Source of book:
I own this
Like virtually
every teenager in America, I took an economics class my senior year of high
school. Because I was homeschooled, options were limited. I took video classes
my last three years of primary schooling, from A Beka, which meant a fairly
good academic education (particularly in math and English), but some highly
questionable ideological indoctrination.
For the
economics course, this meant complete and utter worship of laissez faire economic
theory, and venomous hatred for John Maynard Keynes, FDR, the New Deal, and
every form of government intervention in the economy.
Even when I was
taking the class, I had my skepticism about the propaganda, but that was also
my embarrassing Rush Limbaugh era, so I believed
a lot of things that make me cringe now.
Ironically, one
of the things that made me change my mind about right wing economics was
reading The Wealth of Nations by Adam Smith.
Because Adam Smith would be considered a total flaming socialist
by today’s right wing.
I mention all
of this because that economics course required some sort of a paper - I can’t
even remember what the specified topic was or what I wrote about it, because it
was boring and stupid, like many high school assignments are. You write them
because you have to and because learning to write is a necessary skill.
This paper
required me to find sources, and not just the textbook. I don’t recall exactly
what I got from the library, other than that I picked up a book by John Kenneth
Galbraith. I think it was a collection or something, but I cannot recall the
title or what I read in it. Other than that, at that time, it went WAY over my
head.
I do remember
that it sounded interesting, even if I didn’t understand it, and appeared to be
an alternative to the propaganda I was learning.
Fast forward to
today, and I was able to find a used copy of the Library of America edition of
four of his works. Out of that, I decided to read the first, American
Capitalism. Now that I have, I really want to read the others, particularly
The Affluent Society, which sounds very relevant to today. Stay
tuned.
By global and
the standards of his time, Galbraith was center-right, a proponent of
capitalism, but with regulation and restraints. This, of course, means that
today’s American right wing would consider him a flaming communist, because he
advocated for building a better society rather than giving everything away to
the ultra-rich.
American
Capitalism, written in 1951, starts with a bold
assertion: Free markets do not really exist in most industries, so a new
explanation of economic activity, particularly the setting of prices, is
needed.
For Galbraith,
his theory is what he calls “Countervailing Power.” Because most industries
naturally tend to become oligarchies (more on that later), they have - in
theory - monopoly price-setting power, and wage-setting power. However,
industry clearly does not have these powers in full, so there must be power
that is opposed to these pricing powers. Galbraith insists that these arise
naturally, because anywhere there is power to make money, there is incentive to
grab a share of that power.
Galbraith talks
about specific forms of countervailing power. For example, unions exist to
counter the wage-setting power of large corporations. This is why they tend to
be healthiest when there is a lot of money to be made, and of limited power
against smaller companies. Likewise, government is countervailing power. On the
pricing side, giant retailers counter the power of giant producers.
The power of
this book is in Galbraith’s clarity of writing and thought, and in his ability
to focus on the reality of what actually exists, not what economic theory says
should exist.
I will note a
few things at the outset that I think are spot on, and supremely relevant
today.
First is that
right wing economic theory is a religion, and it is ideologically based, not
fact based. The belief in “free markets” is like a belief in the passenger
pigeon - they don’t actually exist anymore, or behave the way that theory says
they will.
Second is that
because of this religious belief, right wing economics conflates corporate
power with “freedom,” and anything that challenges that power to be
“socialism.”
This is nothing
new. Galbraith quotes business leaders from the 1940s sounding just like they
do now, complaining that any regulation is the slippery slope to
communism.
What is ironic
- as Galbraith points out - is that industry actually thrives when there
is countervailing power. Regulation leads to trust that products won’t kill us,
unions keep wages up so that workers are able to buy stuff, government
management of facets of the economy prevents depressions where everyone loses,
and social programs raise the standard of living. The very bedrock of corporate
moneymaking is the existence of countervailing power.
This shouldn’t
be controversial anymore. But this fear of “socialism” is still driving
elections. This sounds familiar, right?
The principal, and apart from treason,
the all but exclusive issue in elections since the war has been whether America
is being transformed from a capitalist into a welfare state, a status state, or
a socialist one.
