John Kenneth Galbraith's Contributions to Economics

This is from Stanley Brue's The Evolution of Economic Thought, 5th ed., Chapter 19, The Institutionalist School, pgs 407-412. It is a non-technical, easily readable description of some of Galbraith's main contributions to the field of economics:  

JOHN KENNETH GALBRAITH

John Kenneth Galbraith (1908-2006) was born in Canada and studied at the Universities of Toronto and California. His experience has included the post of chief economist for the American Farm Bureau Federation, high positions with the U.S. government during World War II, membership on the board of editors of Fortune magazine, ambassador to India during the Kennedy administration, professor of economics at Harvard University, and chairman of the Americans for Democratic Action. Galbraith is also a novelist and an expert on Far Eastern art.

Taken as a whole, Galbraith's major writings constitute both an attack on neoclassical economic thought and an analysis of modern capitalism. Nearly all of the characteristics of the institutionalist school apply to his many works.

The Conventional Wisdom

Galbraith is a critic of the neoclassical "conventional wisdom": a set of ideas that is familiar to all, widely accepted, but no longer relevant. His evolutionary approach explores changing conditions and examines the need to change our ideas to fit new situations. In a statement similar to that made by Veblen, Galbraith said, "Ideas are inherently conservative. They yield not to the attack of other ideas but to the massive onslaughts of circumstances with which they cannot contend." He is quick to point out that his attack is on the conventional wisdom, not on those who originally expounded the ideas:

The reader will soon discover that I think very little of certain of the central ideas of economics. But I do think a great deal of the men who originated these ideas. The shortcomings of economics are not original error but uncorrected obsolescence. The obsolescence has occurred because what is convenient has become sacrosanct.[16]

And how is it that these obsolete neoclassical ideas have been able to survive? Galbraith answers as follows:  

The neoclassical system owes much to tradition - it is not implausible as a description of a society that once existed....

Additionally it is the available doctrine. Students arrive; something must be taught; the neoclassical model exists. It has yet another strength. It lends itself to endless theoretical refinement. With increasing complexity goes an impression of increasing precision and accuracy. And with resolved perplexity goes an impression of understanding."[17]

Within Galbraith's overall theory of modern capitalism one can find several specific theories that challenge orthodox economics. Two theories of particular importance are his notion of the "dependence effect" and his theory of the behavior of the firm.  

The Dependence Effect

According to Galbraith, modern capitalism is dominated by large enterprises and characterized by an abundance of contrived wants that are the product of corporate planning and massive advertising:

As a society becomes increasingly affluent, wants are increasingly created by the process by which they are satisfied.... Wants thus come to depend on output. In technical terms, it can no longer be assumed that welfare is greater at an all-round higher level of production than at a lower one. It may be the same. The higher level of production has, merely, a higher level of want creation necessitating a higher level of want satisfaction. There will be frequent occasion to refer to the way wants depend on the process by which they are satisfied. It will be convenient to call it the Dependence Effect.[18]

It is not consumers who are sovereign in the modern industrial system, but rather the gigantic firms that produce and market goods and services. In Galbraith's "revised sequence," producers decide what shall be produced and then mold consumers' tastes so that they buy these products. Orthodox economics hold that initiative lies with the consumer, who buys goods and services in the market in response to personal desires or demands. The neoclassical theories of consumer choice takes wants as given. To say that consumers maximize their utility, says Galbraith, begs the important question of how consumers go about formulating those wants in the first place. And, if wants must be created through advertising, how urgent can they be? Furthermore, the neoclassical theory of consumer demand, with its emphasis on consumer sovereignty, implies that the market dictates the optimal composition of output and allocation of resources. This view, said Galbraith, makes little sense: "One cannot defend production as satisfying wants if that production creates the wants."

