Chapter 6:
John Kenneth Galbraith and the Rise of the Industrial State

"It is not the quantity of goods that matters, but the quality of life."

The rise of the corporation and technostructure
The manipulation of demand and conventional wisdom
Who controls production

Who controls production?

The beauty of a market economy, a Demand Side economy, can be that the choices of individuals select the products and goods that are produced.  A command economy, such as that of the former Soviet Union, must make production decisions bureaucratically.  But having a market economy does not mean having a Demand Side economy. The American market economy is dominated by producers.  This is no accident.  Production entails plant, equipment, technology investment and distribution channels which involve immense planning, coordination and control.  It is precisely the scale of this effort that leads the corporation to attempt to control demand with advertising and promotion and political influence.  Still, the result or corporate influences on demand is an absurd abundance of trivial personal consumption items and a paucity of essential Public Goods.  John Kenneth Galbraith described this in acute detail forty years ago, and we visit his work in Chapter 5.

With the immense challenges that confront the present society, it is no longer sufficient to produce randomly,  oblivious to what goods may comprise that product, satisfied that the total increases and large unemployment is avoided.  Specific remedies are needed for environmental degradation and for economic privation both now and clearly visible out the windshield.  These will not be produced if we simply trust the vagaries of the market.  Goods of quantity and scale and technology far beyond that now being produced are required almost immediately.  Whole new industries must be up and running soon.

An economy dominated by producers cannot change or focus in a sufficiently forward-looking manner.  The incentives are strong for dominant corporations to produce private goods for which plant, equipment, technology and markets currently exist, manipulating demand to these ends.  Thus we have a cacophony of private items stored in houses at the end of broken streets.

Does this mean a necessary compromise with a bureaucratic command economy?  No.  Demand Side as envisioned here does not require an immense explosion of government to produce or demand the needed new products and processes.  It is sufficient to simply remove the Supply Side bias from the market, the implicit subsidies, particularly those implied by so-called "externalities."  It is no exaggeration to the say that the market of today's economists begins and ends with the purchase-sale transaction.  Externalities - the pollution, social stress, etc. - of production and consumption are "external" only to this purchase-sale event.  Production of a car may involve enormous preparation and production before the event.  Its use may extend many years after the event.  But the market is closed once the transaction has been made.  The use or outcomes of use become somebody else's costs.  Only by bringing all costs and preferences into the event of sale can the market internalize them and so function rationally.

Demand Side components of price do not need to go through the government.  Private accounts will do.  In the example of gasoline, the cost of its enormous externalities can be transmitted to other private companies who are willing and able to engage in mitigation activities or in developing and implementing  the replacement technologies.

That is, the effects of pollution, road construction and maintenance, traffic control and policing, the costs of accidents, as well as the geopolitical maneuvers made on behalf of supply, could be calculated with some degree of accuracy and applied to the price of a gallon of gasoline.  This is already done with respect to road construction; typically gas taxes are dedicated sources for building roads.  The resulting price of gasoline would then approximate its true cost.  This allows the market to function rationally, allocating the product on the basis of real costs.  It does not matter whether mitigation is undertaken by private companies directly funded by the gasoline fees or as is more likely be private companies under contract to the government.  The price of gasoline would be paying the full costs of the use of gasoline.  It is no accident that the appropriate price would reduce consumption.  The current price, after all, is essentially subsidized by government and by future generations who will absorb the costs.  A price which factored in the externalities would be much higher.

Throughout the Twentieth Century and into today the doctrine of the free market and its unerring invisible hand has been poised over the government and the public.  Business groups and corporate boards are a fountain of confidence in the mind of the market.  Doubtless some would be surprised to be told that Adam Smith, the coiner of the "invisible hand," looked unfavorably upon the business associations who promote his metaphor in their lobbying. "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."  Smith referred to the form of enterprise known now as the corporation and  then as the joint stock company and now as the corporation as "useless"  and opined that "negligence and profusion ... must always prevail, more or less, in the management of the affairs of such a company."

Consternation would likely be dismissed by a few words on circumstances and complexities of a modern society that have made Smith's simplistic attitude toward business collusion in need of amendment (or in this case, complete reversal) even as the idea of the invisible hand needs no revision.  Similar revisions have been made to canons across time.  Unfortunately the invisible hand is invisible because it is nonexistent.  Production and supply are provided by at most a few corporations, and demand is controlled from the mind of the consumer to the franchised seller.  The "free" in free market refers today to freedom for business from government interference and public oversight.

