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A Case of Inflation

Galbraith Corrects Galbraith’s Errors,” announced a New York Times story about the publication of the second edition of The New Industrial State. But the event hasn’t precisely matched the advance publicity. As befits a critic of the auto industry’s annual style changes, Professor Galbraith has avoided wasteful retooling costs in preparing this “new, completely updated” edition. A few statistics are brought up to date; a once topical reference to President Johnson is deleted; a new Introduction by the author notes the impressive circulation of the first edition and (with an occasional concession) brushes off its detractors.

The book jacket announces, presumably for the benefit of the hard of hearing, that the first edition’s “phrases—the technostructure, the revised sequence, numerous others—are now part of the language.” Otherwise almost nothing is changed except the price—$8.95, up from $6.95 in 1967, a 29 percent increase during a period in which the Consumer Price Index was rising 22 percent—reminding us how inflation, in the words of an earlier Galbraith book, undermines “all the amenities which Western man has so laboriously built up and which permit him to describe himself as civilized.”

More immediately, the publication of this higher priced but virtually unaltered second edition during the Phase One ninety-day price freeze has raised one of those tricky technical questions that send weak-spirited men to their lawyers.

But it is not only the second edition that leaves the reader with a sense of déjà vu. As critics have pointed out, the basic theses of the book have been commonplace for decades. In the space of three chapters, Galbraith tells us that the modern corporation is run by its managers, not by its owners; thus spake Berle and Means, circa 1934. Another two chapters observe that advertising allows the corporation to dictate what consumers will buy. Thor-stein Veblen reported that news long before.

Later on we are taught, at some pains, that big corporations and big unions are no longer enemies; that defense contractors have supported the cold war; and that scientists and university professors cherish the aesthetic values that business ignores. For the most part, reading The New Industrial State is like searching through a hay stack and finding only hay.

But the major criticisms of the book have been less of its novelty than of its truth. As Galbraith foretold, the loudest complaints have come from economists. Galbraith, retracing Veblen, challenges the central notion of the economics profession: that a competitive capitalist system responds to “consumer sovereignty.” If you neglect the question of income distribution and assume there are no monopolies, then (with a few more assumptions) the economist can prove to you that a profit-driven system will take the society’s stock of resources and turn it into precisely that batch of goods and services that is most eagerly desired by consumers. The “invisible hand” of the price system directs land, labor, and capital into the lines of production that most fully satisfy consumers’ wants.

This theorem—known as the “optimality” of perfect competition—underlies all the policy conclusions of traditional economics: tariffs are a bad thing (because they distort the tendency of product prices to register the relative scarcity of goods and intensity of consumer demand); monopolies and cartels are evil, for the same reason.

Galbraith’s argument is directed to two postulates about economic behavior that prop up the optimality theorem. Producers, the theorem assumes, are motivated only by the desire to maximize profits. Consumers are assumed to be autonomous in their preferences—that is, the kinds of goods and services a consumer wants are not supposed to be determined by the activity of producers. If people like big cars more than little cars, that’s supposed to be simply a matter of individual taste—like a preference for chocolate over vanilla—and not a result of car manufacturers’ advertising campaigns.

Here, says Galbraith, is where the economists have gotten things wrong. Big corporations do not systematically maximize profits at all—instead, once the corporation has achieved a minimum level of profitability, its managers are more interested in building up sales. Consumers do not make up their minds on their own—their tastes and whims are largely the products of advertising. We live, according to Galbraith, under the pervasive sovereignty of producers.

Long ago most economists learned to live with pint-sized versions of Galbraith’s argument. They can admit that businessmen don’t always maximize profits, since sometimes they are keeping an eye on the clock or the secretary rather than on the balance sheet. And economists can concede that advertising, as well as price and quality, help to guide the shopper’s hand. But they cannot swallow the full Galbraithian system. Even if economists were willing to jettison the implications of perfect competition for policy making (e.g., the anathema upon tariffs and monopolies), they would still want to retain the profit-maximizing assumption for scientific purposes.

Profit-maximizing plays roughly the same role in the scientific structure of economics as the concept of entropy does in thermodynamics. With the postulate, a series of specific testable hypotheses about behavior can be deduced (e.g., that the number of appendicitis operations performed by doctors will vary with the formula by which they are compensated). Without the postulate, or some clear and simple alternative, all remains chaos.

Of course, economics is a social rather than a physical science and therefore its hypotheses are with some regularity not testable, not true, or not worth the bother. But to the extent that economics does try to be scientific, it needs simplifying assumptions like profit-maximization and can tolerate a fair measure of inaccuracy. Suppose managers try to maximize profits but are lazy or dumb about it; or suppose that they maximize corporate profits except where it comes to the purchase of an executive jet. In either case the qualifications can be ignored for most of the economist’s purposes. If he wants to predict the effect of a 7 percent investment tax credit on total corporate investment, the random stupidity or cupidity of executives will increase his likely error but will not invalidate the general tenor of his conclusions.

There is, however, no litmus test for the value of a simplifying assumption like profit-maximization, and Galbraith may be right in arguing that its inaccuracy outweighs its value. The debate is an old and important one and there are serious questions to be raised about the assumptions of economists. But Galbraith’s contribution consists more of panache than argument. Occasionally it simply amounts to nonsense—as when we are told that the old-fashioned owner-run business was less bothered by depressions than the giant modern corporation, since the owner would personally survive the crash whereas the corporation might not.

Galbraith’s platform, too, has its weaknesses. He rests his hopes on America’s thinking men—“the Educational and Scientific Estate”—who may yet rescue the industrial system from vulgarity and war. Though bred by the corporate economy, they alone can take their distance from it. As their numbers grow, so will their power and independence. Eventually they may make America a land of peaceful ambitions and good television. McGeorge Bundy’s shift of attention from retaliatory bombing to public broadcasting is presumably but an omen of things to come.

Perhaps, but even Galbraith seems occasionally to suffer doubt. In a recent review of LBJ’s memoirs, Galbraith assesses the responsibility for Vietnam less to the Emperor than to his evil advisers. “[T]he voice is Jacob’s voice, but the hands are the hands of Esau—Esau being a pseudonym for Walt Whitman Rostow.” Esau was not, to be sure, a smooth man, and may thus have forfeited his berth in the Educational and Scientific Estate. But Rostow and the other State Department hands whom Galbraith blames for Vietnam were ranking members of the very technostructure that Galbraith is counting on to save us. Their errors, one would think, are some reflection on their ways.

Letters

Phase Two March 9, 1972

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