Memorializing John K. Galbraith: a review of his major works, 1908-2006.

Ramrattan, Lall ; Szenberg, Michael

Introduction

John Kenneth Galbraith was born on October 15, 1908 at Iona Station in Ontario, Canada, the son of William and Catherine Galbraith. His father was a schoolteacher, a politician of Canada's Liberal party, holding various offices in the county. Galbraith attended local schools, graduating from Ontario Agricultural College in 1931, and then moved to the United States. He did his graduate studies at UC at Berkeley in agricultural economics, gaining a Ph.D. in 1934 for his dissertation written on California County Expenditures. In 1934 he became an Instructor at Harvard, where some of his colleagues included Joseph Schnmpeter, Alvin Hansen, and Seymour Harris. At Harvard, Galbraith broadened his economic perspectives to include macroeconomics and industrial organization.

In the 1930s, when the world was suffering from the Great Depression, when unemployment was rampant and governments were struggling with policy measures to steer the economy back to growth, Galbraith published an influential paper titled Monopoly Power and Price Rigidity (1936) to address the problem. It was a landmark year because John Maynard Keynes, who brought macroeconomics into being, had published his General Theory the same year, dealing with similar topics of price rigidities. After receiving a Social Science Research Fellowship in 1937, Galbraith went to Trinity College, Cambridge where he met distinguished economists such as Michal Kalecki, Joan Robinson, Richard Kahn and Piero Sraffa. At that time, Keynes had suffered a heart attack, so Galbraith did not meet him, but got the gist of his macroeconomics from Keynes' colleagues. He did study with Keynes, however, in 1937-38 (Dimand, 1988, 146), and impressed Keynes, who viewed Galbraith "as an engaged and politically purposive intellectual" (Parker, 2005, 96).

From that time onwards, Galbraith stayed in the public arena. He served on the National Defense Advisory Committee from 1940 to 1941. In 1942 he was appointed as deputy administrator of the Office of Price Administration where he served until May 1943. Galbraith was co-director of the United States Strategic Bombing Survey after WWII, and served as ambassador to India from 1961 to 1963 under the Kennedy administration.

As we intend to review Galbraith's main contributions, we provide a preamble of what others think about his works. In the area of price theory, he was praised by his adversary, Milton Friedman, who wrote "... of price and wage control, Kenneth Galbraith has the company of many other people-but so far as I know, he is the only person who has made a serious attempt to present a theoretical analysis to justify his position" (Friedman, 1977, 12).

In industrial organization Galbraith propounded the virtues of Schumpeter's theory that large firms are "almost perfect instruments for inducing technical change" (Galbraith, 1956, 91), and formulated his own theory of "Countervailing Power" which states that if sellers develop market power through concentration, then buyers will also develop market power through concentration giving rise to big business and big unions. This "Countervailing Power Ideology" is comparable to the Classical Capitalist, Managerial, People's Capitalism, and Enterprise Democracy ideologies of capitalism (Samuelson, 1972, V. 3,613). The place of this idea in the economic literature stands opposite to Marx's prediction of demise of capitalism. The rivalry of "giants against giants", in Galbraith's Countervailing Power view, is not "decadence but rather ... ruthless efficiency and dynamic expansion" (Samuelson, 1973, V. 3,707).

Galbraith criticized growth for its own sake as wasteful. What is still carried in modern textbooks is his argument that firms use advertising to create demand. In growth theory proper, Galbraith stands against Marx's self-destruction prognosis for capitalism. He sees growth in capitalism through a neoclassical lens, looking "forward to continued real progress, rather widely shared among the various income classes, the rich and the poor" (Samuelson, 1972, V. 3, 705). While this view would require technological progress to transcend limited resources, government participation will be necessary to address a fair distribution of the gains.

In macroeconomics, Galbraith echoed the works of Keynes, Tawney and Hansen (Samuelson, 1966, V. 2, 1504-1505). An important thread that links these authors is their "... emphasis upon the importance of programs in the public sector in comparison with the expansions of private spending" (Samuelson, 1977, V. 4, 875). One implication here is that the "public sector is too small compared to the private sector" (Samuelson, 1972, V. 3, 509). On the fiscal policy side, his mantra on the income policy was "permanent governmental controls of prices and wage rates", which works in the very short run (Samuelson, 1986, V. 5, 966). Galbraith was "against the use of restrictive monetary policy" in that the interest rate cannot be low enough (Samuelson, 1972, V. 3, 569). Inflation was not quite a monetary phenomenon for Galbraith as for Friedman. Galbraith was credited for early views on administered price inflation (Stigler, 1968, 236-238). The increased monetary spending, like controls, is most potent in the short run, where it is found to have influence on production, and employment when full employment and production is not achieved (Samuelson, 1977, V. 5,966).

In a review of Galbraith's Age of Uncertainty, Stigler summarized some of Galbraith's views at that time. On the economic side, the list started with "Adam Smith preached a narrow doctrine of self-interest", and ended with the need to confront the anxiety of the age, namely nuclear warfare (Stigler, 1985). In a review of Galbraith's The Affluent Society, Hayek identified Galbraith's main argument to be that "... in our affluent society the important private needs are already satisfied and the urgent need is therefore no longer to further expansion of the output of commodities but an increase of those services, which are supplied (and presumably can be supplied only) by government" (Hayek, 1961). All in all Samuelson, Stigler, Hayek, and Friedman have paid attention, and valued Galbraith's contributions, albeit to varying degrees.

On Economics

The economics of Galbraith is liberal, a departure from the classical market theory. The justification of this departure; its consequences; the successful attempt to elevate this departure from the view point of logic and reason, and the final arrival of a liberal market structure to build economics for the future is the roadmap of Galbraith's work in economics.

