A Senior Moment

Today, in my econ course ("6 Great Economists") in Geezer College (aka Senior University), the teacher introduced the class to John Kenneth Galbraith. Everything was moving right along through affluence and countervailing power until the teacher announced that Galbraith was an unreconstructed socialist. There was an audible gasp from most who were present. A real, live socialist? If this is (fair & balanced) incredulity, so be it.

The Conservative Onslaught
by John Kenneth Galbraith

This article is abridged from Speak Out Against the New Right edited by Herbert F. Vetter (Boston: Beacon Press, 1982).

In economic and social affairs we value controversy and take it for granted; it is the essence of politics, its principal attraction as a modern spectator sport. This regularly keeps us from seeing how substantial, on occasion, can be the agreement on a broad range of ideas and policies within which the political debate proceeds.

Such has been the case with economic and social policy in the industrial countries since World War II. There has been a broad consensus in the United States extending to most Republicans and most Democrats. Similarly as between Christian Democrats and Social Democrats in Germany and Austria, the Labor and Tory parties in Britain, Liberals and Progressive Conservatives in Canada. Policies in France, Italy, Switzerland, and Scandinavia have generally conformed. The rhetoric in all countries has been diverse. The practical action has been similar.

There have been three points of convergence. All governments in all of the industrial countries, although differing in individual emphasis, have agreed that:

• There must be macroeconomic management of the economy to minimize unemployment and inflation. This, at least in the English-speaking countries, was the legacy of Keynes.

• There must be action by governments to provide those services which by their nature are not available from the private sector or on which, like moderate-cost housing, health care, and urban transportation, the private economy defaults.

• There must be measures—unemployment insurance, welfare payments, old-age pensions, medical insurance, environmental protection, job safety and product safety regulation—to protect the individual from circumstances with which he or she cannot, as an individual, contend. Much of this last has been thought of as smoothing and softening the harsh edges of capitalism.

No accepted term exists for the consensus which these policies comprise. Keynesian policy refers too narrowly to macroeconomic action; liberal or social democratic policy has too strong a political connotation for what has been embraced in practice by Dwight D. Eisenhower and Gerald Ford, Charles de Gaulle, Edward Heath, and Konrad Adenauer. I will not try to devise a new term; instead I will refer to the broad macroeconomic, public-service, and social welfare commitment as the economic and social consensus or just the consensus. It is the present attack on this consensus—notably by Mrs. Thatcher's government in Britain and by numerous of Ronald Reagan's supporters in the United States—that I wish to examine.

The ideas supporting the economic and social consensus have never been without challenge. Keynesian macroeconomic management of the economy, the first pillar of the consensus, was powerfully conservative in intent. It sought only to correct the most self-destructive feature of capitalism, the one Marx thought decisive: its tendency to recurrent and progressively more severe crisis or depression. It left the role of the market, current income distribution, and property rights unchallenged. But numerous conservatives, especially in the United States, long equated Keynesian economics with subversion. There was some conservative discomfort when, thirty years after Keynes's General Theory was published and the policy it prescribed was tending visibly to obsolescence, Richard Nixon, in an aberrant moment, was led to say that all Americans, including Republicans, were Keynesians now. A reference to the social welfare policies of the consensus has always encountered a slightly disapproving mood: something expensive or debilitating was being done for George Bernard Shaw's undeserving poor. The need to compensate for the failures of capitalism in providing lower-cost housing, lower-income health care, and mass transportation has been accepted in all countries; but in the United States at least not many have wanted to admit that this is an unavoidable form of socialism. In all countries at all times there has been much mention of the cost of government, the level of taxes, the constraints of business regulation, and the effect of these on economic incentives.

It has always been likely, one should note, that an attack on the economic and social consensus would be taken to reflect the views of a larger section of the population than was actually the case. That is because articulate expression on public issues is strongly correlated with income, and the consensus is of the greatest importance for those of lowest income.

There is, indeed, substance to the conservative attack on the economic and social consensus. It strikes at genuine points of vulnerability. This, however, is not true of all of the attack; some of it is merely a rejection of reality—or compassion. The conservative onslaught we now witness needs careful dissection and differentiation.

Three different lines of attack can be identified, and the relevant nomenclature readily suggests itself. There is the simplistic, the romantic, and the real attack. These terms, needless to say, are intended to be purely descriptive; they have no pejorative connotation.