This faith,
though, has crumbled for many over the years. The first big hit was the Great
Depression, where it became clear that “the market” could easily find
equilibrium with one quarter of workers unemployed. In effect, this was the
failure of capitalism - it happened before the failure of communism, actually -
and what succeeded it is an economy that has a mix of elements.
It wasn’t just
the public, however, that lost faith. Business too, despite its continued
fearmongering about “socialism,” actually feared another failure.
The businessman shares with many others
yet another fear which, unlike his political doubts, he leaves largely
unexpressed. It is that private capitalism is inherently unstable.
And indeed, to
a degree it is. Which is why the New Deal policies were necessary - and, in
retrospect, highly effective at preventing a catastrophic crash.
I want to
mention at this point as well, another factor that has led to resistance to
government action.
The well-to-do and the wealthy man will
normally be mistrustful of change. This has been so, in the past, in nearly all
times and places. It is a simple matter of arithmetic that change may be
costly to the man who has something; it cannot be so to the man who has
nothing. There is always, accordingly, a high correlation between conservatism
and personal well-being.
It has been
fascinating (and not in a pleasant way) to watch my parents as they changed
over the years. As they moved from poor enough to utilize government clinics
(welfare!) to rich enough to own a vacation home, their politics moved
accordingly. The more wealthy they became, the more they mistrusted any policy
to help others. This is, generally, a pattern, and the best explanation for why
younger people are not getting more conservative as they have gotten older is
that they have not gotten richer.
Galbraith notes
that “classical” economics - based on market competition - probably did lead to
efficient outcomes in the past, when both buyers and sellers were small, and
when unemployment was virtually unheard of. But as industry has become more
advanced, and society as a whole more complicated - and dependent on jobs for
survival with few alternatives - competition no longer is able to be effective
- hence the periods of significant unemployment.
Since economic
efficiency is clearly not served with portions of the workforce idle, then why
is the myth of competition so powerful?
Galbraith’s theory is that the belief in competition allows the economically
powerful to believe that they do not have power.
The role of power in American life is a
curious one. The privilege of controlling the actions or of affecting the
income and property of other persons is something that no one of us can profess
to seek or admit to possessing.
But of course
there is power, and businessmen, as he calls them, seek it. They just can’t
openly admit it.
Power obviously presents awkward
problems for a community which abhors its existence, disavows its possession,
but values its exercise. In the nature of man, the alarm over the exercise of
such power runs to its use by second persons. The businessman is not disturbed
about the use of authority of which, by hard work and merit, he has become the
custodian; he is alarmed about its misuse by government. The liberal naturally
views the exercise of private business power with concern. On acquiring public
office he is not likely to be persuaded of the danger of misusing his own
righteously won authority. This tendency to alarm over the possession of power
by other people is greatly enhanced by the convention of denying that one
possesses power. The conventional assertion that one has none is readily
translated into belief.
This is also
manifested, although Galbraith doesn’t go there in this book, by the belief by
white males that they are the least powerful people in our country, despite
overwhelming evidence to the contrary. They, like businesspeople, cannot see
their own power or how they exercise it.
This is where
the myth of competition comes in. Because business doesn’t have power, then
there is no need for government to restrain it. If business lacks the power to
set prices, then there is no possible risk that customers will be gouged. If
business lacks the power to set wages, then there is no risk of workers being
exploited. It all sounds great on paper, right?
Everything is
perfect, right? The market will cure any problem, just give it time and keep
hands off.
But the problem
is that power does exist, and in industries with oligarchies, there is
power both to raise prices and to set wages.
The system of ideas just outlined - the
theory of capitalism and the solution of the problem of power it provided - was
vulnerable at two points. In the realm of ideas there was its pivotal
dependence on competition, on a definition of competition that had tended to
become increasingly precise and hence increasingly brittle. Even the staunchest
defenders of the doctrine required a rigorous form of competition - with
Professor Hayek they held that it had to be the competition in which “the
individual producer has to adapt himself to price changes and cannot control
them.” There was also, in the world of reality, the need for performance. The
system had to work. Were the assumption of competition to be undermined, it
would be a devastating blow. So, equally, would be a failure in performance.
Both blows fell simultaneously in the decade of the thirties.
Galbraith then
dives into the reality. I am going to summarize this discussion, but I really
encourage anyone who wants to understand our current economy better to read the
whole chapter.
