This post may contain affiliate links. Please read our disclaimer for more info.
Shares

Welcome back you bunch of HomoEconomicus! In today’s Daily Dose of ECON we discover the controversial John Kenneth Galbraith.

john kenneth galbraith

“Where the market works, I’m for that. Where the government is necessary, I’m for that. I’m deeply suspicious of somebody who says: ‘I’m in favour of privatisation‘ or ‘I’m deeply in favour of public ownership’. I’m in favour of whatever works on the particular case.” 

John K. Galbraith, 1994

INTRODUCTION

Today, we will be diving head first into the economic contributions of the man above: John Kenneth Galbraith. Here is his Wikipedia bio: “a Canadian-born economist, public official, and diplomat, and a leading proponent of 20th-century American Liberalism. His books on economic topics were bestsellers from the 1950s through the 2000s, during which time Galbraith fulfilled the role of public intellectual. As an economist, he leaned toward post-Keynesian economics from an institutionalist perspective.” Now, I feel the phrases in bold require a significant amount of explaining, so as to properly appreciate the context of Galbraith’s intellectual proclivities.

AMERICAN LIBERALISM

Modern liberalism in the United States is the dominant version of liberalism in the United States. It combines ideas of civil liberty and equality with support for social justice and a mixed economy. According to Ian Adams, all American parties are “liberal and always have been. Essentially, they espouse classical liberalism—that is, a form of democratized Whig constitutionalism, plus the free market. The point of difference comes with the influence of social liberalism”. Economically, modern American liberalism opposes cuts to the social safety net and supports a role for government in reducing inequality, providing education, ensuring access to healthcare, regulating economic activity and protecting the natural environment.” Wikipedia

POST-KEYNESIAN ECONOMICS

“Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes… Historian Robert Skidelsky argues that the post-Keynesian school has remained closest to the spirit of Keynes’ original work. It is a heterodox approach to economics.” Wikipedia

INSTITUIONALIST PERSPECTIVE

“Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour.” Wikipedia

Let’s hop into it!

Galbraith was a critic of the neo-classical school of economic thought, due to the fact that in his estimation it had not evolved on par with the shifting global economic conditions. He believed the conservative ideas were apt to describe the particularities of economic phenomena when they were discovered, but no longer able to model the intricacies of current economic conundrums. For example, he argued that the the complicated diagrammatic models perplexed students and economists alike and therefore, were incredibly attractive and eventually became sacred. So, his perception was that “with increasing complexity” individuals assumed that this necessarily translated into improved precision with which to drive the economic machine. However, whilst he made clear he was not a fan of centrally planned economies and considered that a mixed economy was the road to success; Galbraith was a proponent of Keynesianism, a theory which evolved into incredibly complex mathematical models attempting to control the economic beast.

Moreover, this distrust of neo-classical ideas and his inclination towards the Institutionalist School led him to produce a set of popular theories during the 20th-century. We will be exploring the following:

The Dependence Effect

Galbraith assured that modern capitalism was dominated by large enterprises, who control the wants of society through mass campaigns of deceptive advertising. The rational HomoEconomicus was not a sacrosanct sovereign member of society; on the other hand, large firms created products and consequently moulded consumer tastes through manipulation. Essentially, a more sinister version of “supply creates its own demand” aided by modern marketing. At the time, Galbraith was laying some foundation for the behavioural economists of today by challenging the idea that individuals are the commanders of their needs and desires – without external influences shifting or creating said preferences.

Therefore, Galbraith developed this idea and forged his theory of “social imbalance”. This meant that the allocation of scarce resources disproportionately fuelled into the private sector, into goods and services with less value than those of the public sector. Thus, to lead society to better horizons the government had the imperative to enact tax policy to discourage consumption of private goods, whilst simultaneously utilising this tax revenue to increase the provision of public goods. Essentially, the evolution of Thorstein Veblen’s theory of “conspicuous consumption“. 

There are clear authoritative as well as paternalistic elements to Galbraith’s proposition. Initially, there is a simple question which rises above the rest: Who decides what is “conspicuous consumption“? According to Galbraith, it would be a group of institutional elite centrally deciding the allocation of scarce resources as well as the adequate wants of individuals. So much for being against central planning! It is self-evident, that the creation and evolution of consumer wants within an economy is driven by the constantly shifting demands of individuals as well as the innovation of firms in producing revolutionary goods/services. However, to entirely attribute consumer wants to mass advertising campaigns is simply incorrect; but the vast acceleration of technology and the era of Facebook shifting the tides of national elections, may increase the value of Galbraith’s analysis of the modern economy. Nonetheless, one would have to adopt the assumption that individuals essentially lack free will, continually demonstrate herd behaviour and would not rebel against this corporate manipulation.

Additionally, he claims that modern capitalism is controlled by large firms… and that is only a half truth. Large firms emerge from innovation and a flawless servicing of consumer demands; to become like Apple, you need to create a powerful philosophy, product line as well as effectively cater to the demands of your consumer base. Therefore, limiting the ability of entrepreneurial individuals to achieve these heroic feats would wreck the entire economic system, by directly destroying the incentive structure. Moreover, small and medium-sized businesses (SMEs) account for the bulk of job creation, output, productivity growth … they are the backbone of modern economies:

“According to the Bureau of Labor Statistics, since the end of the Great Recession, small businesses have created 62 percent of all net new private-sector jobs. Among those jobs, 66 percent were created by existing businesses, while 34 percent were generated through new establishments…” Inc.

