The purpose of this paper is to explore Dennison' s influence on an economist considered by many adherents to be the most important living exponent of "old" institutionalism. The central means of going about this task is to review Dennison and Galbraith's work and, more importantly, to utilize the latter's testimony to elaborate upon the snippets of reference in the secondary literature to this key period in his life.2 It is argued that Dennison played a key role in prodding Galbraith to defect from orthodoxy and to embrace the then-controversial ideas of J.M. Keynes' General Theor), before their wider acceptance even at Harvard, which is viewed as "the principle avenue by which Keynes" ideas passed to the United States" (Schlesinger 1984, 9; Galbraith 197 l, 49).3 It is also argued that Galbraith's later foray into the US industrial order was an important outcome of his defection from orthodoxy. The seeds of Galbraith's embrace of more heterodox ideas regarding the functioning of the industrial order were planted in his mind as a result of his relationship with Dennison.
The paper is organized as follows: The first section outlines the nature and significance of the intellectual relationship between Galbraith and Dennison and explores the former's recollections as a means of assessing the extent of Dennison's influence on Galbraith' s embrace of the ideas of Keynes. This influence is evidenced in the next two parts of the paper by exploring Dennison and Galbraith's joint monographs, as is the emergence of his interest in a more heterodox consideration of industrial organization. In the final section, this line of argument is pursued more forcefully and it is demonstrated that the germ of Galbraith in later writings on industrial organization, the corporation, and the behavior of business managers lay gestating in his joint publications with Dennison.
Dennison's Proto-Keynesianism and Its Impact on Galbraith
After completing his PhD at University of California, Berkeley, and a brief stint with the Agricultural Adjustment Administration in Washington, D.C., Galbraith joined the Department of Economics at Harvard in late 1934. There he met Edwin Gay, who had returned to the Cambridge side of the Charles River following distinguished service as foundation dean of the Harvard Business School. In the summer of 1936, Gay introduced and recommended Galbraith to his friend, Boston businessman Henry S. Dennison, as a possible teacher of economics. Dennison subsequently hired Galbraith as a tutor-in-residence4 and to assist in the preparation of a manuscript that Dennison, together with fellow scientific managers Lincoln Filene, Morris Leeds, and Ralph Flanders, wished to propound as the liberal business response to the Great Depression. These corporate liberals were united in the view that government had to do something about escalating unemployment and so broke with conservative business ranks in support of President F. D. Roosevelt. The ensuing intellectual collaboration between Galbraith and Dennison marked the beginning of a friendship that lasted until Dennison's death in 1952 and that continued thereafter with members of the Dennison family (Galbraith 1996a; 1981, 63).
Dennison was a Boston paper products manufacturer and president of the Dennison Manufacturing Co., well known at that time for the production of shipping tags, Christmas cards, gift wrapping (including a patent on the rights to making crepe paper), and gummed labels.5 In a career spanning fifty years, he was an early exponent of scientific management,6 his company was the first in US corporate history to introduce private unemployment insurance (in 1916), and he was a leading corporate liberal of the interwar period serving as an economic adviser to the Wilson, Harding, Hoover, and Roosevelt administrations.7 As I have argued elsewhere (Bruce 1998), Dennison was an economic analyst who, in both his private and public activities, demonstrated an activist concern with the place, character, and management of the modem business enterprise and with the impact of the capitalist business cycle on broader society. He sought to deal with these issues in his role as a business leader and public figure; that is, as a practitioner or "doer." But he did so also as a theoretician or "thinker," both in the discipline of economics and also in management. His thought was published widely in economics, management, and other social science journals and in the five monographs he authored.
In an interview with this writer in 1996, Galbraith stated that Dennison was a "quasi-parent" or "parent in residence" to him, taking him in when he knew few others among the hallowed Harvard environs.8 It would seem that Dennison sympathized with Galbraith, who was very much an outsider owing to his educational, ethnic, and class background. Despite being from a background much like those of his Harvard peers, Dennison felt a distinct sense of alienation both during and after his own Harvard years (Galbraith 1996a; 1981, 63).0 Besides this point of commonality, and crucial for the scope of this paper, Dennison had a profound effect on Galbraith's economic thought, just as Galbraith was to sharpen and deepen the latter' s perspective on economic matters. Upon commencing his duties as Dennison' s tutor, Galbraith was immediately struck by Dennison's deep understanding of economics--he possessed what Galbraith termed "a shrewd analytical view" toward the workings of the economy, a rare thing for a businessman both then and now. In fact, Galbraith ventured to call Dennison "arguably, the most interesting businessman in the United States" (Galbraith 1981, 61).
