Planning in a Market Economy
At the start of the cold war, the word planning developed a negative connotation throughout American society. The idea of planning was associated with a deep rooted hatred for communists that was largely inspired by the McCarthy witch trials of 50’s. Most people failed to realize how key an element planning plays in the market economy and how similar central planning and corporate planning are.
The anticipation of a producer on the quantity of product to manufacture is quite comparable to the decisions made by a central planner on the how to accommodate a specific sector. Both parties’ make their decisions on future necessities and both parties’ take the risk of their predictions being completely off. Both central planning and corporate planning depends on anticipated growth rates and the ability to obtain accurate information in order to properly estimate it.
In his book The New Industrial State, John Galbraith argues that planning has long been an underappreciated aspect of the market economy. As he puts it,
Firms seem to do this on both the supply and demand sides. On the supply side, they effectively plan their means of production and attempt to properly anticipate demand. On the demand side, they establish social trends and advertise accordingly. The fact that both supply and demand are being planned suggests one thing. We live in a planned economy. Before the development of modern civilization, product delivery was a much more simple and direct process. Because of the simplicity of goods, desired supply was able to be accommodated quite easily. With the development of modern technology, goods have become ever more complex and difficult to manufacture. This complexity factor has added additional development time and has thus made planning substantially more important.
Dell, for example, cannot order the parts required to make a computer after a customer has purchased the machine. Thus, some predictions have to be made on the amount of product that will be sold in order to purchase the right amount of intermediate goods. These predictions are an essential part of the market economy and their planning remains a large aspect of company efficiency. Thus, planning is a quintessential part of the marketplace. Without the proper planning, a company doesn’t stand a chance in the open market.
The development of the market has relied heavily on planning. From your local fruit store to Microsoft, planning is everywhere. The market has even found ways of eliminating some aspects of planning, as it is a difficult task. A great example of partially eliminating planning is what is known as vertical integration or the purchasing of assets that are required in a company’s intermediate production. Maybe the most famous example of vertical integration was Rockefeller’s Standard Oil. Standard Oil bought up every aspect of its business from the refineries to the rail road delivery system. In this way, it was able to eliminate the uncertainties that come with market operations. Vertical integration shows us a market economy with an essentially planned supply.
John Galbraith suggest that those “who make use of large amounts of capital have successfully minimized their dependence on the market for what they use”. Technological growth has been a key stimulant in the expansion of planning in business supply. Because of the increased sophistication of goods, supply has to be further planned out. Galbraith gives a good example with road building. Before the development of the modern highway system, roads were constructed by people without any specialized skills. Today, we need whole spectra of specialists in order to construct roads. Because of the layout of modern cities, road construction has become a more elaborate process. Engineers have to determine every detail in order to make roads completely efficient and beneficial for the future. At the same time, the actual development of the road requires a great deal of capital and modern equipment, something that isn’t as easy to obtain as unskilled labor. Once again, we see that the supply of a market based country’s infrastructure is clearly dependent on effective planning.
Planning goes into the demand side of the market economy as well. corporations, with their mass advertising campaigns and psychological marketing, dominate every aspect of our lives. The demand side planning of corporations reflects an end to true consumer sovereignty. From television to the internet, we are targeted with an array of advertising that tells us what to wear, what to eat and what to drive. The goal of every business in America has always been the desire to effectively pursue the consumer and to capture his/her attention just long enough to make a clever pitch. This pitch is usually based on the social trends established by the same corporations. As a result, their marketing and advertising campaigns are often very effective. Thus, in a very larger way, the demand of the market economy is planned for us. So the question that remains is clearly, do we in fact live in a planned system? According to Galbraith, the answer is yes. Galbraith argues that “the genius of the industrial system lies in its organized use of capital and technology”. This, he suggests, is made possible by “extensively replacing the market with planning” (3). The market system is thus scarcely market based. Both supply and demand sides are carefully projected to reach an equilibrium desired by corporations rather then decided by the market.
According to Galbraith, “leaving things to the market is like leaving things to chance”. Companies like Microsoft don’t leave things to chance. The recent anti-trust case against the software giant brought to light business tactics that essentially impeded on significant competition. This was especially the case with their internet browser software. To what extent, one might ask, does the market coordinate the business of a company that engages in these tactics? The answer is likely to be that Microsoft’s planning eliminates a lot of the chance involved in market operations and thus secures the company’s immediate future. Microsoft’s tactics further illustrate the planned nature of the modern corporate world.
Galbraith’s work shows us that Market Economies contain a great deal of planning and on a larger corporate level, the market does very little coordinating. Planning can be found both on supply and demand side of the Market Economy. Further, large corporations often eliminate a great deal of supply side planning through maneuvers such as vertical integration. Together, these observations lead us to conclude that we live in a very much planned economy where the role of the market is far smaller then originally anticipated. Planned economies are thus much closer then they appear.
John Kenneth Galbraith, The New Industrial State, Houghton Mifflin Company, 1967 (1) P24 (2) P35 (3) P354
The 1950’s were a time of increasing prosperity for American citizens. Production and personal incomes were expanding while poverty declined, allowing the lines between personal needs and wants to be blurred. In his book “The Affluent Society,” John Galbraith examined existing notions of the importance of production and economic growth to the security of society and individuals, and suggested ways in which an economy must shift its focus as it expands.
