Galbraith's Two Hats
BLAIR, JOHN M.
Galbraiths Two Hats by JOHN M. BLAIR A fter more than a quarter century of preoccupation with other subjects, there are signs of a reawakening of interest among economists in the original...
...Another case in point concerns the reports of increasing use by the Soviet Union of the market mechanism: "This has been widely hailed as a return by those countries to the market...
...Producing their own raw materials, they are free of concern over supplies...
...this is the ability to plan: "The size of General Motors is in the service not of monopoly or the economies of scale but of planning...
...Moreover, it affects more directly than any other discipline that most sensitive part of the human anatomy, the pocketbook nerve...
...And, as the author obviously intended, it should prove to be highly controversial...
...Moreover, he fails to mention the newer Schumpeterian "invention-innovation" rationale which sees in the research of the large companies the fountainhead of new products and processes, even though he was vigorously urging it upon us only a few years ago...
...But when both consumers and technology become sophisticated and unpredictable, attempts at planning, whether public or private, may prove to be far less efficient than the market in bringing demand and supply together...
...Galbraiths Two Hats by JOHN M. BLAIR A fter more than a quarter century of preoccupation with other subjects, there are signs of a reawakening of interest among economists in the original subject of the profession—the nature and behavior of business enterprises, the determination of price, the structure of industry, and so on...
...It is also not likely to gain many converts...
...And just how does a corporation such as General Motors plan...
...the new sovereign is the corporation which by managing its demand determines what and how much will be produced ; and through the artful use of the means of communication the consumer can be induced to like what is proffered...
...The enormous power, whether exercised or not, of a handful of New York banks which are regularly selected to vote the impressive stockholdings of mutual funds, pension funds, and investment trusts is a reality, the significance of which is simply not known...
...Moreover, it is a logically organized and, in part, quite original work...
...But there are other reasons which are inherent in the nature of the subject itself...
...The area of the economy in which competition is very much alive is certainly as large as the area in which it is quiescent...
...Yet anyone who contends that the giant corporations of today are largely the inevitable result of the "imperatives of technology" is merely reflecting his ignorance of the literature...
...For many of the industrial leaders, General Motors among them, planning consists of setting their prices in relation to their costs at such a level as to yield a rate of return on investment of fifteen or twenty per cent, after taxes, or about three times the level permitted public utilities...
...Also, mention should be made of Galbraith's unfortunate tendency to be didactic on points on which not even he can claim omniscience...
...In this "revised sequence," the consumer is no longer king...
...Yet it is at least within the realm of possibility that only the form of ownership interest has changed...
...Galbraith's solution is the wry commentary and ironic understatement...
...By its very nature planning requires foreknowledge of what consumers want and what the instruments of production can supply...
...When it comes to public policy, Galbraith's principal contribution is a series of negative constraints...
...Then, there should be applied to such public needs as urban and in-terurban transportation the kind of overall planning which AT&T has brought to the telephone...
...Referring to those among his colleagues who specialize in narrow fields, he states: "I have drawn on their work, quantitative and qualitative, at every stage...
...Like all social sciences, it is not and cannot be an exact science...
...But in Galbraith's view there is a summum bonum of bigness, transcending considerations of efficiency or innovation...
...Anti-trust action is also to be eschewed...
...Fortune magazine of June, 1967, contains a provocative article, "How Mutual Funds Influence Management...
...And, of course, there is always the hope inherent in increased emphasis on education, particularly in the liberal colleges...
...Some economists, such as Veb-len, have deliberately practiced obfus-cation as a means of protective coloration...
...Recognizing the limitations inherent in extreme compression, the key points of Galbraith's argument may be summarized somewhat as follows: The free market of classical economic theory has been replaced by the great corporations, which, for all practical purposes, are free from any outside force of influence...
...Finally, a word on Galbraith's celebrated style...
...As long as their unmet wants are so great as to make consumers satisfied with practically any type of merchandise, and as long as the nature of technology is relatively standardized and stable, planning, whether private or public, can be made to work...
...On the basis of my own study of the subject in Europe last year, I am not sure that it is a mirage...
...It is something else again to assert that its fundamental premise is well rooted in inexorable economic forces—that, specifically, bigness is machine-made, not man-made...
...The available empirical studies, however, enable us to be far more precise...
...In relation to the needs of the industrial system, the space competition is nearly ideal...
...Equally unclear is where an author's real view lies above that which is deliberately understated...
...or to U.S...
...The savants of the University of Chicago notwithstanding, this is a not inaccurate—though largely familiar— description of much of our industrial economy...
...At least, such appears to be the conviction of those who have had the greatest experience with planning and are finding it less and less suited to the realities of the day...
