MotherJones.com News Commentary Arts Discuss Reader Services About Us
Mission: Control
Why can't economists admit that corporations serve themselves, not the market?
James K. Galbraith
November/December 2006 Issue
HERE'S A LITERARY CURIOSITY for our times. John Kenneth Galbraith was
the most widely read economist of the last century, and possibly,
after Karl Marx, of all time. Yet his most important book, though it
sold millions of copies in four editions, has languished out of print
for many years.
The New Industrial State was not my father's best seller. That would
be The Great Crash, his account of the 1929 Wall Street bust,
continuously in print since 1955. (When I met Fidel Castro in Havana
four years ago, his first words were, "The Great Crash! My favorite
book! I have a copy on my night table!") Nor was it his finest
literary creation. That honor belongs to The Affluent Society, perhaps
the last book in the history of economic thought to shake the
conventional wisdom—a phrase coined therein—to its core.
Instead, The New Industrial State was Galbraith's major work of new
theory. It was his effort to actually replace the prevailing economic
model with something more meaningful and more real. In it he forged a
vision of the business firm not as a simple seeker after profits but
as an organization, and of the matrix of such organizations as the
essential basis of advanced capitalism. Traditional economics, still
in the thrall of a small-town view of business firms, largely rejected
this vision, but the large corporation did not go away, and the world
still needs the theory set out in this book.
Corporations exist to control markets, and often to replace them.
Business leaders reduce uncertainty not through clairvoyance (or
"perfect foresight," as the economics textbooks call it), nor by
confident exploitation of probability ("portfolio diversification").
They do it by forming organizations large enough to forge the future
for themselves. In politics these are countries and parties; in
economics, big corporations.
Technology dictates that markets must be controlled. The products that
define modern life—automobiles, jet aircraft, electric power,
microchips, and cable television—cannot be produced except over long
lead times and by integrating vast networks of engineering talent.
This requires planning. Tasks must be subdivided so that organized
knowledge—chemistry, metallurgy, optics, physics, genetics—can be
brought to bear. The subdivided tasks must then be assembled.
Customers must be found, and if possible committed, well in advance.
These are the tasks of the Technostructure: the network of
professionals who actually run organizations. Sometimes the planning
goes wrong. But the uncertainties are mainly technical and
organizational, rather than caused by the market. In an interesting
example, Airbus has firm customers for its A380 at present; what it
lacks are the actual planes.
Once control passes to the organization, Galbraith wrote, it passes
completely; the economics developed to describe the small firm and its
owner-entrepreneur becomes obsolete. Corporations work for themselves,
not for their shareholders. In particular, they do not maximize
profits merely to pass them along. To think otherwise, he wrote, "one
must imagine that a man of vigorous, lusty and reassuringly
heterosexual inclination eschews the lovely and available women by
whom he is intimately surrounded in order to maximize the
opportunities of other men whose existence he knows of only by
hearsay." Years later, when a few mainstream economists began to study
the extreme detachment of shareholders from management, they called it
the "principal-agent problem." The language wasn't as colorful, and
the insights weren't any deeper.
The Galbraith paradox is that the theorist of organizations worked
alone—he was an intellectual entrepreneur. Meanwhile, the academic
phalanx who scorned his ideas were organization men, conformist in
view, careful tenders of their departmental franchise. None of them
will be remembered as individuals, yet their hold on reputable thought
remains absolute. Galbraith's heresies triumphed in the open market;
within the university they were repressed by methods on which he
literally wrote the book.
Galbraith foresaw this. "The captious," he wrote, "would be critical
of any description of the social geography of the United States which,
by assuming away New York, Chicago, Los Angeles and all other
communities larger than Cedar Rapids, was then able to describe the
country as essentially a small-town, front-porch community." But so,
in economics, are undergraduates still taught: The small, competitive,
owner-managed business firm rules in the world of textbooks.