The most direct look at the structure and motivation of industry in the postwar economy was taken by John Kenneth Galbraith.  Canadian born, but raised at Harvard, Galbraith, like Keynes, served in several responsible positions in the government over an extended period of time.  During World War II he was director of the key Office of Price Administration and assigned the task of keeping the nation's wartime shortages from leading to price gouging or inflation.  He then managed the post-mortem survey of Germany to assess the causes and conditions which led to its defeat.  His briefing documents offer rare insight into some of the less than epic causes for the demise of the Third Reich.   Galbraith was active in the political campaigns of Adlai Stevenson and John F. Kennedy, to whom he was a close advisor, and he served as ambassador to India under Kennedy.

Where Adam Smith's look at the economy of his time revealed a competitive marketplace which determined price and output, income and investment, Galbraith's view two hundred years later presented something quite different.  If only by three relatively straightforward and easily confirmed postulates, Galbraith has subverted the entire foundation of the Classical or free-market paradigm.

(1)    Income is a function of power, not value.

(2)    Corporations are run for the benefit of their managers, not the stockholders.

(3)    The contest between the corporation and the people through the state is the defining contest.

That these observations are not more universally accepted and applied in economics is testament to the need for modern economists to be convenient to the powerful.  In three volumes - The Affluent Society, The New Industrial State, and Economics and the Public Purpose - Galbraith consolidated his direct view and his alternative.   He saw that corporate control of economic activity had spread from the major industries it had controlled at the opening of the Twentieth Century - railroading, steelmaking, petroleum, etc., where scale required bigness, to all corners of the society, from groceries to newspapers and media.  The ownership of corporations, Galbraith saw, had been transferred from strong personalities at the helms of businesses they had made - the Rockefellers and Carnegies - to anonymous stockholders. 

The corporation itself is not ruled for profit maximization to benefit its owners, Galbraith says, but became the tool of its managers, and is run for their purposes, whether pecuniary or simply prestige.  Stockholders are needed only insofar as they can be persuaded to bid up the share price and thus the rationale for further escalation of payments to the corporate officers.

     "... the stockholder ... is a passive and functionless figure, remarkable only in his capacity to share, without effort or even without appreciable risk, in the gains from the growth by which the technostructure measures its success."

Rather than being determined by supply and demand, price is determined by the oligopoly, the "big business" responsible for the preponderance of economic activity, acting sometimes as a monopoly and other times in other characters.   But the product of the society, rather than being rationally determined by need was determined to a large extent by the manipulation and persuasion of the corporation.  This was in no small way a function of the affluence of the post-war years.  As Galbraith said, "No hungry man who is also sober can be persuaded to use his last dollar for anything but food," but in evenly modestly more affluent conditions consumers' "economic behavior becomes in some measure malleable."   And so arose the industries of persuasion, advertising, promotion and manipulation of the political process.  At its end,

     "The initiative in deciding what is to be produced comes not from the sovereign consumer who, through the market, issues the instructions that bend the productive mechanism to his ultimate will.  Rather it comes from the great producing organization which reaches forward to control the markets that it is presumed to serve and, beyond, to bend the customer to its needs.  And, in so doing, it deeply influences his values and beliefs."

Writing in 1967, Galbraith noted that some sectors have not come under corporate dominance.

     "Agriculture, truck mines, painting, musical composition, much writing, the professions, some vice, handicrafts, some retail trade and a large number of repairing, cleaning, refurbishing, cosmetic and other household and personal services are still in the province of the individual proprietor.  Capital, advanced technology, complex organization, and the other hallmarks of what we have come ... to consider modern enterprise are limited or absent."

Oligopoly is defined as the domination of a market by a few large firms.  Oligopolies directly account for the majority of private economic activity and the overwhelming preponderance of activity indirectly.  The economic treatment of oligopoly differs from the Corporate Oligarchy that is one of our "big words" the way a football game differs from live fire combat.  The Corporate Oligarchy may employ strategies familiar to football, but it does not play within the lines or stop at controlling the market.  Corporate Oligarchy seeks to define and form the market, for example, by making it as big as possible by shifting costs to the public and demand away from public goods.  The Corporate Oligarchy seeks to control the context of its market by controlling its regulators and buying its legislative oversight.  Thus, while there may be competition within a market between members of the oligopoly, there is only concerted unified action with respect to the wider society within which the market exists.

The implications of an economy dominated by large corporations run for the benefit of their managers are many.  Predicating them all, however, is that income is distributed by the measure of power, not by the value or utility of one's contribution.  Pricing power itself is more a function of an imperfect market than a perfect one.  It is by positioning one's product or service in a unique niche that one is able to extract the maximum price.  This is most often done by monopoly - either legal, as arising from patents and copyrights, or less than legal, as arising from intimidating, coopting, or pricing one's competition out of the market.

Economists make a distinction between monopolistic competition - this effort to offer products that are in some way unique though often similar to others - and oligopoly.  That distinction, however valid in the context of market behavior, dissolves when the perspective is expanded with the concept of the Corporate Oligarchy.