Plus, SMEs are under constant threat from modern legislators as they continuously increase the degree of business regulation; regulations which hurt the bottom lines of SMEs significantly more than large corporations. Great video on the matter:

So, if institutions are unfairly benefitting large corporations due to their political myopia and tendency towards cronyism… How would these same institutions decide consumer wants? Curb the influence of these large corporations? Improve the entrepreneurial environment to foster new business creation? Well, Galbraith has no answer to that. His critique should be centred around the fact that government hijacked capitalism, and continuously prevents SMEs from adequately competing against these corporate giants. Conversely, he decides to focus on how “angelic” legislators will fix their own catastrophic mistakes.

Draw your own conclusions!

Theory of the Firm

Here again, Galbraith rejects the neo-classical interpretation that firms generally aim to maximize their profits. He explains that while this may be true in the market sector comprised of SMEs, it does not hold when one analyses the planning sector [the large firms which produce the majority of society’s output]. The planning sector contains a “divorce of ownership”, due to the fact that the technostructure (managers, executives, scientists…) has different goals than the common shareholders. Ultimately, Galbraith is referring to the principal-agent problem:

Consequently, Galbraith assumed that this issue would incentivise the technostructure to engage in two main activities: protection and affirmation.

Protection

Large corporations strive towards ensuring a oligopoly status – through price fixing or industrial collusion – and in this way continue to manipulate their consumer base, by making them entirely dependent on their good/service. Throughout the continuous expansion of market share, they are able to effectively benefit from economies of scale and in so doing, enforce mass advertising campaigns to cement their corporate position. However, their objective is not to become an oligopoly and restrict output to maximise profits; large firms aim to appease their rivals by ensuring their competitors’ a sufficient level of profit and thus, enforce their affirmative function.

Affirmation

Galbraith essentially claims that the affirmative purpose is to increase corporate growth, and subsequently maintain the job security as well as benefits of the technostructure. This action marked upon by large corporations, emerges as a consequence of their protective function of survival. “On no conclusion is this book more clear: Left to themselves, economic forces do not work out for the best except perhaps, for the powerful.” John K. Galbraith, Economics and the Public Purpose

Now, I would like to reference one of the websites I utilised for my research of this man. They explain his policy applications, top counter his perceived issues with modern capitalism:

“The public, through government, must wrest control of the planning sector of the economy from the technostructure, ensuring that it serves the public purpose. This control should take several forms. For example, a permanent public price and wage agency should control the prices of the largest firms in the economy and ensure that wage gains in the major collective bargaining agreements do not exceed the growth of national productivity. A public planning authority needs to be established to join with the major corporations and unions to plan and coordinate economic activity. This planning authority will also have to coordinate economic plans with other industrial nations. Along with these reforms, Galbraith has called for government redistribution of income through public control of executive salaries, progressive taxation, an increase in the minimum age, and a negative income tax plan. Firms in the market sector should be encouraged to merge so that they can compete more effectively with the firms in the planning sector. Like Veblen and Mitchell before him, Galbraith sees the need for a greatly expanded role for government in the modern economy.” Economists View

Certainly seems like Galbraith strongly advocated for the expansion of government, and we all now the dangers in assuming that the state is the immediate answer to perceived economic flaws [read Hayek’s Road to Serfdom]. Neo-classicals have devoutly opposed Galbraith’s Theory of the Firm, by stating that a firm which fails to ensure long-run profit maximisation becomes the target of other profit-maximising firms. Other firms have an incentive to acquire non profit-maximising firms as their stock is trading below its future productive potential – since they are not maximising their profits, but could be. Therefore, by offering to buy the stock for a price nearer to its true market value, the profit maximising firm can acquire the company.

Nevertheless, Galbraith’s evaluation and development of the principal-agent problem, in unison with other colleagues from the Institutionalist School proved to be valuable. Owners and managers, had different objectives – a conflict arose between profit vs. revenue as well as short vs. long-term. Therefore, nowadays the technostructure is offered stock options in their company so as to better align the enveloping values of the firm; the current performance targets as well as the overall vision for the future [Read Schiller’s Finance and the Good Society].

Conclusion

Despite Galbraith’s apparently objective nature, one immediately perceives his inclination towards governmental expansion. He defended a set of ideas which attempted to dethrone the cemented neo-classical ones by flipping them on their head, and blaming the woes of capitalism on large corporations. Never did Galbraith evaluate the fact that the cronyism which has hijacked many originally capitalist economies is being upheld by the very institutions which he praises. Ultimately, time tends to be the ultimate arbiter in establishing the legitimacy of a set of ideas and it is no surprise that the battle between the Institutionalists and Neo-classicals was short-lived, and concluded with the continuation of neo-classical economic hegemony. However, the academic and legislative influence of the Institutionalist School is clear as most Western nations follow a Keynesian doctrine.

After all, how could governments not feel particular allure towards an ideology which cements their influence and power? Giving them the academic legitimacy to steer the economy wherever their political agendas see fit. A utopic economy in which any economic flaw can be corrected by the “compassionate” state. Galbraith definitely left his mark, even though his main theories were expediently debunked by the Neo-classicals; his overarching school of thought [Keynesianism] did benefit from the intellectual debate.   

May the ECON be with you   

BIBLIOGRAPHY:

Articles

John Kenneth Galbraith – Wikipedia   

John K. Galbraith – Econlib

The Economics Contributions of JKG – Academia

JKGs Economic Contributions – EconView

Ethics of Political Participation and Engagement – Cairn

The Truth About SMEs – Inc.

Books

Finance and the Good Society (2003) – Robert J. Schiller

Road to Serfdom (1944) – Friedrich Hayek

john kenneth galbraith quote