Chapter 12—The Economics of Violent
Intervention in the Market (continued)
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Chapter
12—The Economics of Violent Intervention in the Market
(continued)
10.
Growth, Affluence, and Government
A.
The Problem of Growth
In recent years economists and journalists alike have been heavily
emphasizing a new concept—“growth,” and
much economic writing is engaged in a “numbers
game” on what percentage, or “rate of
growth,” “we” should have next year or in
the next decade. The discussion is replete with comparisons of the
higher rate of country X which “we” must hurriedly
counter, etc. Amidst all the interest in growth, there are many grave
problems which have hardly been touched upon. First and
foremost is the simple query: “What is so good about
growth?” The economists, discoursing scientifically
about growth, have illegitimately smuggled an ethical judgment into
their science—an ethical judgment that remains
unanalyzed, as if it were self-evident. But why should growth be the
highest value for which we can strive? What is the ethical
justification? There is no doubt about the fact that growth, taken over
as another dubious metaphor from biology, “sounds”
good to most people, but this hardly constitutes an adequate
ethical analysis. Many things are considered as good, but on the free
market every man must choose between different quantities of them and
the price for those forgone. Similarly, growth, as we shall presently
see, must be balanced and weighed against competing values. Given due
consideration, growth would be considered by few people as the only
absolute value. If it were, why stop at 5 percent or 8 percent growth
per year? Why not 50 percent?
It is completely illegitimate for the economist qua
economist simply to endorse growth. What he can do is to contrast what
growth means in various social conditions. In a free market, for
example, every person chooses how much future growth he wants as
compared to present consumption.
“Growth,” i.e., a rise in future living standards,
can be achieved, as we have implicitly made clear throughout this
volume, only in a few definable ways. Either more and better resources
can be found, or more and better people can be born, or technology
improved, or the capital goods structure must be lengthened and capital
multiplied. In practice, since resources need capital to find and
develop them, since technological improvement can be applied to
production only via capital investment, since entrepreneurial skills
act only through investments, and since an increased labor supply is
relatively independent of short-run economic considerations
and can backfire in Malthusian fashion by lowering per capita output,
the only viable way to growth is through increased
saving and investment. On the free market, each individual decides how
much he wants to save—to increase his future living standards
—as against how much he wants to consume in the present. The
net resultant of all these voluntary individual decisions is the
nation’s or world’s rate of capital
investment. The total is a reflection of the voluntary, free
decisions of every consumer, of every person. The economist, therefore,
has no business endorsing “growth” as an end; if he
does so, he is injecting an unscientific, arbitrary value
judgment, especially if he does not present an ethical theory in
justification. He should simply say that, in a free market, everyone
gets as much “growth” as he chooses to obtain; and
that, furthermore, the people as a whole benefit greatly from the
voluntary savings of others who do the saving and investing.
What happens if the government decides, either by subsidies or by
direct government ownership, to try to spur the social rate of growth?
Then, the economist should point out, the entire situation
changes. No longer does each person elect to “grow”
as he thinks best. Now, with compulsory saving and investing,
investment can come only at the expense of
the forced saving of some individuals. In short, if
A, B, and C “grow” because their standard of living
rises from compulsory investment, they do so at the expense of D, E,
and F, the ones who were compelled to save. No longer can we say that
the social standard of living, the standard of living of each active
person, rises; under compulsory growth, some people—the
coerced savers—clearly and demonstrably lose.
They “grow” backward. Here is
one reason why government intervention can never
raise society’s rate of “growth.” For
when individuals act freely on the market, every one of their
actions benefits everyone, and so growth is truly
“social,” i.e., participated in by
everyone in the society. But when government acts to force growth, it
is only some who grow at the expense of the retrogression
of others. The Wertfrei economist is therefore not
permitted to say that “society” grows at all.
Growth, therefore, is demonstrably not the single absolute value for
anyone. People on the market all weigh growth against
present consumption, just as they weigh work against leisure,
and all goods against one another. If we fully realize that there is no
such existent entity as “society” apart from
individuals, it becomes clear that
“society” cannot grow at the expense of
imposing losses on some or most of its members. Suppose, for
example, that a community exists where the bulk of the
population do not want to
“grow”; they would rather not work very hard or
save very much; instead they would loll under the trees, pick berries,
and play games. To advocate the government’s coming on the
scene and forcing these people to work and save, in order to
“grow” at some time in the future, means to
advocate the compulsory lowering of the standard of living of the bulk
of the populace in the present and near future. Any sort of achieved
production, under this scheme, however great, would not be
“growth” for society; instead it would be
retrogression, not only for some but for most people. An economist,
therefore, cannot scientifically advocate
compulsory growth, for what he is really doing is attempting to impose
his own ethical views (e.g., more hard work and saving is better than
more leisure and berries) on the other members of
society by force. These members greatly lose utility as a result.
Furthermore, it must be emphasized again that in cases of coerced
saving the saver reaps none of the benefit of his
sacrifice, which is instead reaped by government officials or other
beneficiaries. This contrasts to the free market, where people
save and invest precisely because they will reap
some tangible and desired rewards.
In a regime of coerced growth, then, “society”
cannot grow, and conditions are totally different from those of the
free market. Indeed, what we have is a form of the
“free rider” argument against the free
market and for government; here the various “free
riders” band together to force other
people to be thrifty so that the former can benefit.
Even if we set these problems aside, it is doubtful how much the
coercing free riders can benefit from these measures. Many
considerations treated above now come into play. In the first place,
the growth and success of the compulsory free riders
discourage production and shift more and more people and
energy from production to the exploitation of production, i.e., to
compulsory free riding. Secondly, we have seen that if
government itself does the “investing” out of the
confiscated savings of others, the result, for many reasons, is not
genuine investment, but waste assets. The capital
built out of coerced savings, then, instead of benefiting the
consumers, is largely wasted and dissipated. Even if government uses
the money to subsidize various private investments, the
results are still grave; for these investments, being uneconomic in
relation to genuine consumers’ demand and profit-and-loss
signals on the market, will constitute malinvestment.
