One of the less-recognized accomplishments of the New Deal was its displacement of scores of entrenched bureaucrats, following twelve years of Republican administrations. Believers in balanced budgets and free markets were out, while believers in jobs programs and government regulation were in. In this atmosphere of change, many liberal reformers were swept into the federal government, including a young Harvard professor named John Kenneth Galbraith. With a degree in agricultural economics from Berkeley, Galbraith was employed by the Agricultural Adjustment Administration in the summer of 1934. Thus began a long and illustrious career---one that included Director of the Office of Price Administration during World War II, Editor at Forbes, President of the American Economic Association, and Ambassador to India.
As a Democratic administration once again reorients itself in the wake of twelve years of Republican rule, the life and ideas of John Kenneth Galbraith take on renewed importance. Gaibraith is not just another "progressive" economist. His major works, American Capitalism (1952), The Affluent Society (1958), The New Industrial State (1967), and Economics and the Public Purpose (1972) contain the foundations of an enlightened economic tradition. Call it progressive, liberal, or socialist--the viewpoint that emerges from these 1,293 pages offers both a theoretical justification for enlightened government intervention and a blueprint for action.
The importance of a theoretical rationale to justify public policy should not be underestimated. Adam Smith continues to stand as a symbol for almost any policy in which the government is asked to do nothing. He is regularly cited by the opponents of affirmative action, import quotas, minimum wage, union recognition, Social Security, Medicare and Medicaid, government training, farm supports, and welfare. The fact of his death (more than two hundred years ago) has done little to dissipate the enthusiasm of his followers. Some of the most zealous have even been known to wear Adam Smith neckties.
While no one can expect Bill Clinton to distribute Galbraith neckties to his new appointees, a copy of Economics and the Public Purpose would be of far greater practical value. The progressive program described in this book is essential to deal with the backlog of social problems inherited from the past twelve years of essentially disengaged administrations. Not only has the concept of progressive public policy atrophied from years of neglect, it has been jolted by the implosion of the planned economies, and further diluted by an infiltration of conservative ideas. Galbraith's work provides a model of analysis that could prove useful, if not essential, for resuscitating a progressive agenda.
Market heresy
The influence enjoyed by opponents of enlightened public policy clearly peaked during the 1980s with the ascendance of monetarism, supply-side economics, and Reaganomics. But the popularity of this view has always been strong in policy circles, and has provided Galbraith with a consistent target over the years. And, like Galileo, whose work made him a heretic in the eyes of the church, Galbraith has, on many occasions, found himself in violation of accepted doctrine. He confessed in his autobiography that "One of my greatest pleasures in writing has come from the thought that perhaps my work might annoy someone of comfortably pretentious position." His assault on those wearing the Adam Smith neck-tie-advocates of laissez-faire and neoclassical economics-must have provided a particularly rich source of enjoyment.
A principal belief of the opponents of public policy concerns the alleged superiority (if not perfection) of the unimpeded market. While many economists (even liberals) are quick to concede this point, Galbraith does not. The problems with competitive markets are fundamental--they are technologically backward. Preoccupied with ensuring their own survival, the typical farmer, the bituminous coal company, and the shoe manufacturer have little interest in devoting huge sums of money to risky endeavors with possible payoffs that are put off many years into the future. Hence, those industries that come closest to meeting the conditions of perfect competition also conduct the least amount of research. Even in agriculture, technological deficiency has been avoided only by the concerted efforts of government and large suppliers.
One of the oldest arguments in defense of markets rests on the belief that markets have an unrivaled capacity for meeting consumer needs and desires. Unlike producers in centrally planned economies, their counterparts in free markets are merely the servants of consumers who remain masters of their own demand. A comforting image, says Galbraith, but not one with much relevance. It is no secret that large firms dedicate substantial funds to advertising and related selling efforts. Firms are in the business of shaping the very demands they are supposed to meet. The obvious conclusion is that actual production is some combination of what individuals desire, and of what firms want to produce.
Among the various strategies devoted to marketing, one must include most research and development devoted to new products. The idea that firms engineer socially useful products is a comforting notion that appeals to industrial engineers and business economists, but the reality is that firms design new products because they are salable. Galbraith asserts that even a comparatively useless product can be salable when its demand responds well to advertising campaigns that promise "greater sexual opportunity, less obesity, or some significant escape from the crypto-servant role of the housewife." Product development and market research are seldom very distant from each other in the corporate organization chart.
