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Finding Economic Power: An Introduction to the Ideas of John Kenneth Galbraith

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Econ 500: History of Economic Thought A long time ago in a far away place

Archibald Galbraith, a Canadian schoolteacher, once climbed onto a platform atop a

steaming pile of manure to address a group of Liberal party voters before the coming Ontario

elections.

“Before I begin,” he said, “I must apologize for speaking from the Tory platform.”

Later on, his teenage son, John Kenneth, would congratulate him on the dig, to which he

[Archibald] would respond, “It was good. But it didn’t change any votes.” (Arthur Scheslinger,

1984, p. 7) So, from an early age, John Kenneth Galbraith was between the world of politics and

pragmatism.

John Kenneth Galbraith was born in 1908. His father’s involvement in politics had a

profound impact on the young John Kenneth, politicizing him at an early age. He originally

studied Agricultural Economics at the Ontario Agricultural College, but would eventually say

that he took his first “real” economics course at UC Berkeley, and that the economics instruction

in Canada was “very poor” (Dunn, 2002, p. 350). As a graduate student at UC Berkeley, he

continued his study of agricultural economics and worked as a research assistant for a “very zany

old man by the name of Edwin Voorhies” (Kreisler, 1986). He stated that it was his study of

agricultural economics that left him with a strong feeling that “social science should be tested by

its usefulness,” an idea inspired by Veblen’s dichotomy between exoteric knowledge (knowledge

that is valuable and applicable) and esoteric knowledge (knowledge that has no practical

application, but because of that, is considered more “prestigious”). Galbraith believed that social

sciences should be exoteric, not esoteric. In his book Economics and The Public Purpose,

Galbraith develops this idea further, saying, “The ultimate test of a set of economic ideas is

whether it illuminates the anxietes of the time” (Galbraith, 1973, p.198).

In the 1930’s, while Galbraith was studying to receive his Ph. D, it was clear that

economic theory was not addressing the anxietes of the time. Economists were struggling to

explain how free markets had led the United States to economic ruin. One in four Americans

were jobless. Production had all but ground to a halt. Obviously, there were egregious errors in

the accepted dogma, which stated that free markets left to their own devices would bring about

efficiency and employment. Galbraith said that his method of coming to an understanding was to

“for years…start with [Alfred] Marshall, see the world as it is, and make the requisite

modifications” (Dunn, 2002, p. 351). Upon graduating, Galbraith traveled to Washington D.C.

and took a position assisting with the implementation of the Agricultural Adjustment Act, before

taking a position as a tutor at Harvard. At Harvard, he made speeches supporting the reelection

of Roosevelt, cementing his initial ties with the Democratic party. Not long after, he was offered

a fellowship at Cambridge, where the discussions centered around Keynes, who had just

published his General Theory of Employment, Money, and Interest (Dunn, 2002, pp. 350-355).

Galbraith returned from England to his tutor position at Harvard a confirmed Keynesian.

He spent a few more years tutoring at Harvard (where he met John F. Kennedy) and then took a

job as resident economist for the American Farm Bureau Federation in Washington. Galbraith’s

observation of the farm industry solidified his belief in the power of government to move

industries forward. In 1930, farm households accounted for a quarter of the population, whereas

today they account for only 1% of the population and yet on the whole, they now produce more

than they did in 1930. This is due to strong government support of the farming industry. That

national planning could “transform a weak, disorganized, and poverty prone sector of the

economy into America’s most spectacular productive success…preserved his political concerns”

(Arthur Schlesinger, 1984, p. 8). Galbraith became head of the Office of Price Administration in

1941 during World War II, and at the same time began his long career as a ghostwriter, penning

speeches for Samuel Rosenman and Robert Sherwood (Arthur Schlesinger, 1984, p. 8).

Galbraith then became editor of Fortune magazine, where he worked directly for Harry

Luce, founder of Time Inc., whom he called “one of the most ruthless editors I have ever known,

or anyone has ever known” (Kreisler, 1986). Galbraith has credited Luce with dramatically

improving his writing via ruthless editing. Galbraith credited Fortune with giving him a

“marvelous introduction to the corporate mind,” because the focus of the magazine at the time

was “the anatomy of the big corporations” (Dunn, 2002, p. 353). The decision making processes

of major corporations would be a recurring phenomenon that he would write about in many of

his publications.