Once the government removed its subsidies and let all capital compete
equally in serving consumers, it is doubtful how much of this
investment would survive.
Although we have no intention of dealing here to any extent with an
empirical problem like Soviet economic growth, we may illustrate our
analysis by noting the hullabaloo that has been raised in recent years
over the supposedly enormous rate of Soviet growth. Curiously, one
finds that the “growth” seems to be taking
place almost exclusively in capital goods, such as iron and steel,
hydroelectric dams, etc., whereas little or none of this growth ever
seems to filter down to the standard of living of the average Soviet
consumer. The consumer’s standard of living, however, is the
be-all and end-all of the entire production process. Production
makes no sense whatever except as a means to consumption.
Investment in capital goods means nothing except as a necessary
way station to increased consumption. When capital investment
takes place in the free market, it deprives no one of
consumption goods; for those save who voluntarily choose
investment over some present consumption. No one is required to
sacrifice present consumption who does not wish to do so. As a
result, the standard of living of everyone rises continually and
smoothly as investment increases. But a Soviet or other system of
compulsory investment lowers the standard of living
of almost everyone, certainly in the near future. And there is
every indication that the “pie-in-the-sky” day when
living standards finally rise almost never arrives. In short,
government “investment,” as we have noted above,
turns out to be a peculiar form of wasteful
“consumption” by government officials.
There is another consideration that reinforces our conclusion.
Professor Lachmann has been diligently reminding us of what economists
generally forget: that “capital” is not just a
homogeneous blob that can be added to or subtracted from.
Capital is an intricate, delicate, interweaving structure
of capital goods. All of the delicate strands of this structure have to
fit, and fit precisely, or else malinvestment occurs. The free market
is almost an automatic mechanism for such fitting; and we have
seen throughout this volume how the free market, with its price
system and profit-and-loss criteria, adjusts the output and
variety of the different strands of production, preventing any one from
getting long out of alignment.
But under socialism or
with massive government investment, there is no such mechanism
for fitting and harmonizing. Deprived of a free price system
and profit and-loss criteria, the government can only blunder along,
blindly “investing” without being able to invest
properly in the right fields, the right products, or the right places.
A beautiful subway will be built, but no wheels will be
available for the trains; a giant dam, but no copper for transmission
lines, etc. These sudden surpluses and shortages, so
characteristic of government planning, are the result of
massive malinvestment by the government.
The current controversy over growth, is, in a sense, the result of a
critical error made by “right-wing” economists in
their continuing debate with their
“left-wing” opponents. Instead of
emphasizing freedom and free choice as their highest political
end, the rightist economists have stressed the importance of freedom as
a utilitarian means of encouraging saving, investment, and
therefore, economic growth. We have seen above that
conservative opponents of the progressive income tax have
often fallen into the trap of treating saving and investment as somehow
a greater and higher good than consumption, and therefore of
implicitly criticizing the free market’s
saving/consumption ratio. Here we have another example of the same
lapse into an implicit, arbitrary criticism of the market.
What the modern “leftist” proponents of
compulsory growth have done is to use the venerable arguments of the
conservatives as a boomerang against them, and to say, in effect, to
their opponents: “Very well. You have been maintaining that
saving and investment are of critical importance because they lead to
growth and economic progress. Fine; but, as you yourselves implicitly
grant, the free market’s proportion of saving and investment
is really too slow. Why then rely upon it? Why not speed up growth by
using government to coerce even more saving and investment, to speed up
capital further?” It is evident that conservatives
cannot counter by reiterating their familiar arguments. The
proper comment here is the analysis we have been
expounding—in short: (a) By what right do
you maintain that people should grow faster than
they voluntarily wish to grow? (b)
Compulsory growth will not benefit the whole of society as will freely
chosen growth, and it is therefore not “social
growth”; some will gain—and gain at some distant
date—at the expense of the retrogression of others. (c)
Government investment or subsidized investment is either
malinvestment or not investment at all, but simply waste assets or
“consumption” of waste for the prestige of
government officials.
What, in point of fact, is economic
“growth”? Any proper definition must
surely encompass an increase of economic means available for the
satisfaction of people’s ends—in short, increased
satisfactions of people’s wants, or as P.T. Bauer has put it,
“an increase in the range of effective alternatives open to
people.” On such a definition, it is clear that compulsory
saving, with its imposed losses and restrictions on people’s
effective choices, cannot spur economic growth; and also that
government “investment,” with its neglect
of voluntary private consumption as its goal, can hardly be said to add
to people’s alternatives. Quite the contrary.
Finally, the very term “growth” is an illegitimate
import of a metaphor from biology into human action.
“Growth”
and “rate of growth” connote some sort of automatic
necessity or inevitability and have for many people a
value-loaded connotation of something self-evidently desirable.
Concomitantly with the hubbub about growth there has developed
an enormous literature about the “economics of
underdeveloped countries.” We can here note only a
few considerations. First, contrary to a widespread impression,
“neoclassical” economics applies just as
fully to underdeveloped as to any other countries. In fact, as P.T.
Bauer has often stressed, the economic discipline is in some ways
sharper in less developed countries because of the extra
option that many people have of reverting from a monetary to a barter
economy. An underdeveloped country can grow only in the same
ways as a more advanced country: largely via capital investment. The
economic laws which we have adumbrated throughout this volume are
independent of the specific content of any
community’s or nation’s economy, and
therefore independent of its level of development. Secondly,
underdeveloped countries are especially prone to the wasteful,
dramatic, prestigious government “investment” in
such projects as steel mills or dams, as contrasted with economic, but
undramatic, private investment in improved agricultural tools.
Thirdly, the term
“underdeveloped” is definitely value-loaded to
imply that certain countries are “too little”
developed below some sort of imposed standard. As Wiggins and Schoeck
point out, “undeveloped” would be a more objective
term.