The simplistic attack consists in a generalized assault on all the civilian services of modern government. Education, urban services, and other conventional functions of government; government help to the unemployed, unemployable, or otherwise economically incapable; public housing and health care; and the regulatory functions of government are all in the line of fire. People, in a now famous phrase, must be left free to choose.

In its more elementary form this attack on the consensus holds that the services of government are the peculiar malignity of those who perform them; they are a burden foisted on the unwilling taxpayer by bureaucrats—public servants. The most eloquent American spokesman for this view is William Simon, once a prominent Cabinet prospect under Mr. Reagan. "Bureaucrats," Mr. Simon has said, "should be assumed to be noxious, authoritarian parasites on society, with a tendency to augment their own size and power and to cultivate a parasitical clientele in all classes of society." There must, he urges, "be conscious, philosophical prejudice against any intervention by the state into our lives." If public services are a foisted malignancy—if they are unrelated to need or function—it follows that they can be reduced more or less without limit and without significant social cost or suffering. This is implicit, even explicit, in this case.

Yet another attack on the public services comes from Professor Milton Friedman and his disciples. It holds that these services are relentlessly in conflict with liberty. The market accords to the individual the sovereignty of choice; the state, as it enlarges its services, curtails or impairs that choice. And its tendency is cumulative and apocalyptic. By its acceptance of a large service and protective role for the state, democracy commits itself to an irreversible descent into totalitarianism and communism. Professor Friedman is firm about the prospect. "If we continue our present trend," he has said, "and our free society is replaced by a collectivist society, the intellectuals who have done so much to drive us down this path will not be the ones who run the society; the prison, the insane asylum, or the graveyard would be their fate.” “Or," he has asked, "shall we have the wisdom and the courage to change our course, to learn from experience, and to benefit from a Rebirth of freedom?’”

I have called this attack on the social consensus simplistic; it could, by the untactful, be called purely rhetorical. That is because it depends almost wholly on passionate assertion and emotional response. No one, after reflection, can easily conclude that publicly rendered services are less urgently a part of the living standard than privately purchased ones—that clean water is less needed than clean houses, that good schools for the young are less important than good television sets. Public transportation is most important for the least affluent. So are public hospitals, public libraries, and public housing. So are the services of the police and other municipal services. Unemployment and welfare benefits are important for those who have no other income.

The romantic attack on the social consensus, to which I now turn, has superficially a more powerful intellectual base. It calls on the two-hundred-year-old tradition of classical and neoclassical economics which holds that all possible economic decision should be left to the freely competitive market. No other system is socially so efficient or responds more genuinely to the will of the consumer. None rewards more reliably the competent response or punishes more reliably the incompetent one. The social consensus has impaired the operation of the market in two ways: first, by enlarging the public sector, it has diminished, pro tanto, the market sector of the economy; second, by accepting and encouraging a large and varied range of regulation, it has interfered with the free operation of markets. So for this reason too government must be reduced in scale. And, more specifically, it must remove the regulatory shackles from private enterprise and restore the market. In the recent campaign this demand was strident. It is an appeal that can be counted upon to arouse the interest of numerous, otherwise quite placed economists. Here is the opportunity to protect or retrieve the textbook market to which the intellectual capital of much of the profession is still firmly mortgaged.

I have called this attack on the consensus romantic; that is because it ignores the historical forces which make practical steps to restore the market deeply unappetizing. And it makes them especially unappetizing to the very people who urge reestablishing the primacy of the market.

Specifically, the greatest historical force against the market is the modern great corporations. Of these, a couple of thousand now produce around 60 percent of all private product in the United States. This is not exceptional; the concentration is similar in the other industrial countries. These corporations have substantial discretion in setting their prices. They extensively influence the taste of consumers. They similarly organize their supplies of raw materials. With all of this they erode the power of the market. And, given the scale of their investment and the long-term horizons involved, this is what corporations must do. Planning in a partially controlled setting is essential for modern corporate operations. Such planning the classical market does not allow.

But a crusade against corporations does not attract the free-market philosophers. One does not turn the guns on one's own cavalry. So it must be pretended that the modern corporation does not exist. Or with equal implausibility it must be urged that General Motors, Shell, IBM, Philips, and Nestle are only a slightly enlarged manifestation of the classical atomism of the market. Mobil is just the corner grocer grown up. This latter effort, regularly undertaken by corporate spokesmen, serves principally to cultivate the suspicion that the large corporation somehow lacks legitimacy. Something must be fishy when corporate spokesmen (or compliant economics professors) are forced to argue that Exxon and the friendly neighborhood news vendor are the same economic institution—that each is governed by the same inexorable competitive forces; each is subordinate to the same impersonally determined market prices; neither has a significant political role in the state.

