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How does JK Galbraith’s The New Industrial Estate hold up after 6 decades?

Summary:
I was asked to con­tribute to an Ital­ian online pub­li­ca­tion’s trib­ute to John Ken­neth Gal­braith, by answer­ing some ques­tions about the rel­e­vance of his major work The New Indus­tri­al State (Gal­braith and Gal­braith 1967) six decades lat­er. These were my respons­es. Read­ing The New Indus­tri­al State (Gal­braith and Gal­braith 1967) again, six decades after it was first pub­lished, high­light­ed for me just how far eco­nom­ic the­o­ry has retreat­ed from real­i­ty since the 1960s. The New Indus­tri­al State (here­inafter called TNIS) described the actu­al struc­ture of a mod­ern indus­tri­al econ­o­my. It has noth­ing to do with Alfred Mar­shal­l’s vision of a mar­ket econ­o­my, in which a mul­ti­tude of small entre­pre­neur­ial firms sold homoge­nous goods

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I was asked to con­tribute to an Ital­ian online pub­li­ca­tion’s trib­ute to John Ken­neth Gal­braith, by answer­ing some ques­tions about the rel­e­vance of his major work The New Indus­tri­al State (Gal­braith and Gal­braith 1967) six decades lat­er. These were my respons­es.

Read­ing The New Indus­tri­al State (Gal­braith and Gal­braith 1967) again, six decades after it was first pub­lished, high­light­ed for me just how far eco­nom­ic the­o­ry has retreat­ed from real­i­ty since the 1960s.

The New Indus­tri­al State (here­inafter called TNIS) described the actu­al struc­ture of a mod­ern indus­tri­al econ­o­my. It has noth­ing to do with Alfred Mar­shal­l’s vision of a mar­ket econ­o­my, in which a mul­ti­tude of small entre­pre­neur­ial firms sold homoge­nous goods direct­ly to con­sumers in anony­mous mar­kets, and in which prices were set by the inter­sec­tion of sup­ply and demand. Instead, the econ­o­my is dom­i­nat­ed by large cor­po­ra­tions, which them­selves are run by a bureau­crat­ic “technostructure”—the term Gal­braith invented—that attempts to man­age every­thing, from input costs to final con­sumer demand which they manip­u­late via mar­ket­ing. Prices are tamed by long term con­tracts, and the only source of insta­bil­i­ty in prices comes from wage demands on the one hand, and the vagaries of agri­cul­tur­al and ener­gy pro­duc­tion on the oth­er.

This was the real­i­ty of the mid-1960s on which Gal­braith com­ment­ed. At the time he wrote, Gal­braith was con­fi­dent that this real­i­ty would sup­plant the Mar­shal­lian fan­ta­sy of sup­ply and demand curves, which dom­i­nat­ed eco­nom­ic the­o­ry.

Fat chance! Gal­braith’s opti­mism about his pro­fes­sion of eco­nom­ics was mis­placed: faced with a con­flict between real­i­ty and the­o­ry, main­stream eco­nom­ic ele­vat­ed the­o­ry over the incon­ve­nient facts of the real world. The main real-world changes since Gal­braith’s time have been the crush­ing of trade unions, which has large­ly elim­i­nat­ed the capac­i­ty of work­ers to bar­gain for wage ris­es, the devel­op­ment of glob­al­iza­tion, which has cre­at­ed long and extreme­ly frag­ile sup­ply chains, with much pro­duc­tion occur­ring off­shore rather than in Amer­i­can fac­to­ries, and the finan­cial­iza­tion of near every­thing. But a “tech­nos­truc­ture” is still in charge, and the real­i­ties of pro­duc­tion, man­age­ment and mar­ket­ing are the same as he observed in the mid-1960s.

None of this real­ism has seeped into eco­nom­ic the­o­ry.

Gal­braith gained his knowl­edge of the actu­al nature of the man­age­ment of indus­tri­al cap­i­tal­ism from sim­ple obser­va­tion and, cru­cial­ly, being involved in the pro­cure­ment and price con­trol efforts of World War II. In the 1990s, the main­stream econ­o­mist Alan Blind­er gained sim­i­lar knowl­edge via a very care­ful ran­dom sur­vey of Amer­i­can com­pa­nies with sales exceed­ing $10 mil­lion per year.

