). In Britain, he wrote, the plan of union ‘seems not to be agreeable to any considerable party of men’. He concluded, with regret that: The plan which, if it could be executed, would certainly tend most to the prosperity, to the splendour, and to the duration of the empire, if you

Adam Smith on the mercantile system

259

except here and there a solitary philosopher like myself, seems scarce to have a single advocate. (Corr: 382) The outcome had been in doubt from an early date. David Hume, who had supported American independence as early as 1768, felt that the link with America ‘cannot long subsist’ (Greig, 1932:2. 237). Thomas Pownall, addressing the Commons prior to the surrender at Saratoga advised his colleagues that: Until you shall be convinced that you are no longer sovereigns over America, but that the United States are an independent sovereign people—until you are prepared to treat with them as such—it is of no consequence at all, what schemes or plans of conciliation on this side the House…may adopt. Stevens (1977:379–80) The terms offered by the Carlisle Commission on June 13, 1778 and which were rejected by Congress, further illustrate the difficulties confronting the British Government The Commissioners offered to ‘consent to a cessation of hostilities, both by sea and land. To restore free intercourse, to revive mutual affection, and restore the common benefits of free naturalisation through the several parts of this empire. To extend every freedom of trade that our respective intercourse can require. To agree that no military force shall be kept up in the different states of North America, without the consent of the general congress, or particular assemblies… To perpetuate our union…’ (Morris, 1970:272–3). The offer was too late. The terminology used by Smith is surely striking—his preference was for a strategy which would support the prosperity, splendour and ‘duration of the empire’. What he had in mind, as a preferred solution, was a kind of Atlantic Economic Community which unlike other ‘communities’ of a later date would have the advantage of a common language and culture. Smith was in effect advocating an Anglo-American Empire of enormous power and potential. Writing in 1973, Galbraith observed: ‘In Europe, the nation states have created the ultimate monument to Adam Smith, the European Economic Community’ (Galbraith, 1974:76). Smith might well have preferred a rather different, and a more congenial, solution. Given that union with America was no longer likely, Smith turned his attention to other, more practicable possibilities. One possible solution to current difficulties was military victory; an outcome which was supported by Hugh Blair, William Robertson and Adam Ferguson (Livingston, 1990:143)—but not by Hume. As Smith wryly observed, the problem with this ‘solution’ arises altogether from the resistance of America (Corr: 281). He also observed that Should the war in America drag out through another campaign, the American militia may become in every respect a match for that standing

260

Andrew S.Skinner

army, of which the valour appeared, in the last war, at least not inferior to that the hardiest veterans of France and Spain. (WN, V, i, a. 27) Yet even if victory were possible, the outcome, he advised, would still be unworkable. A military government, he wrote, ‘is what of all others, the Americans hate and dread the most While they are able to keep the field, they will never submit to it; and if, in spite of their utmost resistance, it should be established, they will, for more than a century to come, be at all times ready to take arms in order to overturn it’ He went on: After so complete a victory…after having, not only felt their own strength, but made us feel it, they would be ten times more ungovernable than ever, factious, mutinous and discontented subjects in time of peace; at all times, upon the slightest disobligation, disposed to rebel; and, in the case of a French or Spanish war, certainly rebelling. (Corr: 383) Besides, he concluded: By our dominion over a country, which submitted so unwillingly to our authority, we could gain scarce anything but the disgrace of being supposed to oppress a people whom we have long talked of, not only as our fellow subjects, but as of our brethren and even as of our children. (Corr: 381) A third option open to the British government was simplicity itself—voluntary withdrawal from the conflict and recognition of America as a separate state. The advantages of such a bold course were, in Smith’s opinion, immense. At one stroke, Britain would be free of the crushing burden of expenditure needed to defend the colonies and could avoid further conflict with France and Spain, at least in the New World. As Smith wrote in the Wealth of Nations: By thus parting good friends, the natural affection of the colonies to the mother country, which, perhaps, our late dissensions have well nigh extinguished, would quickly revive. (WN, IV, vii c. 66) Hume had already advocated such a policy in a letter addressed to William Strahan, dated October 26, 1775: Let us…lay aside all anger, shake hands, and part friends. Or, if we retain any anger, let it be only against ourselves for our past folly: and against that wicked Madman Pitt, who has reduced us to our present condition. Greig (1932:2. 300–1)