While these simple observations take much of the luster off the argument that maintains the perfection of free markets, Galbraith proceeds one step further. If many of the goods currently produced could not be sold without advertising, then how important are these goods? The possibility that some portion of private production is superfluous raises serious doubts about its virtue. We are led to the unavoidable conclusion that private businesses are just as capable of providing unnecessary goods and services as the commonly maligned government sector.
In addition, market defenders insist on painting a picture of firms as if they had no power over the government, consumers, or even their own prices. Once again, according to Galbraith, the image scores higher for the comfort it affords the powerful than for its relevance. Many large firms not only influence consumers and the state, they also exercise considerable discretion over the prices they set. While liberals can applaud this position, both because of its obvious wisdom and the discomfort it inflicts on the conservatives, they may find themselves in less than full agreement with the remainder of Galbraith's argument.
The problem with power, according to Galbraith, is not that firms produce too little (as suggested by conventional monopoly theory), but that they produce too much. The result is that resources are not underutilized by large firms who make up the planning structure, but are overused. This is a heresy of Galbraithian proportions----one that demands a proper explanation. While the planning sector may lose some sales by charging a higher price, the loss is more than offset by the additional sales arising from massive expenditures on advertising and research and development. Where the conventional monopoly model implies that the U.S. auto industry of the 1960s was underproducing. the reality, in this view, was just the opposite. At the time, more resources were devoted to the manufacture of automobiles than could be justified reasonably. The result was more cars and their complements--roads, parking lots, gas stations, pollution, and highway deaths--than would have existed in a more competitive and less profitable market that did not have the resources to put out a new model every year and advertise it on all the major networks.
Incentives
For those opposed to government intervention, a special place is reserved for the role of market incentives. Supply-side economics of the 1980s was based largely on the belief that taxes sullied these pure incentives and resulted in a stark reduction of productive activity. But this notion has been around for a long time, or at least since 1956. In that year, an address to the National Association of Manufacturers claimed that the prevailing tax structure "destroys the incentive of people to work . . . . It makes it increasingly difficult, if not impossible, for people to save."
In response, Galbraith pointed out the obvious (if not inconvenient) fact that the tax structure had changed little for two decades; and yet, the country had enjoyed "years of rapid economic growth." The disincentives associated with the tax system were devastating in theory, but fortunately, nearly invisible in reality. Savings were not particularly low, observed Galbraith, nor would "many businessmen wish to concede that they are putting forth less than their best efforts because of insufficient pecuniary incentive."
Another violation of the market incentives, according to government opponents, is the welfare system. Where, they lament, is the motivation to work when one can remain idle and collect welfare? But in Galbraith's view, "The corrupting effect on the human spirit of a small amount of unearned revenue has unquestionably been exaggerated as, indeed, have the character-building values of hunger and privation." His proposal to alleviate poverty included a sizable increase in the average welfare grant; and rather than spending less on the education and development of poor children, as is the common practice, he argued that more should be spent.
While the poor are left to suffer the costs of a poorly functioning labor market, the rest of society has, in Galbraith's estimation, largely distanced itself from the insecurity and risk of the market. The planning system of large corporations and the complementary function of trade unions tend to push risk farther down the corporate ladder. Social Security eliminates much of the risk associated with old age, and federal farm-support programs greatly reduce the anxiety in agriculture. Even Keynesian macroeconomic policy alleviates much of the risk inherent in the overall economy. But unlike most economists who lament the loss of market forces and their highly prized incentives, Galbraith recognizes this development as the product of a progressive economy. After all, human beings are strongly averse to risks involving serious deprivation---especially those related to unemployment, bankruptcy, or depression. It is understandable that a relatively affluent society would develop institutions with the explicit purpose of lessening the impact, or likelihood, of such calamities.
As for the incentives discarded with the risks, the loss is again hardly evident. "The most impressive increases in output in the history of both the United States and other western countries have occurred since men began to concern themselves with reducing the risks of the competitive system." But it will take more than obvious facts to break the spell that the concept of market incentives holds over the average economist. The preservation of market incentives has become a calling for many academics--even those on government payrolls, or with tenure. The irony was not lost on Galbraith, who noted, "Restraints on competition and the free movement of prices, the principal source of uncertainty to business firms, have been principally deplored by university professors on lifetime appointments."