Galbraith returned to Academia in 1948, having spent five years as editor of Fortune. He

was nominated to a position teaching economics at Harvard. However, members of Harvard’s

board of overseers regarded him as a “dangerous Keynesian,” and as a result, “took the step,

almost unprecedented in modern times, of blocking the appointment” (Dunn, 2002, p. 353).

However, Galbraith had many political allies, and among them was Harvard’s president, James

B. Conant. Conant was such a fan of Galbraith that he threatened to resign unless the board of

overseers backed down. Eventually they did, and Galbraith became a tenured professor at

Harvard. It was then that he began work on his first major bestseller, American Capitalism: The

Concept of Countervailing Power.

Galbraith begins his discussion of capitalism in America by pointing out the following

conundrum: Mainstream economic theory asserts that in the case of monopoly, prices will rise,

business will screw consumers, fail to innovate, and as a result, the economy will be in bad

shape. He then notes the work of Joan Robinson in developing the idea of monopolistic and

oligopolistic competition, noting that oligopolistic industries behave in the same way as

monopolies would, and through informal agreements can have the exact same effect. Then, using

the actual data collected by the American government, he shows that the majority of industries

are in fact oligopolistic. But he goes even further than that, saying that almost all industries will

eventually become oligopolistic for the following reasons: At the birth of an industry,

competetion is necessary and possible, as no firms have clear and significant advantages yet. But

over time, it will become increasingly difficult to enter the industry because of the barriers to

entry created by high capital requirements and increasing returns to scale. At the same time that

increasing returns to scale start to set in (as they inevitably do), existing firms will also gain the

advantage of experience and prior organization. The convergence of these factors leads, in most

cases, to an industry with a few power players and a larger but still relatively small number of

hangers-on, who exist by filling niches that aren’t worth the time of the large firms.

Galbraith poses a question in American Capitalism, and before getting to that question, it

is important to get a sense of the context in which he asks it. After World War II, America was

experiencing incredible prosperity. But underlying this prosperity was the fear of depression. The

Great Depression was still fresh in the collective consciousness, and the average man’s faith that

capitalism would bring about efficiency and full employment was shaken. And yet, as the years

after the war progressed, things were stable and employment was plentiful. It is also important to

note that the era of non-depression Keynesianism was beginning, and much to the chagrin of the

business community, government was becoming a much more participatory force in markets.

The business community was reacting violently against this expansion of government, claiming

that it was a complete disaster, wasteful to the very extreme and bound to cripple growth. The

state of the American economy in the 1950’s then was that of big government, near-ubiquitous

monopoly or oligopoly, and an underlying fear of depression. Yet, by almost any measure, the

economy was a success.

The problem, according to Galbraith, was that, “in principle, the economy pleased no

one; in practice it satisfied most. Social inefficiency [government spending], unrationalized

power [monopoly and oligopoly], intrusive government [regulation], and depression were all

matters for deep concern. But neither liberal nor conservatives, neither the rich nor all but the

very poor, found the consequences intolerable” (Galbraith, 1954, p. 85). What fascinated

Galbraith was how an economy which was so flawed in theory could work so well in practice.

The question he asked was: Why are things so…well…good? Thus, he states that his aim in

American Capitalism is to “examine in turn the circumstances that have kept social inefficiency,

private power, government intervention, and unemployment from ruining us in the recent

present” (Galbraith, 1954, p. 85).

The first answer that he gives is that oligopoly is much more conducive to techonological

innovation than classical competetion. “There is no more pleasant fiction than that technical

change is the product of the matchless ingenuity of the small man forced by competition to

employ his wits to better his neighbor. Unhappily, it is a fiction,” he says. “Technical

development has long since become the preserve of the scientist and engineer” (Galbraith, 1954,

p.86). His argument is that due to the costliness of development, it can only be undertaken by a

firm with considerable resources. In highly competitive industries, no one firm has considerable

resources. Moreover, because innovations can easily be imitated, it is not economical for a small

competitive firm to bear the research and development costs for an entire industry.