...One can only hope that this interest stems at least in part from a growing concern over the effects of our increasingly organized society on the rights, life, and opportunities of the individual...
...To recommend a course of governmental action with the same sardonic amusement which is employed in describing some of the industrial system's least attractive features is certainly not the best way to distinguish what ought to be changed from what must be accepted...
...It is one thing to offer such an argument as a provocative challenge to received wisdom, particularly the wisdom associated with the economists of the University of Chicago...
...he is both the objective, disinterested observer and the advocate of particular types of public policy...
...Only the Stygian pit reserved for those considered to be "technically incompetent" awaits the luckless soul who in the interest of clarity dispenses even momentarily with a protective clutter of caveats...
...Governmental expenditures can most easily be justified if they are for military purposes which, given the nature of modern weaponry, makes it essential to find an acceptable solution for the arms race: "A simple increase in consumer spending resulting from tax reduction or in public spending for housing or pensions would be no substitute...
...As to just how much of the economy, there is room for a considerable difference of opinion...
...We are informed only that the "mature corporation" sets prices "not where they maximize profits but where they best contribute to the security of the technostructure and to the growth of a firm...
...That is a mirage...
...The same question would also apply to drug companies whose planning enables them to earn profit rates of thirty per cent or more, after taxes...
...Their size frees them from the constraints of the market, while their ability to raise capital from retained earnings frees them from the influence of investors...
...While this is not the occasion to summarize the state of knowledge on the relationship of size to efficiency, it can be said that in most of our concentrated industries the size of the optimal plant has been demonstrated to be far below the size of the largest company, that the gains in efficiency of operating many plants under common ownership and control appear to be at least offset by the losses arising from the cost of excessive bureaucracy and the like, that even with their greater monopoly power the largest firms do not show the highest profit rates in three industries out of four, that in most industries the largest plants are of declining importance, and that new technological developments such as computers, plastics, fiberglass, and pre-stressed concrete promise further reductions in the size of the optimal firm...
...It would be a typical Galbraithean paradox if planning were to prove as obsolete and outmoded in the future as he regards competition today...
...In this book the difficulty of ascertaining meaning is compounded by the fact that Galbraith wears two hats which are constantly being interchanged...
...The question is whether such planning, admittedly good for General Motors, is also good for the country...
...Thus, any direct governmental intervention in corporate affairs is to be avoided, since it will only interfere with the ability of the corporation to plan...
...Mocking the views of others conveys only imprecisely the nature of one's own beliefs...
...Thus he is even more certain of the divorce between ownership and control in the modern corporation than were Berle and Means when they first promulgated the thesis more than thirty years ago...
...A good many, particularly among today's younger mathematical economists, do not write well because they have never learned to write at all...
...the reason advanced is the hoary old chestnut, "It would require that we have simple products made with simple equipment from readily available materials by unspecialized labor...
...Steel, which has been able to break even operating at less than a third of capacity, or to concentrated industries, in general, whose typical reaction to a falling off in demand is to reduce production and employment while maintaining or even increasing their prices...
...For this reason alone, John Kenneth Galbraith's book, The New Industrial State, would be welcome since it constitutes an addition to the small but growing body of literature in which economists are combining their interest in the profession's original subject matter with a recognition of the reality of the modern corporation...
...To the best of my knowledge, this is the first work which can justifiably be accused of defending bigness per se, since at one point Galbraith concedes that General Motors at least is beyond any size required by efficiency...
...perhaps Galbraith is aware of the hard times which this justification for bigness has suffered at the hands of empirical investigators...
...Management and stockholder groups may applaud the skill with which, through planning, these and similar objectives have been accomplished...
...Those with broader horizons might wonder if the public interest would be better served if the planning were less successful...
...Unhappily, what is gained in readability is all too often at the expense of clarity...
...This is the fundamental question which Galbraith ignores except to warn against governmental interference on the grounds that it injects "control . . . at the expense of competence...
...And what is most remarkable, they are able through modern advertising and other forms of non-price competition to "manage" their demand...
...But the free market functions tolerably well in such additional fields as construction, most foods, most textiles, apparel, lumber, furniture, printing, some paper products, stone and clay products, nonferrous metals (except aluminum), fabricated metals, most machinery, many electronic products and some chemicals...
...Any writer who can infuse economics with so much ironic wit, wry understatement, and elegant aphorisms justly deserves to be celebrated...
...In Galbraith's view the description applies to all areas except agriculture, services, the professions, handicrafts, a few retail trades, and "some vice...
...As to affirmative proposals, the Government must shore up demand through deficit spending...
Vol. 31 • August 1967 • No. 8