Galbraith's theory of consumer demand has an important policy implication: there will be an underallocation of resources to public goods. Galbraith called this circumstance "social imbalance." The creation of artificial wants through advertising and the propensity for emulation shifts resources toward private goods and away from public goods that have greater inherent value. New automobiles are seen as being more important than new roads; vacuum cleaners in the home are desired more than street cleaners. Alcohol, comic books, and mouthwashes take on a greater aggregate importance than schools, courts, and municipal swimming pools. One way to remedy this imbalance, said Galbraith, would be to impose sales taxes on consumer goods and services, using the proceeds to increase the availability of public sector goods and services.

Galbraith's Theory of the Firm

The neoclassical theory of the firm concludes that corporate behavior and performance can best be understood by assuming that firms attempt to maximize profits. According to Galbraith this may be true in the market sector, where owners of small firms actively manage their enterprises, but does not describe the far more important planning sector - the 2000 or so largest firms that produce over half of society's output. In the planning sector, ownership and control are divorced. The owners of the giant firms are the millions of holders of common stock who have no actual control over the operation of the corporation. Instead, control is exercised by the technostructure - a professional elite consisting of executives, managers, engineers, scientists, product planners, market researchers, marketing personnel, and so on. The disgruntled stockholder who does not like the performance of a particular firm does not have the option of firing the management. The usual recourse is to sell the shares of the company and to buy shares of another company. It is naive, said Galbraith, to assume that the technostructure has an incentive to maximize the return to the millions of anonymous stockholders. The technostructure pursues much more complex purposes, which he categorized as protective and affirmative.

The central protective purpose of the firm is survival, which translates into the need to earn a profit sufficient to keep most stockholders relatively happy and to provide sufficient retained earning for investment and growth. One way that this less-than-maximum profit can be assured is by taking product price out of competition. Doing this can take the form either of direct price fixing or of informal price understandings within an industry. It is not the purpose of price fixing to restrict output and maximize joint profits as the neoclassical model implies. Instead, the purpose is to assure that the rival firms earn a satisfactory level of profit, thus enabling them to meet their protective goals and to pursue their affirmative purposes.

The major affirmative purpose of the firm is corporate growth. Growth of output, sales, and revenues produce greater employment security and financial rewards to the members of the technostructure. In the orthodox theory of the firm, oligopolists restrict their production in order to boost their prices and enhance their profits: "No point is better accepted by the neoclassical model than that the monopoly price is higher and the output smaller than is socially ideal. The public is the victim. Because of such exploitation, oligopoly is wicked."[19] In Galbraith's theory, oligopolists fix prices at low levels - ones that achieve a minimum profit and permit expansion of total output and sales. Huge advertising outlays, campaigns to gain market share, unprofitable mergers between competitive and noncompetitive firms, and so forth, all make perfect sense if the goal is growth. According to Galbraith, "The neoclassical model describes an ill that does not exist [high oligopolistic prices and restricted output] because it assumes a purpose that is not pursued [profit maximization]. "[20]

Galbraith's theory of the firm has several interesting policy implications. For example, traditional antitrust efforts should be abandoned: "Nothing has yet happened to arrest the development and burgeoning power of the technostructure." Large firms have grown because of technological imperative. Their size owes to economies of scale, large research and development budgets, and the ability to incorporate new technology. It has been, and will continue to be, futile to try to arrest these forces through public policy, said Galbraith:

Thus the [antitrust] remedy that emerges from the neoclassical model is harmless. It presents no threat to the power or autonomy of the technostructure or to its affirmative interest in growth. And since the remedy is thought to be comprehensive - since competition is considered the remedy for all industrial ills - it directs all complaints into an essentially harmless channel. What might be dangerous agitation for effective regulatory action or for public ownership or socialism comes out safely as a demand that the antitrust laws be enforced.... Best of all from the standpoint of the technostructure would be immunity from all attack. But the next best thing - and a very good thing - is a system of ideas that diverts all attack into channels that are safely futile."[21]

Should society then simply pursue a policy of laissez-faire, counting on these economic forces to produce the social good? Galbraith answered with a resounding "No." In the preface of his Economics and the Public Purpose he stated, "On no conclusion is this book more clear: Left to themselves, economic forces do not work out for the best except perhaps, for the powerful."