The reality of
what we actually see is this: as any industry becomes mature, it will tend to
shrink to a few giant firms, with a few smaller ones around the
periphery.
This is not the
result of nefarious scheming or vast conspiracy (and definitely not a Jewish
one), but as the result of the inherent rules of the game.
It is easy for
a firm to go out of business, but very hard for new firms to enter - there is a
high entry cost. Firms may also choose to merge, but there is no inherent
incentive to break apart.
So, over time,
the number of firms declines, until there are few enough that their mutual
survival becomes more important than competition with each other.
Let me give a
few examples. I have been thinking about these a lot lately, and particularly
while reading this book.
Take, for
example, the industry that manufactures commercial aircraft. (I’m a plane geek,
so buckle up for a rabbit trail…)
Right now,
there are two giant firms which manufacture commercial aircraft: Boeing, and
Airbus. Boeing is the only manufacturer in the United States, the world’s
largest economy. Airbus is a joint venture between multiple European nations.
These two manufacture the overwhelming majority of commercial aircraft - and all
of the larger aircraft.
There are a few
other firms that have found niches making smaller jets: Bombardier in Canada,
Embraer in Brazil. You can probably now add Comac in China, but its production
numbers are far lower than the other four at this time. Mitsubishi in Japan
made an attempt, but that never got off the ground. (Sorry.)
There used to
be more, of course. The US alone had Lockheed and McDonnell Douglas back when I
was a kid, and Europe had a whole handful of firms.
What happened?
Well, mergers and bankruptcies mostly.
Firms
disappeared, and they were not replaced. Just like Galbraith predicted.
At this point,
it is unlikely that there will be increased competition coming any time soon.
Comac is the most likely to eventually join the party, but it has challenges.
Despite being backed by the second largest economy in the world, Comac is
making planes at a slow rate, and its aircraft are dependent on Western
suppliers for everything from engines to avionics. At this time, it is limited
to the Chinese domestic market, and getting certification from either Europe
(EASA) or the US (FAA) is at least 10 years away, if Comac even decides to
apply.
The barrier to
entry is so high that even the world’s second largest economy, China, with full
government backing, is finding it difficult to compete.
There is a
non-zero chance that, due to mismanagement, profiteering, and lack of
development, that Boeing could go out of business in the next few years. That
would leave just one firm. Boeing will not be replaced, because there is
nothing to replace it with. The barriers to entry are just too great.
Again,
predicted by Galbraith.
Let’s move
instead to the automobile industry. When the industry began, there were dozens
of firms in the US alone, and many more in other countries. Over time, firms
have gone bankrupt or merged, leaving fewer and fewer over time.
Right wing
economists love to point to the competition from Toyota and Honda as proof that
there can be new entries to the field, but they leave out that these firms are
actually very old. They just expanded to new markets, which is not the same
thing.
Right now,
there is a huge opportunity to shake up the industry: electric vehicles. And
yet, the secondary players - even the most successful like Tesla - are
struggling to actually break in permanently.
Tesla, mind
you, has the financial backing of one of the five richest humans in the world.
Yes, he isn’t really helping things right now, but he has the money. But
Tesla’s flagship vehicle (Model S) is now 12 years old - ancient by automotive
industry standards - and there is no apparent expected replacement. Production
has also struggled - Tesla makes nowhere near the numbers of the major
manufacturers. And Tesla is essentially a success story in comparison with the
other startups.
Galbraith
points out that the issue isn’t merely capital: it is expertise. The business
of building cars is incredibly complex, and merely hiring a few engineers isn’t
going to get you everything you need, from design to supply chains. It is an
incredibly high barrier to entry.
I could go on
with other industries, of course, because the pattern of consolidation leading
to oligarchy is everywhere - even in industries that Galbraith thought were
exempt, such as farming.
And again, this
isn’t nEfaRiOus CoNSpIrAcY: it is the predictable result of market forces in a
mature and complex industry.
This then leads
to the question of power. Oligarchies should in theory be able both to
set prices AND to suppress wages. But….they don’t always. (And they
particularly didn’t in the 1950s, when wages rose and prices fell.)