Galbraith's Definition and Methodology of Economics

Following Alfred Marshall, Galbraith accepts, with some modification that "Economics is a study of men as they live and move and think in the ordinary business of life. But it concerns itself chiefly with those motives which affect, most powerfully and most steadily, man's conduct in the business part of his life" (Marshall, 1920, 14). Galbraith had studied Marshall's Principles during graduate school, but he was also influenced by Veblen and Marx (Gambs, 1975, 28). Galbraith does not seem to have any problem with Marshall's definition if he could add: "... a reference to organization for economic tasks by corporations, by trade unions and by government. Also of how and when and to what extent organizations serve their own purpose as opposed to those of the people at large. And of how the public purpose can be made to prevail" (Galbraith, 1980, 1).

More modern definitions claim scientific grounds for economics. Economic agents engage in choice behavior which economists study from a scientific point of view. This was particularly the case for Lionel Robbins' definition to the effect that economics is a science, which studies how scarce resources, which have alternate uses are channeled to a certain end by consumers and producers (Robbins, 1935, 16). Galbraith examined the image that this definition creates for economics.

As one economist put it, "John Kenneth Galbraith believes that men orientate themselves not to phenomena but to the images of those phenomena which they have formed in their minds; and that ideologies and belief-systems are of particular value as a map of the somewhat forbidding world of economic and social reality" (Reisman, 1980, 1). Galbraith explicitly noted that "Economics provides (people) with their image of economic society. That image notably affects their behavior--and how they regard the organizations that comprise the economic system" (Galbraith 1973, 5). On the producer's side, the term "scarcity" represents an image that attaches great importance to organizations of production. On the consumer side, the "imagery of choice" in the aggregate is the controlling mechanism of the economic system. As for corporations, "... nearly all study of the corporation has been concerned with its derivation from its legal or formal image" (Galbraith, 1967, 73).

Galbraith stands on the shoulders of Keynes. Keynes thought that "... the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood... I am sure that the power of vested interest is vastly exaggerated compared with the gradual encroachment of ideas" (Keynes, 1936, 383). Although Galbraith believed that "Ideas may be superior to vested interest", he added that "They are also very often the children of vested interest." But the duality of ideas and vested interests is not complete for Galbraith. We are still missing one element. Galbraith wrote "... in economic affairs decisions are influenced not only by ideas and by vested economic interest. They are also subject to the tyranny of circumstance" (Ibid., 11). In other words, we are forced to rewind and consider that circumstances may "close in and force the same action on all," whether we are to the right or left, liberals or conservatives, capitalists or socialists. In times of crises, the choice of what to do is very limited, and there are not many options for the different believers to follow.

In Galbraith's methodology, we see a movement from images, ideas, and vested interests to circumstances. The latter can be seen in light of the word "events" used in The Affluent Society, where we find that "The first requirement for an understanding of contemporary economic and social lives is a clear view of the relation between events and ideas which interpret them" (Galbraith, 1958, 35). In this view, Galbraith is building on the works of giants. Since the time of John Locke and David Hume, the terms "image" and "ideas" have been centerpieces for the study of thought. "Locke took great pains to prove that all our ideas have their source in experience, sensation, and reflection" (Osler, 1970, 11). With Locke, however, we did not come to a clear understanding of "ideas". It can be either simple or complex. It is intentional in that it is an idea of something. Apparent objects are ideas, attributes and partial ideas. Ideas are tied up with intuition, reason, sensation, and perception (Husserl, 1900, 355; Russell, 1945, Ch. XIII). For David Hume, ideas are mental images. He declares that all of our sensations, passions and emotions under impressions and ideas are "faint images of these in thinking and reasoning" (Flew, 1961, 22).

In the applications of images and ideas, Galbraith accorded more freedom to the interpreter of economic phenomena than to the interpreter of physical phenomena. In economics this freedom leads to the belief of what is more acceptable, than what is more relevant. We "associate truth with convenience", and "we adhere, as though to a raft, to those ideas which represent our understanding. This is a prime manifestation of vested interest." Again, "Familiarity may breed contempt in some areas of human behavior, but in the field of social ideas it is the touchstone of acceptability." Familiarity bestows on acceptable ideas great stability, which yield predictable results. The stable acceptable ideas for a time period that have the element of predictability Galbraith called "conventional wisdom" (Galbraith, 1958, 36).

Events are the enemy of conventional wisdom. The view we hold of the world is challenged as new events in the real world occur. For instance, Galbraith explained that people are caught in the vision of a liberal state dating from the time "Traders and merchants in England ... had learned that they were served best by a minimum of government restriction rather then, as in the conventional wisdom, by a maximum of government guidance and protection ... These views were finally crystallized by Adam Smith" (Galbraith, 1958, 40). The theory of Ricardo pointed out the core economic roots of the social imbalance. "Labour and capital increased in productivity; the land supply remained constant in quality and amount. Rents, as a result, increased more than proportionately and made the landlords the undeserving beneficiaries of advance" (Galbraith, 1958, 69). "Ricardo's case for leaving everything to the market.., was essentially functional. Idleness not being subsidized and substance not being wasted, ore was produced and the general well-being would thus be raised" (Galbraith, 1958, 69, 73). The prediction of this acceptable view is what Kenneth Boulding (1959) called "social imbalance". He argued "that the conventional wisdom resists the expansion of public goods because it still judges the sacrifice in terms of an earlier age when private goods were scarce. This devil therefore consigns us to a peculiarly appropriate hell in which we drive increasingly elaborate (private) cars on increasingly inadequate (public roads) in search of ever more evanescent (public) parking places, and in which we picnic with ever more elegant (private) equipment on (public) site ever more befouled by both biological and economic excreta" (Boulding, 1959, 81). The solution in this case would be an appropriate mix of sales taxes and poverty policy. Further methodological development of Galbraith's thoughts can be examined through the lenses of Institutionalism, and of economics in general.

Galbraith as an Institutionalist

Galbraith was a modern institutionalist, who emphasized the importance of the open-system of production and consumption, evolution in technological progress and circular cumulative causation, social planning, and the normative aspects of science (Tsuru, 1993, 73). Galbraith's concept of countervailing power "goes beyond the closed-system character of neoclassical economics ... The concept of "dependence effect" is also an example of the open-system character of consumption where the consumers' sovereignty is circumscribed by the aggressive policies of suppliers" (Ibid., 1993, 78).