Adam Smith on the mercantile system

261

Even if the two countries were to part with some evidence of ill-feeling, Smith advised Wedderburn that the ‘similarity of language and manners would in most cases dispose the Americans to prefer our alliance to that of any other nation’ (Corr: 333). Yet withdrawal from the conflict was unlikely: [T]ho’ this termination of the war might be really advantageous, it would not, in the eyes of Europe, appear honourable to Great Britain; and when her empire was so much curtailed, her power and dignity would be supposed to be proportionably diminished. What is of still greater importance, it could scarce fail to discredit the government in the eyes of our own people, who would probably impute to mal-administration what might, perhaps, be no more than the unavoidable effect of the natural and necessary course of things. (Corr: 383) He continued: A government which, in times of the most profound peace, of the highest public prosperity, when the people had scarce even the pretext of a single grievance to complain of, has not always been able to make itself respected by them, would have everything to fear from their rage and indignation at the public disgrace and calamity, for such they would suppose it to be, of thus dismembering the empire. (Corr: 383) Smith was not above an exercise in the politics of the cabinet in suggesting that Great Britain might restore Canada to France and Florida to Spain thus rendering ‘our colonies the natural enemies of these two monarchies and consequently the natural allies of Great Britain’. As he noted: Those splendid, but unprofitable acquisitions of the late war, left our colonies no other enemies to quarrel with but their own mother country. By restoring those acquisitions to the (ancient) masters, we should perhaps revive old enmities, and probably old friendships. (Corr: 383) But Smith saw no alternative to defeat—and the loss of most if not all the thirteen colonies accompanied by the successful defence of Canada: the worst possible outcome from an economic point of view.

Postscriptum If we strip out those aspects of the Memorandum which illustrate the ‘politics of the cabinet’, there is a remarkable degree of realism as to Britain’s options. The

262

Andrew S.Skinner

dilemma posed by the distinction between a rational course of action and the force of domestic and world opinion has haunted many governments since. There were also many commentators who doubted the wisdom of military intervention. But perhaps Sir James Steuart (1713–1780; Principles, 1767) offers an interesting set of parallel arguments to those advanced by his ‘rival in fame’. Steuart’s views as to the options open to the British Government are set out in nine letters on the American Conflict’ and were first published as recently as 1994 (Raynor and Skinner, 1994). The letters were addressed to Archibald Hamilton of Westburn, a property near Steuart’s ancestral home in Lanarkshire which is close to the city of Glasgow. The letters were intended to be transmitted, probably to George Germain, Secretary of State for the American Department (1775–1782: Raynor and Skinner, 1994:758). Germain is unlikely to have been pleased with Steuart’s bleak assessment of the situation. Like Smith, he noted that whereas force may give subjects to a state, it will not give citizens, before going on to point out that ‘it is hardly possible by any force we can send against the colonies, to overcome the general spirit of the people which pushes them to resistance’ (1994:759). In the manner of his close friend, Lord Barrington, Steuart argued in favour of a naval blockade which would enforce the colonial non-importation and nonexportation agreement: ‘I confess that on the whole I still believe the cutting off all their trade will be a readier means of bringing them to obedience than the force of arms’ (1994:760). The views stated above were based upon an appreciation of British naval power and supported by the belief that the effects of a total blockade would be offset by the fact that British trade could probably find ‘a new channel’; a view which Steuart shared with Hume and Smith. But while economic sanctions were seen by Steuart as the most effective instrument of policy, he nonetheless concluded that if success came by this route ‘I would open to America the trade of the whole world as much as to GB’ (1994:760). The concluding paragraph of one letter (letter 6) offers recommendations for the harmonisation of British and colonial taxes in order to maximise the benefits of reciprocal trade; an argument which Smith himself was to develop in the final passages of WN, Book 5. The similarities in approach are quite striking, even if the two men adopted approaches to political economy that were very different. Steuart was essentially European in his perspective and his work is informed throughout by a close knowledge of the backward conditions in Scotland and on the Continent (Skinner, 1996: Chap. 11). The whole approach was dominated by an interest in economic policy, although as Rogin noted ‘Steuart’s distinguished recipe for a New Deal was completely overshadowed by Smith’s treatise’ (Rogin, 1956:106). But Schumpeter’s description of the work done by Ferdinando Galiani (cf. Hutchison, 1988: Chap. 15) applies equally to David Hume and to Sir James Steuart. Schumpeter wrote of Galiani that he was an economist who always insisted on the variability of man and of the relativity to time and place, of all policies;…one who was completely free from the paralysing