He also discovered that most of Dennison's economic ideas ran counter to the textbook teachings on which he himself had been reared. At the time of their meeting, though he had read Veblen and Karl Marx at Berkeley (and was very much taken with the former), Galbraith was first and foremost a neoclassical economist.10 The inevitable clash between economic worldviews of the orthodox young economist and the progressive businessman ensued when Galbraith attempted to answer Dennison's questions concerning the causes of the 1930s depression. This caused a major difficulty that Galbraith explained thus:
When I first met him, I was "caught." This was before The General Theory and ! was of the orthodox impression at that time that the Great Depression was caused by the restrictive activities of great industry--monopoly--that one had full employment, large capacity in agriculture where you had competition. You did not have that in industry and that was what explained the depressive character and unemployment of industry and this was associated with its rigid prices. I persuaded Dennison along these lines. He was resistant to it, but ! persuaded him and that was one of the themes of the [first] book we wrote together, Modern Competition and Business Policy. (Galbraith 1996a)
Dennison, in fact, held a decidedly different view and one that shook the very foundations of Galbraith's commitment to economic "truth," personified at that time by the twin edifices of Say's law and neoclassical orthodoxy. In short, Dennison did not accept the mainstream explanation of the depression, as Galbraith observed:
[O]ne of his more remarkable features in the area of economic affairs was that, in some respects, Dennison anticipated Keynes .... He [Dennison] saw income moving out from the production of goods in two broad streams. One stream went to people of modest income and was likely to be spent. The other went to the more affluent or to the business enterprise, and this was likely to be saved. There was a spendings and a savings stream, and these terms ... were Dennison's own. Depression, he believed, was caused by the nonspending of the income in the savings stream. The remedy or partial remedy was to shift taxation from income that was being spent or was on its way to be spent to income that was on its way to be saved--from a sales tax, as one example, to the corporate or personal income tax. (Galbraith 1981, 64)
To Galbraith, and indeed anyone properly weaned on the orthodoxy, this was pure heresy. Though mainstream economists frequently made allowances for temporary market failure to be corrected by government intervention, few if any were prepared to question the sanctity of Say's law. For the majority of mainstream economists before the publication of The General Theory, production created the necessary purchasing power to ensure that all that was produced was bought and any "leakages" in the savings stream, as they were later to be called, were absorbed by borrowers who would then use these funds to invest.11 In other words, the economy if left to itself would find equilibrium at full employment owing to the adjustment of wages or interest rates.
Galbraith therefore resisted Dennison's line of thought for the simple reason that "whether a man accepted or rejected Say's law was, until well into the 1930s, the test of whether he was qualified for the companionship of reputable scholars or should be dismissed as a monetary crank" (Galbraith 1952, 22). Since he took both his reputation as well as his commitment to "economic truth" seriously, Galbraith' s dilemma, given Dennison's heretical vision, was a difficult one (Galbraith 1981, 65). It would become even more difficult for, as he noted, "in the very same weeks that I was writing my brief for my views on competition and thus refuting the errors of Dennison, I was reading The General Theory." Thereafter he discovered that Keynes was with Dennison and not with himself: Keynes' underemployment equilibrium explanation was more sophisticated but held the same practical consequences as Dennison' s! He explained:
While [our] book [Modern Competition] was going through final revisions I read The General Theory. The terrible thought developed in my mind that I had been wrong in persuading Dennison as I did, that he was instinctively right, and I told him so. I got the disconcerting answer that, "Indeed, I always thought that among economists Keynes made more sense than most." Unfortunately the book had gone so far it couldn't be stopped. (Galbraith 1996b, 136-137)
However, neither author was completely sure of the accuracy of his respective position as to the cause of the depression. For his part, Galbraith went to Cambridge, England, in 1937 to study under the master himself. Though Keynes was absent owing to the first of his heart attacks, there were plenty of willing "teachers" in the guise of R. F. Kahn, Joan Robinson, Michal Kalecki, and Piero Sraffa to convince Galbraith of the logic of the ideas espoused in The General Theory. Meanwhile, back at Cambridge, Massachusetts, Dennison wondered whether there might be some truth in Galbraith' s position and took their joint manuscript to his friend Felix Frankfurter at Harvard Law School for judgment. The latter left the manuscript on his desk unread and subsequently passed it to an editor of Oxford University Press, thinking it a book in search of a publisher. It was accepted for publication. According to Galbraith, Modern Competition was a bad book that should never have been written; it rarely appears in his publications under the banner of books under his authorship. Being in accordance with majority orthodox opinion, however, it was warmly received (Galbraith 1981,66, 74).
Modern Competition and Business Policy: A Prelude to Later Galbraith
Despite Galbraith' s reservations about Modern Competition12 and even if marred by the "blinkers" of its relatively orthodox outlook, the volume was an interesting exercise in industrial organization and a neat popularization of the work of Edward Chamberlin and Robinson on market structure and of A. Berle and G. Means on the corporation. As the anecdotal evidence above attests, Modern Competition proved to be more representative of the views of Galbraith before his "conversion" to the more heterodox ideas held by his co-author, Dennison. Modern Competition was the outcome of a brief that Galbraith prepared for Dennison to correct his heretical opinions as to the cause of the depression and to sway him to the view that more competition was the most appropriate remedy, a view that would undergo a fundamental transformation in Galbraith's later work (Galbraith 1981, 64). In the foreword, Dennison and Galbraith stated that their overriding aim was to explore the shortcomings of what they termed the "good health equilibrium" view of the economy in relation to the workings of the business sector or "industrial organization" and to suggest appropriate remedies. They aimed to describe the modem competitive structure and compare this with actual business experience or practice.