Galbraith self-selects himself as an institutionalist by his emphasis of the evolutionary character of technology. Technology is the driver of change. But modern changes require the lengthening of the time required for production. For example, the Model-T was produced in a much shorter time span than a modern car. As the time to complete a task increases more capital is to be committed to it, which in turn requires more skilled labor. As the production process becomes more specialized, its counterpart, the organizational structure must improve. Furthermore, all these operations need planning.

Planning is needed by the firm to harmonize the production process in the face of advanced technology, but also at the state level to redress any social imbalance. For Galbraith, "the productive society ... provides an opulent supply of some things and a niggardly yield of other ... the line which divides our area of wealth from our area of poverty is roughly that which divides privately produced and marketed goods and services from publicly rendered services" (Galbraith, 1958, 207). Again, "Failure to keep public services in minimal relation to private production and use of goods is a cause of social disorder or impairs economic performance" (Ibid., 1958, 213).

In his review of Veblen, Galbraith gave more credit to his theory of leisure class for its equating human behavior to that of the savages. He wrote that "The rich have often been attacked by the less rich because they have a superior social position that is based on assets and not on moral or intellectual worth ... These attacks the rich can endure. That is because the assailants conceded them their superior power and position; they only deny their rights to that position or to behave as they do therein ... Here is Veblen's supreme literary and polemical achievement. He concedes the rich and the well-to-do nothing ... Veblen calmly identified the manners and behavior of these so-called gentlemen with the manners and behavior of the people of the bush" (Galbraith, 1979, 136-137).

In a more modern work, Galbraith has further echoed the work of Veblen. He wrote about work that "Those who least need compensation for their effort, could best survive without it, are paid the most. The wages, or more precisely the salaries, bonuses and stock options, are the most munificent at the top, where work is a pleasure. This evokes no seriously adverse response. Not until recently did the inflated compensation and extensive perquisites of functional or nonfunctional executives lead to critical comment" (Galbraith, 2004, 18-19).

Galbraith does not find much science in Veblen's economics. He noted that "Raymond Aron argues that Veblen was better in his social than in his economic perception. With this I agree" (Galbraith, 1979, 144). He reflected on his reading of Veblen's The Theory of Business Enterprise when he was at Berkeley: "There is a conflict between the ordered rationality of the machine process as developed by the engineers and the technicians and the moneymaking context in which it operates ... The money makers ... sabotage the rich possibilities inherent in the machine process ... the idea has been a blind alley. Organization and management are greater tasks than Veblen implies; so is the problem of accommodating production to social need" (Galbraith, 1979, 144). Galbraith went on to spin-off these ideas in different directions. For instance, he wrote: "There is no name for all who participate in group decision-making or the organization which they form, I propose to call this organization the Technostructure" (Galbraith, 1967, 71).

Galbraith's General Economic Model

Galbraith's education is anchored to classical economic theory. Galbraith departed from the classics by painting some "alternative picture of the structure of modern economic society" (Galbraith, 1979, 3). He summarized his thoughts under two distorting factors. The first is the great inclination to think in static terms as in the physical sciences. This image is distorting because of "the very high rate of movement that has been occurring in the basic economic institutions." The second distorting factor is a "not valid" image of the modern industrial economy. That image includes such propositions as: the market dominates; firms are numerous; firms are competitive; firms submit to the will of the consumers; consumer's decision is sovereign; prices are profits determined by the market; diseconomies reflect "higher preference of people for the goods being produced as opposed to the protection of air, water or landscape," and that "an organic relationship between the business firm and the state does not exist" (Ibid., 4-7).

He modified the classics as he saw fit for The Good Society. The good society has both "utopian" and "achievable" worlds in it (Galbraith, 1996, 3). It is also characterized by "human" and "institutional" characteristics in the sense that "Human beings are human beings wherever they live", and "there is fixed instructional structure of the economy--the corporations and the other business enterprises, large and small, and the limits they impose." Within that view of society, people are committed to consumer goods "as the primary source of human satisfaction and enjoyment and as the most visible measure of social achievement. Among these achievable or accessible institutional attainments are personal liberty, basic well-being, racial and ethnic equality, and opportunities for a rewarding life (Ibid., 2-4).

Galbraith categorized traditional economics as having a unimodal image. He wrote that "The presently accepted image of this economy is of course, of numerous entrepreneurial firms distributed as between consumer- and producer-good industries, all subordinate to their market and thus, ultimately, to the instruction of the consumer. Being numerous, the firms are competitive; any tendency to overprice a product by one firm is corrected by the undercutting of a competitor... In one exception, the firm has influence over prices and output; that is the case of monopoly or oligopoly" (Galbraith, 1979, 5). He added that "The valid image of the economic system is not, in fact, of a single competitive and entrepreneurial system. It is a double of a bimodal system" (Ibid., 7). By bimodality he meant that concentrated large firms account for approximately half of the market activity, while the dispersed sector accounts for the other half.

As a test to his bimodal hypothesis, Galbraith pointed to the combination of severe unemployment with severe inflation. Fiscal and monetary policies will fail to stop the demand for goods and services from falling if inflation exists. Galbraith speculated that only an income and price policy can arrest unemployment, as it did in Germany, Austria, Switzerland, and Scandinavia where "implicit incomes policy ... considers the effect of wage concessions on both domestic inflation rates and external competitive position" (Ibid., 14).

For Galbraith, income and price policies rested on a cost-push inflation. As Simkin (1968, 1970) pointed out, the possibility "of using controls over wages, if these can be applied, obviously depends upon the extent to which prices are cost-determined and upon the extent to which wages are influenced by other factors than demand for labour." Galbraith has advanced such a possibility. The argument is that trade unions have power over wages and corporations have power over prices. While the old-fashioned wage-price spiral argument is no longer prevalent, unions and management can collectively bargain and pass price increases to the public. "Complaints over the cost of wage settlements now rarely come from employers. Almost invariably they come from the government, which is concerned over the inflationary effects, or from the public, which has to pay the higher price" (Galbraith, 1979, 12).