What is true is
that in these industries - increasingly in all of them - there is no incentive
to compete. It is in the best interest of all the firms to keep prices similar,
and wages similar, and so on. If a firm attempts to compete, it could very easily
drive the entire industry into bankruptcy.
If there is only a handful of
producers, there is a chance that none will assume the initiative. There is at
least the possibility that all will prefer and concur in choosing profitable
and comfortable stagnation.
We both see
this and don’t see this, depending on the situation. There are, I think,
industries where things have stagnated, but there are others where
countervailing power of various kinds keeps the pressure on. Later in the book,
Galbraith looks at how this works.
What he does
highlight at this point is that the ideal of perfect competition doesn’t exist
in most industries (even less so now than in 1951), and that therefore the
classic model of economics simply cannot be useful in real life.
After talking
about the depression earlier, Galbraith eventually spends an entire chapter on
the “depression psychosis,” as he refers to it - the fear of another
depression, and the attempts to prevent another one. There are some great lines
here.
The competitive model of a capitalist
economy allowed, as noted, for rhythmic increases and decreases in prices and
production and even for occasional bouts of unemployment. It did not
contemplate the possibility of a catastrophic and enduring depression.
Economists, and through them politicians, businessmen and the public, were
insulated from the need to think of such a tragedy by the benign theorem that
the act of production provided the purchasing power for all that was produced
at approximate full employment.
This is the
great myth of capitalism: that it is economically efficient and leads to full
employment. Even the businessmen, though, have doubts deep down. Perhaps
unmanaged capitalism actually leads to periodic catastrophes.
These, in their mature form, made
depression, or its counterpart inflation, the normal behavior pattern of
uninhibited and unmanaged capitalism.
This was in
fact the point that Keynes made: that depression and mass unemployment are not
abnormal in unregulated capitalism.
On the contrary, the economy can find
its equilibrium at any level of performance. The chance that production in the
United States will be at that level where all, or nearly all, willing workers
can find jobs is no greater than the chance that four, six, eight, or ten
million workers will be unemployed. Alternatively the demand for goods may
exceed what the economy can supply even when everyone is employed. Accordingly
there can be, even under peacetime conditions, a persistent upward pressure on
prices, i.e. more or less serious inflation.
Behold the
post-pandemic global inflation. The US has actually had lower inflation than
the rest of the first world - this isn’t something that can be blamed on
President Biden, who has actually taken steps to cool the inflation here, and
done better than much of the rest of the world. (Side note: presidents have
little control over global economic patterns, but governments do have the
ability to prevent catastrophe to their citizens in many cases. Just something
to think about in light of the New Deal and other remedies that have kept
people from starving in the past.)
After the Great
Depression, the ideas of Keynes pretty much won out. By spending during
slowdowns, governments could prevent catastrophic depressions - something that
all of the first world has done since that time. Galbraith notes, however, that
conservatives have opposed this, despite the fact that it actually benefits
business a lot.
Liberals almost spontaneously adopted
the Keynesian formula. They were also puzzled by the reluctance of
conservatives, especially businessmen, to embrace it. Here was protection from
the overwhelming threat of depression, the only threat of potentially revolutionary
proportions seemingly faced by capitalism. The businessman remained undisturbed
in his prerogatives as an owner and manatee and had the promise of better
business to boot. What could he lose?
Galbraith
answers the question with a psychological barrier.
However, as often happens, it
encountered the sharp cleavage which exists in our attitude toward
technological and social change. If a man seeks to design a better mousetrap,
he is the soul of enterprise; if he seeks to design a better society he is a crackpot.
For those who mistrust social change it was not an argument that profits might
be increase, even that disaster might be avoided. They were opposed to change
and they could not be bought. They were men of principle.
God, this is
what I find when discussing - or trying to discuss - anything about economics
with right wingers. The opposition to change of any sort is so strong, even in
the face of evidence that everyone is better off with change.
There are other
reasons too: businessmen like the prestige of being the most important people
in the economy. Government action would diminish that prestige. And, there was
also the philosophical problem caused by the belief in the myth of competitive
markets.
If the normal tendency of the economy
is toward full employment, then the use of labor and other economic resources
by government is at the expense of their use by the private economy. Dams and
post offices are built at the cost of private consumption or investment. If
there is full employment in the first place, something must be given up. But if
unemployment is chronic, the dams and post offices require no sacrifice of
private production or consumption.