Because of its spectacular burst of popularity, something must here be
said of the recent “stages of economic growth”
doctrine of Professor Rostow. Highly recommended as “the
answer to Marx” (as if Marx had never been
“answered” before), Rostow divines five stages of
economic growth through which each modern nation passes; these
center around the “take-off” and include
“preconditions” of take-off, drive from take-off to
“maturity,” and, as the final stage,
“high mass-consumption.”
In addition to committing
the common fallacy of assuming some sort of automatic rate of
“growth,” Rostow adds many others of his own, among
which are the following: (a) the resumption of the
futile modern search for nonexistent “laws of
history”; (b) the discovery of such
“laws” by way of that hoary fallacy of late
nineteenth-century German thought, “stages of
history,” with each arbitrary stage somehow destined to
evolve automatically into the next; (c) the undue
stress—here, as in other ways, closer to Marx than most
critics realize—on sheer technology as
the fons et origo of economic development;
(d) the deliberate mixing of government and private
firms as equally capable of “entrepreneurship”; and
(e) reliance on the fallacious concept of
“social overhead capital,” which must be mainly
supplied by the government before
“take-off” is achieved. Actually, as we
have seen, there are not different stages of economy, each subject to
its own laws, but one single economics which applies to any level of
development and explains any degree of
“growth.” Rostow’s final stage of
“high mass consumption” is particularly open to
question. What was more characteristic of the early,
“take-off” stage of the Industrial
Revolution in Britain than precisely the shift of production
toward mass consumption of cheap, factory-made textile goods? Mass
consumption was a feature of the Industrial Revolution from
the beginning; it is not, contrary to a popular myth, some sort of new
condition of the 1950’s.
B.
Professor Galbraith and the Sin of Affluence
In the early part of the twentieth century, the main
indictment of the capitalist system by its intellectual
critics was the alleged pervasiveness of
“monopoly.” In the 1930’s, mass
unemployment and poverty (“one third of a
nation”) came to the fore. At the present time growing
abundance and prosperity have greatly dimmed the poverty and
unemployment theme, and the only serious “monopoly”
seems to be that of labor unionism. Let it not be thought, however,
that criticism of capitalism has died. Two seemingly contradictory
charges are now rife: (a) that capitalism is not
“growing” fast enough, and (b)
that the trouble with capitalism is that it makes us too
“affluent.” Excess wealth has suddenly replaced
poverty as the tragic flaw of capitalism.
At first sight, these
latter charges appear contradictory, for capitalism is at one
and the same time accused of producing too many goods, and yet of not
increasing its production of goods fast enough. The contradiction seems
especially glaring when the same critic presses both lines of attack,
as is true of the leading critic of the sin of affluence, Professor
Galbraith.
But, as the Wall
Street Journal has aptly pointed out, this is not
really a contradiction at all; for the excessive affluence is all in
the “private sector,” the goods enjoyed by the
consumers; the deficiency, or
“starvation,” is in the “public
sector,” which needs further growth.
Although The Affluent Society is replete
with fallacies, backed by dogmatic assertions and time-honored
rhetorical devices in place of reasoned argument,
the book warrants some
consideration here in view of its enormous popularity.
As in the case of most “economists” who attack
economic science, Professor Galbraith is an historicist, who
believes that economic theory, instead of being grounded on the eternal
facts of human nature, is somehow relative to different historical
epochs. “Conventional” economic theory, he asserts,
was true for the eras before the present, which were times of
“poverty”; now, however, we have vaulted
from a centuries-long state of poverty into an age of
“affluence,” and for such an age, a completely new
economic theory is needed. Galbraith also makes the
philosophical error of believing that ideas are essentially
“refuted by events”; on the contrary, in human
action, as contrasted with the natural sciences, ideas can be refuted
only by other ideas; events themselves are
complex resultants which need to be interpreted by correct ideas.
One of Galbraith’s gravest flaws is the arbitrariness of the
categories, which pervade his work, of
“poverty” and “affluence.”
Nowhere does he define what he means by these terms, and
therefore nowhere does he lay down standards by which we can
know, even in theory, when we have passed the magic borderland
between “poverty” and
“affluence” that requires an entirely new economic
theory to come into being. The present book and most other economic
works make it evident that economic science is not
dependent on some arbitrary level of wealth; the basic
praxeological laws are true of all men at all times, and the
catallactic laws of the exchange economy are true whenever and wherever
exchanges are made.
Galbraith makes much of his supposed discovery, suppressed by other
economists, that the marginal utility of goods declines as
one’s income increases and that therefore a man’s
final $1,000 is not worth nearly as much to him as his
first—the margin of subsistence. But this knowledge is
familiar to most economists, and this book, for example, has included
it. The marginal utility of goods certainly declines as our income
rises; but the very fact that people continue to work for the final
$1,000 and work for more money when the opportunity is available,
demonstrates conclusively that the marginal utility of goods
is still greater than the marginal disutility of leisure forgone.
Galbraith’s hidden fallacy is a quantitative
assumption: from the mere fact that the marginal utility of goods falls
as one’s income and wealth rise, Galbraith has somehow
concluded that it has already fallen to virtually,
or really, zero. The fact of decline, however, tells us
nothing whatever about the degree of this decline,
which Galbraith arbitrarily assumes has been almost total. All
economists, even the most “conventional,” know that
as incomes have risen in the modern world, workers have chosen to take
more and more of that income in the form of leisure. And this should be
proof enough that economists have long been familiar with the
supposedly suppressed truth that the marginal utility of goods
in general tends to decline as their supply increases. But, Galbraith
retorts, economists admit that leisure is a consumers’ good,
but not that other goods decline in value as their
supply increases. Yet this is surely an erroneous contention; what
economists know is that, as civilization expands the supply of goods,
the marginal utility of goods declines and the
marginal utility of leisure forgone (the opportunity cost of
labor) increases, so that more and more real income will be
“taken” in the form of leisure. There is nothing at
all startling, subversive, or revolutionary about this familiar fact.