According to Galbraith, acceptance of the bimodal model creates more unequal developments. The corporate sector is able to convince the government and consumers of the need for their product. It achieves this goal by employing technical skills, advance organizations, and large amounts of capital. On the other hand, the competitive sector has less adequate means. This bimodality explains why products such as adequate housing, and health care are usually undersupplied in even developed countries. A correlate to this unequal development is inequality of opportunity and income. It is not easy for the unemployed to move into a unionized job, and movement in the competitive sector is associated with lower paying jobs. This process augments the unemployment that is associated with the inability of fiscal and monetary policy to control inflation.

Galbraith's socio-economic views appear as a research program. For over 70 years, he moved between "approved belief ... conventional wisdom ... and the reality." His research revealed that "reality is more obscured by social or habitual preference and personal or group pecuniary advantage in economics and politics than in any other subject." He continued: "economics and larger economic and political systems cultivate their own version of truth ... It is what serves, or is not adverse to influential economic, political and social interest ... Most progenitors ... are not deliberately in its service. They are unaware of how their views are shaped, how they are had" (Galbraith, 2004, ix); In this new reality, "Managers ... not the owners of capital, are the effective power in the modern enterprise ... the term 'capitalism' is in decline ...; Management having full authority in the modern great corporation, it was natural that it would extend its role to politics and government ... The blurring of the difference between the private and corporate sector and the diminishing public sector proceeds" ...; and "The institution and its leader are the ordained answer to both boom and inflation and recession" (Ibid., 3, 35-36, 43).

Galbraith's Propositions of Economics

We turn now to some propositions in Galbraith's works that form the premises of the bulk of his arguments.

Theorem I (Galbraith: Power): "... if choice by the public is the source of power, the organizations that comprise the economic system cannot have power" (Galbraith, 1973, 5). This proposition established the dichotomy between the "market system" and the "planning" system. "Power is the ability of an individual or a group to impose its purposes on others ... In the planning system, the economy of the large corporation, the power is possessed by the technostructure" (ibid., 99). "In the neoclassical mode the firm is ultimately subordinate to the market and thus to the consumer" (ibid., 1973, 105).

Galbraith argued that "the neoclassical system is not a description of reality" (Ibid., 1973, 28). Power resides with the control of the factors of production. Galbraith asked "why power is associated with some factors and not with others" (Galbraith, 1967, 47). An examination of history indicates that "power over the productive enterprise.., has shifted radically between the factors of production" (Ibid., 50-51). For centuries after the discovery of America, land was given a strategic power role. For instance, the physiocratic school held that land was the source of value. For Ricardo diminishing returns was a result of lack or arable land for cultivation at the margin, and Malthus' dismal prediction can be sourced to the lack of land to grow the needed food supply for the geometrically growing population. With the coming of inventions, the role of capital became elevated (Ibid., 54).

It is interesting to note that power did not pass to labor or to the classical entrepreneur as a factor of production. "Labor has won limited authority over its pay and working conditions but none over the enterprise" (Ibid., 58). The entrepreneur's "principal qualifications were imagination, capacity for decision and courage in risking money ... None of these qualifications are especially important for organizing intelligence or effective in competing with it" (Ibid., 68).

For Galbraith, theorem I is equivalent to an "either or proposition": either the market system where "consumer behavior, costs, the response of suppliers, the behavior of the state, are all beyond the reach of the individual firm" or a planning system where "firm seeks and wins power or influence over all of these things ..." "It is not to individuals but to organizations that power in the business enterprise and power in the society has passed" (Ibid., 60). With this passing of power to the organization, "There is, a priori, no reason to believe that it will maximize the return to capital. More plausible it will maximize its success as an organization" (Ibid., 121). That is not to say that an organization has no goals in regards to returns. "The first concern of the technostructure ... is to protect the minimum level of return which secures its autonomy and hence its survival (Ibid., 192). This security resides with stable prices, control of demand through the management of how income is spent. "The purpose of demand management is to insure that people buy what is produced" (Ibid., 203).

Several corollaries follow from Theorem I.

Corollary 1 to Theorem I: Organizations "... are merely instruments in the ultimate service of that choice" (Galbraith, 1993, 5). Galbraith thinks that "... if we know the goals of the society we will have guidance to the goals of the organizations that serve it and the individuals that comprise these organizations." He therefore, finds it "necessary to summarize and reaffirm a rule. The relationship between society at large and the organization must be consistent with the relation of the organization to the individual. There must be consistency in the goals of the society, the organization and the individual (Galbraith, 1967, 159).

Members of the technostructure have goals. The technostructure refers to all the participants "... in group decision-making or the organization which they form" (Ibid., 71). Their goals are reflected in the corporation. The goals of the corporation are in turn a reflection of the goals of society (Ibid., 161).

Corollary 2 to Theorem I: "... persuasion ... becomes the basic instrument for the exercise of power" (op.cit., 1973, 7). Corporations can assure themselves of a minimum return for survival if they manage the demand for their product. The kind of management required includes persuasive advertising and other sales effort. "Product design, model change, packaging and even performance reflect the need to provide what is called strong selling points (Galbraith, 1967, 203). As the goal of a firm is to expand sales, the technostructure must be aggressive in its sales promotion, advertising, and marketing efforts. In other words, "... if sales' are slipping, a new selling formula can be found that will correct the situation. By and large this assumption is justified, which is to say that means can almost always be found to keep exercise of consumer discretion within workable limits" (Ibid., 207). The development of advertising media--radio, television, magazines, newspaper, etc have enabled and facilitated "mass persuasion."