Leaving aside
the obvious issue of whether making more widgets for consumption is inherently
better than creating public infrastructure, this is where reality matters.
Particularly when unemployment is high, it is no loss to the private sector for
government to utilize labor to create infrastructure.
Galbraith is
loathed by right wing thinkers, but in reality, he is actually quite
pro-capitalism - managed and regulated capitalism with countervailing power. It
is a sign of just how far to the extreme right our right wing has drifted over
the last 45 years that this is so. When the book was written, Galbraith was
able to honestly say that neither side fully liked him or Keynes. But despite
everyone being unhappy, the economy was….really good.
In principle, the economy pleased no
one; in practice, it satisfied most. Social inefficiency, unrationalized power,
intrusive government and depression were all matters for deep concern. But
neither liberals nor conservatives, neither the rich nor all but the very poor,
found the consequences intolerable.
The 1950s
certainly had its faults - Jim Crow, for one thing. The inequality of women for
another. Unfortunately, Galbraith doesn’t address these, which is in my opinion
the main fault of the book. (The other part that hasn’t aged well is that he
failed to predict some things that happened later - the backlash to the Civil
Rights Movement that led to working-class white people voting against their
economic interest rather than accept equality for minorities - but it is hard
to fault Galbraith for failing to predict the future accurately in all respects
- no one can do that.)
Galbraith’s
point though remains: for all the whinging about the New Deal, about banking
regulations, about unions, and so on, the 1950s were actually a time of
prosperity and growth that created a larger middle class than we have seen
before or since. And, at the same time, business did quite well. This is a
lesson we still refuse to learn, which is that if the bottom 50% do well,
everyone else does fine as well. It isn’t a zero-sum game for business at
all.
The book next
tackles another myth that we Americans in particular cling to.
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. Technical development has long since become the preserve of
the scientist and the engineer. Most of the cheap and simple inventions have,
to put it bluntly and unpersuasively, been made. Not only is development now
sophisticated and costly but it must be on a sufficient scale so that successes
and failures will in some measure average out.
This is so
obviously true yet so widely disbelieved by the average American. We LOVE our
myths - and the myth of the self-made man most of all. But guess what? Neither
you nor I is capable of making a revolutionary discover that will make us rich
and change the world. It takes resources - and scientific knowledge and
engineering ability - to do that.
Just as one
example: the greatest innovation of the last 5 years has been the rapid
development of vaccines for Covid. This includes the mRNA delivery system which
is already revolutionizing the prevention of disease.
You or I could
not do this. This isn’t just smearing some pus from a cow into a cut to prevent
smallpox. One needs the equipment to create nanoparticles of oil to protect the
mRNA, the equipment to copy the mRNA in the first place, and the knowledge of
molecular biology to do everything involved. It took large companies with
support from government to do it.
Not only that,
but the groundwork was started two decades ago, and relied on knowledge gained
about mRNA from decades before that. It is a whole process, much of which did
not immediately lead to something that could be sold for profit.
And yet, the
Covid vaccines are estimated to have saved 14.4 million lives per year, per the
NIH.
This is where
we are at with science and technology: the low hanging fruit has been plucked,
and continued development requires immense resources, and the patience to wait
out decades before a new technology becomes economically rewarding.
It should be
obvious that this too is a reason why a few large firms dominate industries,
and why so many of our most beneficial inventions are done with government
funding and support. This is the future, if we are to have one.
Next up, the
book talks about the existence of advertising. Apparently, Galbraith goes into
more detail in The Affluent Society, but he touches on it here.
Basically, in a society that meets the basic needs of its people and has excess
to spare, will tend to need advertising to sell the excess economic
capacity.
It is not necessary to advertise food
to hungry people, fuel to cold people or houses to the homeless. No one could
make a living doing so. The need and the opportunity to persuade people arise
only as people have the income to satisfy relatively unimportant wants, of the
urgency of which they are not automatically aware. In other words the social
inefficiency of a wealthy community grows with the growth in wealth that goes
far to make this inefficiency inconsequential.
Galbraith also
looks at the problems of income inequality. The money is to be made in selling
unnecessary goods to the wealthy, and providing basic needs for the poor tends
to be neglected. In this, Galbraith anticipates the greatest problem facing my
home state of California.