Adam Smith on the mercantile system

263

belief, that crept over the intellectual life of Europe, in practical principles which claim universal validity, who saw that a policy which was rational in France at a given time, might be quite irrational, at the same time in Naples… Schumpeter (1954:293–4) This was Steuart’s position. He was interested in practical matters of policy and deeply aware of the great variety of economic conditions to be confronted in Scotland, France, Germany, Italy and Spain. He was interested in the problems confronting economies as they emerged, at varying rates, from the feudal state; in the areas of regional imbalance and structural unemployment, not to mention the problems confronted by economies engaged in trade with different factor endowments and rates of growth. An advocate of economic management, he was aware that there were circumstances in which freedom of trade was a sound policy and of others where a strategy of protection was to be preferred. It was this broad, practical approach which helps to explain Keith Tribe’s point that at least on the Continent of Europe, and until the end of the century, Steuart’s ‘Inquiry was better known and more frequently cited than Smith’s The Wealth of Nations’ (1988:133). But in view of Smith’s later reputation in the former Colonies, the most intriguing link is with the United States. The Dublin edition of 1770 circulated widely in the Colonies. The Principles attracted the attention of Alexander Hamilton, whose protectionist position was adopted with a view to counterbalancing the advantages of the British economy after 1783. Hamilton considered Steuart’s work to be a safer guide than that of Smith (Skinner et al., 1988:i. lxiv; Stevens, 1975:215, 217). In this connection, Galbraith recorded that: ‘In the funeral elegy for Alexander Hamilton in 1804, James Kent complemented his deceased friend on having resisted the ‘fuzzy philosophy of Smith’ (1958:14). The city of Glasgow, whose street names still recall a colonial age (Jamaica, Tobago, Glassford, Cochrane and Buchanan, to name but a few) and which was heavily committed to American commerce, might also have benefited from the advice of the late jacobite/economist. To quote from ‘Senex’: Well do I remember the melancholy and dejected countenance of every person in our city at the sad news of the loss of America; and the circumstance is still fresh in my memory, of my father, almost with tears in his eyes, reading to us the first number of the Glasgow Advertiser published by Mennons in which at full length were recorded the preliminaries of peace between Great Britain and the United States. There was no rejoicing here at this peace, no illuminations, no bonfires, no squibs or crackers, no firing of guns or ringing of bells—all was silence and sorrow. Phillips (1983:11–2) But in the event the sorrow did not last It was the French, whose alliance with America in 1778 played so crucial a role, who failed to acquire the level of access

264

Andrew S.Skinner

to the markets of the United States for which they had (very reasonably) hoped. Claude Fohlin, in offering a ‘French view’ of the Peace of Paris, noted that The Franco-American treaty of commerce was still valid, but it had little effect for either side once the war was over. For almost two centuries, Americans had relied on the British market… The French proved unable to unseat them as British goods inundated the American market Fohlin (1985:137) The point had already been established by T.M.Devine in his major analysis of the Aftermath of the American War’ (1975:153–73), as it affected Scottish (and British) trade. In the years following 1783 there was a major change in the tobacco trade, but as Professor Devine has noted: Significantly, tobacco ships delivering cargoes to Europe loaded up with manufactured goods for the return voyage in British ports and not continental centres. (1975:163–5) As usual, Hume was correct in his assessment: the worst effect of the loss of America will not be in the Detriment of our Manufactures, which will be a mere trifle, but to the Credit and Reputation of Government. Greig (1932:2. 304–5) But in Smith’s view it was an unnecessary loss; a source of regret; a lost opportunity. It was perhaps for this reason that Smith mounted what he himself called ‘the very violent attack I had made upon the whole commercial system of Great Britain’ (Corr: Letter 208, October, 1780). Smith consistently drew attention to the pernicious influence of the mercantile interest and to its undue power over the Legislature (cf. Samuels, 1973; West, 1976). Note 1.

References to Smith’s works follow the usages of the Glasgow edition: Corr The Glasgow edition of the works and correspondence of Adam Smith Vol. 6: The correspondence, edited by I.S.Ross and E.C.Mossner, Oxford: Clarendon Press, 1977. LJ The Glasgow edition of the works and correspondence of Adam Smith Vol. 5: Lectures on jurisprudence, edited by R.L.Meek, D.D.Raphael and P.G.Stein, Oxford: Clarendon Press, 1978. WN The Glasgow edition of the works and correspondence of Adam Smith Vol. 2: An inquiry into the nature and causes of the wealth of nations, edited by R.H. Campbell, A.S.Skinner and W.B.Todd, Oxford: Clarendon Press, 1976.

