ECONOMICS AND THE PUBLIC PURPOSE. John Kenneth Galbraith, Boston: Houghton Mifflin Co., 1973, 334 pp., $10.00.
With the publication of this volume, John Kenneth Galbraith has completed his trilogy which began with The Affluent Society in 1958 and continued through The New Industrial State in 1967. Because his writings strike a deep chord of agreement among the intellectual class in America, England, and possibly throughout the world, Galbraith deserves to be taken very seriously by advocates of laissez-faire economic policy. The ideas which he creates and defends are important not only because they are held by a powerful political constituency—and therefore must be answered—but also because so many observers must see something in common; perhaps there is some empirical truth in his arguments. This reviewer is of the opinion that there is some empirical truth in his arguments, but that Galbraith has generalized from a specific case to the economy and society as a whole. By over-generalizing, Galbraith weakens his case; but where his observations are true, we must consider what to do about the problems.
What is the major problem? Galbraith calls it "the planning system," which he argues has supplanted the free market in the modern industrial society, taken over the apparatus of the State for its own profit, and generally proceeded to run the world as a feudal barony. Wouldn't you be alarmed if you thought this were true? Galbraith's intellectual constituency sincerely believes in this conspiracy theory. We can ask ourselves: is this version of the conspiracy theory any more or less true than the John Birch Society's conspiracy theory ("the insiders, bankers, planners") or the older theories—implicating the Catholic Church, the Jews, the Masons, or the Communists?
John Kenneth Galbraith is an educated and an urbane man. He is not given to ranting, nor to unsophisticated statements. To the extent that he exercises this self-restraint, he will not be discredited as a crackpot. To the extent that his observations agree with the average reader's observations, he will be persuasive. His advertising agency describes his verbal talent: "Galbraith, as may be expected, presents his powerful and even revolutionary analysis in a style that is disarmingly elegant and witty." Thus also, to the extent that he is alliterative and subtly rhetorical, he will be seductively persuasive—and soon you, too, will start to see "the planning system" everywhere you look.
THE PLANNING SYSTEM
What, specifically, does "the planning system" consist of? Giant corporations, the Fortune 500, of course. Unfortunately, all of Galbraith's detailed examples (and they are few and far between) are chosen from the military-industrial complex, from the regulated industries, such as drugs and transportation, and from the subsidized industries, as in research and development. Their distinguishing characteristic is that they are insulated from the market, supposedly, and are controlled by men who plan their activities rather than who respond to consumers. Galbraith, however, omits one very important step in his theory and his exposition. He only illustrates his argument, he does not attempt to test it. Just as the sophisticated Freudian uses examples from literature, or the sophisticated Christian uses examples from the life of Christ and daily personal experience to "prove" the truth of their beliefs, Galbraith and his constituency use examples from the military-industrial complex and the regulated sectors of the economy to prove the importance and need for "public" control. Counter-examples and alternative explanations are either not mentioned, or dismissed with a joke.
In this book, Galbraith grants a role to the free market. He acknowledges that it exists, and that it works. Yet he relegates it to a minor and shrinking role in society, and openly advocates that the government should take over the areas of health care, housing, and other "weak" places—where the market doesn't work as well as planning would, of course. His understanding of "the market" is that old straw man: "millions of little producers."
STRUCTURE VS. PROCESS
The school of economic thought which Galbraith represents—and it is not small, considering that he is a recent President of the American Economics Association—is the institutionalist school. He places the market on the same footing (i.e. one institution among others) as he places the State and "the planning system"—this last being his "discovery" and in one sense itself a meta-institution, therefore more important in the long run.
The institutionalist school places primary weight on the structure of economic and social activity. The Austrian school, by contrast, places primary weight on the process of economic and social activity (cf. Israel M. Kirzner, Competition and Entrepreneurship, University of Chicago Press, 1973). From the point of view of the "process" approach, the active agents of the economic system seek to discover cost-effective ways of satisfying demand, and thereby pocket the profits. Naturally, the most obvious locus of inefficient methods and procedures would be the monopolies and cartels which spring up here and there and everywhere; and sure enough, the Austrians argue, competition will eradicate such institutions in the long run (ten or fifteen years, from an empirical point of view, depending on the industry). The Austrians recognize that legal barriers to competition will stop this process, and therefore Austrian economists are typically political libertarians.
