Wednesday, May 10, 2006

Great economist passed away

The great keynesian economist John Kenneth Galbraith passed away recently. He was economic advisor to John F. Kennedy. But his economic ideas were no longer in vogue. Today it is generally presumed among Western economists that the "consumer is king". That is: There are free markets, free competition, and the interplay of demand ans supply determine prices. By shifting demand from one item of consumption to another, the consumer decides what is produced. The information about production and the quantities produced is passed automatically through the market, via demand and supply. By allowing the maximum freedom of market forces, it is believed in the neoclassical, Hayek-inspired school of economics, the maximum welfare of a population will be secured.

Galbraith knew how far from reality this rosy "analysis" was, even at his time:

"The giant corporation had become an increasingly obtrusive feature of the business landscape. Its importance was assumed everywhere except in the economics textbooks. And even the more casual scholars had difficulty in disguising from themselves the fact that markets for steel, automobiles, rubber products, chemicals, aluminum...electrical gear and appliances, farm machinery, most processed foods, soap, tobacco, intoxicants and other basic products were not shared by many producers, each without power over its prices, but by a handful of producers with a great deal of such power ... Between the competition of the many and the monopoly of the single firm there was now inserted the oligopoly of the few. And, although at first reluctantly, oligopoly came to be recognized as a normal form of market organization," he said in "Economics and the Public Purpose" from 1973.

Today, monopolisation of large market sectors has progressed even more. The profits of giant banks, shipping companies and oil companies show the extent to which Galbraith was right in his analysis of the capitalist economic system.

"It should be noted that exponents of the neoclassical system, while they have long deplored the monopolistic and hence pathological tendencies of oligopoly in principle, have never done much about them in practice. There was cancer, but one did not operate." ("Economics and the Public Purpose", 1973)

"The rise of the great corporation" extended far beyond the question of price fixing and demand-side management through advertising, to an extensive "influence [over] the attitudes of the community and the actions of the state ... They are not confined by the market. They transcend the market, use the market as an instrument and are the chariot to which society, if not chained, is at least attached."

Who exert power in this oligopolistic/monopolistic "market" system? According to Galbraith it is the so-called "Technostructure". It is not primarily the owners, for instance the shareholders, as it was in the market based capitalism in the 19th century. The technostructure consists of managers and technical experts at the top levels of management. They run the corporations on a day-to-day basis. That gives them power. This layer also knows how to be rewarded. The average central executive officer (CEO, i.e. top manager) of a Standard & Poor's 500 company made $11.75 million in total compensation in 2005” (

According to neoclassical lyrics this is only a "just" compensation for their contribution to output. High level management skills are in short supply. Therefore it is necessary with a commensurate remuneration. This is pure bullshit. The reason why the compensation of the top layers of management is so high is pure power. It may be damaging to the companies the managers run that they have to pay so much to the fat cats in management. It is a management style that is spreading from the US to the rest of the Western economies. The Danish business paper Borsen reports today that the top manager of the Danish multinational ISS (International Service Systems) received more than 13 mio. $ in his total pay packet (pay, incentive pay, stock options) last year. The whole top management of this company got more than 26 mio. $ for one year of work. These managers are the same people who preach wage restraint to ordinary wage earners and employees. If this bottom layer of the corporations receive pay increases it will affect competitiveness of the company and other companies negatively, it is argued.

Galbraith understood how this was a question of power - not a question of the just revenue of the "marginal product of the production factor", as argued in neoclassical theory. When wages of top management continue exploding it's because the power of this segment of society continues increasing. It's a question of class analysis, if one wants to understand it, not of anonymous market forces.


Blogger Sophia said...

My interpretation of Hayek is that he believed in the autoorganization of socciety. he envisioned minimum governmental intervention because of that and because of - his theory was a theory of knowledge before being an economical theory - the fact that no one man or few men can actually encompass the totality of knowledge of the market, knowledge being distributed among all individuals and it is from their free interactions that the bext output could be achieved. Even though I am no fan of Hayek I think his thinking was perverted. Do you see the actual market as a free market left for individual inetractions ? No, they stripped public institutions from their power in the name of ultraliberalism but they didn't leave the market to ordinary inddividuals, they left for few men and women paid heavily by corporations. It is a takeover of power from the government to corporations, no hayekian philsosophy is at work here, hayek is just an honorable intellectual polish (badlu used and applied) to savage economic practices.

By the way, I am proud to tell you that JK Galbraith is canadian but he studied and worked in the states and became a US citizen.

5:23 PM  

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