Adam Smith on the mercantile system

265

References Andrews, C.M (1924) The Colonial Background of the American Revolution, New Haven, CT: Yale University Press, Devine, T.M. (1975) The Tobacco Lords: A Study of the Tobacco Merchants of Glasgow and their Trading Activities, Edinburgh: John Donald. Dickerson, O.M. (1951) The Navigation Acts and the American Revolution, Philadelphia: University of Pennsylvania Press. Fohlin, C. (1985) ‘The Peace of 1783: a French view’, in P.Gifford, ed., The Treaty of Paris in a Changing States System, Lanham, MD: University Press of America. Galbraith, J.K. (1958) The Affluent Society Boston: Houghton Mifflin. Galbraith, J.K. (1974) ‘Adam Smith’, in Commemorative Symposium, Kirkcaldy: Kirkcaldy Town Council. Greig, J.Y.T. (1932) Letters of David Hume, Oxford: Clarendon Press. Hutchison, T.W. (1988) Before Adam Smith: The Emergence of Political Economy, 1662–1776, Oxford: Basil Blackwell. Koebner, R (1961) Empire, Cambridge: Cambridge University Press. Jensen, H.E. (1984) ‘Sources and contours in Adam Smith: conceptualised reality’, in J.C.Wood, ed., Adam Smith: Critical Assessments, London: Routledge and Kegan Paul. Livingston, D. (1990) ‘Hume, English barbarism and American independence’, in R.B. Sher and J.R.Smitten, eds, Scotland and America in the Age of Enlightenment, Edinburgh: Edinburgh University Press. Morris, R.B., ed. (1970) The American Revolution, 1763–1783, New York: Harper and Row. Phillips, A. (1983) Glasgow’s Herald, Glasgow: Richard Drew. Pownall, T. (1776) A Letter from Governor Pownall to Adam Smith, London (also in Corr, appendix A). Raynor, D., and A.S.Skinner (1994) ‘Sir James Steuart nine letters on the American Conflict, 1775–1778’, William and Mary Quarterly, 3rd series, 51,4. Rogin, L. (1956), The Meaning and Validity of Economic Theory: A Historical Approach, New York: Harper and Row. Ross, I.S. (1972) Lord Kames and the Scotland of his Day, Oxford: Clarendon Press. Samuels, W.J. (1973) Adam Smith and the economy as a system of power’, Review of Social Economy 31. Schumpeter, J.A. (1954) History of Economic Analysis, London: George Allen and Unwin. Sher, R B., and J.R.Smitten, eds. (1990) Scotland and America in the Age of Enlightenment, Edinburgh: Edinburgh University Press. Skinner, A.S. (1996) ‘Mercantilist policy: the American colonies’, in A System of Social Science: Papers Relating to Adam Smith, Oxford: Oxford University Press. Skinner, A.S., N.Kobayashi, and H.Mizuta, eds (1998) Sir James Steuart’s Principles of Political Oeconomy, London: Chatto and Pickering. Skinner, A.S., ed (1999) The Wealth of Motions, Books IV–V, Harmondsworth: Penguin. Smitten, J. (1990), ‘Moderation and history: William Robertson’s unfinished history of British America’, in P.B.Sher and J.Smitten, eds, Scotland and America in the Age of Enlightenment, Edinburgh: Edinburgh University Press. Stevens, D. (1975) Adam Smith and the colonial disturbances’, in A.S.Skinner and T.Wilson, eds, Essays on Adam Smith, Oxford: Oxford University Press. Stevens, D., ed. (1977) ‘Smith’s thoughts on the state of the contest with America, February 1778’, in Corr, appendix B.

266

Andrew S.Skinner

Tribe, K. (1989) Governing Economy: The Reformation of German Economic Discourse, 1750–1840, Cambridge: Cambridge University Press. West, E.G. (1976) ‘Adam Smith’s economics of politics’, History of Political Economy 1. Winch, D. (1978) Adam Smith’s Politics: An Essay in Historiographic Revision, Cambridge: Cambridge University Press. Wood, J.C., ed. (1984) Adam Smith: Critical Assessments, London: Routledge and Kegan Paul.

Index

Abolafia, Mitchel Y., 101 Adams, W., 21 administrated capitalism, 15 prices, 32 advertising, 21 aggregate demand, 36, 48 Alchian, A.A., 150 Allen, G.C., 159, 173 American Economic Association, 1, 9, 13, 15, 40, 95, 96, 239 American institutionalism, 21, 22 policy experimentation, 21 amoral familism, 58 Amsden, Alice H., 188 Andrews, C.M., 250 Andrews, Philip, 48 Arnold, Thurman, 41 Association for Evolutionary Economics (AFEE), 2, 112 Atkinson, Glen, 89 Austrian economic policy, 9 Ayres, C.E., 22, 105, 107 ‘bad boy’ award, 2 Balogh, T., 21 Banfield, E.C., 58 Baran, Paul A., 2, 8, 11, 70, 83, 168, 175 Barber, William J., 48, 228–31, 235, 238–40

Battle of Seattle, 69, 85, 91 Baumol, William, 83, 158, 173 Becker, G.S., 52, 109–10, 112 Benn, Tony, 72, 73 Berle, A., 158, 174, 184 Bertalanfly, Ludwig von, 97 Bevan, A., 59 Bhaskar, Roy, 103 Black, Conrad, 5 Blair, Tony, 85 Blaug, Mark, 235 Bloom, Allan, 189 Boulding, K.E., 150 Bourdieu, P., 52 Bowles, Samuel, 3, 82 Boyer, Robert, 217 Brady, Robert A., 4, 116, 130–1, 133, 139, 215 his premature anti-fascism, 131 in Business as a System of Power, 130 Brinkley, Alan, 238–9 Brown, D.V., 221, 242 Brown, Michael Barrat, 87 Bruce, Kyle, 4, 26, 172 Buckley, William, 8 Burnham, J., 173 Burns, Arthur F., 103 business schools, 145 study of, 146 unions, 123 267