The poverty of public goods
Among the most profound accomplishments of economic conservatives has been their ability to establish a positive image for private production, matched by an equally negative one for public production. While politicians are well-regarded for any increase of the gross domestic product that occurs during their tenure, they are attacked for expansions of government spending. The fact that government spending may be necessary to stimulate economic growth has never been sufficiently appreciated by the populace. The myth that private production is, in some way, superior to public production has persisted long past its usefulness. "Comic books, alcohol, narcotics, and switchblade knives are, as noted, part of the increased flow of goods, and there is nothing to dispute their enjoyment," added Galbraith.
He continued that the prevailing view flies in the face of common sense and makes "education unproductive and the manufacture of the school toilet seats productive . . . . Presumably a community can be as well rewarded by buying better schools or better parks as by buying bigger automobiles." The results of such perverse priorities are occasionally so striking that they can't be ignored. In the 1950s, "Some . . . even pointed out that, in the same week the Russians launched the first earth satellite, we launched a magnificent selection of automobile models, including the uniquely elegant new Edsel." But unfortunately, recognition of the problem has been infrequent and fleeting. Private production continues to enjoy an undeserved reputation vastly superior to its public counterpart.
What is the source of this discrepancy that Galbraith would call the social imbalance? One answer is that the private sector does a much better job of promoting itself. It leaves only positive images in the minds of consumers through extensive advertising, sales promotion, and company public relations. There is no comparable advertising by the public sector. Elementary schools, police, social-welfare agencies, public housing, city parks and pools, public transportation systems, and state universities are not at liberty to spend large amounts of their budgets on self-promotion. An exception is the advertising conducted by the government for military recruiting. But, this exception only proves the rule, since military spending has traditionally enjoyed a deeper level of support and funding than other government activities. As such, the public sector is at a distinct disadvantage, leaving it especially vulnerable to the ravages of anti-government pundits.
The role of economics
Economists are fond of examining the role that self-interest plays in economic decisions. Most recently, some economists identified with the public-choice school have won acclaim for examining the self-interest of politicians. But conspicuously absent from the spotlight exposing self-interest are economists themselves. If ever they succumb to a moment of self-examination, they become inclined to view themselves as participants in the honorable pursuit of knowledge, objectively applying the scientific method to questions of great social importance. The suggestion that their work might be slanted in some perverse fashion in order to favor the powerful in society--those in positions to provide jobs, contracts, or grants--is regarded as a profound insult.
Galbraith has ensured himself a reputation as a heretic by applying the same assumption of self-interest to the economist that the economist applies to others. For example, Galbraith has argued that "mainstream economics has, for some centuries, given grace and acceptability to convenient belief--to what the socially and economically favored most wish or need to have believed." The rewards for embracing the conventional view may be subtle--for instance, in improving access to jobs or obtaining promotions and tenure. In other cases, direct pecuniary rewards may be involved, as occurs when an economist engages in a consulting or research contract with a large corporation. It is seldom clear in such a relationship whether it is the research or the conclusions that have been purchased.
In addition to questioning the motivation of economists, Galbraith has presented repeated challenges to the profession. Neoclassical economics, he observed, fails to describe the big picture only because its proponents are hopelessly engrossed in irrelevant details. It is characterized by "refinement with relevance." Galbraith begins a chapter in Economics and the Public Purpose with a quotation by Joan Robinson: "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions but to learn how not to be deceived by economists."
A question of standards
Conventional economists routinely evaluate the merit of economic policies by determining how much the results diverge from those of a competitive market. But once one recognizes the shortcomings of such an approach, how does one distinguish between good economic policies and bad ones? Galbraith again serves as an example.
Any economic argument should not only be believable. it should also hold up over time. "The enemy of the conventional wisdom is not ideas but the march of events." Similarly, "For being right, one may perhaps conclude it is better to have the support of events than of high scholarship." By this criterion (admittedly his own), Galbraith is worthy of a very high score.
In 1952, Galbraith described the inability of centrally planned economies to contend with the wide variety of consumer goods and services necessary to support a modern economy. The problem is largely resolved in the United States by a division of labor. A planning system that encompasses large corporations controls the production of consumer durable goods and natural resources, while a more decentralized market system handles the myriad complexities associated with smaller consumer goods and services. The Soviet economy had no comparable mechanism to handle these latter demands--a shortcoming that Galbraith claimed would only get worse with time. The eventual collapse of the Soviet system in the 1980s was widely believed to be related to this particular deficiency.
