In the New Industrial State, Galbraith argued that large corporations would try to manage the demand for their products. He claimed that large corporations, who have a range of financial commitments, would try to alleviate the uncertainties they face by managing prices, and directly manipulating consumer response. He named this manipulation: The management of specific demand.
A central concept of the book is the revised sequence. The conventional idea in economy is that it is a set of competitive markets which are ultimately governed by the decisions of their customers. This is called the Accepted Sequence. The Revised Sequence is the opposite, where businesses exercise control over their customers through advertising.
The revised sequence only applies to the industrial system, made up of about 1,000 of the largest corporations –it does not apply to the market system that is also mentioned in Galbraiths book, which is made up of the vast majority of business organizations, for which price competition remains the dominant form of social control for them.
Galbraith opens with an explanation on how technology has advanced and machines have replaced man power. Quote “The high production and income from technology removes a large part of the population from the pressures of physical want, which makes economic behaviour more malleable.” For example, a hungry, sober man will not be persuaded to spend his last dollar on food, but a well-fed, well-off man can be persuaded with an electric razor or toothbrush. Along with prices and costs, consumer demand becomes subject to management.
“Modern technology defines a growing function of the modern state. The imperatives of technology and organization, not the images of ideology, are what determines the shape of economic society.”
“What counts is not the quantity of our goods but of the quality of life.”
The most important consequence of technology, in terms of economics, is in forcing the division and subdivision of any task into its component parts. This has 6 consequences:
1. The beginning to the completion of a task is separated by an increasing span of time
2. There is an increase in the capital that is committed to production. The increased time, and therefore increased investments in goods, costs money.
3. With increasing technology the commitment of time and money tends to be made inflexible to the performance of a particular task. If a task is changed, new knowledge and equipment is needed.
4. Technology requires specialized manpower.
5. The counterpart of specialization is organisation
6. From the time and capital that is required, 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.
Galbraith predicted in 1966, that a man could land on the moon within the next 5 years.
The subject moves from technology to planning, and the importance of planning. The need for planning comes 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 to the particular task.
Galbraith claimed that planned supply should equal planned use, otherwise there will be surpluses or deficits.
One answer to the problems is to have the state absorb the major risks. It can provide or guarantee a market for the product, can underwrite the costs of development, or can pay for or make available the necessary technical knowledge.
The State is an important factor when looking at economy. The services of Federal, state and local governments now account for between a fifth and a quarter of all economic activity, whereas in 1929 it was only about 8%.
Since the “Keynesian Revolution”, the state undertakes to regulate the total income available for the purchase of goods and services in the economy. It tries to ensure sufficient purchasing power to buy whatever the current labour force can produce. It also seeks to keep wages from forcing up prices, and prices from forcing up wages in a persistent upward spiral.
The state uses its power over taxation and expenditure to provide the balance between savings and their use that the industrial system cannot provide for itself.
Galbraith also writes about how the individual serves the industrial system through savings and capital and by consuming its products. He believes a family’s standard of living becomes an indicator of their achievement.
Galbraith believes that “the men responsible for economic policy must contemplate estimates of intended industrial investment to see whether these, along with probably government deficit, will absorb net savings.” Failure to do so results in recession or depression.
In the classic economic tradition of Adam Smith, Ricardo, Malthus, J.S Mill and Marshall, the business enterprise was assumed to be small in relation to the market supplied. The price it received was competitively determined by the market and so was the priced paid to suppliers. Wages were also set by the market, and the interest on borrowed funds. Profits reduced themselves to a competitive level, and technology was assumed to be stable. However, in the current economy production is dominated by those who supply and control capital. Prices and wages are set in their collective interest. They dominate society and set its moral tone. They also control the state which becomes an executive committee serving the will and the interest of the capitalist class.
The topic then moves on to power. In the New World, as well as in the Old, it was assumed that power belonged to men who owned land. Democracy, in its modern meaning, began as a system which gave the suffrage to those who had proved their worth by acquiring property.
America, South Africa and Australia were later found to have large, unused and useable amounts of land. New land could be obtained easier, and so the need became for capital to pay for seed, livestock and equipment to tide a man over until the first harvest. So power over the enterprise passed to the capital.