268

Index

Camic, Charles, 111 capital monopoly, 70, 71, 88 globalising, 73 prerogatives of, 91 thwarted goals, 91 capital roundabout, 241 capitalism, 214, 222 contemporary, 209 corporate, 210 liberal, 207 misinterpretation and misrepresentation, 199 neoliberal, 208 Rhine, 204, 206 restored, 203, 206–8 Carroll, Michael C., 2 Casson, Mark, 148 Castells manual, 213 Centre of Evolutionary Economics, 112 Chamberlain-Robinson imperfect competition, 38 line, 40 theory, 34 Chandler, Alfred, 48, 158, 175, 184 Chicago School of Economics, 1 civil service, 71, 72 Clarke, John Maurice, 71, 95 classical liberalism, 9, 69, 70 state versus market dualism of, 76 closed system, 103 Coase, Ronald, 158, 167–8, 171, 177 Coats, Ken, 87 Cochran,Thomas C., 38, 39 Cohen, Mark Nathan, 192 Colander, David C., 222, 235, 239, 244 Cole, Harold L., 243 Coleman, J.S., 52 Commons, John R., 2, 25, 95, 105, 107, 108 competition degree of, 32 free, 29 monopolistic, 29, 41 non-price, 44 oligopoly, 29, 41 price, 42 uninhibited price, 42 complex adaptive systems, 153, 154 conscience, collective, 58 consumptive demand, 36, 37 corporate governance, 21 hegemony, 13, 15 corporate power, 15, 16

Cowling, K., 167–70, 177 Croce, Benedetto, 1 Cultural retrenchment, 189, 190 culture of contentment, 86 Currie, Lauchlin R, 224, 227–9, 231–2, 235–6, 238–9, 242, 244 Cyert, R.M, 158 Davis, J.R., 48 Davidson, G.S., 171, 175, 176 Davidson, P., 166, 170, 171 Dead End Capitalism, 189, 190 Capitalists, 192 deadlock credit, 23, 243 monetary, 231 De Gens, Arie, 150–3 degree of competition, 32 monopoly, 32 Demsetz H., 159 domesticated Keynesianism, 219, 235, 239 Dennison, Henry S., 25, 28, 29–40, 42–4, 46–8, 172, 211, 221 Dennison-Galbraith nexus, 26 proto-Keynesianism, 28 Depression of 1930s, 28–31, 33, 35, 36, 39, 220, 226–7, 229, 232, 240–41 Devine, T.M aftermath of the American War, 264 de Tocqueville, Alexis, 56 Dewey, John, 1, 73, 76, 79, 81, 82, 89, 90 discretionary pricing, 2 Donalds, David, 4, 207, 214, 216 Dore, Ronald, 54 Dorfman, Joseph, 1, 95 Dowd, Douglas E, 2, 74, 80, 132, 134, 139, 185 Drache, Daniel, 217 Dugger, William M., 4, 12, 70, 165, 168, 175, 183, 185, 187 Dunn, Stephen, 4, 25, 159, 167–8, 170–2, 174–5 Durkheim, Emile, 58

Index

Downie, J., 173 Eccles, Marriner S., 231–3, 235–6, 238, 243 ecological crises, 18 ecology, 13, 17 economic individualism, 55 economic instability, 13, 14 return of, 190 economic retrenchment, 187, 190 economic system, capitalist, 71 economic theory conventional, 69 Marxian, 2 neoclassical, 67, 69 economic wisdom, 1 economics classical, 107 conventional, 2, 13 critique of, 104 definition of, 99 depression, 219 evolutionary, 2 hedonic, 107 institutional, 2, 14, 22, 95, 96, 106, 107, 110–12 lower, 173 mainstream, 35, 98, 101–4, 106, 109–11, 118, 134, 205, 210, 216 modelling of, 103 neoclassical, 26, 47, 51, 96, 97, 102, 107 Oliver Williamson, 102 positive, 69, 99, 200 pragmatic American institutional, 7 supply side, 14 economists and business, 143–55 economists, post-Keynesian, 157, 172, 178 economy competitive, 41 mature, 239, 241 micro-macro analysis, 2 social, 22 Edward, Richards, 3, 82 Ehrenreich, Barbara, 187–8 Einstein, Albert, 127 Ekelund, R.B.Jr, 21 entertaining economists Galbraith, J.K., 115 Veblen, T., 115 Etzioni, A., 56 European Association for Evolutionary Political Economy (EAEPE), 2, 112