The answers these com­pa­nies gave Blind­er about their oper­a­tions turned every­thing in main­stream eco­nom­ics upside-down—just as Gal­braith’s book had done 30 years ear­li­er. Firms face falling mar­gin­al costs, not the ris­ing mar­gin­al costs assumed by eco­nom­ic the­o­ry. Over 70% of their out­put is sold to oth­er com­pa­nies, not to end con­sumers. Prices of indus­tri­al goods are sub­ject to long-term con­tracts, and change rarely. Word for word, the sur­vey repro­duced the vision of the cor­po­rate sec­tor that Gal­braith had laid out. Blind­er him­self observed that “The over­whelm­ing­ly bad news here (for eco­nom­ic the­o­ry) is that, appar­ent­ly, only 11 per­cent of GDP is pro­duced under con­di­tions of ris­ing mar­gin­al cost”, and that “their answers paint an image of the cost struc­ture of the typ­i­cal firm that is very dif­fer­ent from the one immor­tal­ized in text­books” (Blind­er 1998, pp. 102, 105).

The real world is “over­whelm­ing­ly bad news” for eco­nom­ic the­o­ry because, with falling mar­gin­al cost, the text­book sup­ply curve does not exist: the out­put of firms is not con­strained by ris­ing costs, but instead, any firm that secures a larg­er mar­ket share also secures a high­er prof­it. The neat equi­lib­ri­um of the text­book is replaced by an evo­lu­tion­ary strug­gle for sur­vival and dom­i­nance.

Not a word of that real­i­ty made it into eco­nom­ic text­books. Even Blind­er’s own under­grad­u­ate text­book (Bau­mol and Blind­er 2015) pre­tends that Mar­shal­l’s mod­el is accu­rate, despite his own knowl­edge that the results of his sur­vey were “over­whelm­ing­ly bad news here (for eco­nom­ic the­o­ry)”.

Gal­braith’s book there­fore remains rel­e­vant as a descrip­tion of eco­nom­ic real­i­ty, but the opti­mism he had that his real­is­tic vision would replace text­book fan­tasies was mis­placed.

Much of the US indus­tri­al cir­cuit has been relo­cat­ed to Chi­na and oth­er devel­op­ing economies, but if any­thing this has strength­ened the impor­tance of the tech­nos­truc­ture: the coor­di­na­tion that Gal­braith saw play­ing out across the con­ti­nen­tal USA is now an order of mag­ni­tude more com­plex.

The growth of soft­ware has also made Gal­braith’s analy­sis even more appo­site. Though the mar­gin­al costs of indus­tri­al firms are low and falling—the oppo­site of the text­book model—the mar­gin­al costs of soft­ware firms are clos­er to zero. The prof­it mar­gins from mar­ket dom­i­nance are there­fore even big­ger. There is no sec­ond place in the word proces­sor mar­ket (Microsoft Word) or the brows­er mar­ket (Google Chrome), and sec­ond place in the oper­at­ing sys­tem mar­ket (Apple MacOs) is long dis­tant from first place (Win­dows).

The need to con­trol prices and man­age demand are even big­ger in the dig­i­tal/high-tech world than they were in Gal­braith’s indus­tri­al day, while the capac­i­ty for mar­ket dom­i­nance by the mar­ket leader is stronger still where prod­ucts have a sub­stan­tial net­work effect. This applies to every­thing from the obvious—such as social media prod­ucts like Twit­ter and Face­book—to the mun­dane. Word’s dom­i­nance of the word proces­sor mar­ket is large­ly due to the fact that it was the pro­gram most users used. Minor­i­ty prod­uct users—which I once was, using Lotus Word Pro in pref­er­ence to Word because of its supe­ri­or desk­top pub­lish­ing features—were forced to adopt Word for com­pat­i­bil­i­ty with the peo­ple with whom we had to com­mu­ni­cate. Rivals like Word Pro with­ered and died in the mar­ket­place, sim­ply because they were not the num­ber one prod­uct.