They opened the volume proper by outlining the standard ideal of competition familiar to any economics undergraduate, which will not be further elaborated. They then qualified this precis by advancing a perspective Galbraith was to later refine and strengthen in The New Industrial State (1967). They asserted "that the simple statement of textbook orthodoxy, or some refinement of it has been regarded as more, much more, than a statement of what would be ideal in industrial organization. It has been regarded as the state of affairs which actually exists when industry is organized by competition" (13). In reality, the authors observed, "this kind of competition is quite different from that which prevails in modem industry.., and there are, in fact, very real differences between competition of the automatic and self-regulating sort... and competition of the modem industrial world" (19). They stated that agricultural staples were perhaps the only major example of self-regulating competition and that elsewhere, the industrial terrain is characterized by "a relatively small number of relatively large producers and the tendency of many individual producers to acquire more or less distinct submarkets of their own" (21). This was said to give the leaders of these enterprises "a measure of jurisdiction over the prices of his products." In other words, and in the Chamberlin-Robinson-Berle-Means tradition, Dennison and Galbraith saw that industry was characterized by administered prices and that this "market power" emanated from product "separation or differentiation," market segmentation, and diversification into upstream and downstream markets.
The effects of "producer price jurisdiction" and the ensuing relative price inflexibility, at least in terms of the frame of reference of the competitive ideal, were judged by the authors to impair or eliminate the self-regulatory aspects of competition. Price making, or "market power," was said to result in underproduction and overpricing, price wars and cutthroat competition, and over-investment, excess capacity, and wasteful sales promotion. Herein lies the essence of the explanation Galbraith gave Dennison as to the cause of the depression: "[W]e have in price jurisdiction and the attendant curb on potential output one significant explanation of the failure of the American economy to achieve the standards of abundance which all with a gleam of imagination know are possible" (Dennison and Galbraith 1938, 37). Important also in this regard is the fact that the duration of the depression was explained by the authors as being due to the interference, by price jurisdiction and resultant relative inflexibility or rigidity of prices, with the delicate signaling network characteristic of self-adjusting or clearing markets: "That prices in most of the industrial world have no such prompt and sensitive response, "is a matter of common knowledge" (51). The remedy therefore, was more competition. As suggested above, this explanation proved to be premature and underwent substantial revision as part of Galbraith's intellectual "conversion" to the ideas of Keynes and his belated acceptance of Dennison's reasoning.
With the competitive ideal out of the way, the second part of the volume turned from the atomistic producer and moved to a discussion of the modem corporation, foreshadowing much of Galbraith' s future work. Though the bulk of the analysis remained squarely within the mainstream, Chamberlin-Robinson tradition, toward the conclusion (and without any apparent supporting argument), the authors claimed that "[w]e dissent from efforts to meet the problems of the modern corporation by reducing its size. Arbitrary measures to prevent bigness per se we regard as not so much harmful as merely lacking a reasoned and defined objective" (Dennison and Galbraith 1938, 118; emphasis added). This is an important point, because despite the authors' apparent case of intellectual schizophrenia (which is not surprising given the lack of finality in both their minds as to the soundness of their views in this particular volume), the final chapters of Modern Competition proved to be more representative of the intellectual debates among the authors referred to earlier in the paper and more indicative of the direction Galbraith was to take in later work.
This surfaces clearly in a proposition made by the authors that "if it is accepted that any form of industrial organization straying from the self-regulatory competitive ideal is bad," and that a restoration of this ideal is good, this raises the problem of restoring "something which has never existed in most modem industry" (Dennison and Galbraith 1938, 82), or further, restoring "the sort of business structure which the nineteenth-century business man and economists assumed (and still assumes) to exist, but which may not exist" (80). The alternative, for Dennison and Galbraith, was "to accept American business as it now is and to attempt to design a set of mechanisms which will do some of the work of the automatically self-regulating features which have been lost" (80; emphasis added). In other words, in order "to re-design and supplement the organization of modem industry to provide that degree of regulation which is so obviously essential" it is necessary that socio-economic institutions be called upon for this service. In this regard, the authors noted that "[t]he present task...is not to improve the machinery for doing an old and familiar job. It is to invent new machinery for a new job" (83, 104). Note that there is no advocacy of antitrust action; this was an important departure from the regulatory consequences of the Chamberlin-Robinson theory, which, almost without exception, leaned toward virtually automatic antitrust action. It was a stance vindicating the decidedly institutionalist outlook of the authors and one that very much foreshadows Galbraith's later insistence that corporations should be regulated in the public interest rather than broken up into smaller firms as prescribed by antitrust laws motivated by outdated notions of atomistic competition (Hession 1972, 24; Gambs 1975, 40).
Their analysis then turned to regulation, focusing on the history and problems thereof. Surveying regulation in railways and utilities and other industries subject to natural monopoly conditions, they repeated their earlier aversion to automatic and blind reliance on antitrust action, noting that this might work should there exist pure, or what they call "100 percent monopolies." However, and this foreshadows much of Galbraith's future work, they characterized antitrust legislation as a "misdirection of legislative emphasis," noting that it is not isolated cases of monopoly or else firms controlling over half of the industry, "but a growth of single producers to sizes large enough to affect price appreciably which is the basic factor in eliminating the selfregulatory character of industry" (Dennison and Galbraith 1938, 103). Accordingly, they argued that the US economy was incapable of being controlled by self-regulation and, therefore, government must become more than a passive referee: "If industry cannot regulate itself...then the responsibility rests with the state" (105). By this they meant cooperative and experimental industrial planning under the aegis of a planning commission empowered by Congress to regularize and stabilize production and output and enforce price and labor policies and standards in the social interest (106). Overall, Modern Competition can be best considered as providing a window into the intellectual relationship between the authors and their debate as to the efficacy of mainstream economics--Alfred Marshall plus modifications by Chamberlin and Robinson--in explaining the cause of the depression and more importantly, what was to be done about it. As will be argued below, it also laid the foundations for Galbraith' s incisive exploration of the inner workings of oligopolistic US corporations.