269

evolutionary economist, 102, 103 Leon Walras, 102 Filene, E.A., 28 Filene, L.A., 35, 172 Flanders, R.E., 35, 172 Fohlin, C., 264 Fredrick, William C., 22 free market(s), 55 capitalism, 68 globalising, 70 Freedom of Information Act, 9 Friedman, Milton, 159, 225, 233, 242–3 Fukuyama, Francis, 52, 54, 55 Furubotn, Eirik G., 102 Galbraith, John Kenneth administrated economy model, 23 analysis of giant U.S. corporations, 117 and the democratic prospect, 91 a neoclassical economist, 28 an involved economist, 11 approach of modern firm, 171 A Tenured Professor, 67 capitalism and the state, 79 convenient social virtue, 79 conventional wisdom, 79 economic ideal, 61 economic inquiry, 3 educated proletariat, 19 essays on price control, 10 fascination with the business, 144 focus on power, 10, 13 globalism and good life, 199 global prominence in American Capitalism, 61, 82, 106, 128, 174 in Economics and Public Purpose, 13, 62, 178, 199 intellectual convergence, 138 intellectual relationship, 46 intellectual turnaround, 33, 40 in The Affluent Society, 9–11, 62, 82, 106, 125, 128, 203, 216 in The Culture of Contentment, 125 in The Good Society, 64, 80, 86, 125, 129 in The New Industrial State, 19, 61, 83, 106, 125, 128, 148, 157–9, 161,

270

Index

173, 203, 210 in The New Republic, 65 in Theory of Price Control, 64 in The Triumph, 69, 81 Marc Tool, description of, 2 major books of, 118, 134 organisation, definition of, 167 original sequence conception, 12 planning and the market, 162 political animal, 60 political answer, 62 political economy, 3, 51, 60, 62–5, 73, 80, 83, 211 position among economists, 1 private affluence amid public squalor, 79 reflections on, 115 revised sequence, concept, 13 Ron Stanfield’s description of, 2 six consequences of technology, 160 stylised facts, 159, 160 technostructure, 57, 83–5, 128, 161, 168, 170, 174, 184, 201 test of anxiety, 7, 13, 15, 19–21 the good state, 86 the imagery of choice, 12, 13, 19 the revised sequence, 200 Theory of the Firm, 26, 148, 157–60, 167, 173, 200 The Useful Economist, 7 Toward Full Employment (TFE), 35 unlettered proletariat, 19 Galbraithian challenge and prospect, 21–3 for political economy and social reform, 8 Galbraithian ethos, 211 Galbraithian industrial system, 209 Galbraithian image of economy, 215 Galbraithian Model, 7, 16, 17 essential features of, 7 of advanced capitalism, 7, 10, 12, 21, 22 view of the modern economy, 159 Galbraithian tradition, 168 Galbraithian wit, 7, 8 Gambs, John S., 34, 38, 47 gangster capitalism, 188–9, 190 Giddens, Anthony, 85, 216–17 global finance capital, 69 governance, 73, 85 technostructure, 85 globalisation, 124, 127, 214 sceptics, 214

Glennerster, Howard, 188 Gordon, David M., 1, 3, 70, 84, 126, 158–9, 174, 215 Gray, John, 212, 216–17 great capitalist restoration, 88, 89 Great Depression, 116 Great retrenchment, 186–9, 191–2 Greig, J.Y.T., 264 Groenewegen, John, 183 Gruchy, A.G., 162, 185 Haberler, Gottfried, 9, 233, 241 Halberstam, David, 183 Hamel, G., 149, 154 Hamilton, Walton H., 2, 95–7, 105, 111 Hansen, Alvin H., 234, 239–42 Hawtrey, R.G., 226, 228, 231, 243 Hayek, Friedrich A. von, 9, 53, 153, 222–3 Heaton, Herbert, 47 Henderson, David, 143 Hession, Charles H., 34, 38 Hill, Lewis E., 107 Hirsch, F., 18, 54 Hodgson, Geoffrey M, 4, 103, 106, 110–12, 150, 165, 175, 216 Holland, John H., non-linear adaptive networks, 153 Hollingsworth, Rogers J., 210 return of, 191–2 social systems of production, 210 Horowitz, Irving Louis, 73, 74, 76 Huberman, Leo, 116 Human capital, 52, 69 privatisation of, 82 Humphrey, Thomas, 242 Huntington, Samuel P., 85 Hutchison, T.W., 262 Hutton, Alan, 4, 207, 216–17 ideological identification, 55 industrial publicity, 34 inequality, 13, 16 return of, 191–2

