I'm glad someone recommended that I read F. C. Hayek's Road to Serfdom, because
this book, as it turns out, is in large part a response to that work, as well
as an exploration of what one is to do when a society reaches a state where
production outstrips the need for people to be constantly producing--that is,
where there is a surplus of necessary goods.
Galbraith notes that he has some skepticism about the worship of free market
instead of socialism proffered in books like Hayek's. Those truisms, he says,
are not a given. Planned economies can do great things too, like launch
Sputnik. Furthermore the challenge of modern society is not poverty as was the
case throughout human history for most people. Why do some stay poor amid abundance
for most in the moder world? How do we resolve? These are the questions
Galbraith sets out to explore. It’s not just about the free market—free market
simply offer you a difference in terms of who you serve: the blind free market instead
of a government bureaucrat.
Conventional wisdom is what most speak; it is based on what we are
comfortable with based on experience, but it is not based in current events.
Sometimes situations have changed and conventional wisdom is outdated and
wrong. Revolutions in thought occur at some point and become new wisdom. Examples:
The liberal policies of the American revolution broke the national planning of
colonizers. The welfare state broke the free market. Keynesianism broke the balanced
budget. Are we on the cusp of another revolution? (Or at least, were we in the
1950s to the 1970s, when Galbraith was writing this?)
A main problem with the free market is a lack of equality; another is the
lack of security in the business cycle. The hard working person is just as
likely to fail by luck as succeed.
Galbraith then provides a short history of American economic thought, with
special emphasis on a non-American with the strongest influence during the
gilded age: Herbert Spencer and social Darwinism, out of which our special
faith in the free markets perhaps derives and continues. With Spencer, the rich
are the fit, the poor are the weak and are slated to drop off. It's no big deal
if the weak drop off; in fact, it is poor form to help them because you’re
allowing the less fit to survive.
The counter to Spencer is Marx who is just as much a pessimist and optimist
but in other ways. Society will always produce too much, which drives down
wages of the poor and kills jobs. When produce runs out and the poor go back to
work, wages rise, which brings about higher production costs, which kills jobs
and thus kills the continued productivity. And so on. The cycle repeats itself,
getting worse and worse until revolution results. Even if disagreeing with Marx,
he has had a great influence on economic theory.
There are three basic economic problems: productivity, inequality, and
insecurity. These were what economists dwelt on till twentieth century and what
Galbraith spends the rest of the book analyzing.
Galbraith notes that there’s been a loss of interest in inequality since
about 1950. Why is that so, even though it is still exists? Because of
increases in productivity. In rich societies, everyone is getting a bigger
amount, even if their shares aren’t equal. In poor societies landowners took
all the surplus or growth; in addition, in the 1970s showing off wealth became
gauche, so rich became less known. (That certainly doesn't seem the case in the
1980s or 2000s, but maybe it was a bit the case in the 1990s.) Likewise the rich
are less powerful than they once were, as they are rarely any longer both
entrepreneurs and owners (again, this seems less true now in our tech
billionaire age); rather, faceless stockholders own the wealth. (Galbraith
provides numbers for the share of wealth owned by the few at the time; they are
small compared with today, even though they were egregious even then.)
As for security, that has been resolved for commoners by social programs
like unemployment and social security. For the rich, corporations have
diversified and grown huge such that they can sustain losses in one area to
gain in another and are too big to fail. Poor communities have little heavy
desire for security, as they are simply struggling to stay alive, but as
society grows affluent, the desire for insurance and the like is a result of
what might be lost. The idea that security might make us less productive is a
false one, as productivity has increased more with unemployment insurance and
social security than without. (Galbraith fails to take into account many economies
where people are less inclined to work, if they can't find the job they want, when
unemployment is generous.)
Productivity is the obsession of the modern economist. Yet we define it
narrowly. We take public service as being unproductive while producing private
goods is productive. Actually, though, unemployment and government work helps
stabilize the economy by providing production in downturns and thus keeping the
private sector busier than it would otherwise be.
Satisfaction is never gained by an increase of goods. So there is no end to
production. Yet it is rare goods, not easily obtained goods, that people want.
This seems contradictory. Simply producing doesn’t mean you’ll sell the product
produced. You have to have demand. That demand for product is based on seeing
what others have and on advertising. Compare something you truly need versus
something wanted. You know when you are hungry without someone telling you. The
fact that someone has to inform you of a product through ads or comparison
shows you don’t have to have it—it’s not a true need.
Production has become the system through which the economy grows. This came
out of the depression when the solution was to get people back to work through
producing stuff via government input. But the government never stopped pushing
production and so we have way more stuff now than we used to.
Production is not that important really except insofar as it is necessary
for security, that is, to keep people employed. Most people would choose to
have low productivity and consistent jobs than high productivity and fewer jobs
(this is Schumaker's argument too, in Small Is Beautiful). Contributing to this
concern is the amount of debt people take on, which outpaces increased wages.