According to Galbraith, economists willfully ignore the spectre of the
satiation of wants. Yet they do so quite properly, because when
wants—or rather, wants for exchangeable goods—are
truly satiated, we shall all know it soon enough; for, at that point,
everyone will cease working, will cease trying to transform land
resources into final consumers’ goods. There will be no need
to continue producing, because all needs for consumers’ goods
will have been supplied—or at least all those which can be
produced and exchanged. At this point, everyone will stop work, the
market economy—indeed, all economy—will
come to an end, means will no longer be scarce in relation to ends, and
everyone will bask in paradise. I think it self-evident that this time
has not yet arrived and shows no signs of arriving; if it some day
should arrive, it will be greeted by economists, as by most other
people, not with curses, but with rejoicing. Despite their venerable
reputation as practitioners of a “dismal
science,” economists have no vested interests, psychological
or otherwise, in scarcity.
But, in the meanwhile, this is still a world of scarcity; scarce means
have to be applied to alternate ends; labor is still
necessary. People still work for their final $1,000 of income
and would be happy to accept another $1,000 should it be offered. We
would venture another prediction: An informal poll taken among the
people, asking whether they would accept, or know what to do with, an
extra few thousand dollars of annual (real) income, would find almost
no one who would refuse the offer because of excessive affluence or
satiety—or for any other reason. Few would be at a loss about
what to do with their increased wealth. Professor Galbraith,
of course, has an answer to all this. These wants, he says, are not
real or genuine ones; they have been “created” in
the populace by advertisers, and their wicked clients, the
producing businessmen. The very fact of production, through
such advertising, “creates” the supposed wants that
it supplies.
Galbraith’s entire theory of excess affluence rests on this
flimsy assertion that consumer wants are artificially created by
business itself. It is an allegation backed only by repetitious
assertion and by no evidence whatever—except perhaps for
Galbraith’s obvious personal dislike for detergents and
tailfins. What is more, the attack on wicked advertising as
creating wants and degrading the consumer is surely the most
conventional of the conventional wisdom in the
anticapitalist’s arsenal.
There are many fallacies in Galbraith’s conventional attack
on advertising. In the first place, it is not true that advertising
“creates” wants or demands on the part of
the consumers. It certainly tries to persuade consumers to buy the
product; but it cannot create wants or demands,
because each person must himself adopt the ideas
and values on which he acts—whether these ideas or values are
sound or unsound. Galbraith here assumes a naive form of
determinism—of advertising upon the consumers, and, like all
determinists, he leaves an implicit escape clause from the
determination for people like himself, who are, unaccountably, not
determined by advertising. If there is determinism by
advertising, how can some people be determined to rush out and
buy the product, while Professor Galbraith is free to resist the
advertisements with indignation and to write a book denouncing the
advertising?
Secondly, Galbraith gives us no standard to decide which wants are so
“created” and which are legitimate. By his stress
on poverty, one might think that all wants above the
subsistence level are false wants created by advertising. Of course, he
supplies no evidence for this view. But, as we shall see further below,
this is hardly consistent with his views on public or governmentally
induced wants.
Thirdly, Galbraith fails to distinguish between fulfilling a given want
in a better way and inducing new wants. Unless we are to take the
extreme and unsupported view that all wants above
the subsistence line are “created,” we must note
the rather odd behavior attributed to businessmen by
Galbraith’s assumptions. Why should
businessmen go to the expense, bother, and uncertainty of
trying to create new wants, when they could far
more easily look for better or cheaper ways of fulfilling wants that
consumers already have? If consumers, for
example, already have a discernible and discoverable want for a
“no-rub cleanser,” it is surely easier and less
costly to produce and then advertise a no-rub cleanser than it
would be to create some completely new want—say for blue
cleansers in particular—and then work very hard and spend a
great deal of money on advertising campaigns to try to convince people
that they need blue cleansers because blue
“is the color of the sky” or for some other
artificial reason.
In short, the Galbraithian
view of the business and marketing system makes little or no sense.
Rather than go to the expensive, uncertain, and, at bottom, needless,
task of trying to find a new want for consumers, business will tend to
satisfy those wants that consumers already have, or that they are
pretty sure consumers would have if the product were available.
Advertising is then used as a means of (a) conveying
information to the consumers that the product is now available and
telling them what the product will do; and (b)
specifically, trying to convince the consumers that this
product will satisfy their given
want—e.g., will be a no-rub cleanser.
Indeed, our view is the only one that makes sense of the
increasingly large quantities of money spent by business on
marketing research. Why bother investigating in detail what
consumers really want, if all one need do is to create
the wants for them by advertising? If, in fact, production really
created its own demand through advertising, as Galbraith maintains,
business would never again have to worry about losses or bankruptcy or
a failure to sell automatically any good that it may arbitrarily choose
to produce. Certainly there would be no need for marketing
research or for any wondering about what consumers will buy. This image
of the world is precisely the reverse of what is occurring. Indeed,
precisely because people’s standards of living are moving
ever farther past the subsistence line, businessmen are worrying ever
more intensely about what consumers want and what they will buy. It is
because the range of goods available to the consumers is expanding so
much beyond simple staples needed for subsistence, in quantity,
quality, and breadth of product substitutes, that businessmen
must compete as never before in paying court to the consumer,
in trying to obtain his attention: in short, in advertising. Increasing
advertising is a function of the increasingly effective range of
competition for the consumer’s favor.
Not only will businessmen tend to produce for and satisfy what they
believe are the given wants of consumers, but the consumers,
in contrast to voters, as we have seen above, have a direct
market test for every piece of advertising that they confront. If they
buy the cleanser and find that much rubbing is still required,
the product will soon fade into oblivion. Thus, any
advertising claims for market products can
be and are quickly and readily tested by the consumers. Confronted with
these facts, Galbraith could only maintain that the aversion
against rubbing was itself generated, in some
mysterious and sinister fashion, by business advertising.