Making Amends: Toward Full Employment
Though Galbraith was formally employed as a ghost writer in the preparation of Toward Full Employment, he used it as a launchpad for his revised economics worldview. As he has noted, "[i]ts publication coincided almost precisely with my emerging doubts as to the validity of its argument" (Galbraith 1994, 86). After reading The General Theory and studying at Cambridge University, he became convinced that "Dennison was right and that our book [Modern Competition] was wrong" and therefore, Full Employment "was designed to correct that earlier error" (Galbraith 1996a). He has also recently stated that Full Employment "embraced Keynesian ideas to a much larger measure" and that when he was drafting the ideas of Dennison, Flanders, Leeds, and Filene, "I put together their ideas with, as I say, a heavy Keynesian overtone" and noted that though his name doesn't appear on the title page, drafting this volume "was the process by which I became attracted to Keynesian ideas" (Galbraith 1996b, 137).
The official "authors" met regularly at Dennison's home to brainstorm with Galbraith, though the latter was responsible for the final draft. The book represented a liberal business view of the depression and the New Deal, seeking to "diagnose our trouble and suggest remedies" (Dennison et al. 1938, v) and was divided into three parts: Part One, "The Provision of Useful Employment," was Leeds' section; Part Two, "Fiscal Policy and the Business Cycle," was Flanders' contribution; and Part Three, "Toward A Tax System That Fits," was Dennison' s section. Filene listened and encouraged during the brainstorm sessions but did not contribute appreciably (Galbraith 1981, 66).
Dennison's chapter revealed the impact of Keynes on both himself and Galbraith,13 The emphasis was on demonstrating how the tax system could be used for maximum employment.14 As mentioned in the anecdotal analysis above, Dennison convinced Galbraith that the continuous and dynamic flow of income separated into two streams: a consumption stream and a savings/investment stream. As he reasoned:
The money income which is being released by production of goods and services at any time may be looked upon as a stream which separates itself to flow into two channels. One fork of this stream--it may be termed the consuming stream--flows to be exchanged for consumers' goods .... The second fork of the stream--which may be termed the savings stream--.., is spent not for consumers' goods, but for the purchase or construction of capital goods. (Dennison et al. 1938, 160-161)
Therefore, he continued, "[i]n one sense the consumption stream turns the millwheels while the investment stream furnishes more wheels to be turned." Dennison believed this was a point lost on the fiscal authorities. Through his analysis of the tax system, he found that it was "too heavily weighted against consumption" (5). His overriding aim, therefore, was to "reexamine [the] distribution of taxation between income flowing into consumption and income flowing into savings" because, in his opinion, the present distribution between these two was "not the best possible" (163).
In this examination of the contemporary distribution of tax incidence on consumption and savings in the United States, Dennison found evidence to support his initial hypothesis regarding the overburden on consumption. That is, after examining taxes on corporations, individuals, goods, and property, he found that "taxes in our country fall 73 per cent upon the consuming stream and 27 per cent upon the savings stream" (Dennison et al. 1938, 185). He noted that in some cases, such as that of tobacco and alcohol, taxation on consumption was deemed to be a social necessity to control demand for those commodities. But on the other hand, "it is apparent, also, that by shifting to income and inheritance taxation and abandoning taxation of commodities, it is possible to shift some of the burden from consumption to savings" (188).
This distribution of the tax burden was inefficient, Dennison believed, because it impacted unfavorably on consumption. This was because the ability of households--especially lower income-higher spending households--to pay taxes depended on their budget constraints or nominal incomes. In other words, Dennison realized that "it is not necessarily true that all of the taxes paid by each income group are divided between saving and consumption in strict proportion to the way in which the group divides its entire income" (Dennison et al. 1938, 166). The imposition of taxes may actually alter or thwart consumption, as he highlighted:
[T]he imposition of tax on a commodity of a highly inelastic demand may not reduce its sale to low income families, but may force these families to reduce the use of another commodity of more elastic demand. Such a tax would thus come completely from consumption. On the other hand, wealthy groups may maintain a given living standard regardless of changes in taxation. An increase in the tax on bread would merely diminish their surplus of income over all consumption expenditures. It would come entirely out of what would have been saved.
This was disastrous for overall consumptive demand (later called aggregate demand), he argued, because it is lower-income groups that have a higher tendency (known subsequently as propensity) to consume. He suggested that this was a possible factor behind the underconsumption that caused the depression. In this way, Dennison was an early US advocate of progressive income taxation as a means of restoring and maintaining purchasing power, while his focus on the "savings stream" as a possible tax base revealed that he was decidedly influenced by The General Theory.
