Galbraith

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the essentialGalbraithkJohn Kenneth Galbraithselected and edited byAndrea D. WilliamsA Mariner Originalhoughton mifflin companyb o sto nne w yo r k20 0 1

b o o k s byj o h n ken n e t h g a l br a i t h[a partial listing]American Capitalism:The Concept of Countervailing PowerThe Great Crash, 1929The Affluent SocietyThe ScotchThe New Industrial StateThe TriumphAmbassador’s JournalEconomics, Peace and LaughterEconomics and the Public PurposeMoney: Whence It Came, Where It WentThe Age of UncertaintyAnnals of an Abiding LiberalA Life in Our TimesThe Anatomy of PowerA View from the StandsEconomics in Perspective: A Critical HistoryA Tenured ProfessorThe Culture of ContentmentA Journey Through Economic Time:A Firsthand ViewA Short History of Financial EuphoriaThe Good Society: The Humane AgendaName-Dropping: From F.D.R. OnThe Essential Galbraith

co n t e n t sPreface viiIntroduction ixCountervailing Power 1from American CapitalismThe Concept of the Conventional Wisdom 18from The Affluent SocietyThe Myth of Consumer Sovereignty 31from The Affluent SocietyThe Case for Social Balance 40from The Affluent SocietyThe Imperatives of Technology 55from The New Industrial StateThe Technostructure 66from The New Industrial StateThe General Theory of Motivation 79from The New Industrial StateEconomics and the Quality of Life 90from Economics, Peace and Laughter

C0ntentsviThe Proper Purpose of Economic Development 109from Economics, Peace and LaughterThe Valid Image of the Modern Economy 118from Annals of an Abiding LiberalPower and the Useful Economist 134from Annals of an Abiding LiberalThe Founding Faith: Adam Smith’s Wealth of Nations 153from Annals of an Abiding LiberalThe Massive Dissent of Karl Marx 169from The Age of UncertaintyWho Was Thorstein Veblen? 200from Annals of an Abiding LiberalThe Mandarin Revolution 224from The Age of UncertaintyHow Keynes Came to America 236from Economics, Peace and LaughterThe Speculative Episode 249from A Short History of Financial EuphoriaIn Goldman, Sachs We Trust 255from The Great Crash, 1929The Crash 275from The Great Crash, 1929Things Become More Serious 292from The Great Crash, 1929The Unfinished Business of the Century 307Speech given at the London School of Economics, 1999Sources 315

p re f a ceI send this book to press and on to my readers with one slight senseof concern. It is that someone will ask who decided that this was TheEssential Galbraith. The author will be a plausible suspect. In fact, itwas associates, my publisher and the wider professional and readingpublic who were responsible. The selection here is of writing that isthought to have had some durable impact on economic and otherscholarly thought or on the world at large.Thus, as later noted, the piece on Countervailing Power, an excerpt from American Capitalism, is still in print after nearly fiftyyears. The balance of power between buyer and seller therein described was considered a major modification of the traditionalcompetitive supply-and-demand construct to which all who havestudied economics were exposed. It is perhaps a measure of the enduring nature of the term “the Conventional Wisdom,” as defined inthe second essay, that one rarely gets through a newspaper todaywithout encountering it. Though I try, however unsuccessfully, toconvey an aspect of modesty, I am always pleased to have added thisphrase to the language.The Affluent Society, from which several chapters are here included, was the most widely published economic volume of its time.After his nomination for President in 1960, one of the first questionsasked of John F. Kennedy was whether, if elected, he would beguided by the ideas expressed by his known supporter in that book.He responded favorably but also with a certain note of ambiguity.Later in this collection come three pieces from The Great Crash,

viiiPreface1929, which was published in 1955, just after the twenty-fifth anniversary of that catastrophic event. It was a bestseller at the time; so ithas remained to this day. Even now, as we are launched in a newcentury, there is inevitable unease about the future of the economyand therewith the stock market, so a knowledge of what happenedin 1929 is, indeed, still essential.There are other essays here which were similarly selected and thusselected themselves. The reader will, I think, have no trouble accepting their relevance either to history or to the present day, and I haveadded some headnotes to suggest my view of their particular significance then and now. I end with a paper given at the LondonSchool of Economics in 1999 on the unfinished business of the millennium; this had the largest circulation both here in the UnitedStates and around the world of any lecture I have ever given.John Kenneth GalbraithMarch 2001