Although exploitation of consumers is not a problem of modern capitalism, there are other grave problems that arise from the exercise of power by the planning system. The public, through government, must wrest control of the planning sector of the economy from the technostructure, ensuring that it serves the public purpose. This control should take several forms. For example, a permanent public price and wage agency should control the prices of the largest firms in the economy and ensure that wage gains in the major collective bargaining agreements do not exceed the growth of national productivity. A public planning authority needs to be established to join with the major corporations and unions to plan and coordinate economic activity. This planning authority will also have to coordinate economic plans with other industrial nations. Along with these reforms, Galbraith has called for government redistribution of income through public control of executive salaries, progressive taxation, an increase in the minimum age, and a negative income tax plan. Firms in the market sector should be encouraged to merge so that they can compete more effectively with the firms in the planning sector. Like Veblen and Mitchell before him, Galbraith sees the need for a greatly expanded role for government in the modern economy.

Criticisms

Galbraith's attack on conventional economics has produced many rejoinders. As just one example, critics have pointed out that, at the extreme, he seems to deny that the consumer has free will, that the buyer is able to determine his own interests and act on them. Orthodox economists reject this view and its implication that some undefined entity other than consumers themselves might best determine what is in the consumers' true interests. As another example, critics have stated that a firm that fails to maximize its long-run profits runs the danger of becoming a target for a corporate takeover. The price of the target firm's common stock, which reflects the discounted stream of its anticipated future earnings, will be lower for the nonprofit maximizer than it could be. By offering shareholders a price for their stock above the present market price, the acquiring firm can gain control of the target firm, replace the management, increase profits, and make a capital gain on their initial holdings.

In conclusion, Galbraith's volleys at economic orthodoxy, like those of Veblen before him, could be said to have forced neoclassicists temporarily to halt their march, to have required them to acknowledge and even engage the opposition. Galbraith elicited much return fire. This very fact - that he could not easily be ignored - is a testament to his powers of intellect, wit, and pen. Nevertheless, orthodox economics has experienced few casualties and even fewer defectors; put bluntly, it marches on. For institutionalism to reemerge as a major force in economic thought, it must win the minds of a future generation of economists. Its best hope for doing this is to develop a unified set of theories, readily understandable and teachable, that hold up to careful intellectual and statistical scrutiny. To date, say its detractors, it has not accomplished this.

---

[16] John Kenneth Galbraith, The Affluent Society (Boston, MA: Houghton Mifflin, 1958), 4.
[17] John Kenneth Galbraith, Economics and the Public Purpose (Boston, MA: Houghton Mifflin, 1973), 27.
[18] Galbraith, Affluent Society, 158.
[19] Galbraith, Economics, 119.
[20] Galbraith, Economics, 120.
[21] Galbraith, Economics, 121.

Comments

[Emmanuel]

John Kenneth Galbraith brought John Maynard Keynes' economic ideas (Keynesianism) to America. Whether that was a contribution or not is subject to a debate which I think is not quite finished.

[Bruce Wilder]

Keynes' great American champion was Alvin Hansen. Galbraith, who styled himself an institutionalist in the critical tradition of Thorstein Vebler, was not a part of the Keynesian "macroeconomics" club, whose leading members composed the CEA of the Kennedy and Johnson administrations.

[Emmanuel]

True about Hansen, BW, but Galbraith did have a part as well in bringing Keynesianism stateside. This is from an interview of Galbraith for the PBS "Commanding Heights" documentary about his learning in Cambridge from Keynes:

INTERVIEWER: Did Keynes create a sense of hope where there'd been despair?

JOHN KENNETH GALBRAITH: Did Keynes create a sense of hope? Oh, unquestionably. There was this breath of hope and optimism, and I came back from Cambridge to find a whole group of people here who had also read The General Theory. And the younger Harvard community, coupled with one or two older professors, the most distinguished being the famous Alvin Hansen, I've said many times I think had something, maybe quite a bit, to do with bringing Keynes across the Atlantic.