Index

institutional economists, 97, 112 environment, 106 Gunnar Myrdal, 98 Joseph Schumpeter, 106 K.William Kapp, 97 Karl Marx, 106 ShigetoTsune, 97 sympathisers, 96 institutionalism, 95–100, 103, 104, 106–8, 110 Ayresian vision of, 108 defining characteristics of 102, 110, new, 110 old, 98, 102, 103, 104, 106, 111 institutionalised individual, 104, 107 institutionalist tradition, 98 integration horizontal, 164 vertical, 164–5, 167 intolerance return of, 191 Japan Association for Evolutionary Economics, 12 Jeffersonian tradition, 72 Jensen, H.E., 252 Johnson, Lyndon Great Society programme, 70 Jolink, Albert, 102 Jordon Bill, 88 Jorgensen, E.W., 131, 134 Jorgensen, H.I., 131, 134 Kahn, R.F., 31 Kalecki, Michal, 31 Kapp, K.William, 97 Kasper, Wolfgang, 102 Kay, John, 146, 147 Keaney, Michael, 214 Keynes, John Maynard, 30, 31, 42, 46–8, 60, 65, 67, 173, 219, 232 archpriest of economic unsoundness, 240 curried, 232 economics, 221 General Theory, 67, 219–21, 233, 235, 244 instantaneous multiplier analysis, 1, 5 speculative motive, 232 Treatise of Money, 226, 234

271

Keynesian(s) American, 221 economists, 223, 228–39 fiscal activism, 219 ideas, 35, 225 revolution, 14, 224 theory, 219 Kotz, David M., 3, 21, 70 Krugman, Paul, 102 Laidler, David, 226–7, 241–4 Landreth, Harry, 222, 235, 239, 244 Langlois, Richard, 106 Lash, Joseph, 237, 244 Lawson, Tony, 103, 112, 159, 171 Layard, Richard, 69 Lazonick, William, 48, 175 Lee, Frederic M., 240 Leeds, M, 35, 172 Lend-Spend Bill, 225 Leiss,W., 12, 18 Lerner, Max, 116 liberal globalism, 201 Linder, Marc, 76 liquidity trap, 230, 231 Livingston, D., 250, 259 Lloyd, Brian, 77 Lowe, Adolph, 2 Lukes, Steven, 109 Lummis, Douglas C., 67 Mäki Uskali, 107 managerial state, 71 March, J.G., 158 Marglin, Stephen, 3 market capitalism, 199 competition, 119 deregulation, 187 economy, myths of, 209 power, 32, 33, 125 rivalry, 119 structures, 136, 171 Marshall, Alfred, 47, 56, 111, 150 Marshall, T.H., 58 Marshallian price theory, 107 Marris, Robin, 83, 158–9, 173, 178 Marx, Karl, 1, 67, 76, 77 Marxian economics, 106 McClintock, B.T., 22 Meade, J.E., 177

272

Index

Means, Gardiner C., 2, 40, 158, 184, 186 technocracy, 174 Mehrling, Perry G., 241 Meltzer, Allan, 233, 243 Midgley, James, 188 Miller, David, 107, 186 Mills, C.Wright, 1, 130 Mitchell, Wesley C., 2, 25, 95, 103, 105 mixed economy, 60 money, speculative, 243 monopoly capital school, 2 monopoly message, 238 Morris, R.B., 248–50, 259 multilateral agreement on investment, 69 Munkirs, J.R., 21 National Industrial Recovery Act (NIRA), 228–29 National Recovery Administration (NRA), 228 Nelson, R.R., 150 Neoclassical economics, 103, 107, 110, 149 economists, 62, 100, 102 equilibrium theory, 144, 146 libertarianism, 60 macroeconomics, 103 marginal utility, 100 most important defect of, 105 paradigm, 101, 149 synthesis, 14, 16 theorists, 148 theory, 100, 101 welfare, 101 neoliberal economic theory, 69 model of world capitalism, 69 revival of, 204 New Deal, 219–21, 223, 225, 228–30, 240, 244, 262 New Industrial State, 183–6, 188–92 Newman, Janet, 71 North, D.C., 18, 21 nurturance gap, 11 Nygaard, Ingrid, 76 O’Connor, James, 5, 69–71, 82, 86, 87, 89, 91

O’hanion, Lee E., 243 one nation, 58 open system, 103 orthodox economics, 13 Panitch, Leo, 71 Pareto, 51 criterion, 100, 101 Parker, John, 69 Parsons, Wayne, 89 path dependence, 18 Patinkin, Don, 235, 242 Peacock, Alan, 143, 155 Penrose, Edith, 149, 150, 158, 167 Peterson, Wallace, 187 The Silent Depression, 187 Phillips, A., 263 Philips, RonnieJ., 231 physical capital, 52, 53, 69 Pieper, Ute, 85 plutocracy, 214 Polanyi, Karl, 206 political correctness, 192 political correctness, 192 political economy globalisation of, 85 reconstructed, 89 Prahalad, C.K., 149, 154 Pratson, Fredrick J., 47 producer price jurisdiction, 33 radicalism, U.S. brand of, 130 rational choice, 110 learning, 110 reconstitutive downward causation, 110, 111 Reisman, David A., 4, 5 relative price inflexibility, 33 reputational capital, 57 reverse discrimination, 192 Ricardo, David, 77, 119 Richardson, G.B., 158 Richter, Rudolph, 102 Robinson, Joan, 31, 35, 40, 222–3 Rogin, Leo, 79, 80, 262 Rose, I.S., 258 Rose, M, 148 Rotheim, R, 166, 174–5