Text­books treat this as an interesting—and eas­i­ly ignored—exception to the assumed rule of ris­ing mar­gin­al cost. But in fact, it is an ampli­fi­ca­tion of the process­es Gal­braith iden­ti­fied in the indus­tri­al state, which make the text­book mod­el even more irrel­e­vant to the real world.

The decline in the polit­i­cal pow­er of the work­ing class since the pub­li­ca­tion of TNIS has been dra­mat­ic. Gal­braith fore­saw this pos­si­bil­i­ty, as he not­ed the extent to which the tech­nos­truc­ture attempt­ed to have work­ers iden­ti­fy with the firm rather than their social class. Here Gal­braith deserves praise for a great deal of pre­science:

The plan­ning sys­tem, it seems clear, is unfa­vor­able to the union. Pow­er pass­es to the tech­nos­truc­ture, and this lessens the con­flict of inter­est between employ­er and employ­ee which gave the union much of its rea­son for exis­tence. Cap­i­tal and tech­nol­o­gy allow the firm to sub­sti­tute white-col­lar work­ers and machines that can­not be orga­nized for blue-col­lar work­ers who can. The reg­u­la­tion of aggre­gate demand, the result­ing high lev­el of employ­ment togeth­er with the gen­er­al increase in well-being, all, on bal­ance, make the union less nec­es­sary or less pow­er­ful or both. The con­clu­sion seems inevitable.

The union belongs to a par­tic­u­lar stage in the devel­op­ment of the plan­ning sys­tem. When that stage pass­es, so does the union in any­thing like its orig­i­nal posi­tion of pow­er. And, as an added touch of para­dox, things for which the unions fought vigorously—the reg­u­la­tion of aggre­gate demand to ensure full employ­ment and high­er real income for members—have con­tributed to their decline. (Gal­braith and Gal­braith 1967, p. 337)

One fac­tor that Gal­braith did not antic­i­pate in 1967 was the rise in the sig­nif­i­cance of the finan­cial sec­tor, not only in the USA, but world­wide. When TNIS was pub­lished, pri­vate debt was under 90 per­cent of GDP, and the indus­tri­al sec­tor was the dom­i­nant sec­tor of the US econ­o­my. Today, pri­vate debt is over twice as high rel­a­tive to GDP, and the finan­cial tail now wags the indus­tri­al dog—see Fig­ure 1.

Fig­ure 1: Pri­vate debt is dra­mat­i­cal­ly high­er today than it was when TNIS was first pub­lished in 1967

How does JK Galbraith’s The New Industrial Estate hold up after 6 decades?

As a result, Amer­i­ca is no longer dom­i­nat­ed by the mil­i­tary-indus­tri­al complex—to use the phrase invent­ed not by Gal­braith, but his con­tem­po­rary Pres­i­dent Dwight D. Eisen­how­er—but by what I call the politi­co-finan­cial com­plex. We have to look, not to Gal­braith in 1967, but to Marx a cen­tu­ry ear­li­er, for an accu­rate char­ac­ter­i­sa­tion of what this has meant for the via­bil­i­ty of the cap­i­tal­ist sys­tem:

Talk about cen­tral­i­sa­tion! The cred­it sys­tem, which has its focus in the so-called nation­al banks and the big mon­ey-lenders and usurers sur­round­ing them, con­sti­tutes enor­mous cen­tral­i­sa­tion, and gives to this class of par­a­sites the fab­u­lous pow­er, not only to peri­od­i­cal­ly despoil indus­tri­al cap­i­tal­ists, but also to inter­fere in actu­al pro­duc­tion in a most dan­ger­ous manner—and this gang knows noth­ing about pro­duc­tion and has noth­ing to do with it. (Marx 1894, Chap­ter 33)

Re-read­ing TNIS made me nos­tal­gic for the 1960s, not because the music was better—though, of course, it was—but because the vision of the future which Gal­braith had was bet­ter than the future itself has turned out to be. Gal­braith’s eru­dite prose was under­writ­ten by a pre­sump­tion that the knowl­edge he had acquired—of how the Amer­i­can indus­tri­al sec­tor actu­al­ly functioned—would sup­plant the reas­sur­ing fic­tions of Mar­shal­lian mar­kets that aca­d­e­m­ic econ­o­mists con­tin­ued to ped­dle in their first year text­books.