A few of the devout who seek the revival of the market do call for vigorous action to restore competition—for action to arrest and reverse the trend to industrial concentration. But that again is to turn the guns on one's own troops. It also requires action by the government—an alliance with the enemy. And even for the passionate, the antitrust laws, which are the traditional instrument, are a serious strain on faith. We have had them now for ninety years; how much longer do we have to wait before they become effective against industrial concentration?

The market, none should doubt, continues to render highly useful service. In economics there are no absolutes. But the only possible policy toward the market, either for conservatives or liberals, right or left, is one of open-minded pragmatism. Where it works, the market should be allowed to work. Where it doesn't, regulation has to be accepted.

I come now to the attack on the economic and social consensus which I called real. It holds that expenditure on public welfare services has involved no careful judgment on need or cost; more has been believed to be better. And that the quality of public administration has been seriously deficient. And finally and most importantly, it holds that the macroeconomic management of the consensus no longer works. On all three points the attack seems to me justified; on all three the economic and social consensus is vulnerable.

On public welfare and social expenditure—for housing, health care, various forms of direct welfare support, education, and public services in general—active exponents of the consensus have indeed taken the position that the more the better. The basic test has been what conservatives could be made to accept.

The second vulnerable point of the economic and social consensus concerns the quality of public management. When they are judged by the same standards, public bureaucracy is not obviously inferior either in moral tone or even in efficiency to private bureaucracy. Incompetence and failure in the leadership of private corporations are commonplace. So is dishonesty. Chrysler has for many years had a reputation in automobile circles for cloning inadequacy. This is now conceded; its advertising speaks of the "new" Chrysler Corporation.

What will be needed by defenders of the consensus is not relaxation but a vigorous effort to bring it abreast of the changes that rendered it vulnerable. This means, as noted, better tests of what is sufficient and affordable in public services and public welfare. It means all possible steps to ensure better public management. But it requires, most of all, acceptance of the logic of modern corporate, union, and other organized power and its effect on price-making and inflation.

Corporations now have an admirable tendency to invest when they foresee a profit; tax reduction does not turn a prospective loss into a profit. It is the pride of the modern corporate executive that he gives his all to his enterprise; it is insulting to him to suggest that he grades his effort to his after-tax income. And he would be fired were he thought to do so. Taxes on unearned income and inheritance are good for the work ethic; over time they return the rich and their offspring to useful toil. It is one of the oddities of our time that we think the work ethic to be particularly ethical for those in the lower income brackets. A well-considered use of leisure by the affluent is a mark of civilized behavior.

But we must also have direct action to hold wages and salaries to what can be afforded at current prices. And likewise, and as firmly, there must be action, enforced as necessary by law, to restrain industrial prices where market power is great. No market principles are violated when the state moves to fix those prices that, as the product of industrial concentration, are already fixed. And other income that is subject to organized enhancement must similarly be subject to restraint. This is not as great a task as is sometimes imagined. The centralization of market power by corporations, unions, and farm organizations that causes inflation in its modern form greatly reduces the number of firms and organizations that must be controlled. It is not the classical market that is being replaced. That has obviously gone forever and that is the problem.

Thus the task. The consensus must, of course, be defended at its positions of present strength. But here there will be great support from circumstance. The real task is to repair, renew, and redesign it at its points of present failure.

In a conversation in which Henry Kreisler asked the political economist how he would most like to be remembered, he replied: “I suppose that I would, in economics, most like to be remembered—and most plausibly will be remembered—for bringing emphasis to an economic structure in which the characteristic organization is the great corporation rather than the competitive enterprise and of seeing economic life as a bipolar phenomenon, by which I mean, seeing it as a structure, on the one hand, of a few hundred great corporations, and seeing it, on the other hand, as the residual structure of agriculture, small business, the services. And arguing that the controlling economic behavior in the two parts is by no means the same. It has to be examined seprately. I would hope that there might be some minor effect from that."

John Kenneth Galbraith was a U.S. ambassador to India as well as national chairman of Americans for Democratic Action, Galbraith is an Emeritus Professor of Economics at Harvard University. His autobiography is A Life for our Times. A full expression of this topic can be found in The Economics of Innocent Fraud (2004).

Copyright © 2004 Herbert F. Vetter