i n t ro d u c t i o nIf, as Professor Galbraith says in the preface, others are responsiblefor the contents of this book, it is of primary interest to inquire whyhe himself eschews the credit. It has been widely believed that he isnot a man for whom modesty is a familiar virtue, so why does hefind it necessary now to step back into the shadows? The answerseems to lie in the fact that what has been considered vanity couldbe better viewed as a deep sense of security. He is secure in his basicbeliefs and secure that his readers, for whom he has the deepest respect, will be able to discern them. He is not given to self-analysis,and so, while he clearly understands what is the Essential Galbraith,he prefers that others define it.It should first be noted that in the pages that follow, readers willfind John Kenneth Galbraith the economist and the writer, with little trace of the diplomat, the art historian, the novelist, the book reviewer, the theater critic or even, except in the last essay, the lecturer.This is highly appropriate, because economics has, in fact, been hischosen field and writing his obviously innate talent. He has alwaysbelieved that economics should be studied not in the abstract or as amathematical construct but as it affects the lives of men and womenevery day. He is not afraid to overturn or at least reexamine stronglyheld beliefs of earlier generations, realizing that as technology, communications and business change, so too must the economist’s interpretation of them. He has brought to the subject a new way oflooking at the role of the great corporations as they faced the countervailing power of trade unions and consumer coalitions. He has

xIntroductionidentified those who are the guiding intelligence of the corporateworld, naming them the technostructure, and has undermined belief in what he calls the myth of consumer sovereignty. A better balance between public and private expenditures has been a recurringtheme in his writing, with its reminder that the affluence of ourcontemporary society should be made to extend to the poorest andmost defenseless of our citizens. The uses of power and the persistence of financial euphoria in our public marketplace have consistently attracted his interest, as have the problems of the developingcountries, notably India. Above all, the constant thread through hiswork is his concern with how economics affects the quality of ourdaily lives and how it will change that of succeeding generations.These are some of the essentials of the Essential Galbraith, butthere are more. There is his continuing fondness for certain of hiseconomic predecessors — for the gift for language and the basicstructure that Adam Smith gave to political economy, for the irreverence and unique perception of Thorstein Veblen, for the profoundeffect John Maynard Keynes and his General Theory of EmploymentInterest and Money had and continue to have on the economicworld.Finally, there is a writing style that illuminates and enhances allthat is said: sardonic humor, felicitous phrasing, reasoned argumentin reasonable words or, as he would say, clarity of thought reflectedin clarity of prose.So how can the Essential Galbraith be defined? He is a committedliberal, a compassionate optimist, a cautious but firm iconoclast anda writer whose words can change the way the world looks at itsproblems.And none of that would he ever write about himself.Andrea D. WilliamsMarch 2001

Countervailing Power[from American Capitalism]This is a chapter from one of my first books, the generously titledAmerican Capitalism, which came out in 1952, barely into the secondhalf of the last century. Then, and for well over a hundred years before,a near-sacred doctrine in the economic textbooks had been thebeneficent regulatory role of competition. It was the competition ofmany sellers that protected the consumer and also the individuallypowerless wage earner from the full economic effects of monopoly. Thepreservation of competition through the antitrust laws — the fabledSherman Act in particular — was a vital element of public policy goingback to the latter part of the nineteenth century. Now, as I argued inAmerican Capitalism, a new process was at work: trade unions, acountering organizational force, were the obvious response to thegreater power of the big corporations. Similarly, but less evidently,when there was one expression of economic power — such as the largeproducer of consumer staples — another one developed in the form ofthe seller of those staples — the A&P or the latter-day Wal-Mart. Thenumerous and technically competitive farmers found their best economic recourse in purchasing cooperatives when dealing with thosewho bought and bargained for their product. Thus the answer to monopoly was less and less the rule of law and more and more the coercionof countering bargaining power. Not exceptionally, perhaps, I carriedthis idea somewhat to the extreme, but it did involve an impressive attack on established belief.A substantial number of economists greeted my thesis with interest