[T]here are still many poor people in
the United States. They bear the higher prices associated with monopoly power
and the higher costs of distribution along with those who can afford them and
who, as the result of their escape from physical to psychological standards of
consumption, actually encourage such expenditure. There are still many who
would live fuller and better lives if elementary goods were produced more
abundantly and more cheaply. Housing is a case in point.
I just saw this
week that the median price for a house in California is now over $900,000.
That’s insane - and clearly unaffordable for most people. A significant driver
in this is that it is more lucrative to build large McMansions for the rich
than to build modest housing that the working poor can afford. This, combined
with tax laws that incentivise rent-seeking over development, and zoning that
prevents density in most of our urban areas, has predictably led to an
explosion in homelessness. The rent is too damn high compared to wages, and
especially to Social Security and disability payments.
Another example
of this is the near-disappearance of affordable cars. It is more lucrative to
build giant trucks and SUVs for the rich than to build basic transportation.
(And that’s before we get into the resistance to building public
transportation, which really should be the infrastructure most of us use for
basic commuting.)
Income inequality, like monopoly,
distorts the use of resources. It diverts them from the wants of the many to
the esoteric desires of the few - if not from bread to cake at least from
Chevrolets to Cadillacs. Unnecessary inequality in income - unnecessary in the
sense that it does not reward differences in intelligence, application or
willingness to take risks - may also impair economic stability. The saving or
spending of income that accrues in large chunks to relatively few people is
subject to far more erratic impulses than the saving or spending of income of
wage and salary earners.
After all of
this essentially background information, Galbraith finally presents his theory
of Countervailing Power, and it starts with the observation that the theory
does not match the reality. Here are the key ideas:
As with social efficiency, and its
neglect of technical dynamics, the paradox of the unexercised power of the
large corporation begins with an important oversight in the underlying economic
theory. In the competitive model - the economy of many sellers each with a
small share of the total market - the restraint on the private exercise of
economic power was provided by other firms on the same side of the
market.
…
In fact, new restraints on private
power did appear to replace competition. They were nurtured by the same process
of concentration which impaired or destroyed competition. But they appeared not
on the same side of the market but on the opposite side, not with competitors
byt with customers or suppliers. It will be convenient to have a name for this
counterpart of competition and I shall call it countervailing power.
…
The fact that a seller enjoys a measure
of monopoly power, and is reaping a measure of monopoly return as a result,
means that there is an inducement to those firms from whom he buys or those to
whom he sells to develop the power with which they can defend themselves
against exploitation. It means that there is a reward to them, in the form of a
share of the gains of their opponents’ market power, if they are able to do so.
In this way the existence of market power creates an incentive to the
organization of another position of power that neutralizes it.
It shouldn’t be
too hard to recognize what Galbraith is talking about. We see it in the natural
world, and call it evolution. Any organism which gains a large advantage will
see others fill that niche, not so much by competition, but by developing
countermeasures. An explosion in mice will lead to more predators eating them.
Mice eating too many seeds will lead to countermeasures among plants to
survive. The power attracts countervailing power in society as in nature.
I’m not going
to try to get into all the details, but Galbraith anticipates that inflation is
a specific scenario in which countervailing power causes problems. There is an
incentive in such a situation for the various factions to collude to raise
prices in what can become a vicious cycle (and destabilize nations and their
economies.) Galbraith looks at this scenario, and concludes that, as in the
case of a depression, a period of excess inflation needs to be addressed, not
by market forces, which lead to a feedback loop, but with government
intervention. The problem is that the primary tools government has regarding
inflation are either weak (in the case of interest rates, which are better for
fine tuning than stopping an inflationary feedback loop) or unpopular (in the
case of raising taxes, particularly on the wealthy.) Again, I recommend reading
the entire chapter, because Galbraith’s analysis is excellent and
detailed.
Galbraith
spends several chapters talking about the role of government in the economy.
First up, he posits that the “major domestic peacetime function of the federal
government” was - and should be - supporting countervailing power. In other
words, the government should recognize where monopolistic power exists, and
support and encourage the development of countervailing power to oppose it. So,
the Wagner Act helped union organizing.
(Side note
here: one of the most damaging things Ronald Reagan did was to cripple unions.