This influence is also evident in Dennison' s refutation of the capital market clearing function of interest rates,15 being of the view that "the rate of interest has a very limited bearing on the decision to invest in capital goods," "that the supply of savings and the extent of the use which is made of that supply have no close relation to one another," and that "in the case of an excessive supply of savings there would appear to be no "self-corrective" influence which would lead (through a lower interest rate) to restricted saving and increased use and so to complete utilization of supply" (Dennison et al., 192-193; parentheses in original).16 This was dangerous for overall consumptive demand or purchasing power, he postulated, because it meant there was no selfcorrective mechanism to prevent hoarding: "Is it possible that the total of the income paid out or made available by production will not be spent?" (194). In words reminiscent of Keynes, "[t]here is a 'leak' between what he [the consumer] receives and what is spent" (197; parentheses added). Savings here are explicitly labeled a "leakage" from the circular flow of income. The crux of Dennison's analysis in this context is that he believed there was "evidence of an insufficiency of purchasing power in the hands of consumers to buy the potential output of industry" but that there was "no evidence of an insufficiency of saving to meet the demands of industry for new capital equipment" (Dennison et al. 1938, 199). This being the case, it was obvious--at least for Dennison--"that the case for shifting a reasonable amount of taxes from the consuming stream to the savings stream is a strong one" (201). During good times, he continued, taxation of consumption is replaced or counter-balanced by government or government employee spending. So too taxation of savings during good times results in government spending replacing private investment and, in some cases, replacing wasteful speculation in stocks. Yet during depression, the effect of these two types of taxation is different:
Taxation of the savings stream will bring a positive increase in spending. For now part of funds which would otherwise have been uninvested savings are taxed and spent by the government. The result is a larger volume of spending and a smaller volume of hoarding during depression than if taxes all fell upon the consumer. (200)
And further, if these potentially idle savings funds are
taxed and expended by the government, there will be not only the initial employment and expenditure by the amount involved but also the indirect and secondary expenditure by those from whom the government buys materials or at whose establishments the recipients of government pay-checks trade. The relief of the consumer from taxation causes the tax system to work against rather than with the deflationary pressure of a depression period. (201-202)
Accordingly, for overall policy prescriptions Dennison advocated a long-time program of tax reform that generally eliminated federal consumption taxes--except where socially necessary--and a greater taxation of income and wealth at all levels and on all economic actors. In his view, "the case for shifting a reasonable amount of taxes from the consuming to the savings stream is a strong one" (Dennison et al. 1938, 201). Further, an income tax "effects the redistribution [of income] with less damage and more benefit to the functioning of the economic system than any other tax of equal importance'' (217). Likewise, a tax on inheritance, general property, and land transfers has the same properties as income taxes in terms of taking some of the burden off consumption.
Intellectual Convergence: The Later Galbraith
That the tension between the authors, though shrouded in Modern Competition, was in some way responsible for Galbraith' s later heterodox position regarding industrial organization has been intimated rather than fully explored by Charles Hession (1972, 24) and John Gambs (1975, 40). It is argued in this section that Galbraith underwent a wholesale intellectual turnaround in this regard, from being an exponent of more competition to a staunch critic--and further, to a defender--of big business as an organic and necessary component of contemporary industrial life. This is apparent by comparing and contrasting a small discussion of Dennison's in the Journal of Economic History in 1943 and two largely overlooked papers written by Galbraith in 1949 and 1955. These writings reveal both authors' re-evaluations and sharpening of earlier ideas in light of their mutual influence on one another.
Dennison' s 1943 Journal of Economic History paper, the outcome of a commentary on a paper by economic historian Thomas C. Cochran concerning historical and theoretical aspects of Chamberlin-Robinson imperfect competition, continued in the spirit of Modern Competition by comparing theory with actual business practice. As to production decisions having no relation to effective scale of production, for Dennison this was nothing novel, "for of course our output never did have any relation to theoretical effectiveness." And further: When fundamentally you make to order (and what manufacturer doesn't?), and are not in business solely for your health but are trustees for a thousand or two stockholders, how in glory can you choose the "most effective scale of production" unless you define "most effective," as we always did, as that which yielded the most net profit or the least net loss? (Dennison 1943, 48)
As regards mutual interdependence in pricing decisions under imperfectly competitive conditions, again, apart from finding nothing new in this theory in light of his business experience, Dennison believed that Cochran made too little of the point:
Our company.., universally set prices on our guess or knowledge of the action (please note I did not say "logical action") of our market rivals .... [T]he process of pricing was always the same. After Thurman Arnold's reverberations have died out there will still be uniformity and some unanimity in pricing because we shall each judge our rivals' "logic" by starting on the basis of our own.
This is an important point in light of Galbraith's later position on the efficacy of antitrust legislation: it demonstrates that Dennison harbored a skeptical stance on the worth of the Department of Justice's most visible protector of free market competition.
In the first of Galbraith's papers mentioned in opening this section--"Monopoly and the Concentration of Economic Power," written for the American Economic Association's Survey of Contemporary Economics in 1952--he first presented an overview of the work of Sraffa, Robinson, Chamberlin, and Means. Galbraith then essentially expanded upon his and Dennison's work of a decade earlier, noting that the dominant market of modem capitalism was that of few sellers. He argued further that the notion of pervasive oligopoly has emancipated market analysis from the inadequate extremes of competition and single-firm monopoly and resulted in the acceptance of "administrative as distinct from market co-ordination" in the industrial heartland of the US economy (Galbraith 1949, 101, 106; emphasis added).
