Everyone’s Guide to Economics with John Kenneth Galbraith

Say’s Law and Harvard

In Almost Everyone’s Guide to Economics, John Kenneth Galbraith tells readers that back in the 1930s, you could not get your doctorate in economics at Harvard unless you believed in Say’s Law. If you recall, Jean Baptiste Say wrote in his Treatise on Political Economy that “the value we can buy is equal to the value we can produce.” So “the more men can produce, the more they will purchase.” To many at the time, Say’s ideas went as far as to suggest that supply-side economics was enough to save demand and usher in prosperity.

Today, “[you] might not get a PhD at Harvard if [you] believe in Say’s Law”, Galbraith remarks. As John Maynard Keynes later explained in his General Theory, the purchasing power of an economy can malfunction in spite of its capacity for production because families and firms can choose not to spend. And as the Great Depression showed, production will not restore demand when families, producers, entrepreneurs, and investors are overcome by fear and caution. So as theory and history goes, state intervention is sometimes necessary to reverse the fall in aggregate demand and the vicious cycle of recession.

My interest here, however, is not about the validity of Saysian or Keynesian reasoning, but about the gatekeeping of ideas in economics. Indeed, theories that seem to triumph in one decade can fail as quickly in the next. The issue is most prescient in the social sciences where theories and models help to legitimize political, economic, and ideological pursuits. So I cannot help but wonder what fervently held ideas today are vulnerable to the test of time and reality.

Neoclassical designs

Modern economics, for starters, owe their foundations to the “classical design” of Adam Smith and his peers. They include beliefs in the motivating role of self-interest in economic transactions; the self-regulating effects of competition and prices on resource allocation; and that interactions between buyers and sellers will bring about efficient results in the aggregate. Unsurprisingly, these ideas are appealing to the capitalists. Classical theory, after all, recommends a humbler role for the state—suggesting that markets usually know best, and that we ought to leave law-abiding profit-seekers to their own devices.

Neoclassical economics pushed these themes further when twentieth century economists popularized the ideas of marginality, rationality, optimisation, and general equilibrium. People began to relate “the economic system [to] the pendulum of an unwound clock… [that] would always return to the same position,” Galbraith writes. Keynes later added his diagnosis and prescription for business cycles and recessions—that equilibriums with high unemployment can arise, and that governments must sometimes borrow and spend to return the economy to full employment.

Two-sector economy

But for all its appeal, “the neoclassical system depends for its credibility and its workability on a credible, workable market”, Galbraith reminds. And as any student of economics will tell you, its workability depends on, amongst other things, competition between many buyers and many sellers. The idea, of course, is intuitive to most. Whether we’re talking about commodity markets, labor markets, or financial markets, it seems unwise to allow any one buyer or seller to monopolize prices, free-entry, and related facets of the invisible hand.

Real life, of course, rarely abides to the niceties of theory. “The modern economy”, Galbraith reminds, “breaks into two sectors.” The first consists of many small businesses. These are your mom-and-pop shops, cafes, hairdressers, bakeries, restaurants, and so on. The second consists of a few gargantuan enterprises that do “a large share of the business.” Take finance, insurance, construction, automotive, aviation, computing, software, confectionery, mining, and energy, for instance. Each of them are dominated by oligopolies.

Murky territories

That’s not to say, however, that oligopolies are more inefficient or terrible or better than other conceivable alternatives. Sometimes, larger enterprises may confer scale economies, increasing returns, and spillover effects that small firms cannot replicate. It’s hard to say, for example, if society would be better off with one Google, or hundreds of smaller but comparably sized companies. In real life, economics gets complicated fast—and it is difficult to detach our personal values, interests, and priorities from the problem at hand.

But even if society was better off with many smaller companies, competition of this sort would remain unstable in many sectors. It is unstable in the sense that, sooner or later, a few players will come to dominate the market by way of network effects, scale economies, strategic execution, and sheer luck. Uncompetitive firms will pivot into another niche, while others fade into oblivion. Such is the way of a Darwinian market ecology.

Of course, economists are no strangers to agglomeration. Adam Smith himself wrote about the propensity for sellers to collude on prices and harm the invisible hand. Similarly, in Galbraith’s assessment, “economic affairs… [is now] the product of the bargaining between interest groups.” So “much of the political economy has to do with advancing and reconciling producer interest.”

Agency and interdependency

Moreover, “once you let go of the idea of consumer sovereignty and concede that the corporation has power on both sides of the market, you strike a devastating blow at the neoclassical system.” That is, “the market really ceases to be an independent power when the large corporation has control… over both buyers and sellers.”