While my dad benefited from being hired by the FAA after the strike, the harm
to less fortunate people over the last 40 years has far outweighed that
advantage our family gained.)
There are other
examples Galbraith cites, from the price supports to agriculture to minimum
wage laws. The most important point that Galbraith makes is that the best thing
for society is for disadvantaged groups improve their lots. A rising tide lifts
all boats, so to speak, but the water that rises is the lower strata of
society.
It must surely be agreed that, during
the present century, American economic and political life have gained in
strength as the result of the improved position of workers and farmers - two
important and once disadvantaged groups. A scant fifty years ago American labor
relations were characterized by sullenness, anger and fear. Farmer attitudes
were marked by a deep sense of insecurity and inferiority. There can be little
question that these attitudes were an aspect of economic inferiority. Workers
and farmers lived in the knowledge that they were subject, in one way or
another, to the power of others. It was inevitable, therefore, that with the
development of countervailing power these attitudes would change and they have.
In place of the inferiority and insecurity has come a well-developed sense of
equality and confidence. It would seem difficult, indeed, to argue that the
American economy and polity is anything but stronger as a result.
Unfortunately,
many of these gains have been erased by Reaganomics and the use of government
to weaken countervailing power over my lifetime. But the lesson to take here is
that when government supports countervailing power, the economy and our
political system benefit as well.
This applies to
so many of our challenges right now. Want to eliminate racial unrest? Give
minorities equality and confidence. Want Trump-voting white men to stop
expressing their feelings of insecurity and inferiority in anti-social ways?
Well, one part of that is to address the declining fortunes of rural workers.
(Something the Biden Administration has worked hard to do, by the way…) Solving
the problem of income inequality would take pressure off of a lot of other
areas - all of us humans are less generous and less loving when we feel
threatened - it’s human nature. Give people a sense of security and confidence,
and they are more able to be generous.
On the whole, the appearance of
countervailing power as a political issue cannot be considered especially
unhealthy although it will almost certainly be so regarded. At first glance,
there is something odious about the notion that the poor and the excluded
improve their lot in a democracy only by winning power. But so far there has
been much less reason to regret than to approve the results. The position of
great groups in the community has been notably strengthened and improved.
This is a
discussion I have had with some of my friends - the ones I admire the most: on
the one hand, as a Christian, I admire the teachings of Christ about not
seeking power for one’s self. On the other, for those who are in poor or
excluded groups, the cure is surely not to expect them to reject countervailing
power. The goal needs to be, not to make them feel better about being
oppressed, but to equalize the power. In the end, everyone benefits from
the existence of countervailing power.
At the end of
the book, Galbraith examines the respective roles of “decentralized” decisions
- those made by private actors - and those made by the government. He envisions
roles for each - and indeed that is how all first-world economies function in
our time. Galbraith found that this position led to criticism from both left
and right. The left (of the time) wanted to find the existence of large
corporations to be nefarious rather than the result of predictable market
forces, while the right resented the call for government regulation. The idea
that countervailing power exists and should be encouraged by government
satisfied neither side.
I venture to suggest that this
rationale of private authority over production - or of private enterprise -
will be almost equally unpalatable to liberals and conservatives. This is often
the case with reality.
This is a good
time to remember that the United States at present does not have a viable
leftist movement. The Democratic Party is center-right by global standards,
while the GOP is at best extreme-right laissez faire libertarianism and
at worst open Fascism in its Trumpist form. No viable party is calling for
anything approaching true socialism - or even for the universal healthcare that
the rest of the first world enjoys. The “liberals” of Galbraith’s time have
nearly disappeared as a viable political force in our time.
But the point
still stands: both the far left (see: communism) and the far right (see: social
darwinist libertarianism) dislike reality. It conflicts with the
ideology.
Galbraith
spends much of the book defending government, but he also notes that for the
production side of consumer goods, there is no “administratively feasible
alternative” to capitalism. These days, even nominally “communist” countries
like China rely substantially on regulated capitalism for production - hence
its giant corporations, income inequality, high housing costs, and other things
we see in the United States.
For Galbraith,
there are categories of industry that end up, for practical reasons, using
different forms of economic organization.