Advertising is one of the areas in which Galbraith, curiously and in
glaring self-contradiction, treats private business
differently from governmental activities. Thus, while business
is supposed to be “creating” consumer
wants through advertising, thereby generating an artificial affluence,
at the same time the neglected “public sector” is
increasingly starved and poverty-stricken. Apparently,
Galbraith has never heard of, or refuses to acknowledge the existence
of, governmental propaganda. He makes no mention
whatever of the hordes of press agents, publicists, and
propagandists working for government agencies, bombarding the
taxpayers with propaganda which the latter have been forced
to support. Since a considerable part of the propaganda is for
ever-greater increases in the particular government
bureau’s activities, this means that G, the
government officials, expropriate T, the bulk of the
taxpayers, in order to hire more propagandists for G, to persuade the
taxpayers to permit still more funds to be taken from them. And so
forth. It is strange that, while waxing indignant over detergent and
automobile commercials over television, Professor Galbraith
has never had to endure the tedium of “public service
commercials” beamed at him from the government. We may pass
over the Washington conferences for influential private
organizations that serve as “transmission
belts” for government propaganda to the grassroots, the
“inside briefings” that perform the same function,
the vast quantities of printed matter subsidized by the
taxpayer and issued by the government, etc.
Indeed, not only does Galbraith not consider
government propaganda as artificially want-creating (and this
is a realm, let us remember, where consumers have no market
test of the product), but one of his major proposals is for a
vast program of what he calls “investment in men,”
which turns out to be large-scale governmental
“education” to uplift the wants and tastes of the
citizenry. In short, Galbraith wants society’s
objective to be the deliberate expansion of the “New
Class” (roughly, intellectuals, who are blithely assumed to
be the only ones who really enjoy their work), “with its
emphasis on education and its ultimate effect on intellectual,
literary, cultural and artistic demands. . . .”
It seems evident that, while the free market and business are accused
of artificially creating consumer wants, the shoe is precisely
on Galbraith’s own foot. It is Galbraith
who is eager to curtail and suppress the consumers’ freely
chosen wants, and who is advocating a massive and coercive attempt by
the government to create artificial wants, to “invest in
men” by “educating” them to redirect
their wants into those refined and artistic channels of which Professor
Galbraith is so fond. Everyone will have to give up his tailfins so
that all may be compelled to . . . read books (like The
Affluent Society, for example?).
There are other grave and fundamental fallacies in
Galbraith’s approach to government. In particular, after
making much ado over the fact that, with poverty conquered, the
marginal utility of further goods is lower, he finds that everything
somehow works in reverse for “governmental needs.”
Governmental needs, in some mystical way, are exempt from this law of
diminishing marginal wants; instead, mirabile dictu,
governmental needs increase in urgency as society
becomes more affluent. From this flagrant and unresolved contradiction,
Galbraith leaps to the conclusion that government must compel the
massive shifting of resources from superfluous private, to starved
public, needs. But on the basis of diminishing marginal utility alone,
there is no case for such a shift, since all wants
at a higher real income are of lower utility than the wants of the
poverty-stricken. And when we realize that if we talk about
“created” wants at all, governmental propaganda is
vastly more likely to “create” wants than is
business, a case, even in Galbraith’s own terms, can
be made for just the reverse: for a shift from the governmental to the
private sector. And, finally, Galbraith, in his lament for the
starved and underprivileged public sector, somehow neglects to inform
his readers that, whatever statistics are used, it is clear that, in
the past half-century, government activity has increased far more than
private. Government is absorbing and confiscating a far greater share
of the national product than in earlier days. How much lower its
“utility,” and how much greater the case, in
Galbraith’s terms, for a shift from
government to private activity!
Galbraith also airily assumes, in common with many other writers, that
many governmental services are “collective goods”
and therefore simply cannot be supplied by private
enterprise. Without going further into the question of the desirability
of private enterprise in these fields, one must note that Galbraith is
quite wrong. Not only is his thesis simply a bald assertion,
unsupported by facts, but, on the contrary, every single service
generally assumed to be suppliable by government alone
has been historically supplied by private enterprise. This includes
such services as education, road building and maintenance, coinage,
postal delivery, fire protection, police protection, judicial
decisions, and military defense—all of which are
often held to be self-evidently and necessarily within the
exclusive province of government.
There are many other important fallacies in Galbraith’s book,
but the central thesis of The Affluent Society has
now been discussed. Thus, one of the reasons why Galbraith
sees great danger in the present high consumption is that much is
financed by consumer credit, which Galbraith considers, in the
conventional manner, to be “inflationary”
and to lead to instability and depression. Yet, as we shall see
further, consumer credit that does not add to the money supply is not
inflationary; it simply permits consumers to redirect
the pattern of their spending so as to buy more of what they want and
ascend higher in their value scales. In short, they may redirect
spending from nondurable to durable goods. This is a transfer
of spending power, not an inflationary rise. The device of
consumer credit was a highly productive invention.
Predictably, Galbraith pours much of his scorn on the
supply-and-demand explanation of inflation, and especially on
the proper monetary explanation, which he terms
“mystical.” His view of depression is
purely Keynesian and assumes that a depression is caused by a
deficiency of aggregate demand. “Inflation” is an
increase in prices, which he would combat either
by reducing aggregate demand through high taxes or
by selective price controls and the fixing, by compulsory arbitration,
of important wages and prices. If the former route is chosen,
Galbraith, as a Keynesian, believes that unemployment would ensue. But
Galbraith is not really worried, for he would take the revolutionary
step of separating income from production; production, it
seems, is important only because it provides income. (We have
seen that government activity has already effected a
considerable separation.) He proposes a sliding scale of unemployment
insurance provided by the government, to be greater in depression than
in boom, the payment in depression rising almost to
the general prevailing wage (for some reason, Galbraith would not go
precisely as high, because of a lingering fear of some disincentive
effect on the unemployed’s finding jobs). He does
not seem to realize that this is merely a way of aggravating and
prolonging unemployment during a depression and indirectly subsidizing
union wage scales above the market. There is no need to stress the
author’s other vagaries, such as his adoption of the
conventional conservationist concern about using up precious
resources—a position, of course, consistent with
Galbraith’s general attack on the private consumer.