Galbraith then turns his keen eye to the idea of inefficiency. He deals with this issue by

asserting that America’s relative opulence shields us and is moreover a cause of such

inefficiency. At the time that the classical economists were writing, an opulent economy had yet

to be observed. For Malthus and Ricardo, “inefficiency was, indeed, an evil thing. It denied

bread to the hungry and clothing to the naked” (Galbraith, 1954, p.102). The true power of

Galbraith’s insight is his ability to point out the obvious. He criticizes his fellow economists for

bringing the mentality of the nineteenth century, with all its poverty and degradation, to the

opulent twentieth century. Galbraith finds this error both amusing and absurd, saying, “He [the

mainstream economist] worries far too much about partially monopolized prices…for tobacco,

liquor, automobiles, and soap, in a land which is already suffering from nicotine poisoning and

alcoholism, which is nutritionally gorged with sugar, which is filling its hospitals and cemeteries

with those who have been maimed or murdered on its highways, and which is dangerously

neurotic about body odors” (Galbraith, 1954, p.102). His point is that these inefficiencies are in

fact a sign of the wealth of America. They are the symptom of a wealthy economy, and thus we

ought not to worry so much about them. He also discredits the idea of intrusive government,

noting that, “alarm over pending action by government on economic matters, which frequently

reaches almost pathological proportions when the decision is pending, almost invariably

evaporates completely once the action is taken. One of the profound sources of American

strength has been the margin of error provided by our well-being” (Galbraith, 1954, p.106).

But the most significant reason that monopoly has failed to capsize the American

economy, according to Galbraith is the exercise of what he calls countervailing power. The

assumption always made by economists, when they would consider the case of markets, was that

the check on an individual firm’s power wold come from the supply side of the industry.

Galbraith disagrees. He admits that the existence of monopoly power in a competitive market

does in fact encourage the entry of more producers to appropriate some of that power for

themselves. “In other words,” he says. “Competition was regarded [and is] a self-generating

regulatory force” (Galbraith, 1954, p. 112).

But in a market that is not competitive, the incentive for some economic agent to

approptiate that power still exists. But it need not come from the supply side. That power is, in

practice, usually appropriated by strong buyers or coalitions of buyers, who can sometimes take

even more than their share. Because of the tendency of power to be organized in response to

existing power, “countervailing power is also a self-generating force” (Galbraith, 1954, p. 113).

According to Galbraith, it is the large retailers who, by way of their absolute power over

manufacturers, bargain for the consumer and protect the consumer from the high monopoly

prices that would otherwise result. Likewise, the considerable market power of large firms is

checked by trade unions for a simple reason, there is something to be bargained for Galbraith

notes that trade unions are most powerful in the least competitive industries. This is because the

surplus that a company derives from monopoly power acts as an incentive to unions. In the very

competitive industries, producers and workers are operating at bare minimum profit and the

incentives to organization insignificant.

These are the basic ideas laid out in American Capitalism. The book in many ways lays

the framework and tone for the books he would publish in the sixties and seventies. But while

American Capitalism was Galbraith’s first major bestseller, it was The Affluent Society that

skyrocketed him to fame. The Affluent Society builds on many of the concepts introduced in his

first book, but with several key differences. Though Galbraith could not suppress his urge to

social commentary, The Affluent Society is a much more prescriptive book, growing out of his

chapter on technical development in American Capitalism. To his original analysis he adds a

significantly moral component. The Affluent Society concerns itself with the policies that ought

to be undertaken once the basic needs of the people have been met. Galbraith’s main argument is

that our ratio of private good (cars, televisions, automobiles) to public goods (schools, roads) is

inequitable and ridiculous. The premise of his argument is that once our basic desires such as

food, clothing, and shelter have been satisfied, large corporations employ advertising to concoct

new demand for products. The traditional economic and utilitarian argument for goods qua

goods falls on its face if consumer demand is not sovereign. What is really necessary is the use

of society’s productive resources in the public realm in juxtaposition with growth in the private

realm. He calls this idea “social balance,” saying, “the problem of social balance is ubiquitous,

and frequently it is obtrusive. As noted, an increase in the consumption of automobiles requires a

facilitating supply of streets, highways, traffic control, and parking spaces” (Galbraith, 1958, p.