There is basic
infrastructure, which must be provided largely by government. This includes
everything from the court system to roads to schools. If something is a
necessity, and the market will tend to exclude people from access, then
government involvement is necessary.
Other
industries like utilities are natural monopolies: it is grossly inefficient to
have two competing sets of power or water lines running everywhere. These are
regulated by government, even when provided by private companies. Galbraith
argues that for low-income housing, this is probably the logical direction it
should go. He takes a position that I find entirely logical: the private sector
is fine for many things, but it has limitations. If the basic needs of lower
income people are not being met by the private sector, then the public sector
needs to step in.
I’ll end with a
fascinating observation from the chapter on the public sector. Galbraith
strongly defends the progressive income tax, with a number of compelling
arguments.
One is that
when taxes are progressive (higher rates as your income goes up), it tends to
serve as a natural and automatic damper on both depression and inflation. When
the economy gets too hot, more people pay higher tax rates. When the economy
goes down, people pay less.
It is doubtful, incidentally, if any
single device has done so much to secure the future of capitalism as this tax.
It is regarded, in our time, as the great leveler of incomes. But the income
tax is also - a much neglected point - the great buttress of income inequality.
The rich man no longer has the embarrassing task of justifying his higher
income on grounds of superior morals, ability or higher natural right. He need
only point to the tax he has to pay. And the man of modest income now reflects
that his relative poverty saves him a terrifying tax bill. As an added
dividend, the tax works silently and automatically on the side of economic
stability. Conservatives should build a statue to it and to its inspired
progenitor, President William Howard Taft.
If you want to
understand why our democracy - and indeed capitalism itself - is on the brink,
look no further than Reaganomics, which has led to the rich paying lower rates
than the middle class - and indeed, even than the working poor. This shift of
the tax burden has eliminated the role of taxation in creating economic
stability, shifted the burden to those less able to afford it, led to the
massive shift of wealth and income upwards, and created resentment by those who
see this increasing inequality.
Conservatism
has killed its golden goose. Something is going to give. Either we are going to
return to appropriate taxation, or the rich are going to find themselves in a
revolution like those of the past, where they lost about 8 inches in height
very suddenly. That’s the lesson of history, ultimately.
This is why I
believe that conservatives would do well to read authors like Galbraith, and
remember that inequality hurts everyone, creates economic inefficiency, and
eventually brings down entire economies.
I also find
this book rather hopeful: the existence of power incentivises the rise of
countervailing power. Society evolves like it always has, and we are well due
for a clawing-back of the ill-gotten gains of the last 40 years. How that will
happen is not known - in the 1930s, communism was a genuine possibility for the
United States, but we ended up instead with the New Deal, and the rise of new
forms of countervailing power.
I would
definitely recommend this book for anyone interested in economics and politics,
particularly if they have an open mind to look beyond ideology to a pragmatic
examination of reality.
***
Related books I
have blogged about:
Part
of Our Time: Some Ruins and Monuments of the Thirties
by Murray Kempton
This book is
all about the history of the communist movement in the 1930s and beyond, and
the way that the New Deal headed off a revolution in America. Kempton was part
of that movement, and offers a lot of insider stories that are a fascinating
read.
American
Amnesia: How the War on Government Led Us to Forget What Made America Prosper
by Jacob Hacker and Paul Pierson
For a
comprehensive look at how government regulation, countervailing power, and
other New Deal ideas created prosperity, which has been undermined by the right
wing war on government, this is the book. One I recommend to everyone.
Nickel
and Dimed by Barbara Ehrenreich
A inside look
at the impossible position we place our working poor in: they essentially
subsidize the lifestyles of the rich at the expense of their own well being and
survival.
The
Paranoid Style in American Politics by Richard
Hofstadter
The origins of
today’s bat-shit crazy right wing. If you want to understand the Trump
phenomenon, look back to Barry Goldwater, who likewise weaponized racism to make
working and middle class white voters vote against their economic interests.
Our
Common Wealth by Jonathan Rowe
One of the
great mistakes the right wing has made during my lifetime is to reduce society
and the economy to the parts that can be monetized. In reality, the foundation
of both is what we hold in common, from infrastructure to the environment.
Whereas capitalism seeks profits in the short term, the commons are something
to be passed to succeeding generations for the benefit of all.