Corollary 3 to Theorem h (Galbraith: Countervailing Power) "... Power on one side of the market creates both the need for, and the prospect of reward to, the exercise of countervailing power from the other side" (Galbraith, 1956, 113). Big unions are said to countervail the power of big corporations. With the shift of power from capital to the technostructure, the power of unions has diminished the role of unions. "Labor relations, naturally enough, are conducted in accordance with the goals of the technostructure... This means that the technostructure may readily trade profits for protection against such an undirected event with such an unpredictable outcome as a strike" (Galbraith, 1967, 265). A negotiated wage increase does not come out of the pocket of the union negotiator. It need not come out of profits either, as "the mature firm does not maximize profits, its negotiated wage can come out of increased prices (Ibid., 265).

Corollary 4 to Theorem I: (Galbraith: Firms vs. State) "Technological compulsions, and not ideology or political wile, will require the firm to seek the help and protection of the state" (Galbraith, 1967, 20). The education and technology on which the technostructure depends is mostly provided by the public sector (Ibid., 296). The firm depends on the state in matters of patenting, regulation-wage-price control, and antitrust. "Thus the state, through the tariff, could accord the entrepreneur protection from foreign competition; it also had railroad, power or other public utility franchises to grant; it possessed land, mineral rights, forests and other natural resources for private exploitation; it could offer exemption or mitigation of taxes; and it could provide moral or armed support in managing refractory workers" (Ibid., 298).

By way of summary, "The mature corporation... depends on the state for trained manpower, the regulation of aggregate demand, for stability in wages and prices. All are essential to the planning with which it replaces the market. The state, through military and other technical procurement, underwrites the corporation's largest capital commitments in its area of most advanced technology. The mature corporation cannot buy political power. Yet, obviously, it would seem to require it" (Ibid., 308).

The consequences of Theorem 1 and its Corollaries have been controversial. The corporations along with government wield a lot of power, although not in its absolute form. As a step towards recognizing the reality of this power, Galbraith advocated a revision of standard Keynesian and neoclassical economics. His model shifts power of the production from land, labor, capital, and the entrepreneur to the technostructure of the modern corporation. Once such an amendment is in place, the incentive mechanism of the firm is adjusted from profit maximization toward sales maximization.

This leads to a further theorem. According to Harold Demsetz, "There does exist in Galbraith's work one concisely stated hypothesis . . . This hypothesis states that technostructure-oriented firms sacrifice profits in order to accelerate growth of sales" (Demsetz, 1974, 1). We now state these conditions as Theorem II and its corollary below:

Theorem II (Galbraith and Baumol): The objective of the technostructure is "... to achieve the greatest possible rate of corporate growth as measured in sales" (Galbraith, 1967, 17). This sales hypothesis was first advocated by William J. Baumol but Galbraith has brought it under the arms of his technostructure model.

Corollary 1 to Theory II: Management desires to "prevent the disruption of the firm's plan" (Demsetz, 1974, 3). As Demsetz explains, the control of prices and or output allow the technostructure to plan. The technostructure needs stable prices for its maintenance, and consumers should not refuse to buy at those stable prices. We see that "... intimately intertwined with the need to control prices is the need to control what is sold at that price" (Galbraith, 1967, 199). This second Theorem and its Corollary prompted a characterization of the technostructure firm as one that engages in "... capital intensive production methods, extensive use of advertising, oligopolistic industry structure, large firm size, and orientation toward military production" (Demsetz, 1974, 2-3). However, Demsetz is careful to add that "Galbraith never instructs his readers explicitly as to a method by which it can be ascertained which firms are most closely bound by the demand of modern technology" (Ibid., 2). Others have given mathematical and game theoretic characterization to this theorem.

Galbraith's Mathematical and Game Theory Model Justifications

Galbraith has not given us any mathematical model, but what he says about economics has led economists to formulate such models. On the mathematical side the model of "price maker" as opposed to "price taker" can be adopted to represent Galbraith's position as he is well-known for his price control position. We therefore examine this position before we present any model.

Galbraith on Price Fixing

Traditional classical economics advocates a "price takers" point of view where the market mechanism will determine prices. The question arises as to whether it is wise and possible to fix prices and wages, as is customary to fix taxes and interest. For Galbraith, "... when the number of buyers is relatively small, or the number of sellers relatively small, or both conditions obtain, the market as an abstract entity disappears" (Galbraith, 1954, 11). More bluntly put, "A market system in which wages and prices are set by the state is a market system no more. Only the blithely obtuse can reconcile 'this Free Enterprise System' with the enforcement of wage and price controls" (Galbraith, 1973, 339).

If prices are fixed, say below equilibrium, sellers will give preference to some buyers they favored, which in the ideal case, will eliminate excess supply. "When the government fixes prices, it delegates to sellers in imperfect markets the responsibility of rationing their customers which they, in turn, have the power to undertake" (Galbraith, 1954, 11). This method assumes that buyers are paired with sellers. It worked well in the primary metal markets during the Office of the Price Administration in the early 1940s, but not so well in the market for fresh vegetables prices (Ibid., 12).

Another challenge to price controls occurs when "it is technically possible for sellers in such imperfect markets to ration their customers at the fixed prices ... The more profitable course, the sanction aside, is to raise prices and break the law. Historically, the consequences of such violation--recalling always that it occurs under circumstances when sellers can charge and buyers will pay more--has been considerable more disastrous for the price-fixing authority than for those it sought to regulate." Price-fixing requires "effort to adapt regulation to existing practice rather than to force the adaptation of price to regulation" (Ibid., 13). It would require policing, which is easier in imperfect markets where the players are few.

In some cases, "it is relatively easy to fix prices that are already fixed" (Ibid., 15). Where market power exists, firms are known to fix prices, and may for any one of a number of reasons seek to minimize the frequency of price changes" (Ibid., 13). Such markets use discounts, special deals, and other non-price weapons in preference to price changes because buyers have become accustomed to them. Sellers, therefore, are required by such rule and not regulation to maintain stable prices. Galbraith observed that such stability of prices facilitates control.