He also describes himself as a Keynesian during the post-WWII era:

One could not have had a better demonstration of the Keynesian ideas, and I think it's fair to say that as a young Keynesian in Washington, in touch with the other Keynesians there, we all saw that very clearly at the time.

The rest of the interview is also interesting for economic history buffs (!) like MT.

[anne]

http://cowles.econ.yale.edu/news/tobin/jt_02-03-12_nyt.htm

March 12, 2002

Missing James Tobin
By PAUL KRUGMAN - New York Times

James Tobin — Yale professor, Nobel laureate and adviser to John F. Kennedy — died yesterday. He was a great economist and a remarkably good man; his passing seems to me to symbolize the passing of an era, one in which economic debate was both nicer and a lot more honest than it is today.

Mr. Tobin was one of those economic theorists whose influence reaches so far that many people who have never heard of him are nonetheless his disciples. He was also, however, a public figure, for a time the most prominent advocate of an ideology we might call free-market Keynesianism — a belief that markets are fine things, but that they work best if the government stands ready to limit their excesses. In a way, Mr. Tobin was the original New Democrat; it's ironic that some of his essentially moderate ideas have lately been hijacked by extremists right and left.

Mr. Tobin was one of the economists who brought the Keynesian revolution to America. Before that revolution, there seemed to be no middle ground in economics between laissez- faire fatalism and heavy-handed government intervention — and with laissez-faire policies widely blamed for the Great Depression, it was hard to see how free-market economics could survive. John Maynard Keynes changed all that: with judicious use of monetary and fiscal policy, he suggested, a free-market system could avoid future depressions.

What did James Tobin add? Basically, he took the crude, mechanistic Keynesianism prevalent in the 1940's and transformed it into a far more sophisticated doctrine, one that focused on the tradeoffs investors make as they balance risk, return and liquidity.

In the 1960's Mr. Tobin's sophisticated Keynesianism made him the best-known intellectual opponent of Milton Friedman, then the advocate of a rival (and rather naïve) doctrine known as monetarism. For what it's worth, Mr. Friedman's insistence that changes in the money supply explain all of the economy's ups and downs has not stood the test of time; Mr. Tobin's focus on asset prices as the driving force behind economic fluctuations has never looked better....

[Bruce Wilder]

I take a dim view of Galbraith's intellectual contributions, which, perhaps, colors my general willingness to credit him as much of a "Keynesian". His career as a popular critic of economics has more to do with his role in the dreadful "Commanding Heights" than it does with his actual place in intellectual history.

The mainstream of economics in the late 1930's thru to 1960 was the mathematical codification of price theory, which reached its high points in Paul Samuelson's Ph.D. thesis and textbook, and, a bit later, in the Nobel work of Arrow and DeBreu. Keynes's work, with a little help from J.R. Hicks, Alvin Hansen, and Franco Modigliani was given a suitably mathematical formulation as a system of simultaneous equations, which made its inclusion into the mainstream of post-WWII economics seem very natural.

Galbraith's self-appointed role, beginning in the 1950's, was as a witty, popular critic. He liked to think he was the heir to Veblen, and attempted witty coinages and sociological observation, but he was not the deep thinker Veblen was, and, though there's lots of vague hand-waving in promising directions in his books, they are neither comprehensive nor coherent. He would talk at length about the importance of giant corporations and management and planning -- both private and public -- but, he was not the kind of economist, who could take that critique to root; Galbraith would never stoop to question some theoretical fundamental, like the production function, no matter how relevant it might be to his more sweeping, descriptive generalizations about profit-maximizing and corporate management and management of demand by marketing.

People at the time thought he was very important, and he was; he filled a critical space, and that's a pity, because he really did not do a very good job of it, and left liberalism and progressivism weak and intellectually flabby.