Power goes to the factor which is hardest to obtain or hardest to replace. The requirements of technology and planning have increased the need of the industrial enterprise for specialized talent. Unlike capital, it is not something that the firm can supply to itself. The possession of capital is no guarantee that the required talent can be obtained. This led to a new shift in power from capital, to organized intelligence and has since passed to men of diverse technical knowledge, experience, or other talent which modern industrial technology require.
Galbraith goes on to talk about the Technostructure, which is “the group of technicians within an enterprise or an administrative body with considerable influence and control on its economy. It usually refers to managerial capitalism where the managers and other company leading administrators, scientists, or lawyers retain more power and influence than the shareholders in the decisional and directional process”
I found the chapter on the motivation system very interesting. In Galbraith’s motivation system, There are 4 types of motivation: compulsion, pecuniary compensation, identification and adaption.
Compulsion: Failure to accept the goals of the group may result in punishment.
Pecuniary Compensation: Acceptance of the goal may bring a reward.
Identification: An individual, after joining a group, may feel their goals are superior to his.
Adaptation: An individual may serve an organization because he hopes to make its goals similar to his.
Some motivations clash and neutralize each other, others combine passively, and some reinforce each other. Compulsion and Pecuniary compensation associate with each other to some degree, because a man who is compelled to accept the goals of the group for fear of punishment, may receive reward for his acceptance. However, compulsion is inconsistent with identification nor adaptation. If a man is compelled to accept the goals of the group for fear of punishment, he is unlikely to find them superior to his own, nor feel that they are similar to his own.
The chapter I am going to analyse is Chapter 22: The control of the wage-price spiral. The chapter begins by explaining that the state regulates aggregate demand by providing a volume of purchasing power sufficient to employ the available labour force. A low level of unemployment shows the success of the economy. There is little need for individuals with low educational qualifications, unless aggregate demand is very high. In this case, when demand is reasonably high, prices and wages in the industrial system are unstable. When the demand is high enough that unemployable people are recruited, wages and prices begin to force each other up in a continuing spiral.
When unemployment is low, union members can face a strike knowing that they cannot be easily replaced. This relates back to what I said earlier, about irreplaceable people holding some degree of power. These individuals also know that strike action will inflict a loss on business for the employer. In this situation, the employer would increase wages, knowing that the strong demand that the extra cost of wages can be passed along to the consumer or buyer. Higher wages seem to be a way of holding or recruiting manpower. Due to collective bargaining, most firms will be affected by the wage increase at the same time, leading to them all increasing prices at the same time.
Price increases become cost increases for customers, which then raise living costs, and sparks off wage demands. The obvious remedy for this is for the wage-price spiral to be controlled by public authority, rather than by the technostructure, who set their prices not to maximise profits, but to contribute to their own security and growth of the company.
A restraint on prices and wages is in fact, beneficial for the industrial system, as uncontrolled price and cost increases are less dangerous to the security of the technostructure than uncontrolled price reductions, resulting from price competition or a severe dip in aggregate demand. When there is strong demand, it is easy to increase wages and cover the extra cost by increasing prices, however when demand is low; it is not easy to reduce wages or other costs.
There is a serious danger however, that wage and price restraints will be expected to accomplish more than they are capable of doing. In a sense, they do not prevent inflation, but keep the wage and price spiral from producing inflationary increases on prices when demand is at a sufficient level to provide almost full employment. However, if it is too high, price increases outside the industrial system, competition to fill vacancies, delivery payments and the unions wanting a share in high profits will act to break down the restraints. The remedy is higher taxes and reduced government spending to cut down on demand.
Regardless of the difficulties and failures, a system of price restraint is inevitable in the industrial system, as neither inflation nor unemployment are suitable alternatives. The necessity for control once again reverts back to industrial planning, as mentioned several times previously in the book. This planning replaces prices established by the market with prices established by the firm. The firm has sufficient power to set and maintain minimum prices, and exercise control over what is purchased at these prices.
With minimum prices established by the firms, demand that is managed by them for specific products, demand managed in the aggregate by the state and maximum levels established by the state for wages and prices, the planning structure of the industrial system is complete. If the state is to manage demand, then the public sector of the economy must be fairly large. This means that the state is an important customer, and is especially needed in developing advanced technology which would otherwise be beyond the capability of industrial planning. Therefore, the industrial system is ultimately dependant on the state.
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