JOHN
KENNETH GALBRAITH
Former
American ambassador to India as well as national chairman
of Americans for Democratic Action, Galbraith has served
as Warburg Professor of Economics at Harvard since 1949.
His autobiography is A Life for our Times.
A full expression of this topic will be in his new book
The Economics of Innocent Fraud, to be published
later this year.
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.
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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.”