It is not that the large corporations dominate their niche and then become the big players in the game.  It is that the dominant corporations control and define the game, change its rules, own the judges and referees and persuade the populace that the game is a route to happiness when it may be easily be demonstrated to be more a distraction from essential tasks.  Corporate Oligarchy is literally a description of the organization of the society, comparable to Representative Democracy, Social Democracy, or Military Dictatorship.

We suspect that this view of the economy is much less controversial among lay readers than it will be to economists.  As the chapter on the tenets of Neoliberalism describes, orthodox economic theory often manages the remarkable intellectual achievement of ignoring the corporation entirely.

The corporation itself is immortal and if successful will outlive all its owners and managers.  But while an immortal human being might make some accommodation for the future, knowing that he will have to live there, the mind of the corporation - its managers - do not.  They are increasingly driven by short-term interests: price-earnings ratios, options prices, and so on.  Investment and potential long-term liability are discounted to maximize the short-term profits.

Engaging in labor agreements with pension promises that are not met is one recent example of shot-term bias.    The most dangerous example is likely the willingness to exploit the environment.  Combined with the capture of regulatory authorities, one is reminded of the willingness of tobacco companies to engage in the addiction of millions.  In the current case, however, the smoker is the planet itself.

The mammoth machine of the corporation is used for the benefit of a few, but this is not regarded as a disadvantage.  In fact, the reward to CEOs is evidence to some that they must be doing a good job.  Comparing the performance of owner-dominated or closely held companies with those controlled by diffuse stockholders, one does not find the reward justified by the performance.

Compensation for corporate U.S. CEOs at the top 200 companies is 2.5 times that of their European colleagues, or $11.3 million vs. $4.3 million.  For those in the next tier, American CEOs made twice the level of Europeans in similar positions, and four times that of comparable Japanese ($2.16 million, $1.2 million and $543,000 respectively, on average).  The average CEO of an S&P 500 company made 411 times the average worker's wage in 2005.

Paradoxically the short-term focus of corporate managers retards the evolution of industry, and adaptation to changing circumstances.  Maximizing the short term is accomplished by emphasizing present power and present advantages in capital and arrangement of markets, and so creates momentum along the present path.  It may be true that innovating the next techno-gadget or the next drug will make its originator wealthy, but if Public Goods or actual reductions in consumption are the route to society's survival, the incentives are sadly misplaced.  Energy, Pharmaceuticals, Manufacturing and Banking - capitals indicating their institutional presence - strive to maintain a status quo that amounts to a course toward destruction.

The State

Writing in 1967, Galbraith saw a convergence of the two dominant economic systems - the command economies of the Soviet Union and the industrial system of the West.  "The convergence between the two ostensibly different industrial systems occurs at all fundamental points."  The state is necessary to the capitalist industrial system to provide adequate demand and smooth prices, he thought. 
     "The industrial system has no inherent capacity for regulating total demand - for insuring a supply of purchasing power sufficient to acquire what it produces.  So it relies on the state for this.  At full employment there is no mechanism for holding prices and wages stable." 

And organizational autonomy was essential to communist industries to be efficient.

     "Large-scale organization also requires autonomy. ... Large and complex organizations can use diverse knowledge and talent and thus function effectively only if under their own authority." 

As we noted in passing in Chapter 3 and will visit again in the next chapter, this convergence ended badly for the Soviet nations when they overshot, as free-market "shock therapy" administered as a stimulant created instead Depression and Corporate Oligarchy worse than any in the West.  ("Only the innocent reformer and the obtuse conservative imagine the state to be an instrument of change apart from the interests and aspirations of those who comprise it," wrote Galbraith in The New Industrial State.)

The state may not be the "executive committee" for the capitalist class, s Marxists contend, but the state - particularly in the United States - is heavily influenced by the corporation.  To say that we live in a Corporate Oligarchy means that the corporation has dominant influence over the state, not that the state and its apparatus have been completely subsumed.  Industry lobbyists and interest groups exert influence far beyond their numbers.  Particularly under Republican regimes, but also under Democrats, the agencies that were assigned oversight have become captive to the industries they are supposed to monitor and control.  Officials routinely move from government to the private industry they regulated and back again.  Notice in particular, that the most powerful of independent government agencies, the Federal Reserve Board, the central bank, has become captive to financial interests and regulates the economy with primary concern for inflation, which is benign to many parts of the economy, but not banking.