It did­n’t. Eco­nom­ic text­books today are even more arcane than the aca­d­e­m­ic prod­ucts of the 1960s, which Gal­braith felt he could com­fort­ably dis­par­age as he out­lined what he called the “revised sequence” of how goods are man­u­fac­tured and mar­ket­ed in an advanced cap­i­tal­ist econ­o­my:

In the form just pre­sent­ed, the revised sequence will not, I think, be chal­lenged by many econ­o­mists. There is a cer­tain dif­fi­cul­ty in escap­ing from the inescapable. There is more dan­ger that the point will be con­ced­ed, and its sig­nif­i­cance then ignored…

The revised sequence sends to the muse­um of obso­lete ideas the notion of an equi­lib­ri­um in con­sumer out­lays which reflects the max­i­mum of con­sumer sat­is­fac­tion. (Gal­braith and Gal­braith 1967, p. 265)

Unfor­tu­nate­ly, his “revised sequence” was not even con­ced­ed by the dis­ci­pline, let alone ignored. The muse­um of obso­lete ideas is alive and well in the 2020s, instruct­ing eco­nom­ics stu­dents today in a vision of a mar­ket econ­o­my even more arcane that the 1960s eco­nom­ics text­books that Gal­braith clearly—and wrongly—thought were going the way of the Dodo.

Instead, Gal­braith’s own con­tri­bu­tions large­ly went the way of the Dodo. Mod­ern stu­dents of eco­nom­ics are unaware of his con­tri­bu­tions, from the prac­ti­cal work he under­took to enable the USA to dra­mat­i­cal­ly expand wartime pro­duc­tion with­out caus­ing infla­tion in either mil­i­tary or con­sumer goods prices, to his elo­quent eru­di­tion of an alter­na­tive eco­nom­ics in works such as TNIS, The Afflu­ent Soci­ety (Gal­braith 2010) and The Great Crash 1929 (Gal­braith 1955).

Gal­braith part­ly con­tributed to his own sub­se­quent irrel­e­vance, by not pro­vid­ing a means by which his elo­quence could be turned into equa­tions. His con­tem­po­rary Hyman Min­sky (Min­sky 1975, 1982), who was far less well-known than Gal­braith at the time—even in non-ortho­dox eco­nom­ic circles—is the one whose non-ortho­dox vision lives on after him, large­ly because his vision could be put into a range of ana­lyt­ic forms (Keen 1995; Del­li Gat­ti and Gal­le­gati 1996; Dym­s­ki 1997; Wray 2010; Keen 2020). Even Neo­clas­si­cals, who remain as igno­rant of Min­sky’s real insights as they are of Gal­braith’s, must acknowl­edge the exis­tence of “Min­sky Moments” (Bressler 2021). There is no Gal­braithi­an equiv­a­lent.

The main dif­fer­ence between the Indus­tri­al State that Gal­braith described, and the Dig­i­tal (and Finan­cial) State in which we reside today is the impor­tance of net­work effects for the Dig­i­tal econ­o­my.

The goods pro­duced by the com­pa­nies Gal­braith’s that trea­tise con­sid­ered were not depen­dent on wide­spread con­sumer con­for­mi­ty. The New Indus­tri­al State led to the dom­i­nance of mega-cor­po­ra­tions (like Ford, Gen­er­al Elec­tric, and IBM), but their dom­i­nance did not mean that rival com­pa­nies (like Gen­er­al Motors, West­ing­house and Bur­roughs) were unable to achieve mar­ket share. How­ev­er, in today’s Dig­i­tal State, it is near impos­si­ble for a rival to Face­book to achieve crit­i­cal mass, because Face­book already has that crit­i­cal mass. This makes the Dig­i­tal State a much more all-or-noth­ing con­test than the New Indus­tri­al State of the mid-1960s.