Galbraith, by contrast, believes that the economic "structure" is primary. This emphasis on structure instead of process makes the difference, leading Galbraith to favor a political and economic system based on democratic socialism. The important factor would be that "the people" have the ultimate sovereignty in all things, but Galbraith doesn't offer any clear discussion of the political process whereby "best" decisions might be made.
Whether or not it is primary, we know that structure is relevant, especially since legal barriers to competition do exist. Even some extra-legal barriers exist, at some times and in some places—such as cultural practices which forbid trade or which impose transaction costs. Prof. R.H. Coase once made the observation that even the example of "the perfect market"—the stock exchange—was created by an entrepreneur. There are many areas where economic structure is very relevant to the operation of the economic process. The corporation itself, to generalize, gains some economy of scale by eliminating the market within itself, and allocating resources by authority. Very few firms make use of the "agoric" system of production, where every worker is a sub-contractor on piecework. The costs of information and the costs of transactions are real economic costs. The reduction of costs is what economic behavior is all about. In the real world, there will always be sectors in which improvement can be made, perhaps new market structures invented to reduce the costs of transactions or the costs of information—by conglomeration and far-sighted planning, to achieve a similar result by organization and the elimination of market-style bargaining.
What the institutionalists fail to consider is the point of trade-off, the point at which explicit control and planning cease to yield any reduction in costs. Galbraith is fond of introducing psychological factors to discredit classical economic arguments about market rationality, such as the argument that power-seeking on the part of corporate officers will lead them to go farther than strict attention to marginal costs and marginal revenues would otherwise lead them. Certainly the non-institutionalist must concede that not all income is cash income (some people prefer an easy job with lots of leisure time to one which pays well and demands fifteen hours a day—and leisure time is a form of income which is not taxed); but the institutionalist owes it to himself to really investigate the magnitude of these allegedly insidious factors in "the planning system" which diminish the welfare of the rest of society because they ignore a strict economic accounting and pursue power for glory's sake. The reader is directed to an article by Prof. Yale Brozen, "The Antitrust Task Force Deconcentration Recommendation," Journal of Law & Economics, Vol. 13 (Oct. 1970) and to the three articles by Brozen in the Journal of Law & Economics, Vol. 14 (Oct. 1971) in which he responds to the critics of his first article. Brozen presents empirical data on the extent of "concentration" in various industries versus their rate of return over time. The reader can judge for himself whether or not "the planning system" is a paper tiger. In contrast to Galbraith, Brozen does not use metaphor and alliteration to persuade; he uses statistics to refute (this is the "look in the horse's mouth and count the teeth" approach, also known as the "Chicago school").
In Galbraith's explication of "the planning system" many pages are devoted to a description of the use of market power by the large corporations. One element in the background of all of these descriptions is the role of price, which Galbraith argues to be of minimal importance. If Galbraith genuinely believes that the technocrats exercise this thing known as market power, then he must logically believe that prices are lower than the hypothetical equilibrium. If for some reason, prices are lower than the point of classical equilibrium, then we call it a seller's market because the seller has more choices of customers, or excess demand, and some of them are turned away; only those who "play ball" are served. Do institutionalists such as Galbraith believe that the officers of the Fortune 500 are in business for the "psychic income" of being a Big Shot?
On the contrary, here the conspiracy theme again enters into the argument, because "the planning system" minimizes competition, he says, and leads to overdevelopment of supply, with prices too high for equilibrium, like a cartel with excess capacity. His entire discussion of the power to set prices and allocate resources within "the planning system" seems to be confused, which is unfortunate for a professional economist. Galbraith seems to be overly impressed by the fact that a corporate executive makes a decision about the official price of a product. He fails to look beyond that simple step to the buy or sell transaction, where the effect of the official price is seen. Galbraith's conclusions in favor of price control by the State are founded, essentially, on this fixation with the power to establish prices—again, emphasizing structure, instead of process, and overlooking such things as discounting, under-the-table deals, credit terms, and other factors which are as much a part of "price" as the numerals printed in the catalogs. Of course, price controls abolish all of these under-the-table factors (as the capitalists who lobbied for the Interstate Commerce Commission one hundred years ago knew very well).