Index

Ruml, Beardsley, 215 Russel, Bertrand, 108 Rutherford, Malcolm H., 107 Sachs, Jeffery D., 68 Salant, Walter S., 223 Samuels, Warren J., 95 Sandilands, Roger J., 4, 222–3, 235, 243–4 Sasson, Helen, 3 Saurman, D.S., 21 Sawyer, M.C., 175 Schattschneider, Elmer Eric, 214, 216 Schlesinger, Arthur M. Jr, 154 Schroeder, Gerhard, 85 Schudson, M., 12, 21 scientific socialist, 100 Schull, Joseph, 215 Schumpeter, J.A., 26, 54, 154, 222–3, 241, 262–3 Schwartz, Anna Jacobson, 225, 233, 242, 243 Sen, Amartya, 79, 205 Sharpe, M.E., 159, 173 Sherman, Howard, 190 shock therapy, 68, 69 Simon, Herbert A., 215 Simpson, R.F., 4 Skinner, Andrew S., 5, 247, 263 conceptual reality, 252 mercantile system, 247 Smith, Adam, 1, 5, 118 political economy, 119 The Wealth of Nations, 9 social balance, principle of, 10, 129 social Darwinism, 14 attitudes, 65 capital, 52, 53, 55, 56, 59, 62–5 democracy, 52 interest, 65 investment, 52 social imbalance, 11 Social Structure of Accumulation (SSA) theory, 70 social wage, 123 Solow, R.M., 159, 173 Sperry, Roger M., 111–12

273

Sperry rule, 111 Sraffa, Piero, 8, 31, 40 Stabile, Donald, 78 Stanfield, J.B., 11, 12 Stanfield, James Ronald, 4, 7, 11–13, 17–18, 20, 22–3, 74, 159 state, shrinkage of, 71 Stein, Herbert, 237, 239 Steindl, Frank G., 233, 244 Stevens, David, 249, 258–9, 263 Stewart, Walter W, 95 Stigler, George, 9 Streeck, Wolfgang, 210 Streit, Manfred E., 102 Sugden, R., 167, 168, 170, 177 Swedberg, Richard, 101 Sweezy, Alan, 235 Sweezy, Paul M., 2, 11, 70, 83, 116, 168, 175, 221–2 Taber, John, 8 Targetti, Ferdinando, 4 Tawney, R.H., 59, 60, 63, 65 Taylor, Lance, 85 technostructure, 15, 17–21, 45, 61, 83, 84, 86, 126 Temin, Peter, 226 Temporary National Economic Committee, 41 third way, 85–7 Tilman, Rick, 74, 77–9 Titmuss, Richard, 58, 59, 63, 65 Tobin, James, 239 Tool, Marc R., 2, 22, 68, 86, 89–90 trade unions, 123 trained incapacity, 68, 69 Tsuru, Shigeto, 97 uncertainty, 158, 166–7, 171–2, 175, 178 about one’s information, 162 concept of, 157 environment, 167, 171 Keynesian concept of, 172 market, 164, 166–7 price, 165 study of, 157 unencumbered firm, 216

274

Index

Union for Radical Political Economics (URPE), 2 Veblen-Commons Award, 2 Veblen, Thorstein, 1, 2, 4, 25, 28, 68, 74, 77, 84, 95, 98, 104, 107, 108, 111, 115–40 Absentee Owership, 79 and the state, 74 major book of, 118, 134, 139 on the U.S. slave trade, 117 Oscar Wilde of economics, 131 reflection on, 115 some examples of his humour, 132 soviet of engineers, 174 The Engineers and the Price System, 78 Vonnegut, Kurt Slaughterhouse Five, 134 Wagner Act, 233

Waller, William J. Jr, 111 Walras, Leon, 51 welfare encounters, 59 sector, 59 society, 59 state, 58, 59 Williamson, O.E., 54, 158, 164, 169, 175, 184 Winch, Donald, 254 Winter, S.G., 150 Wolin, Sheldon, 67, 76, 77, 79 Works Progress Administration (WPA) 229 World Bank, 71, 73, 85, 188, 190 crisis of state effectiveness, 84 World Trade Organization (WTO), 69 Wright, David McCord, 9