The effect is pro­found. If the mar­ket had rea­son to com­plain about the prod­uct of an indus­tri­al giant—say, for exam­ple, the Ford Edsel—it was easy to switch to a rival prod­uct from a rival man­u­fac­tur­er. But com­plain as con­sumers do today about Google, Face­book and Twit­ter, the capac­i­ty to turn those com­plaints into a rival prod­uct is vir­tu­al­ly non-exis­tent.

In this way, the dom­i­nance of the tech­nos­truc­ture over the mar­ket that Gal­braith iden­ti­fied in the 1960s is even greater today. But the Sil­i­con Val­ley hip­sters who might well use the word as they debate the Inter­net-Of-Things over a soy lat­te would nev­er know that the word that describes them so well was invent­ed by John Ken­neth Gal­braith.

Bau­mol, William J, and Alan S Blind­er. 2015. Micro­eco­nom­ics: Prin­ci­ples and pol­i­cy (Nel­son Edu­ca­tion).

Blind­er, Alan S. 1998. Ask­ing about prices: a new approach to under­stand­ing price stick­i­ness (Rus­sell Sage Foun­da­tion: New York).

Bressler, Paige D. 2021. ‘In a Min­sky Moment, can finan­cial state­ment data pre­dict stock mar­ket crash­es and reces­sions?’, The Jour­nal of cor­po­rate account­ing & finance, 32: 155–63.

Del­li Gat­ti, Domeni­co, and Mau­ro Gal­le­gati. 1996. ‘Finan­cial Insta­bil­i­ty Hypoth­e­sis and Sta­bi­liza­tion Pol­i­cy: Hyman P. Min­sky’s Con­tri­bu­tion to Polit­i­cal Econ­o­my’, Eco­nom­ic Notes, 25: 411–24.

Dym­s­ki, Gary. 1997. ‘Deci­pher­ing Min­sky’s Wall Street Par­a­digm’, Jour­nal of Eco­nom­ic Issues, 31: 501.

Gal­braith, James K. 2010. The afflu­ent soci­ety and oth­er writ­ings, 1952–1967 (Pen­guin: New York).

Gal­braith, John Ken­neth, and James K. Gal­braith. 1967. The new indus­tri­al state (The James Madi­son library in Amer­i­can pol­i­tics) (Prince­ton Uni­ver­si­ty Press: Prince­ton).

Gal­braith, John Ken­neth. 1955. The Great Crash 1929 (Houghton Mif­flin Com­pa­ny: Boston.).

Keen, Steve. 1995. ‘Finance and Eco­nom­ic Break­down: Mod­el­ing Min­sky’s ‘Finan­cial Insta­bil­i­ty Hypoth­e­sis.”, Jour­nal of Post Key­ne­sian Eco­nom­ics, 17: 607–35.

———. 2020. ‘Emer­gent Macro­eco­nom­ics: Deriv­ing Min­sky’s Finan­cial Insta­bil­i­ty Hypoth­e­sis Direct­ly from Macro­eco­nom­ic Def­i­n­i­tions’, Review of Polit­i­cal Econ­o­my, 32.

Marx, Karl. 1894. Cap­i­tal Vol­ume III (Inter­na­tion­al Pub­lish­ers: Moscow).

Min­sky, Hyman P. 1975. John May­nard Keynes (Colum­bia Uni­ver­si­ty Press: New York).

———. 1982. Can “it” hap­pen again? : essays on insta­bil­i­ty and finance (M.E. Sharpe: Armonk, N.Y.).

Wray, L. Ran­dall. 2010. ‘Min­sky, the Glob­al Mon­ey-Man­ag­er Cri­sis, and the Return of Big Gov­ern­ment.’ in Steven Kates (ed.), Macro­eco­nom­ic The­o­ry and Its Fail­ings: Alter­na­tive Per­spec­tives on the Glob­al Finan­cial Cri­sis (Chel­tenham, U.K. and Northamp­ton, Mass.: Elgar).

Steve Keen
Steve Keen (born 28 March 1953) is an Australian-born, British-based economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay.

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