As we have indicated above, there is a problem of
the “public sector”; scarcities and conflicts keep
appearing in government services, and in these fields alone, e.g.,
juvenile delinquency, traffic jams, overcrowded schools, lack of
parking space, etc. We have seen above that the single remedy that
proponents of government activity can offer is for more funds to be
channeled from private to public activity.
We have shown, however,
that such scarcity and inefficiency are inherent in government
operation of any activity. Instead of taking warning from the
inefficiencies of government output, writers like Galbraith
turn the blame from government onto the taxpayers and
consumers, just as government water officials characteristically blame
the consumers for water shortages. At no
time does Galbraith so much as consider the possibility of mending an
ailing public sector by making that sector private.
How would Galbraith know when his desired
“social balance” was achieved? What criteria has he
set to guide us in knowing how much shift there
should be from private to public activity? The answer is, none;
Galbraith cheerfully concedes that there is no way of finding the point
of optimum balance: “No test can be applied, for none
exists.” But, after all, precise definitions,
“precise equilibrium,” are not important; for to
Galbraith it is crystal “clear” that we must move
now from private to public activity, and to a
“considerable” extent. We shall know when we
arrive, for the public sector will then bask in opulence. And to think
that Galbraith accuses the perfectly sound and logical
monetary theory of inflation of being
“mystical” and “unrevealed
magic”!
Before leaving the question of affluence and the recent attack on
consumption—the very goal of the entire economic system, let
us note two stimulating contributions in recent years on
hidden but important functions of luxury consumption,
particularly by the “rich.” F.A. Hayek has pointed
out the important function of the luxury consumption of the
rich, at any given time, in pioneering new ways of consumption, and
thereby paving the way for later diffusion of such
“consumption innovations” to the mass of the
consumers.
And Bertrand de Jouvenel,
stressing the fact that refined esthetic and cultural tastes are
concentrated precisely in the more affluent members of
society, also points out that these citizens are the ones who could
freely and voluntarily give many gratuitous services to others,
services which, because they are free, are not counted in the national
income statistics.
This is the first line of argument
for government intervention analyzed in Appendix B below.
In many cases, these
“investments” are not simply bureaucratic errors;
they pay welcome gains to government officials in
“prestige.” Every
“underdeveloped” government seems to insist on its
steel mill or its dam, for example, regardless whether it is economic
or not (therefore usually not). As Professor
Friedman astutely points out:
The
Pharaohs raised enormous sums of capital to build the Pyramids; this
was capital formation on a grand scale; it certainly did not promote
economic development in the fundamental sense of contributing to a
self-sustaining growth in the standard of life of the Egyptian
masses. Modern Egypt has under government auspices built a steel mill;
this involves capital formation; but it is a drain on the economic
resources of Egypt . . . since the cost of making steel in Egypt is
very much greater than the cost of buying it elsewhere; it is simply a
modern equivalent of the Pyramids, except that maintenance expenses are
higher. (Milton Friedman, “Foreign Economic Aid: Means and
Objectives,” Yale Review,
Summer, 1958, p. 505)
Cf. L.M. Lachmann, Capital
and Its Structure. Also see P.T. Bauer
and B.S. Yamey, The Economics of Under-Developed Countries
(London: James Nisbet and Co., 1957), pp. 129ff.
On the subject of compulsory
saving and government investment, see the noteworthy article of P.T.
Bauer, “The Political Economy of
Non-Development” in James W. Wiggins and Helmut
Schoeck, eds., Foreign Aid Re-examined
(Washington, D.C.: Public Affairs Press, 1958), pp. 129–38.
Bauer writes:
.
. . if development has meaning as a desirable process, it must refer to
an increase in desired output. Governmental
collection and investment of saving effect production which is not
subject to the test of voluntary purchase at market price. . . .
Increased output through this method is at best an ambiguous indicator
of economic improvement. . . . If the capital is not provided
voluntarily, this suggests that the population prefers an alternative
use of resources, whether current consumption or other forms of
investment. (Ibid., pp. 133–34)
P.T. Bauer, Economic
Analysis and Policy in Underdeveloped Countries (Durham,
N.C.: Duke University Press, 1957), pp. 113ff. On Soviet economic
growth Bauer and Yamey make this salutary comment:
The
meaning of national income, industrial output and capital formation is
also debatable in an economy when so large a part of output is
not governed by consumers’ choices in the market; the
difficulties of interpretation are particularly obvious in connection
with the huge capital expenditure undertaken by government without
reference to the valuation of output by consumers. (Bauer and Yamey, Economics
of Under-Developed Countries, p. 162)
Also
see Friedman, “Foreign Economic
Aid,” p. 510.
For a critique of various
metaphors illegitimately and misleadingly imported from the natural
sciences into economics, see Rothbard,
“The Mantle of Science.”
The presumably excessive growth of
cancerous cells, for example, is generally overlooked.
The prolific writings of Professor
Bauer are a particularly fruitful source of analysis of the problems of
the underdeveloped countries. In addition to the references
above, see especially Bauer’s excellent United
States Aid and Indian Economic Development (Washington, D.C.:
American Enterprise Association, November, 1959); his West
African Trade (Cambridge: Cambridge University
Press, 1954); “Lewis’ Theory of Economic
Growth,” American Economic Review,
September, 1956, pp. 632–41; “A Reply,” Journal
of Political Economy, October, 1956, pp. 435–41;
and P.T. Bauer and B.S. Yamey, “The Economics of Marketing
Reform,” Journal of Political Economy,
June, 1954, pp. 210–34.