2The Essential Galbraithand approval when it was published, but a much larger number of defenders of the orthodox view were strongly at odds. At the annualmeeting of the American Economic Association, the most prestigiousgathering of economists, it was suggested by the head of the organization, the distinguished Calvin Hoover of Duke University, that there bea major reception for the book. This was quickly vetoed, but a specialmeeting to discuss it was added to the program. At lunch that day Iheard someone at the next table say, “We must go now — it’s time tohear them kill off Galbraith.” It didn’t prove to be quite that bad; therewas even some supporting comment. The concept of countervailingpower was allowed to pass into economics and in a small way into public instruction. The book has been continuously in print ever since — asI say, a matter of almost fifty years.*O***n the night of November 2, 1907, J. P. Morgan the elderplayed solitaire in his library while panic gripped WallStreet. Then, when the other bankers had divided up thecost of saving the tottering Trust Company of America, he presidedat the signing of the agreement, authorized the purchase of the Tennessee Coal & Iron Company by the Steel Corporation to encouragethe market, cleared the transaction with President Roosevelt and thepanic was over. There, as legend has preserved and doubtless improved the story, was a man with power a self-respecting man couldfear.A mere two decades later, in the crash of 1929, it was evident thatthe Wall Street bankers were as helpless as everyone else. Their effortto check the collapse in the market in the autumn of that year is nowrecalled as an amusing anecdote; the heads of the New York StockExchange and the National City Bank fell into the toils of the lawand the first went to prison; the son of the Great Morgan went to acongressional hearing in Washington and acquired fame, not for hisauthority, but for his embarrassment when a circus midget wasplaced on his knee.

Countervailing Power3As the banker as a symbol of economic power passed into theshadows, his place was taken by the giant industrial corporation.The substitute was much more plausible. The association of powerwith the banker had always depended on the somewhat tenuousbelief in a “money trust” — on the notion that the means for financing the initiation and expansion of business enterprises was concentrated in the hands of a few men. The ancestry of this ideawas in Marx’s doctrine of finance capital; it was not susceptibleto statistical or other empirical verification, at least in the UnitedStates.By contrast, the fact that a substantial proportion of all production was concentrated in the hands of a relatively small number ofhuge firms was readily verified. That three or four giant firms in anindustry might exercise power analogous to that of a monopoly, andnot different in consequences, was an idea that had come to havethe most respectable of ancestry in classical economics. So, as theJ. P. Morgan Company left the stage, it was replaced by the two hundred largest corporations — giant devils in company strength. Herewas economic power identified by the greatest and most conservative tradition in economic theory. Here was power to controlthe prices the citizen paid, the wages he received, and which interposed the most formidable of obstacles of size and experience to theaspiring new firm. What more might it accomplish were it to turnits vast resources to corrupting politics and controlling access topublic opinion?Yet, as was so dramatically revealed to be the case with the omnipotence of the banker in 1929, there are considerable gaps betweenthe myth and the fact. The comparative importance of a small number of great corporations in the American economy cannot bedenied except by those who have a singular immunity to statisticalevidence or a striking capacity to manipulate it. In principle, theAmerican is controlled, livelihood and soul, by the large corporation; in practice, he or she seems not to be completely enslaved.Once again the danger is in the future; the present seems still tolerable. Once again there may be lessons from the present which, iflearned, will save us in the future.