[JAC]

Bruce:

I am not an economist, and I believe, based on your posts, that you are much smarter than I am. In addition, I don't know that I've ever disagreed with one of your posts, until this one. NEVERTHELESS, I think you greatly underestimate the way Galbraith's "filled a critical space." Far from leaving "liberalism weak and flabby" he gave it a crucial gravitas, and left ordinary, non-intellectual liberals feeling there was some economic heft behind their humane impulses. Maybe I'm committing a logical error, generalizing from subjective experience, but I know my parents, smart but hardly intellectual, enormously admired Galbraith and made me watch as a 9(?) year old his PBS history of economic thought. (Unfortunately, all I remember of this t.v. show is some cartoon figures hoeing.) Still, along with Arthur Schlesinger and others, he made my parents, upwardly mobile from working class backgrounds, proud to be associated with JFK and the Democratic party.

[anne]

Galbraith, Schlesinger, Reinhold Neibuhr, Isaiah Berlin are among the monuments of the century:

http://www.nytimes.com/2005/09/18/books/review/18schlesinger.html?ex=1284696000&en=c7225b818a2f5ced&ei=5090&partner=rssuserland&emc=rss

September 18, 2005

Forgetting Reinhold Niebuhr
By ARTHUR SCHLESINGER JR.

THE recent outburst of popular religiosity in the United States is a most dramatic and unforeseen development in American life. As Europe grows more secular, America grows more devout. George W. Bush is the most aggressively religious president Americans have ever had. American conservatives applaud his "faith-based" presidency, an office heretofore regarded as secular. The religious right has become a potent force in national politics. Evangelicals now outnumber mainline Protestants and crowd megachurches. Billy Graham attracts supplicants by the thousand in Sodom and Gomorrah, a k a New York City. The Supreme Court broods over the placement of the Ten Commandments. Evangelicals take over the Air Force Academy, a government institution maintained by taxpayers' dollars; the academy's former superintendent says it will be six years before religious tolerance is restored. Mel Gibson's movie "Passion of the Christ" draws nearly $400 million at the domestic box office.

In the midst of this religious commotion, the name of the most influential American theologian of the 20th century rarely appears - Reinhold Niebuhr. It may be that most "people of faith" belong to the religious right, and Niebuhr was on secular issues a determined liberal. But left evangelicals as well as their conservative brethren hardly ever invoke his name. Jim Wallis's best-selling "God's Politics," for example, is a liberal tract, but the author mentions Niebuhr only twice, and only in passing.

Niebuhr was born in Missouri in 1892, the son of a German-born minister of the German Evangelical Synod of North America. He was trained for the ministry at the Synod's Eden Theological Seminary and at the Yale Divinity School. In the 1920's he took a church in industrial Detroit, the scene of bitter labor-capital conflict. Niebuhr's sympathies lay with the unions, and he joined Norman Thomas's Socialist Party. Meanwhile, New York's Union Theological Seminary, impressed by the power of his preaching and his writing, recruited him in 1928 for its faculty. There he remained for the rest of his life. He died in 1971.

Why, in an age of religiosity, has Niebuhr, the supreme American theologian of the 20th century, dropped out of 21st-century religious discourse? Maybe issues have taken more urgent forms since Niebuhr's death - terrorism, torture, abortion, same-sex marriage, Genesis versus Darwin, embryonic stem-cell research. But maybe Niebuhr has fallen out of fashion because 9/11 has revived the myth of our national innocence. Lamentations about "the end of innocence" became favorite clichés at the time.

Niebuhr was a critic of national innocence, which he regarded as a delusion. After all, whites coming to these shores were reared in the Calvinist doctrine of sinful humanity, and they killed red men, enslaved black men and later on imported yellow men for peon labor - not much of a background for national innocence. "Nations, as individuals, who are completely innocent in their own esteem," Niebuhr wrote, "are insufferable in their human contacts." The self-righteous delusion of innocence encouraged a kind of Manichaeism dividing the world between good (us) and evil (our critics).