The
following quotation from Bauer’s study on India is
instructive for its analysis of central planning as well as development:
As
a corollary of reserving a large (and increasing) sector of
the economy for the government, private enterprise and investment, both
Indian and foreign, are banned from a wide range of industrial and
commercial activity. These restrictions and barriers affect not only
private Indian investment, but also the entry of foreign capital,
enterprise and skill, which inevitably retards economic development.
Such measures are thus paradoxical in view of the alleged emphasis on
economic advance. (Bauer, United States Aid, p. 43)
Bauer’s chief defect is a tendency to underweigh the role of
capital in economic development.
It is fascinating to discover, in
1925–26, before Soviet Russia became committed to full
socialism and coerced industrialization, Soviet leaders and economists
attacking central planning and forced industry and calling for
economic reliance on private peasantry. After 1926, however, the Soviet
planned economy deliberately planned uneconomically
for forced heavy industry in order to establish an autarkic socialism. See
Edward H. Carr, Socialism In One Country, 1921–1926
(New York: Macmillan & Co., 1958), I, 259f., 316, 351,
503–13. On the Hungarian experience, see
Ray, “Industrial Planning in Hungary,” pp. 134ff.
Wiggins and Schoeck, Scientism
and Values, p. v. This symposium has many
illuminating articles on the whole problem of
underdevelopment. In addition to the Bauer article cited above, see
especially the contributions of Rippy, Groseclose, Stokes, Schoeck,
Haberler and Wiggins. Also see the critique of the concept of
underdevelopment in Jacob Viner, International Trade and
Economic Development (Glencoe, Ill.: Free Press, 1952), pp.
120ff.
W.W. Rostow, The Stages
of Economic Growth (Cambridge: Cambridge University Press,
1960). Perhaps some of the popularity may be due to the term
“take-off,” which is certainly in tune with our
aeronautical and space-minded age.
On the complex of fallacies
involved in the search for “laws of history,” see
Ludwig von Mises, Theory and History (New Haven:
Yale University Press, 1957); for a critique of earlier
“stage theories” of economic history, see
T.S. Ashton, “The Treatment of Capitalism by
Historians” in F.A. Hayek, ed., Capitalism and the
Historians (Chicago: University of Chicago Press, 1954), pp.
57–62. Some of the fallacies of the “social
overhead” concept are refuted in Wilson Schmidt,
“Social Overhead Mythology” in Wiggins and Schoeck,
Scientism and Values, pp. 111–28, although
Schmidt himself clings to several. On the superiority of private over
government entrepreneurship and innovation, and in significance for
development, see Yale Brozen, “Business
Leadership and Technological Change,” American
Journal of Economics and Sociology, 1954, pp.
13–30; and Brozen, “Technological Change, Ideology
and Productivity,” Political Science Quarterly,
December, 1955, pp. 522–42.
Another Rostow fallacy is the adoption of the late
nineteenth-century German theory that a strong centralized
state was a necessary precondition for the emergence of Western
capitalism. For a partial critique, see Jelle C. Riemersma,
“Economic Enterprise and Political Powers After the
Reformation,” Economic Development and Cultural
Change, July, 1955, pp. 297–308.
Finally, for a keen and pioneering discussion of many aspects of
coerced development, see S. Herbert Frankel, The
Economic Impact of Under-Developed Societies (Oxford: Basil
Blackwell, 1953). For a contrasting case study of the
free-market road to development, see F.C. Benham,
“The Growth of Manufacturing in Hong Kong,” International
Affairs, October, 1956, pp. 456–63.
For a critique of Rostow,
stressing his mechanistic view of history and a technological
determinism that neglects the vital ideas creating
technology and political institutions, see
David McCord Wright, “True Growth Must Come Through
Freedom,” Fortune, December, 1959, pp.
137–38, 209–12.
This performance leads one to
believe that Schumpeter was right when he declared:
.
. . capitalism stands its trial before judges who have the sentence of
death in their pockets. They are going to pass it, whatever the defense
they may hear; the only success victorious defense may produce
is a change in the indictment. (Schumpeter, Capitalism,
Socialism and Democracy, p. 144)
John Kenneth Galbraith, The
Affluent Society (Boston: Houghton Mifflin Co.,
1958).
“Fable for Our
Times,” Wall Street Journal, April 21,
1960, p. 12. Thus Galbraith, ibid., deplores the
government’s failure to “invest more” in
scientists and scientific research to promote our growth, while also
attacking American affluence. It turns out, however, that Galbraith
wants more of precisely that kind of research which can have no
possible commercial application.
Galbraith’s major
rhetorical device may be called “the sustained
sneer,” which includes (a) presenting an
opposing argument so sardonically as to make it seem patently absurd,
with no need for reasoned refutation; (b) coining
and reiterating Veblenesque names of disparagement, e.g.,
“the conventional wisdom”; and (c)
ridiculing the opposition further by psychological ad hominem
attacks, i.e., accusing opponents of having a psychological
vested interest in their absurd doctrines—this mode of attack
being now more fashionable than older accusations of economic
venality. The “conventional wisdom” encompasses
just about everything with which Galbraith disagrees.
In addition to wicked advertising,
wants are also artificially created, according to Galbraith, by
emulation of one’s neighbor: “Keeping up with the
Joneses.” But, in the first place, what is wrong
with such emulation, except an unsupported ethical judgment of
Galbraith’s? Galbraith pretends to ground his theory, not on
his private ethical judgment, but on the alleged creation of wants by
production itself. Yet simple emulation would not be a
function of producers, but of consumers
themselves—unless emulation, too, were inspired by
advertising. But this reduces to the criticism of advertising
discussed in the text. And secondly, where did the original Jones
obtain his wants? Regardless of how many people have wants purely in
emulation of others, some person or persons must
have originally had these wants as genuine needs of their very own.
Otherwise the argument is hopelessly circular. Once this is conceded,
it is impossible for economics to decide to what extent each want is
pervaded by emulation.
For more on determinism and the
sciences of human action, see Rothbard,
“Mantle of Science,” and Mises, Theory
and History.