Retailers tend to follow a customary method of pricing. "That many sellers neglect the opportunities for profit maximization in setting prices cannot be doubted. They follow the easy rule of charging what they have charged before or what someone else is charging. Pricing by custom, in this case, represents, no doubt, an atrophy of market motivation; the seller is opting for a habitual rather than a profitable pattern of behavior" (Ibid., 18). Such pricing is characterized in terms of markup, or rule-of-thumb pricing. Price controls in such markets are only a continuation of such rules.

Galbraith's price control is opposed to the classical and neoclassical model. "In the NEOCLASSICAL MODEL prices are primary; they are the intelligence network of the economic system. "It is through prices that the neoclassical monopoly or oligopoly exploits the power that goes with being one, or one of the few, sellers in the market" ...; "In the planning system, the role of prices is greatly diminished, they are much more effectively under the control of the firm" ...; "The control of prices by the firm in the planning system, like the other uses of its power, is governed by the protective and affirmative purposes of the technostructure" (Ibid., 1119-121).

A Mathematical Model of Gailbraith's Price Makers

Hotson, Lermer and Habibaghi (1976) presented a model for Galbraith that shades away the classical picture.

[??] = ([S.sub.A][P.sub.0])(C(x, r) - [P.sub.0])

x = I(X, r, T)+ G

L(X, r) = M / P + T

Where [??] is the rate of change of price with respect to exogenous variables G for government, M for money, and T for taxes. [P.sub.0] is initial equilibrium prices, SA is speed of adjustment, I is an aggregate demand function, C is marginal cost, L is for real balance, X is real output, and r is the nominal interest rate. In their price maker model, output reacts to excess demand, and prices react to cost-price differential. The complete model also has a real balance effect. The model predicts a correlation between firms and government behavior, and sales. "Price makers are seen as responding to increased government spending by running down inventory and increasing output at initially constant prices. If expanded sales raise their costs ... they subsequently raise their prices" (Ibid., 183). The authors are cognizant of the discretionary nature of prices in a planning situation, stating that "... firms may not raise prices when cost increases ... they may not lower prices merely because costs have fallen" (Ibid., 183).

A Game Theory Model of Countervailing Power

The game theory confirmation of Galbraith's hypothesis takes on a firm's behavior head on. A biographer of Galbraith wrote: "In the 1980 ... economists sought new ways of looking at theoretical issues ... They used game theory, for example, to suggest that claims like Galbraith's about 'countervailing power' might not be so implausible after all, by concentrating on situation of 'uncertainty' and 'interaction," in which traditional economics' rules for 'rational actors' were not clear. A new understanding of 'information' and its costs in economic transactions also seemed to support American Capitalism's insistence that orthodox notions of 'competition' were flawed" (Parker, 2005, 250).

Such a game theory model involves negotiations between an employer and a labor union. The model of perfect competition by Cournot can be of use. These models can be shown to have Nash Bargaining solutions. Broadly speaking in cooperative games with convex payoff regions, all the possible payoffs are contained in that region. Within that region some payoffs are better than others. One particular payoff point, the status quo point, is achieved without negotiations. It is the payoff that the players can assure themselves, their security level payoff, which represents the maximum a player can get regardless of what its opponent does. If preplay negotiations are allowed in the game, a player may threaten to play a particular strategy all the time. The payoff to this threat strategy may be worse than the payoff of the status quo point. The aim of negotiation, therefore, is to yield a better payoff than the status quo point, or the pay off associated with the threat strategy.

Take two players M and L who want to decide how to split C = $1,000 royalty from a joint book project they have done. The book publisher suggested 2/3 and 1/3 split, but that was rejected. Player M, being spiritual, prefers the parable of the vineyard solution, where each receives the 50:50 regardless of their effort. Player L will accept the parable outcome as well. Assume that the players utility functions are the same: U(M) = C; U(L) = C. Assume that if they fight, M wins with a probability of 0.8. The Treat point (TP) gives the expected utility of the players: E(M) = 0.8(1000) = 800, and E(L) = 0.2(1000) = 200. We note that a 50:50 split solutions, without recontract, gives each player $500, which is Pareto Optimal since one can gain more only at the expense of the other. In order to find the Nash Bargaining solution, we maximize the following equation, which yields $500 as the maximum after setting the first derivative to zero.

Max[(U(M) - TP(M))(U(L) - TP(L))] = Max[(C - 800)(C - 200)] Max([C.sup.2] - 200C - 800C + 160000) = Max([C.sup.2] - 1000C + 160,000)

In a recent article, Thomas von Ungem-Sternberg (1996, 508) revisited Galbraith's countervailing power hypothesis from the Nash Bargaining point of view. For the purpose of that test, countervailing power meant "... to compare the results of a large producer selling to a large number of small retailers with a situation where he is faced with a smaller number of large retailers ... the ability of these retailers to extract lower prices from their supplier was more important than any negative effect due to the increase in concentration at the distribution level."

The justification of such a hypothesis can be found in Galbraith's work. He wrote "One of the seemingly harmless simplifications of formal economic theory has been the assumption that producers of consumers' goods sell their products directly to consumers ... In fact goods pass to consumers by way of retailers and other intermediaries and this is a circumstance of first importance. Retailers are required by their situation to develop countervailing power on the consumer's behavior" (Galbraith, 1956, 117). The retailer can use a variety of strategies to exact a low price. Such strategies include developing "their own source of supply," concentrating their "entire patronage on a single supplier," and "keeping the seller in a state of uncertainty" (Ibid., 120-121).

Galbraith, however, does not rest the whole foundation of countervailing power on retailing. Countervailing power is most visible in the labor market. "The labor market serves admirable to illustrate the incentives to the development of countervailing power and it is of great importance in this market ...; Countervailing power also manifests itself, although less visible, in producers' goods markets. For many years the power of the automobile companies, as purchasers of steel, has sharply curbed the power of the steel mills as sellers." Galbraith points to the residential-building industry as an instance where countervailing power is absent because of the existence of many thousands of small individual small firms that build houses. Even if the little restraints which is of the form of alliances with each other, unions and politicians were removed, "the typical builder would still be a small and powerless figure buying his building materials in small quantities at high cost from suppliers with effective market power" (Ibid., 117-125).

