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.
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.