Yet in the second half of the paper, Galbraith exhibited a distinct turnaround in his reasoning from that which underlay his early advice to Dennison regarding the cause of the depression. Tackling the nexus between imperfect competition and depression and unemployment head-on, as well as undertaking a "deeper questioning of capitalist institutions for which the depression provided a hospitable environment," Galbraith admitted that a prima facie case could be made for generalized monopoly as an explanatory variable in depression, "as entrepreneurial returns maximized [or protected] at the expense of production." But following the work of Chamberlin and Robinson, who formalized the intuitive opinions and musings of Dennison, Galbraith argued that restricted production, excess capacity and, so, unemployed resources under imperfect competition became the rule rather than the exception. He further argued that "[n]ot many accepted this vulgar formulation," yet once outside the world of academia, imperfect competition was "undoubtedly credited with diagnostic and even therapeutic values which it did not, in fact possess" (Galbraith 1949, 109). This he explained thus:
Once oligopoly and monopolistic competition entered the picture, to prescribe the elimination of monopoly became tantamount to demanding a wholesale revision of the economic order. Economists, some sections of the press oddly to the contrary, are not given to such violent prescriptions. The highly restricted definition of pure competition, which the new theory brought into use, also helped make the competitive goal seem remote and impractical. (111)
In a complete about-turn from his younger self, he stated that "[t]o say that a flexible competitive economy has greater cyclical stability than an inflexible and monopolistic one," despite its appeal in the early 1930s (even to himself), "is to say little that is useful. The real question is whether, given a rule of monopoly or monopoloid forms, stability is enhanced by increasing the area of competitive and flexible prices" (113). His verdict on this count was in the negative: "The selection of inflexible prices as the devil of the piece seems ... to have been based more on tradition than on the analysis of demand and income effects.., and is clearly unfinished business" (114). This is almost word for word what Dennison had said six years earlier in the Journal of Economic History paper discussed above.
Promulgating a policy conclusion for which he later became noted, Galbraith argued against automatic antitrust action for cases of imperfect competition and, further, stated that in some cases, far from inherently breeding "senescence and protection of the status quo," monopolistic or oligopolistic firms may actually spend more money on what later would be called R&D with positive externalities for the whole industry. This is a superior outcome to conditions approaching perfect competition (Galbraith 1949, 120). He concluded with a caustic attack on the administrative arm of antitrust action, the Temporary National Economic Committee (TNEC) and its most visible exponent of antitrust, lawyer Thurman Arnold:
In placing the antitrust laws in perspective, one has to conclude that they are not serviceable for many of the cosmic purposes that their ardent proponents hold sacred .... No serious effort was made [by the TNEC] to provide an appreciation or rationale of large-scale enterprise and concentrated economic power as facts of contemporary economic life .... We do live in an industrial community where oligopoly--or, more horrid word, private collectivism--is the role. But strangely, we do live. (120, 123, 127-128)
In the 1995 paper mentioned above, "The Businessman as Philosopher," completed shortly after Dennison's death, Galbraith continued in this critical vein and provided a rationale for Dennison' s association with Modern Competition despite the fact that the views expressed in that volume were more reflective of Galbraith' s than those Dennison held himself. In almost an apologia for his earlier views--keeping in mind his father figure Dennison had died three years earlier--Galbraith urged that a careful distinction be made between the formal and ritualistic beliefs of business and those that actually govern private business behavior. So though the formal creed commonly professed by businessmen was individualism and unfettered competition--coordinate with suspicion of and resistance to government intervention--he was of the belief that the actual behavior of the American businessman, however, suggests the existence of conflicting attitudes which, if less brave than those just outlined, are also a good deal more practical. It is doubtful if the United States or any other country could survive a rigorous application of [unfettered competition and individualism] and it seems certain that no business firm ever could. (Galbraith 1955, 60-61 )
Continuing on from the germs of insights contained in Modern Competition, he observed that the hallmark of competitive behavior--price competition--was noticeably absent in the US industrial structure, characterized as it was by a small number of large firms. The norm here, he continued, "with a consent so tacit that its existence often goes unrecognized" was for the avoidance of "uninhibited price competition" (61). Dennison had, in fact, questioned its existence and highlighted tacit cooperation as being the norm much earlier, in 1936, highlighting the confluence between the two thinkers:
We have bunked ourselves with an old theory which lasted for one hundred and fifty years because it applies to a growing world constantly pioneering in all its sections. It is the classical economic theory which has its valid elements, but as Keynes says, it is only a special case of a general theory which applies to a pioneering and growing world. We have taken the simple rule of prices and what prices will do. If you reduce them you will sell more, and if you increase them you will sell less. But in case after case price changes do not make any difference. We do not know anything about the effects of price changes. Prices, such as printed as market prices, are not true anyway, because prices are made secretly through all sorts of deals. (Dennison 1936, 8)
Likewise, with regard to the ideals of free entry and exit, Galbraith observed that few businessmen worry about these matters because of the immense capital requirements for effective operation in established industries like steel, automobiles, aluminum, or tobacco: "[T]he dramatis personae of the characteristic American industry changes little from year to year" (Galbraith 1955, 61). And so, he concluded that competition, in the American business faith, is no rigorous, classical idea toward which, however painfully, the economy must be made to conform. There is a singular--and no doubt quite sensible--unwillingness to die in its name. (62-63; emphasis added)
Dennison's influence can be further gleaned in Galbraith' s analysis both in American Capitalism and The New Industrial State. Turning first to American Capitalism, Galbraith again repeated the now familiar observation "that over an important sector of the American economy individual markets are shared by a small number of producers" such that "[i]t is evidently possible to prosecute a few evil-doers; it is evidently not so practical to indict a whole economy" (Galbraith 1952, 42, 55). He criticized economists and policymakers for their pursuit of illusory competition and antitrust action and for their preoccupation being less with interpreting reality than with building an ideal or model economic society (15-17). Furthermore, he called for a more pragmatic recognition that imperfect competition was more realistic than supposing that "the very fabric of American capitalism is illegal" (58), but more importantly, that it was more "workable" and "that overall consequences, which in theory are deplorable, are often in real life quite agreeable" (61).