The literature has examined the countervailing power hypothesis, as it should, from the retailing point of view where the hypothesis is more pervasive. Scherer and Ross (1990) presented the industrial organization side of the hypothesis through bilateral monopoly and oligopoly. Earlier, Joe Bain, anchored Galbraith's thought in the domain of "bilateral monopoly or bilateral oligopoly, which is then pasted on the whole industrial economy" (Bain, 1972, 220). This bilateral domain of economic theory is noted for its indeterminism of output and prices. Nevertheless, Scherer and Ross concluded that "countervailing power is most likely to benefit consumers when three conditions hold simultaneously: when upstream supply functions are highly elastic, when buyers can bring substantial power to bear on the pricing of monopolistic suppliers, and when those same buyers face substantial price competition in their end product markets" (Scherer and Ross, 528). Observing these conclusions, Thomas von Ungem-Sternberg (1996) introduced a game theory model to further improve the bilateral foundation of the countervailing power model. The following is a summary of his model.

We assume N Retailers, each buying from the producer at some input price [c.sub.n] and selling to the consumers the quantity xn. Profits for each will be [[pi].sub.n] = [x.sub.n]([p.sub.n] - [c.sub.n]). p, is the second stage price. If a retailer refuses to buy the input for price [c.sub.n], then his profits will be equal zero. We assume M Producers, with costs [c.sub.m], each selling to all N Retailers, with profits: [[pi].sup.N.sub.P] = N[x.sub.n]([c.sub.n] - [c.sub.m]). In the case of one producer facing all retailers, we can express the Nash Bargaining problem as follows:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

The terms in the first bracket are profits less treat point payoff to the retailer. Similarly, the terms in the second bracket represent profits less treat point payoff to the producer. Among other expressions, the results of the maximization yields a degree of bargaining power, [alpha] = [beta]/(1 - [beta]). The change in the N retailers relative to the producer is equal to the degree of bargaining power to the ratio of their respective derivative, i.e., [DELTA] [[pi].sub.N]/[DELTA][[pi].sub.P] = [alpha] [pi]'.sub.N]/[pi]'.sub.N]]. The assumption about the results is that "... if any one retailer does obtain a lower input price than his competitors, he obtains this lower input price only for the equilibrium quantity he would normally sell in the second stage, and not for any greater quantity" (Ibid., 512).

The interpretation of the results turned on the relationship between bargaining power and the number of retailers, [alpha] vs. N, assuming that the consumers have a linear demand: P = a - bx. The author concluded that "These theoretical models suggest that to find results in support of Galbraith's theory one must have good reasons to suppose that the retailer's bargaining power (as defined in the Nash bargaining solution) increases as their number decreases, i.e. their bargaining power increases more than proportionately with the losses they can inflict on the producer" (Ibid., 518).

Modal Elements in Galbraith's Work

Because much controversy surrounds Galbraith's ideas, we wish to explore his thoughts from a logical point of view. His works resonate modes of what is necessary and what is possible in the world of economics. The "necessary", and the "possible" are foundational terms in Modal Logic. Briefly, First Order Logic (FOL), which is a branch of logic that goes back to Aristotle, is concerned with individuals, which can be defined as people or nations (Holt et al., 1998,280). A second order logic is concerned with the properties of the individuals and Propositional Logic (PL) is concerned with sentences that are either true or false (Stebbing, 1961, 33). For our purpose, "it is sounder to view modal logic as the indispensable core of logic, to view truth-functional logic as one of its fragments, and to view 'other' logics--epistemic, deontic, temporal, and the like--as accretions either upon modal logic ... or upon its truth-functional components (Bradley and Swartz, 1979, 219).

Logic of Necessity and Possibility

Galbraith's thought on economic matters are modal in many senses. Economic expressions have many different moods. In normative economics, we make statements about policies that takes the mood that we "should" take a certain policy. In positive economics, we use the expression that something "is" the case. In instrumental economics, we use statements such as that we "ought to" increase or decrease the rate of interest. Modal Logic studies what implications those moods have for economic reality. The difference between ordinary propositional logic (PL), and the modal logic lies precisely with the concept of implications. Russell and Whitehead (1910) gave us the concept of material implication when they introduce implications in PL. That method relied on the true (T) and false (F) values of sub-sentences for validation. For instance, when we say of the two sub-sentences A, B, that A implies B, we can construct a truth table to show that the argument has validity. The elements of the table hold that 1. If A is true, then B is tree, 2. If A is false then B is false, and 3. If A is false then B is true.

The last inference that B is true when A is false implies a weak implication for the logicians Lewis and Langford (1932) who prefer to deal with "strict" implications of various degrees, which they labeled $1 to $5. By adding the concepts of necessary and possible, their system has laid the foundation of modern modal logic (ML).

Logicians have been busy evolving the methods of reasoning in ML. They use terms such as "necessary" or "possible" to avoid being self-contradictory in their expressions. All of Galbraith's works, for instance, are consistent in that they "describe a set of possible situations that are possible together. The story may or may not be true. The actual world is the story that's true--the description of how things in fact are" (Gensler, 2002, 145).

Corresponding to Kurt Godel's investigation of completeness theorem for PL, Kripke studies completeness theorem for ML. A simple meaning of completeness is that the axioms and rules of a system of logic do not allow one to infer or deduce a conclusion that both B and not B are valid. (For a discussion of Godel, see Szenberg et al., 2005). Here we describe Kripke's system for modal logic (ML) for our purpose of expounding Galbraith's methodology.

