J. K. Galbraith
A lofty view of economics
No review of alternative theories of the firm can be complete without an examination of the contribution of John Kenneth Galbraith, who for decades has attacked the traditional theory of the firm for its unrealistic assumptions. But that is not all he has been famous for.
Tall in stature (6’8’) and deed, Galbraith has been a prolific writer, producing academic works not only in economics, but also in sociology and politics. Not many economists can lay claim to writing best-sellers, yet Galbraith has written five1. He has also been a frequent contributor to newspapers, radio and television. With his dead pan voice and razor sharp wit he has delighted audiences with his acid attacks on big business and free-market capitalism, with its ‘private affluence and public squalor’. As a lifelong liberal and an active supporter of Democrat causes, he has been vehemently opposed to the philosophy of the New Right and to leaders such as Ronald Reagan, George Bush (father and son) and Margaret Thatcher.
As a highly original thinker and maverick he has frequently challenged mainstream economics. This unorthodox approach was apparent in the early years of his career. On appointment as deputy head of the Office of Price Administration during World War II, he was a strong advocate of wartime price controls and rationing, and also argued that widespread price fixing should be seriously considered in peacetime too. After all, he maintained, it was no more than large firms already practised as normal business behaviour! His forced resignation in 1943 stemmed largely from the unpopularity of his views.
The great part of Galbraith’s career has centred on Harvard, where from 1949 to his retirement in 1975 he was Professor of Economics, although for a period under the Kennedy administration he was US ambassador to India. His active participation in politics as speech writer and adviser to a long line of Democrat politicians, including John F Kennedy, has ensured that his views have been heard in highest political circles. In many cases Galbraith has used his political experiences to enhance and develop his theories and to explain the place of power in economic theory – power of the state, power of big business and power of pressure groups.
In The New Industrial State (1967) and Economics and the Public Purpose (1973), he argued that power structures in big business make the traditional assumptions of profit maximisation irrelevant. And yet, economists continue to assume that firms are profit maximises:
The corporate reality is ignored. Discussion begins with the observation: ‘Profit maximisation, of course, assumed’.2
The basis of power in big business is what Galbraith calls the ‘Technostructure’. This is the experts - the scientists, engineers, economists(!) - and the professional managers.
As the firms grows larger, the technostructure becomes the effective governing power for reasons that are not mysterious. Unless you have the knowledge that allows you to participate in making decisions and do participate, you can’t be influential.3
According to Galbraith, the technostructure has its own goals, such as job satisfaction, growth and status, and it will try to shape decisions to achieve these objectives. What has happened is that the capitalists (the owners) have lost power as a result of the increasing complexity of the modern business world. They are no longer in a position to insist on policies of profit maximisation. As Galbraith remarks:
(The modern large corporation) loses its legitimacy as an entrepreneurial and capitalist institution. It becomes instead an instrument of its own organization.....
Having independent power and being the creation of its own organization, the modern corporation, not surprisingly, serves the purposes of its own management. These purposes are frequently different from those of the public, or substantial parts of it, and the latter are less than pleased. Specifically, the corporate bureaucracy, like all organisations, seeks its own expansion.4
Like many of Galbraith’s theories, his analysis of the structure of big business challenges the very foundations of traditional economics. But one person’s heresy can be another’s orthodoxy. Galbraith’s theories have much in common with the other alternative theories of the firm we have considered in this chapter. It’s just that Galbraith has a way of reaching out to a mass audience with his views: something that no other economist has managed to do, with the possible exceptions of his arch academic ‘enemies’, Milton Friedman (see case study in Chapter 28 of this Web site).
1.American Capitalism: the Concept of Countervailing Power (Houghton Mifflin, 1952)
The Affluent Society (Houghton Mifflin, 1958; Penguin, 1962)
The New Industrial State (Houghton Mifflin, 1967; Penguin 1969)
Economics and the Public Purpose (Houghton Mifflin, 1973; Penguin, 1975)
The Culture of Contentment (Sinclair Stevenson, 1992)
2.Economics and the Public Purpose (Penguin, 1975) p106
3.Almost Everyone’s Guide to Economics (André Deutsch, 1979) p55
4.Annals of an Abiding Liberal (André Deutsch, 1980) p75 and p77