193). He also confronts the existence of poverty in an affluent society as being the result of

outdated nineteenth century attitudes. “A poor society,” he says, “had to enforce the rule that

someone who did not work could not eat. An affluent society has no similar excuse for such

rigor” (Galbraith, 1958, p. 251). But he admits that, “nothing requires such a society to be

compassionate. But it no longer has a high philosophical justification for its callousness”

(Galbraith, 1958, p. 251).

In the 50’s, America was in the midst of the cold war and attempts at engineering a better

society were very suspect. Galbraith throughout The Affluent Society understands the inherent

and ideological opposition to big government and social policy, but he is adamant in stating,

“that cities’ residents should have a nontoxic supply of air suggests no revolutionary dalliance

with socialism” (Galbraith, 1958, p. 191).

In fact, Galbraith eventually finds socialism and central planning to be in many ways

similar to the kind of capitalism that developed in America in the latter half of the 20th century.

In The New Industral State, Galbraith focuses his effort on understanding what he calls the

“technostructure.” In an era when the division of intellectual labor is so overwhelming, the

management or even management team of a powerful corporation doesn’t actually make most of

the decisions. The decisions are instead made collectively by teams of experts. Galbraith coins

the term technostructure as, “embracing all who bring specialized knowledge, talent or

experience to group decision-making. This,” he says, “not the management, is the guiding

intelligence, the brain, of the enterprise” (Galbraith, 1967, p.71).

Many of Galbraith’s ideas resonate to this day. Unfortunately, most do not. It would be

tempting to end this essay optimistically, expounding poetically on the way Galbraith’s ideas

continue to influence national policy. In reality, although he was a well-respected and powerful

man, many of his ideas continue to be ignored by mainstream economists and politicians. Rarely

does one hear a contemporary economist talk about countervailing power, or reference the

“technostructure.” While as a society we owe much to Galbraith and his ideas, the discipline of

economics has for all intents and purposes laid his practical ideas by the wayside. But whether or

not his continued influence on economics is felt by the mainstream, his contribution to the

discipline remains poignant and accessible for those who choose to seek it out on their own.

Galbraith’s main contribution to economic thought was his tackling of the problem of

power. He was convinced that the most glaring, most significant, and most ignored problem in

the field of economics was the effect of power on economic activity. Understanding why

Galbraith was so affixed by this idea of power is actually quite simple; he was surrounded by it.

Through his political work, Galbraith knew not only Kennedy, but several other presidents and

all the most powerful officials in the democratic party. Through his work at Fortune he became

acquainted with the heads of the largest and most powerful corporations in the world. He saw,

clearly, the extent to which the decisions of these men (and the technostructures supporting

them) affected the direction and performance of the economy of the whole. Given that he was an

astute man, for him to ignore the influence of power on economies, in order to advance a series

of aesthetically pleasing models and equations, would have been not only unthinkable but

dishonest. Galbraith wanted badly to be useful, to “change votes,” as his father would have said.

To him, sitting in a room concocting theories did not qualify as usefulness. He longed to be in

the thick of policy-making. Later in life, he wanted badly to avoid what he called “Belmont

Syndrome”1 Thus, his struggle to be relevant was not only ideological but moral.

John Kenneth Galbraith died peacefully at home in 2006. He left behind not only an

extensive body of economic work, but two novels. His first novel, The Triumph, written in 1969,

was about U.S. foreign policy disasters in Latin America. His second novel, A Tenured

Professor, written in 1990, was about an eccentric Harvard professor, and lampooned the elite

institution. He lived ninety-seven years, almost all of them (excepting the first few) were

preoccupied with upending the “conventional wisdom.” He remains one of the most famous and

controversial economists of the twentieth century, and a fine novelist.

1 Belmont Syndrome is the nickname for an attitude adopted by Harvard professors who want to travel from their comfortable Belmont homes to comfortable professorships at Harvard without having to question the underlying relevance of their work.

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