Emblematic of the recent corporatizing of government was the Enron debacle, in which the dominant energy corporations wrote in complicity with the vice president an energy policy that was adopted by the administration of Bush II and within a few years led to market manipulation, fraud, and enormous costs to states and individuals across the country.  When a Medicare drug bill became inevitable, vigorous dispute within the legislative branch (indicating the state is not completely coopted) eventually resolved in favor of the interests of the Insurance oligopoly.  Rail, the only alternative to the present gasoline-based highway system, is impossible because the technology and infrastructure is under control of the Corporate Oligarchy.

Galbraith made much of the relationship of the corporation to the state, not limited to the manipulation of the political process and apparatus.  He observed the exaggeration of the importance of industries in which the state guarantees demand - notably national defense and security.  The technological sophistication developed by way of the military industrial complex is astounding.  Its efficacy on the battlefield is unparalleled, but its usefulness in achieving political ends is not impressive.

In Galbraith's terms, the industrial corporation is motivated (and even required for the sake of its own survival) to manipulate as much as possible.  The immense magnitude of investment and capital and time required to develop and implement a technology imply a similar magnitude of loss in failure.  One answer is to arrange for the state absorb this enormous risk, as it does with military hardware.

Corporations are massive, technologically adept, specialized, organized structures.  Their ability to organize on a large scale over an extended time period and deliver complex products means that corporations are potentially the best mechanism to deliver answers for the future.  If the state were to   "absorb risk," it could employ these industrial giants to good effect.  But the state must also be able to curtail the tendency for corporations to maximize their entrenched positions and purvey ever more oil and gasoline, continue a car culture, substitute medication for other therapeutic modalities, exaggerate consumer goods by a science of persuasion, and so on.

The consumption ethic that has been promoted by corporations for the purpose of selling their products now has a life of its own.  We have convinced ourselves, or advertising has convinced us, that happiness derives from consuming things and that prosperity and well-being can be measured by the quantity or quality of goods and services.  It may seem that this materialism was always the primary human motivation, but it is not so.

Strangely, standard economic theory has no room for advertising, promotion, or sales efforts in its supply-demand equilibrium.  These activities, which to the lay observer can see clearly are manipulations of demand, but to a free-market economist they are somehow aspects of supply.  Advertising exists not to persuade, but to inform.  Beer or perfume purveyors may spend more in advertising than in production, but this is not important.

This manipulation of demand is in part a function of affluence.

     "There is little doubt as to the ability of the industrial system to serve man's needs.  As we have seen, it is able to manage them only because it serves them abundantly.  It requires a mechanism for making men want what it provides.  But this mechanism would not work - wants would not be subject to manipulation - had not these wants been dulled by sufficiency."
But the control of appetite is not control of belief.  In the latter endeavor, the corporation and the state come together to create an illusion, an illusion which insists on the excellence of the current regime and so obscures the true nature of the challenges the society must deal with.

     "If we continue to believe that the goals of the industrial system - the expansion of output, the companion increase in consumption, technological advance, the public images that sustain it - are coordinated with life, then all of our lives will be in the service of these goals.  What is consistent with these ends we shall have or be allowed; all else will be off limits.

     "All other goals will be made to seem precious, unimportant or antisocial.  We will be bound to the ends of the industrial system."

Does it have to be that way?  Galbraith, writing forty years ago, said,

     "The future of the industrial system is not discussed partly because of the power it exercises over belief.  It has succeeded, tacitly, in excluding the notion that it is a transitory, which would be to say that it is a somehow imperfect, phenomenon. But General Motors, General Electric and U.S. Steel are viewed as an ultimate achievement.  One does not wonder where one is going if one is already there.  Yet to suppose that the industrial system is a terminal phenomenon, is per se, implausible.  It is itself the product ... of a vast and autonomous transformation.


     "It would be strange were such a manifestation of social dynamics to be now at and end.  So to suggest is to deny one of the philosophical tenets of the system itself ... that change is the law of economic life.

In fact, the industrial system, the large corporation does not have to disappear for solutions to be put in place.  But the state must free itself to act as the representative of long-term survival and rational economic actions.

"... the expansion of public services that are not sponsored by he industrial system, the assertion of the aesthetic dimension of life, widened choice as between income and leisure, the emancipation of education - require that the monopoly of the industrial system on social purpose be broken.  This will not ... be welcomed by all.... But it is not inconsistent with the continued existence of that system."

     If other goals are strongly asserted, the industrial system will fall into its place as a detached and autonomous arm of the state, but responsive to the larger purposes of the society.

This potential and the necessity to manifest it was seen by Galbraith forty years ago.  The same exists today.  The potential and the need to manifest that potential.  The actual economy is a Corporate Oligarchy with threatens the very society it purports to serve.  The trajectory described by it is far wide of the mark.

Income must be reconnected to value, not power.  Corporations must become partners, not masters.  The state must regain its place as the representation of the people and their interests, not as a circus for dominant interests to manipulate.

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