Niebuhr brilliantly applied the tragic insights of Augustine and Calvin to moral and political issues. He poured out his thoughts in a stream of powerful books, articles and sermons. His major theological work was his two-volume "Nature and Destiny of Man" (1941, 1943). The evolution of his political thought can be traced in three influential books: "Moral Man and Immoral Society" (1932); "The Children of Light and the Children of Darkness: A Vindication of Democracy and a Critique of Its Traditional Defense" (1944); "The Irony of American History" (1952).

In these and other works, Niebuhr emphasized the mixed and ambivalent character of human nature - creative impulses matched by destructive impulses, regard for others overruled by excessive self-regard, the will to power, the individual under constant temptation to play God to history. This is what was known in the ancient vocabulary of Christianity as the doctrine of original sin. Niebuhr summed up his political argument in a single powerful sentence: "Man's capacity for justice makes democracy possible; but man's inclination to injustice makes democracy necessary." (Niebuhr, in the fashion of the day, used "man" not to exculpate women but as shorthand for "human being.")

The notion of sinful man was uncomfortable for my generation. We had been brought up to believe in human innocence and even in human perfectibility. This was less a liberal delusion than an expression of an all-American DNA. Andrew Carnegie had articulated the national faith when, after acclaiming the rise of man from lower to higher forms, he declared: "Nor is there any conceivable end to his march to perfection." In 1939, Charles E. Merriam of the University of Chicago, the dean of American political scientists, wrote in "The New Democracy and the New Despotism": "There is a constant trend in human affairs toward the perfectibility of mankind. This was plainly stated at the time of the French Revolution and has been reasserted ever since that time, and with increasing plausibility." Human ignorance and unjust institutions remained the only obstacles to a more perfect world. If proper education of individuals and proper reform of institutions did their job, such obstacles would be removed. For the heart of man was O.K. The idea of original sin was a historical, indeed a hysterical, curiosity that should have evaporated with Jonathan Edwards's Calvinism....

[Bruce Wilder]

JAC: I appreciate your regard. Your report about Galbraith's effect on your parents, accords with my own impressions and personal experience. He was a Giant in the late 1950s thru the 1960s and into the early 1970s. My grandmother, who was a great Reader and small-town community activist going back to WWI, treasured his book on his travels in India, to my fascination.

My negative appreciation should not be confused with thinking him insignificant. There's no current economist with so much stature today -- Krugman, whom I admire greatly, does not come close, in terms of occupying a space in the public imagination.

It is tough to be as negative a critic as I sometimes am, and to be clear in a short space. I am reacting to some of the more expansive tributes, like Brad DeLong's, which I think quite accurate as far as it goes.

I didn't like Galbraith's work, when I read it, in the early 1970's, and my disappointment in him was >despite< the fact that I was inclined by temperment and philosophy to share his liberal and progressive sentiments. And, I think, subsequent developments have confirmed my negative view. Galbraith was a Giant in his own time, but he left little apparent positive legacy, and there was a reason for that, in the nature and quality of his work. That he had such a huge presence in the Public Imagination, and did so little of lasting substance with it, is disappointing to me. Liberalism needed a more effective champion, and economics needed a more effective critic.

But, absolutely, there's no denying how important he was to people in his own time.

If I can offer any justification for my negativity at this moment, it is that I see grave peril in the conservative zeitgeist of my time, and I think we need to be very, very clear about what is needed, and where we previously fell short. Nostalgia for a time of more liberal consensus, should not obscure the shortcomings of thought, which contributed to getting us to the present dire circumstance.

[david]

"As another example, critics have stated that a firm that fails to maximize its long-run profits runs the danger of becoming a target for a corporate takeover."

And yet the critics have no evidence that this is true -- in fact, most recent work suggests that hostile takeovers are not aimed at poor managers in particular, nor that mergers create value in the aggregate. Galbraith's theory of the firm also helps explain the legalized theft in executive remuneration, while his critics, like, one supposes, Michael Jensen, have been able to help legitimize the theft with their bogus alignment of shareholder and management interests.

Especially important in that short summary of the critics' perspective is the "long-term," as takeovers and mergers are often thought to favor the short term, and there is evidence that they do.