MORE OF THE SAME?
If the institutionalists, represented by Galbraith, seem to worry about the power of the ruling class, it is only a device. No attempt is made to distinguish between those activities of the New Industrial State which depend upon law and the police power and those activities which represent freedom of trade. Sometimes the rich do get richer, and the poor are better off because of it (e.g. Henry Ford's assembly line, or Samuel Goldwyn's studio). On the other hand, the fastest road to riches today is to be found in Washington, D.C. First in line are the executives of the Fortune 500. What does Galbraith offer as a solution? He does not offer any proposals which would remove from the Federal bureaucracy the power to formulate a symbiotic relationship with the major concentrations of industrial and financial management. On the contrary, his proposals consist of a cosmetic, structural alteration—one might even say a change "in name only." The planning system, after all, must be pretty good.
Unfortunately, there are no new ideas in Economics and the Public Purpose. In a chapter entitled, "The Socialist Imperative," he writes:
…The central problem of the modern economy is unequal development. The least development is where there is the least monopoly and market power; the greatest development is where there is the most.…(p. 276)
The compelling circumstance, as the reader will have suspected, is the retarded development of the market system. There are industries here which require technical competence, related organization, and market power and related command over resource use if they are to render minimally adequate service. Being and remaining in the market system, that they do not have…. (pp. 277-78)
The only answer for these industries is full organization under public ownership. This is the new socialism which searches not for the positions of power in the economy but for the positions of weakness.…(p. 279)
…With the rise of the market and the planning systems, and the consequent inequality in development, the case for public ownership becomes much more general. It is not that the market, though generally satisfactory, fails in particular cases. It is rather that the market system is generally deficient in relation to the planning system. Accordingly there is a presumption in favor of public intervention anywhere in the market system.…(pp. 281-82)
But the story is not yet complete. The case for socialism is imperative in the weakest areas of the economy. It is also paradoxically compelling in the parts of exceptional strength.…(p. 283)
For unduly weak industries and unduly strong ones—as a remedy for an area of gross underdevelopment and as a control on gross overdevelopment—the word socialism is one we can no longer suppress.…(p. 285)
Galbraith thus switches gears to argue that the case for socialism consists in the fact that "the planning system" is so great that we need to make it universal, and that by making it universal we can exercise "public control" over the technocrats because all decisions would be open to criticism and debate, and none would be reserved as areas "of private concern." Galbraith's big proof of the underdevelopment of the market system lies in the service industries, and in the arts. He makes reference to health care, housing, and agriculture as other areas which might be improved by central planning as well.
This review is not the place to attack the thesis which Galbraith ends up with. In the first place, the nature of the "constructivist rationalist" fallacy which assumes that centralized, planned organization is superior to decentralized, spontaneous order is more thoroughly examined by F.A. Hayek in his new book, Law, Legislation and Liberty (University of Chicago Press, 1973, vol. 1, "Rules and Order"). In the second place, the specific arguments which Galbraith finally makes—based on the constructivist rationalist fallacy—are not the sort of arguments which can be answered by a reviewer. The reviewer necessarily assumes the role of commentator, and to make the comment that "he is simply wrong" puts one into the posture of a know-nothing, an ideological zealot, or a defender of the status quo. The ideal of the rational organization of society is one which has fascinated the best minds of the past dozen generations of mankind, if not more. Who can condemn the pursuit of justice? The mistake is to assume that such a system can be realized by design.
It is not likely that John Kenneth Galbraith will be remembered in twenty years, which makes his popularity and prestige during the past twenty years all the more remarkable. We envy the man his constituency—perhaps a tribute to the power of advertising.
J.M. Cobb is employed as the Chief Budget and Fiscal Officer of the Industrial Commission of Illinois. He has published a number of articles on economic topics since graduating from the University of Chicago in 1966.