4The Essential GalbraithiiAs with social efficiency and its neglect of technical dynamics, theparadox of the unexercised power of the large corporation beginswith an important oversight in the underlying economic theory. Inthe competitive model — the economy of many sellers, each with asmall share of the total market — the restraint on the private exercise of economic power was provided by other firms on the sameside of the market. It was the eagerness of competitors to sell, notthe complaints of buyers, that saved the latter from spoliation. Itwas assumed, no doubt accurately, that the nineteenth-century textile manufacturer who overcharged for his product would promptlylose his market to another manufacturer who did not. If all manufacturers found themselves in a position where they could exploit astrong demand and mark up their prices accordingly, there wouldsoon be an inflow of new competitors. The resulting increase insupply would bring prices and profits back to normal.As with the seller who was tempted to use his economic poweragainst the customer, so with the buyer who was tempted to use itagainst his labor or suppliers. The man who paid less than the prevailing wage would lose his labor force to those who paid the workerhis full (marginal) contribution to the earnings of the firm. In allcases the incentive to socially desirable behavior was provided bythe competitor. It was to the same side of the market — the restraintof sellers by other sellers and of buyers by other buyers, in otherwords to competition — that economists came to look for the selfregulatory mechanism of the economy.They also came to look to competition exclusively, and in formaltheory they still do. The notion that there might be another regulatory mechanism in the economy has been almost completely excluded from economic thought. Thus, with the widespread disappearance of competition in its classical form and its replacement bythe small group of firms if not in overt, at least in conventionalor tacit collusion, it was easy to suppose that since competitionhad disappeared, all effective restraint on private power had disappeared. Indeed, this conclusion was all but inevitable if no search

Countervailing Power5was made for other restraints, and so complete was the preoccupation with competition that none was.In fact, new restraints on private power did appear to replacecompetition. They were nurtured by the same process of concentration which impaired or destroyed competition. But they appearednot on the same side of the market but on the opposite side, notwith competitors but with customers or suppliers. It will be convenient to have a name for this counterpart of competition and I shallcall it countervailing power.1To begin with a broad and somewhat too dogmatically statedproposition, private economic power is held in check by the countervailing power of those who are subject to it. The first begets thesecond. 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 alsostrong buyers, as they have failed to see. The two develop together,not in precise step but in such manner that there can be no doubtthat the one is in response to the other.The fact that a seller enjoys a measure of monopoly power, and isreaping a measure of monopoly return as a result, means that thereis an inducement to those firms from whom he buys or those towhom he sells to develop the power with which they can defendthemselves against exploitation. It means also that there is a rewardto them in the form of a share of the gains of their opponents’ market power if they are able to do so. In this way the existence of market power creates an incentive to the organization of another position of power that neutralizes it.The contention I am here making is a formidable one. It comes tothis: competition, which, at least since the time of Adam Smith, hasbeen viewed as the autonomous regulator of economic activity andas the only available regulatory mechanism apart from the state, has,in fact, been superseded. Not entirely, to be sure. I should like to beexplicit on this point. Competition still plays a role. There are stillimportant markets where the power of the firm as, say, a seller ischecked or circumscribed by those who provide a similar or a substitute product or service. This, in the broadest sense that can be

6The Essential Galbraithmeaningful, is the meaning of competition. The role of the buyer onthe other side of such markets is essentially a passive one. It consistsin looking for, perhaps asking for, and responding to the best bargain. The active restraint is provided by the competitor who offers,or threatens to offer, a better bargain. However, this is not the onlyor even the typical restraint on the exercise of economic power. Inthe typical modern market of few sellers, the active restraint is provided not by competitors but from the other side of the market bystrong buyers. Given the convention against price competition, it isthe role of the competitor that becomes passive in these markets.It was always one of the basic presuppositions of competitionthat market power exercised in its absence would invite the competitors who would eliminate such exercise of power. The profits ofa monopoly position inspired competitors to try for a share. Inother words, competition was regarded as a self-generating regulatory force. The doubt whether this was in fact so after a market hadbeen pre-empted by a few large sellers, after entry of new firms hadbecome difficult and after existing firms had accepted a conventionagainst price competition, was what destroyed the faith in competition as a regulatory mechanism. Countervailing power is also a selfgenerating force, and this is a matter of great importance. Something, although not very

Money: Whence It Came,Where It Went The Age ofUncertainty Annals ofan Abiding Liberal A Life in Our Times The Anatomy ofPower A View from the Stands Economics in Perspective: A Critical History A Tenured Professor The Culture ofContentment A Journey Through Economic Time: A Firsthand View A Short History ofFinancial Euphoria The Good Society .