Also in 1952, Galbraith observed that very little stood in the way of organizing by government employees. He wrote, "Schoolteachers, clerical workers, municipal employees, and civil servants have generally avoided organization . . . . It seems to me possible that the next group to seek to assert its market power will be the genteel white-collar class. In any case, we cannot assume that efforts by presently unorganized groups to seek market power . . . is finished business." In 1962, unions represented only 14 percent of all government employees, but by 1980, the percentage had soared to 36 percent.
While government-sector unions advanced, the overall unionization rate retreated. In 1967, Galbraith wrote: "The loss of union membership is not a temporary setback pending the organization of white-collar employees and engineers but the earlier stages of a permanent decline." Some twenty-five years later, there is still no sign of a let-up in the overall decline of unions.
Time has also been kind to a number of Galbraith's ideas that have been rediscovered by other economists. In 1958, Galbraith discussed the importance of investment in individuals--a precursor of the concept of human capital. "Since investment in individuals, unlike investment in a blast furnace, provides a product that can be neither seen nor valued. it is inferior. Even the prestige of the word investment itself is not regularly accorded to these outlays." Galbraith dedicated an entire chapter in The Affluent Society to discussing the underinvestment in public education. He correctly noted the problem: The young have no collateral on which to borrow for an investment in their future. As a result, he concluded, the market, by itself, fails to provide enough investment in education. All of this was in print three years before Theodore Schultz legitimized the notion of investment in human capital with his 1961 article in the American Economic Review, entitled "Investment in Human Capital." (Galbraith was not cited.)
This is only one of many instances when Galbraith's work anticipated a contemporary economic theme. America's apparent aversion toward leisure was analyzed in The Affluent Society in the 1950s, only to be resurrected in the valuable work of Juliet Schor, The Overworked American: The Unexpected Decline of Leisure in the 1990s. Galbraith pointed out the excessive compensation of corporate executives in the 1970s, but it didn't become a subject of popular debate until the late 1980s. And in Economics and the Public Purpose, Galbraith presented a comprehensive account of a dual economy with considerable relevance to later work on dual labor markets and persistent wage differentials in the 1980s. Galbraith's theories have shown remarkable resilience over the years.
There is one more aspect of Galbraith's work that qualifies him as a heretic--his occasional appeal to decency and compassion. Why is this a heresy? An essential lesson in the economics curriculum asserts that the only legitimate defense of a public policy is efficiency. Since efficiency and laissez-faire are often equated by definition, the bias against government intervention is assured. One way to escape this trap is to broaden the criteria for evaluating public policy. This solution is not unknown. The recently formed Society for the Advancement of Socio-Economics is committed to "alternative approaches" that are "morally sound." For instance, we could apply compassion, thereby giving more weight in economic policy to those with the least income. It is a value that Galbraith has used effectively in his arguments for government intervention. "An affluent society, that is also both compassionate and rational, would, no doubt, secure to all who needed it the minimum income essential for decency and comfort."
The march of events
There was a time during the Great Depression when conventional wisdom condemned government intervention in any form as inimical to economic recovery. As the economy spiraled downward, scholars and pundits alike continued to advocate a balanced federal budget and a tight rein on the money supply. This view was highlighted in a letter written by Herbert Hoover to President-elect Roosevelt in 1932, and later quoted by Galbraith: "It would steady the country greatly if there could be prompt assurance that there will be no tampering with or inflation of the currency; that the budget will be unquestionably balanced even if further taxation is necessary; that the Government credit will be maintained by refusal to exhaust it in the issue of securities."
At the time, these policies were based on solid theoretical principles and thus earned the widespread support of the economics profession. Objections were not unheard of and could be entertained in polite company, but it was the turn of events that dealt this view a swift and decisive blow. The economy responded to the immense budget deficits and currency inflation of World War II, not with a relapse, but with an explosion. In fact, the recovery was so profound that growth rates in real GNP that were experienced during the first three years of the War have yet to be replicated.
In hindsight, it is easy to account for this egregious and costly error. Many in the profession were opposed resolutely to government intervention--a commitment that stood above practical evidence and common sense. In Galbraith's view, it reflected "a marked achievement--a triumph of dogma over thought." In this case, it was the "march of events." rather than the consensus of scholars that discredited the prevailing doctrine.
If the "march of events," rather than the support of scholars, is to be the basis for evaluating economic theories, then Galbraith undoubtedly ranks among the leading economists of the century. Opponents of government intervention have benefited immensely from using the work of Adam Smith as a symbol of market efficiency. Progressive advocates of an enlightened government would do well to employ John Kenneth Galbraith in a similar fashion. His work serves as a useful symbol, even if his visage has yet to grace a necktie.