Again, this analysis is remarkably similar to Dennison's 1943 Journal of Economic History paper, particularly in the context of the nexus between imperfect competition and cyclical downtums. Dennison repeated his objection to Galbraith's explanation for the depression; that is, he rejected the mainstream policy (though not the theoretical import) interpretation of the Chamberlin-Robinson line--virtually automatic antitrust action--which Galbraith had espoused prior to his acceptance of Keynes' General Theory. As he stated:
When a community produces more than the bare staples of subsistence, and especially when it begins making goods to order, prices seem to get further and further away from being automatic regulators of the business cycle. And in all essentials a large majority of manufactured goods are made to order, or to an order in sight. To prosecute combinations in restraint of trade has its good point, but to suppose that when they' re all prosecuted we shall be freed from cyclical depressions and unemployment is famous. (50)
This is almost identical to Galbraith's stance on the (what he believed to be) misguided actions of the Temporary National Economic Committee in restoring and maintaining a textbook notion of competition in the industrial sector of the US economy.
Finally, turning to The New Industrial State, in words almost identical to those in Modern Competition and American Capitalism, Galbraith stated that "[a] vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality" (Galbraith 1967, 72). Unlike this blind pursuit of competition, Galbraith' s overarching concern in New Industrial State was to highlight that in an age of large vertically and horizontally integrated corporations, far from being the controlling power in the economy, markets were increasingly accommodated to the needs and convenience of business organizations (vii). Modem economic .man, he argued, is no longer subject to the authority of the market because "we have an economic system which, whatever its formal ideological billing, is in substantial part a planned economy.'' Far from acting as if consumers are sovereign, corporations decide what will be produced and shape consumer demand, via advertising, accordingly (6). This was, indeed, a far cry from the young Galbraith who tutored Dennison. As is well known to students of his work, Galbraith argued that the need for planning emanated from "the imperatives of technology" and innovation. With the rise of the large, innovative corporation, using the market is too uncertain to risk the massive capital outlays to develop and sustain organizational capabilities. Accordingly, the corporation "must replace the market with planning .... [I]t must exercise control over what is sold... [and] what is supplied .... Needs must be elaborately anticipated and arranged" (16, 24-25).17 Companies have a variety of strategies at their disposal for doing this, particularly using vertical integration to transform bargaining transactions into internal transfers within a planning unit (28). And following Dennison's intuitive understanding of non-price competition as a condition for "workable" competition and controlling markets, Galbraith opined that vertically integrated corporations, particularly in their dealings with upstream suppliers, find it essential for effective planning to engage in "highly cooperative" relations and enter into long-term contracts with one another. Above all, "[t]he option of eliminating a market is an important source of power for controlling it" (29-30). In this way, in the industrial heartland of the US economy, markets have largely if not completely been supplanted by managerial-entrepreneurial hierarchies--what Galbraith called the technostructure.
Galbraith argued further that markets are somewhat self-regulating: "[S]ize and small numbers of competitors lead to market regulation" (Galbraith 1967, 30), which, combined with the exigencies of technological innovation, makes antitrust action somewhat self-defeating. The modem firm, if it is to generate and sustain competitive advantage over rivals and provide quality products at least cost, must be of the requisite size to "carry the large capital commitments of modem technology" and "large enough to control its markets." The size of firms is inextricably related to planning not with monopoly power, "[a]nd for this planning--control of supply, control of demand, provision of capital, minimization of risk--there is no clear upper limit to the desirable size" (76, 110).
It must be emphasized that this was a decidedly different conception of industrial organization and competition from that which Galbraith attempted to adumbrate to Dennison some thirty years earlier. The impact of Dennison on the evolution of Galbraith's thought is unmistakable. With Veblen, Marshall, Frank Knight, Joseph Schumpeter (and perhaps Ronald Coase, Chamberlin, and Robinson during the 1930s, although they remained wedded to marginalism), Dennison (and later Galbraith) was among the first economic analysts to inquire into a rationale for the modem business firm that transcended a singular focus on the production process under conditions of perfect competition, perfect knowledge, and stable equilibrium. As a practicing manager who utilized long-term planning horizons and nurtured forward-looking, long-term "goodwill" or cooperative relations with his customers, competitors, and workers, Dennison found it difficult to accept the mainstream, textbook conception of how business was supposed to be conducted. In this way, he shaped the later thinking of perhaps the most widely read student of the corporation in the figure of Galbraith.
Conclusion
This paper investigated the intellectual relationship between John Kenneth Galbraith and Boston businessman Henry S. Dennison. Utilizing their joint publications and the testimony of Galbraith, it was found that Dennison played a decisive role in Galbraith's embrace of the initially heretical ideas of Keynes. Related to this intellectual "conversion," the paper revealed that Galbraith's incisive foray into the place and character of the modem, large corporation and the important strategic function of businessmen was, in important respects, a result of Galbraith's association with Dennison in the late 1930s. It would seem that Galbraith, after setting out to convince Dennison of the efficacy of unfettered competition for regulating economic affairs, came to appreciate a decidedly different view, one that focused on the centrality of managerial hierarchy and innovation and on the omnipresence of the large, vertically integrated business organization for planning economic activities internally and strategically.