It’s trouble waiting to happen.
How do we bring inflation under control to keep prices stable? When we raise
prices, inevitably labor prices must rise. That means prices rise. It’s a loop.
The key is more production so that prices need not rise to account for higher
labor costs.
We attempt to spur or confine production through available cash—that is, by
monetary policy or fiscal policy. Neither is fully effective and both affect
sectors of society differently. Adjusting interest rates (monetary policy) has
little effect except on smaller businesses, which are less able to invest in
the future when rates are high. Big businesses have enough market share to
inflate prices and consumers will generally just take out longer loans to deal
with higher interest. Fiscal policy (adjusting tax rates) tends to interfere
with stable employment, which then contradicts the goal of stabilizing prices.
It seems there’s little solution. Galbraith seems to argue for price controls
to a small degree here, even though he says that we’re historically averse to
them. (Price controls lead to shortages, however, so I am not sure they are a
real solution.)
Galbraith next turns to what he calls balance—social and investment. Social
balance involves the public versus private economy. Our tendency is to see the
public economy as a drain on the private, but the two go hand in hand, with the
public usually lagging. If the private economy builds more cars, the public
economy will require more roads for example or more traffic cops. We should not
see the public economy as a drain on productivity; it enables continued
productivity. Also of note in this regard is inflation, which Galbraith says
eats into public expenditures as taxes do not rise as quickly (this seems a
dubious claim to me) and taxes themselves (or rather the manner in which taxes
address inequality, as the public sector tends to provide more for the poor but
require more of the rich, which the haves do not like).
Investment balance has to do with how society tends to invest most in that
which produces most and makes the most, which in turn becomes self fulfilling.
A successful industry will develop faster than a more mundane one, leading to
an imbalance in sectors. But what Galbraith really focuses on is education.
Education enables industries to advance, as modern innovation rarely derives
from uneducated people. But education is typically a public expenditure and
thus not seen as directly productive. One could put education fully in the
private sphere, but that would actually decrease freedom. This is a major point
of contention with Hayek’s claim that the private sector ensures freedom rather
than the public. If private industry funded all education, then people would
have little choice in profession; industry would determine what can be studied
and by whom.
This gets us to the crux of Galbraith’s argument, which is that in an
affluent society, production should no longer be the main or only goal. After
all, much production is unnecessary other than to encourage consumption:
without ads few would know they lack a certain leisure good. Do we really want
to force people to move or whatever to enable production of things we don’t
actually have to have? But how, without such production, are we to have
jobs—that is, the means to make money to live off?
The real concern in the economy is not production but employment and the
income that comes with it. To break the dependence on production, Galbraith
suggests unemployment compensation be closer to real wages. He claims this will
lower production but not affect people's willingness to work. (I would suggest,
based on European economies and the old communist regimes, that he is wrong.
People tend to become pickier about jobs or not work to advance their positions
if forced into jobs they dislike.) Or since some cannot work, a minimum living
allowance (as some have recently proposed and experimented with), a likely
better solution. To control inflation he suggests price and wage controls but
only on corporations and unions, which control larger sections of the economy.
This seems dubious also but possibly useful, insofar as indeed a large market
share of a given thing does give one more ability to set prices and wages
compared with a small employer or laborer.
Inadequate social balance between expenditures on private versus public
items is best addressed by taxes, says Galbraith, but not those less flexible
with inflation like property tax. Rather income tax is preferred, but most of
that at this point is taken up by military expenditures. So to compensate we
should have more sales tax. The poor are more affected by it; however, if that
tax is used primarily for the public and especially the poor then taking away
from consumption in the private sector to allow more consumption in public
sector makes sense. We could use that tax for schools and the like, eventually
leading to greater production anyway. Such taxes are also key to helping
address poverty, because there is not more production but instead a better use
of resources. (I’m not sure I buy this argument, as consumption taxes tend to
be regressive; so one would essentially be taking money from the poor and
handing it back to them in the form of government services—in other words, the
government thus would be telling the poor how to spend, as it would do the
spending for them.)
Galbraith closes with a discussion of how greater productivity has led to
fewer hours and more leisure time, but a better way to address better
productivity is also to make work more pleasant. As such there’s a new class,
not a leisure class, but a new class: a group of workers who labor not
primarily for money but for love of the work they do. Education is key to
allowing this and should be the goal to bring most people into this class.
In a world where production is ample and there is no need to spend all our
days just scrounging to survive, new ways of measuring economic value are
needed that don’t simply count what has been produced, ways that actually
somehow take into account our humanity. On this basic point, I guess, I would
agree with Galbraith, but many of his policy solutions seem dubious. No matter, he offers much to think about in a mostly lucid way.