Indeed, all of us, I’m sure, are no strangers to the influence that advertising, merchandising, social media, and salesmanship have on our purchasing decisions. Demand and supply are more nebulous and interconnected than economists typically let on. The makers of cosmetics, firearms, furniture, apparel labels, luxury cars, residential homes, diamonds, holiday cards, cigarettes, and higher education know this especially well.

Galbraith notes also that “the producer interest is specific and cohesive, while consumer interest is diffuse and general. At a minimum, it takes more time for the consumer interest to mobilize and make its concerns felt.” This is a subtle but important clue into the dynamics of market systems. In this way, the static neoclassical models of undergraduate courses may understate the self-reinforcing and far-reaching power of oligopolies. The coalescing and countervailing of market power is forever waxing and waning.

Mystique and applause

While brief, I hope that provides some flavor of what’s to come. Models of power in the political economy, for instance, are ripe for new insight. Until then, might there be ways for us to interpret prevailing economic theory more clearly?

Firstly, we have to be watchful when corporations use the market as a veil to enforce their power. “Nothing more usefully disguises the power that is exercised by General Motors, Lockheed, Shell, [or] Unilever… than the continued instruction of the young that all corporate operations are subordinate to the market”, Galbraith warns.

Secondly, we must not forget that “quite a few economists measure their truth by the applause it evokes.” Unlike the physical sciences where hypotheses are falsifiable through experiment, debunking economic theories is rarely straightforward. Not only is it difficult to repeat the same experiment, it is tricky to isolate effects from the confluence of countless variables. And because the social sciences are enmeshed with politics and ideology, it is tempting to rationalize what we see in the way we want to see it. Those who seek applause over truth, Galbraith warns, will make a habit of it. The United States in particular, he adds, has “more economic theology than any other country.”

“The market is an admirable vision which appeals greatly to economists with a secure income and tenure… So there is a strong even if unconscious impulse to hold on to the idea of the competitive and impersonal market in order to hold on to one’s own subject matter. Again, there is nothing abnormal about this. I have heard that witch doctors hold on rather tenaciously to the concept of the witch… Economists who have been abreast of the times have always been in the minority.”
John Kenneth Galbraith. (1978). Almost Everyone’s Guide to Economics.

Obscure measures

Relatedly, Galbraith says we should recognize the ways in which economists insulate themselves from outsiders through language. Every profession is guilty of this, of course. But economics is an especial process of change. While the laws of nature are fixed, the rules of society, institutions, markets, and organization are forever in flux. The problem is doubly complex because people respond to the very theories that others put forward.

We cannot allow our measures and models to obscure what is really happening in front of us. Take, for example, the case of Gross National Product (GNP). There is no doubt that GNP and related measures are important indicators of economic performance. But its virtue, Galbraith reminds, “has been oversold.” After all, the measure only includes goods and services that are easy to measure. “A city that plans its growth properly, manages its parks well and has clean, safe streets can have a lower contribution to the GNP than a city that does none of these things but produces and sells a lot of goods.” Pornography, Galbraith adds, contributes more to GNP than the avoidance of air pollution and ocean acidification. Nobody would deny, however, that avoided costs are just as valuable. At some point, we need to take into account the value of “unmeasurable things.” This includes the unquantifiable but nonetheless important feelings that love, family, art, and nature brings to us as a collective.

What is economics?

Long ago, in his Principles of Economics, Alfred Marshall wrote that “political economy or economics is a study of mankind in the ordinary business of life.” To this Galbraith adds two refinements. The first is “organization” and “the study of the way people are organized.” The second is a reminder about the “political” in political economy, an adjective that has since fallen out of popular usage. “Economic and political life”, he reminds, “is a matrix in which each part interconnects with the others and all move together.” Under these two points, you might also add the dynamics of power.

Tangentially, in the life sciences, Melanie Mitchell says that we can classify evolutionary biologists under one of three categories: “[1] adaptionists, who believe that natural selection is primary; [2] historicists, who give credit to historical accident for many evolutionary changes; and [3] structuralists,… who focus on how organized structure comes about.” Evolutionary theory, she suggests, will achieve unification once scientists find a way to integrate these viewpoints into a cohesive whole.

At the risk of over-analogizing, I suspect that this is equally true of economics. The social-science, after all, is also a study of change, selection, history, contingency, and emergence. Galbraith would probably agree. He writes that “artificial divisions of subject matter can be a prime source of error. Economic truth only emerges when things are examined whole.” What we need then is a new generation of open-minded thinkers to wade through the mud.

Sources and further reading

Galbraith, John Kenneth. (1978). Almost Everyone’s Guide to Economics.
Mitchell, Melanie. (2009). Complexity: A Guided Tour.
Say, Jean Baptiste. (1834). A Treatise on Political Economy.

Almost Everyone’s Guide to Economics with John Kenneth Galbraith