Notes
1. Galbraith is particularly controversial among analysts operating within the American institutionalist tradition who readily claim him as one of their own. See, for instance, Allan Gruchy (1972, ch. 7) and James Stanfield (1996, 153-160).
2. See Charles Hession (1972), John Gambs (1975), and Arthur Schlesinger (1984). A more recent work, that by Stanfield (1996), makes no reference whatsoever to Dennison or his work.
3. In this context, it should be noted that because of his friendship with Dennison, Galbraith's interest in Keynes' ideas, though no doubt heightened in 1938 and into the 1940s, chronologically preceded those of his more well-known colleagues (save, perhaps, for Lauchlin Currie--see Alan Sweezy [ 1972]) such as Alvin Hansen, newly arrived from the University of Minnesota, and others who attended Hansen's fiscal policy seminars. Yet given most of his colleagues were beginning to embrace the ideas contained in The General Theory in the late 1930s and early 40s, Galbraith, a junior appointment, would have found it more congenial and more practical career-wise to express his "conversion" more openly at this time rather than earlier. To wit, an earlier colleague of Galbraith's (and later an economic advisor to President F. D. Roosevelt)--Lauchlin Currie--"failed of promotion at Harvard partly because his ideas, brilliantly anticipating Keynes, were considered to reflect deficient scholarship until Keynes made them respectable" (Galbraith 1971). The fact remains, as will be made clearer below, that Galbraith was on the side of Keynes much earlier than Hansen et al. as a result of his debates with Dennison and his reading of Keynes in 1936 and owing to his visit to the Cambridge University in 1937.
4. In this context, it might be apt to mention Dennison's diverse interests beyond the scope of running a business, as Galbraith (1981,61 ) does, and to say that Dennison was by no means a dilettante: "When some new subject captured his imagination, he regularly hired someone of professional competence to give him instruction."
5. Dennison's family company still operates today, following a 1990 merger, as the Avery-Dennison Corporation, a US.5 billion Fortune 500 company recognized globally for its innovative pressure-sensitive technologies and products. Its core business remains as paper and adhesive products.
6. Between 1919 and 1921, Dennison was president of a society devoted to the ideas of Frederick W. Taylor, the Taylor Society. As a matter of interest, Irving Fisher was also a member.
7. In this context, Dennison served in Wilson's War Industries Board and the first of his Industrial Conferences; he was a key member of Harding's Conference on Unemployment and well known to the organizer of the latter, Herbert Hoover; Dennison was intimate with Roosevelt and during the New Deal was a member of the Business Advisory Council, the Industrial Advisory Board, the abortive National Labor Board, and the National Planning Board.
8. Galbraith actually lived in Dennison's spacious Framingham, Massachusetts, home and occupied a room in the house at intervals for several years (Galbraith 1981, 63).
9. As Galbraith explains, Dennison thought most of his fellow Boston businessmen were boring and "allowed their commitment to personal dignity, popular cliche and the Republican Party and their hatred of unions to override any residual intelligence." In this context, it might be mentioned that at one stage some of his fellow businessmen boycotted Dennison products because of his "radical" tendencies; he was thought to be spoiling the working classes (Galbraith 1981, 62).
10. In this context, Gambs (1975, 17) has noted that upon completion of his PhD at Berkeley, Galbraith "was thoroughly grounded in neoclassical economics and acknowledged a considerable debt to Alfred Marshall." Frederick Pratson (1978, 6) similarly observed that "[i]n his early reading of economics, Galbraith was thrilled by neoclassical economics as it was presented by Alfred Marshall." More recently, Galbraith himself stated: "It was Marshall's Principles that I read, to some extent mastered and to a large extent accepted after arriving in California in 1931" (Galbraith 1994, 43).
11. There were, however, a vibrant minority of economists who questioned Say's law well before Keynes as analysts such as J. Ronnie Davis (1971) and William J. Barber (1985, 1996) have documented.
12. As Galbraith has noted, "I thoughtfully omitted it from my list of published writings" (Galbraith 1994, 86).
13. Nevertheless, Dennison's interest in taxation and public spending had a long history. For instance, just after becoming president of the Dennison Manufacturing Company in 1917, and as a leading figure in the city of Framingham local government, he made an eight-year estimate of future tax rates and a five-year street building plan involving advanced town budgeting (Dennison 1999).
14. This is actually different from the emphasis of Keynes who, as is well known, saw the problem of insufficient aggregate demand in terms of inadequate investment demand. Dennison saw the same problem in terms of aggregate demand but focused more on consumption expenditure as being inadequate, hence his policy prescription of tax reform.
15. This was a matter of some importance in light of contemporaneous developments across the Atlantic, where at Oxford, R. L. Hall and C. J. Hitch (1939) reached the same conclusion after doing extensive empirical work in 1938.
16. In this context, it is interesting to note the similarities of Dennison's views to those of Oxford Economists" Research Group, like Hall and Hitch (1939) and Philip Andrews (1949), who in the exact same period, also disputed the significance of interest rates in management investment decisions.
17. In this way, Galbraith anticipated much of the work of Alfred Chandler (1977, 1990) and William Lazonick (1991).
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