In Kripke's terminology, we have an actual world that belongs to the set of all the possible worlds that could have existed. He explained it thus: "Intuitively, we look at matters thus: K is the set of all 'possible worlds'; G is the 'real world'. If [H.sub.1] and [H.sub.2] are two worlds, [H.sub.1][RH.sub.2] means intuitively that [H.sub.2] is 'possible relate to" [H.sub.1] "i.e., that every proposition true in [H.sub.2] is possible in [H.sub.1]" (Kripke, 1963, 1971, 64).

The model structure (G, K, R) is a model that assigns T or F for the propositional variables for each world, H, in all the possible worlds, K. Essentially, we can now consider the true-values of the relationship.

When the facts are overwhelming, and can be applied in all states of affairs, the argument from necessity is obtained. When, however, the facts are only partial, and therefore apply to only some of our state of affairs, the argument is from possibility. In propositional logic, the operators [for all] and [there exists] are used respectively to indicate necessity and possibility. They may be used to say that an economic proposition is true for all, or true for some cases, respectively. In modal logic, the respective operators [euro] and [??] are added.

Both necessary and possible arguments occur in a sphere of influence. We therefore, first define what that sphere of influence or state of affairs, is for Galbraith. The logicians suggest alternative ways of doing this. We follow the simple way suggested by Lewis (1973, 6-7). A ball represents a set of worlds, [S.sub.i]. The ball itself contains worlds, "i" that can access the set of worlds in [S.sub.i].

What might Galbraith's "sphere of influence" be? One candidate is his definition of "The Good Society", [S.sub.i] (Galbraith, 1996). The good society has both "utopian" and "achievable" worlds in it (Ibid., 3). It is also characterized by "human" and "institutional" characteristics in the sense that "Human beings are human beings wherever they live", and "there is fixed instructional structure of the economy--the corporations and the other business enterprises, large and small, and the limits they impose" (Ibid., 2-3). Among the achievable or accessible human activities in his "sphere of influence" is the commitment to have consumer goods "as the primary source of human satisfaction and enjoyment and as the most visible measure of social achievement. Among the achievable or accessible intuitional attainments are personal liberty, basic well-being, racial and ethnic equality, and opportunities for a rewarding life (Ibid., 4). Necessity and possibilities limit the scope of the sphere of influence. We can make simple ML and PL statements about Galbraith as follows:

Major Premise: "Economics, like other social life, does not conform to a simple and coherent pattern" (Galbraith, 1970, 35). Where E is economics, and C is a coherent pattern, the ML and PL expressions for this premise are respectively:

E [euro] [right arrow] C or All x(E(x) [right arrow] ~ C(x))

"But one must have an explanation or interpretation of economic behavior ...; Within a considerable range he (the individual) is permitted to believe what he pleases. He may hold whatever view of this world he finds most agreeable or otherwise to his taste" (Ibid., 35). It is possible to accept conventional wisdom when it is convenient to do so, for "truth ultimately serves to create a consensus, so in the short run does acceptability," (Ibid., 34) and we largely "associate truth with convenience" (Ibid., 36). This leads to the notion that there exists a view, an opinion for all persons. If P is a person then P has a view. These possible expressions may take the following ML and PL forms respectively.

P[??] [right arrow]V or All x(P(x) [right arrow]+ V(x))

In the New Industrial State, Galbraith stated the necessity of planning this way: "From the time and capital that must be committed, the inflexibility of this commitment, the needs of large organization and the problems of market performance under conditions of advanced technology, comes the necessity for planning ... The need for planning, it has been said, arises from the long period of time that elapses during the production process, the high investment that is involved and the inflexible commitment of that investment in the particular task" (Galbraith, 1967, 16). The planning system that Galbraith advocates is of the nature of "collective intelligence" involving organizations. "ORGANIZATION is an arrangement for substituting the more specialized effort or knowledge of several or many individuals for that of one. For numerous economic tasks organization is both possible and necessary" (Galbraith, 1973, 87).

In these arguments, the necessity for planning comes out of technological process. Galbraith pinned this necessity of planning to the technological process because technology translates organized or scientific knowledge into practical outcome (Galbraith, 1967, 12). Investment requires the firms to tie up capital for a time during which the anticipated demand may fail to occur. During that time, the firm will have to anticipate that the inputs will be available in a way that cost is compatible with the expected price (Ibid., 24). Technology is both a cause and a consequence of change, which modern corporations are always undergoing (Ibid., 20), and following Schumpeter, technology is in the hands of big corporations.

In summing up the necessary and possible, let QcG represent the inclusion of the government sphere. G is government, and c is a member of all government activities. Similarly, let RdM represent the inclusion of the private market sector. M is the market, and d is a member of all private market activities. Galbraith's model can now be represented as:

QcG & RdM (1)

Equation 1 represents dummy variables, which we can use as operators to make decisions. One can expand the equation to represent countervailing power, by adding C for countervailing power by unions, and making e the inclusion operator. The equation 1 will then become:

QcG & RdM & SeC (2)

The necessity and possibility operators can now be called upon to validate statements. Large corporations necessitate large unions, implying countervailing power. Sharply deteriorating economic conditions, such as the Great Depression, or budget deficits, necessitate government intervention, implying control by economic agents.

Conclusion

Samuelson states that Galbraith belongs to that group of economists who believe in the "big picture theory" of the economy (Samuelson, 1972, V. 3, 275). In this generalist view of economics, power is essential. In the historic evolution of society, economics has witnessed the evolution of power of the factors of production from land to capital, and labor being left behind. Galbraith advanced the view that capital is no longer central to economics as the classical and neoclassical economists thought. The role of capital in the power structure is superseded by the technostructure. This model stands along the classical, neoclassical, and Keynesian models as a viable alternative explanation of the capitalist economic system.

Although Galbraith does not use the mathematical language, his model is adaptable to mathematics. In our exposition we have given samplers of such exposition in terms of theorems, price maker theory, game theory, and modal logic.

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by Lall Ramrattan, University of California, Berkeley Extension, lallram@netscape.net

Michael Szenberg, Corresponding author, mszenberg@pace.edu