The New Industrial State appeared in 1967; the charge against it today
is that it did not anticipate the thrashing that American business
would get in the decades since. This came in four phases. First there
was the Japanese challenge (especially to autos and steel). Then came
the industrial collapse of the 1980s. In the 1990s, it was said that
the technology bubble reasserted the controlling role of the
owner-capitalist, personified by Bill Gates and Steve Jobs, over the
firm. Finally, there came the corporate scandals—Enron, Tyco, and
WorldCom.
That a book didn't foresee the future is a familiar critique. Marx is
often denied greatness for believing that revolution would triumph
everywhere, when it didn't. Galbraith wrote of the American
corporation at the pinnacle of its power, while his critics were
pretending that corporate power didn't exist. Then they pilloried him
for failing to predict its decline—which was said to prove, somehow,
that the power had never existed. For his part, my father moved on,
did not reply vigorously, and The New Industrial State faded from
view.
This was a shame, for the lights of the book beautifully illuminate
the later downfall of American corporate greatness. The Japanese
challenge did not prove that competitive markets rule; it was simply
the intrusion of one planning system onto the turf of another. That
intrusion was managed politically—with "voluntary export
restraints"—by Ronald Reagan's self-described free-marketeers. The
1980s' industrial collapse was not internal to corporations; it was
inflicted by Reagan again, alongside Fed Chair Paul A. Volcker,
through a campaign of relentlessly high interest rates designed to
break the countervailing power of organized labor. That so many firms
also perished was merely collateral damage. War is hell, as is often
observed.
What became the technology boom started with the breaking off of part
of the Technostructure from the large industrial firm. Unlike, say,
wind tunnels, microprocessors were a technology with applications
across many fields; their potential was greater if production was not
tied to any single use. Those who started these firms were hailed as a
new generation of engineer-entrepreneurs. But were they? Here, Robert
Noyce, who went on to found Intel, is a better example than Gates.
Noyce at first sold transistors to the military and to IBM, while
remaining relatively unknown to the public. Intel, of course, sells to
companies and not directly to consumers.
Microsoft, on the other hand, marketed its consumer products by hyping
the image of Gates as the young geek-genius even though he was always
its chief businessman and never its scientific leader. The superstar
myth prettified a firm whose success rested at first on an exclusive
franchise (again, with IBM) and later partly on much-questioned
manipulations of market power. Neither Noyce nor Gates, nor any of
their peers, ever resembled the classic owner-entrepreneur of a small
competitive firm.
Finally, the recent corporate scandals are a pathology explicitly
foreseen in The New Industrial State. There, Galbraith discusses
looting a quarter century before it became a fashionable topic in
academia. Reputable economists blamed the S&L crisis on the "moral
hazard" of deposit insurance—as if insurance provoked otherwise
sensible bankers to wildly risky behavior, similar to the notion that
seat belts promote reckless driving. For Galbraith the failures lay in
the subversion of social and legal norms. As William K. Black, today's
leading expert on control fraud, argues, one must choose. You can
either believe that Enron was the innocent product of a badly made
market, or that Enron suborned the market with criminal intent.
Prosecutors, juries, and Galbraithians have had no difficulty
choosing; more than 1,000 felony convictions followed the unraveling
of the S&L fiasco. Kenneth Lay and Jeff Skilling met similar judgment.
The New Industrial State is not a perfect book. I find in it a few
orthodoxies from which I wish my father had escaped. He wrote for
large audiences, but of all his books, this one is the hardest. And
yet, it is a landmark. Among economists it is an ill-kept secret that
in the 40 years since the book's publication, the robust faith that
once surrounded the concept of the free market as an organizing
principle has collapsed. Yet nothing much has emerged to replace it.
The New Industrial State remains the doorway through which economics
must pass, before progress starts up again.
James K. Galbraith has prepared the preface for a forthcoming edition
of The New Industrial State, from Princeton University Press.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
This article has been made possible by the Foundation for National
Progress, the Investigative Fund of Mother Jones, and gifts from
generous readers like you.
(c) 2006 The Foundation for National Progress
--
Jim Devine / "The human being is in the most literal sense a political
animal, not merely a gregarious animal, but an animal which can
individuate itself only in the midst of society." -- Karl Marx.