Professor Abbott, in his important
book on competition, quality of products, and the business system, put
it this way:
The
producers will generally find it easier and less costly to
gain sales by adapting the product as closely as possible to existing
tastes and by directing advertising to those whose wants it is already
well equipped to satisfy than by attempting to alter human
beings to fit the product. (Abbott, Quality and Competition,
p. 74)
Recent writings by marketing
experts on “the marketing revolution” now under way
stress precisely this increasing competition for, and courting of, the
favor and custom of the consumer. Thus, see Robert
J. Keith, “The Marketing Revolution,” Journal
of Marketing, January, 1960, pp. 35–38; Goldman,
“Product Differentiation and Advertising: Some Lessons From
Soviet Experience,” and Goldman,
“Marketing—a Lesson for Marx,” Harvard
Business Review, January–February, 1960, pp.
79–86.
On the alleged powers of business
advertising, it is well to note these pungent comments of Ludwig von
Mises:
It
is a widespread fallacy that skillful advertising can talk the
consumers into buying everything that the advertiser wants them to buy.
. . . However, nobody believes that any kind of advertising would have
succeeded in making the candlemakers hold the field against
the electric bulb, the horse-drivers against the motorcars, the goose
quill against the steel pen and later against the fountain pen. (Mises,
Human Action, p. 317)
For
a critique of the notion of the “hidden
persuaders,” see Raymond A. Bauer,
“Limits of Persuasion,” Harvard Business
Review, September–October, 1958, pp.
105–10.
Galbraith, Affluent
Society, p. 345. In proposing this large-scale creation of an
intellectual class, Galbraith virtually ignores the artificiality of
educating people beyond their interests, capacities, or job
opportunities available.
Since this would take us far
afield indeed, we can mention here only one reference: to the
successful development of the road and canal networks of
eighteenth-century England by private road, canal, and
navigation improvement companies. See T.S.
Ashton, An Economic History of England: The 18th
Century (New York: Barnes and Noble, n.d.), pp.
72–81. On the fallacy of “collective
goods,” only suppliable by the government, see Appendix B
below.
Amidst the tangle of
Galbraith’s remaining fallacies and errors, we might mention
one: his curious implication that Professor von Mises is a businessman.
For first Galbraith talks of the age-old hostility between businessmen
and intellectuals, backs this statement by quoting Mises as critical of
many intellectuals, and then concedes that “most
businessmen” would regard Mises as “rather
extreme.” But since Mises is certainly not a
businessman, it is odd to see his statements used as evidence
for businessman-intellectual enmity. Galbraith, Affluent
Society, pp. 184–85. This peculiar error
is shared by Galbraith’s Harvard colleagues, whose work he
cites favorably, and who persist in quoting such
nonbusinessmen as Henry Hazlitt and Dr. F.A. Harper as
spokesmen for the “classical business creed.” See
Francis X. Sutton, Seymour E. Harris, Carl Kaysen, and James Tobin, The
American Business Creed (Cambridge: Harvard
University Press, 1956).
The Affluent Society is a work that particularly
lends itself to satire, and this has been cleverly supplied in
“The Sumptuary Manifesto,” The Journal of
Law and Economics, October, 1959, pp. 120–23.
See pp. 944ff., of this chapter.
A brief, and therefore bald,
version of Galbraith’s thesis may be found in John Kenneth
Galbraith, “Use of Income That Economic Growth Makes Possible
. . .” in Problems of United States Economic
Development (New York: Committee for Economic Development,
January, 1958), pp. 201–06. In the same collection of essays
there is in some ways a more extreme statement of the same position by
Professor Moses Abramovitz, who presses even further to
denounce leisure as threatening to deprive us of
that “modicum of purposive, disciplined activity which . . .
gives savor to our lives.” Moses Abramovitz,
“Economic Goals and Social Welfare in the Next
Generation,” ibid., p. 195. It is perhaps
apropos to note a strong resemblance between coerced deprivation of
leisure and slavery, as well as to remark that the only society that
can genuinely “invest in men” is a society where
slavery abounds. In fact, Galbraith writes almost wistfully of a slave
system for this reason. Affluent Society,
pp. 274–75.
In
addition to Galbraith and Abramovitz, other
“Galbraithian” papers in the CED Symposium
are those of Professor David Riesman and especially Sir Roy Harrod, who
is angry at “touts,” the British brand of
advertiser. Like Galbraith, Harrod would also launch a massive
government education program to “teach”
people how to use their leisure in the properly refined and esthetic
manner. This contrasts to Abramovitz, who would substitute a
bracing discipline of work for expanding leisure. But then again, one
suspects that the bulk of the people would find a coerced Harrodian
esthetic just as disciplinary. Galbraith, Problems of United
States Economic Development, I, 207–13,
223–34.
Hayek, Constitution of
Liberty, pp. 42ff. As Hayek puts it:
A
large part of the expenditure of the rich, though not intended for that
end, thus serves to defray the cost of the experimentation with the new
things that, as a result, can later be made available to the poor.
The
important point is not merely that we gradually learn to make cheaply
on a large scale what we already know how to make expensively in small
quantities but that only from an advanced position does the next range
of desires and possibilities become visible, so that the selection of
new goals and the effort toward their achievement will begin long
before the majority can strive for them. (Ibid., pp.
43–44)
Also
see the similar point made by Mises 30 years before. Ludwig von Mises,
“The Nationalization of Credit” in Sommer, Essays
in European Economic Thought, pp. 111f. And see
Bertrand de Jouvenel, The Ethics of Redistribution
(Cambridge: Cambridge University Press, 1952), pp. 38f.
De Jouvenel, Ethics of
Redistribution, especially pp. 67ff. If all housewives
suddenly stopped doing their own housework and, instead, hired
themselves out to their next-door neighbors, the supposed increase in
national product, as measured by statistics, would be very great, even
though the actual increase would be nil. For more on this point, see
de Jouvenel, “The Political Economy of
Gratuity,” The Virginia
Quarterly Review, Autumn, 1959, pp. 515ff.
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