Galbraith begins by defining “conventional wisdom” as “the ideas which are esteemed at any time for their acceptability.” He points out that these ideas are often rooted in outdated ideas or have little basis in sound economic theory. Yet these ideas are part of public opinion, and politicians have little desire to deviate from them, as any radical departure from the norm may cost them elections. It is the inflexibility of the conventional wisdom that hinders effective change in government policy as an economy undergoes changes. He cites as an example the widely held belief at the beginning of the Great Depression that the government’s budget must remain balanced at all times, ruling out federal aid which would have led to a fiscal deficit. Not until it became painfully clear that the economy would not recover on its own that the government allowed a fiscal deficit.
Part of the conventional wisdom, Galbraith goes on to write, is the notion that a large and growing economy lends a high level of security to individuals. A nation with high production can more easily convert its output to military needs in times of war, as America did in World War II. An expanding economy also provides employment, and unemployment, according to the conventional wisdom, is to be avoided at all costs as it is a root cause of poverty. But in times of peace and prosperity, when average incomes increase, and the number of citizens below the poverty line falls, it becomes easier to overlook the poverty that remains. Those who have increasing incomes become more concerned with keeping up their level of consumption than providing for the less fortunate. Galbraith asserts that this is not the only way to achieve security, nor is it a very equitable approach.
Advertising creates markets for a wide variety of non-essential products, which are necessarily produced to provide employment, and as full employment is approached, inflation becomes a concern. Competition for workers, Galbraith states, causes workers to demand higher wages. This pushes prices up, causing workers to ask for even higher pay to maintain their standard of living. The resulting inflation eats away at the value of the income the workers receive. Thus nearing full employment is dangerous for an economy, and a large portion of the goods produced are wholly unnecessary.
The solution Galbraith puts forth to making capitalism more just involves an increase in public services. Although this would be unpopular because people, Galbraith claims, consider public goods inferior to private ones, the benefits would accrue to all members of society. With an increase in private consumption must come an increase in public spending, Galbraith’s example being the need for more highways and road maintenance as well as measures to reduce air polution when more vehicles are purchased. An increase in public spending would lead to cleaner cities, better health for citizens, and most importantly better education for all, which could lead to greater technological progress and therefore increased production. An expansion of unemployment insurance would also lead to greater security without necessitating an increase in production. Galbraith’s suggestion is to index unemployment insurance to the number of unemployed. As more people become jobless, fewer jobs are available for those who seek them, yet a level of unemployment benefits comparable to past income would allow a jobless worker to continue to participate in the economy, and help stimulate an end to a recession. In America the tax system is designed to more heavily tax those who have more. To fund his reforms, Galbraith suggests a sales tax because it will more heavily tax those who spend more. This would not only generate revenue, but discourage the purchase of non-essential items.
These reforms are suggested with the underlying ideas that even in capitalist society, money does not buy happiness, and that in a society of such wealth, the continued presence of poverty that goes unnoticed is unacceptable. If increased income were the only motivation of economic agents, workers would take far less leisure time, however this free time is valuable to the worker. People of any intelligence seek jobs that they find fulfilling rather than settling for mindless labor. On the other hand, people who cannot find employment should not fear for their well-being, and children of poor families should be given every opportunity to be healthy and educated so that they can find meaningful employment later in life.
A remarkable feature of this book is that much of it still holds true today as when it was published forty-five years ago. The debate still rages whether government should expand its programs, or have more limited involvement. The economy continues to expand, but as the 2001 recession has shown, any slip in consumer confidence can slow growth to a standstill, and instability persists when the economy approaches full employment. Advertising becomes increasingly pervasive, as most internet ventures are financed by it, and technology allows us to be ads to be targeted at specific consumers. Since September 11, 2001, advertisers have gone so far as to proclaim consumption as our patriotic duty. To this day the best way we have found to find security as a society is through accomodating the labor force by increasing the amount we produce.
A skeptic of mainstream economic theory, John Kenneth Galbraith was mainly interested in interpreting the changing economic reality, or the “real world“. His fundamental dispute with neoclassical economists is the role of power in the marketplace. As advisor to the Kennedy administration, editor of Fortune Magazine, member of Harvard University‘s Department of economics (until 1975) president of the American Economic Association (1972), U.S. Ambassador to India, leader of Americans for Democratic Action, and a price controller during World War II, “Galbraith has been in a unique position to observe the American economy functioning in war and peace, and to analyze the flow of academic and non-academic thought.“ His publications include: Modern Competition and Business Policy (1938); American Capitalism (1952), in which he argues that economists focus on the interplay of supply and demand in the markets, ignoring the diffusion of economic power, thus blinding themselves to what is actually going on in the economy; The Theory of Price Control; The Affluent Society (1958), which describes how modern corporations create demand for products through advertising, rather than act as servants of consumer sovereignty; The New Industrial State (1967) which became an international bestseller describing his views on modern capitalist enterprise; and economics and the Public Purpose.
According to conventional neoclassical theory, the role of power in the marketplace ultimately resides with the consumer and voting public. Businesses exist to “cater to consumers" wishes and supply to fulfill demand. Optimal resource allocation exists in competitive industries, which makes them efficient. Monopolies and oligopolies are inefficient because they underutilize resources. They “extract prices that are higher in relation to costs than“ competitive firm getting wealth which “otherwise would remain with the buyer in the form of lower prices. And the counterpart of the higher prices is a smaller volume of sales and a smaller output of goods than if prices were those that a competitive firm would have to set. Thus, they stress that the inefficiency of monopolies is caused by profit maximization and restriction on output in order to raise prices. Also, because they maintain the theory of markets, firms are forced to accept the tradeoff between inflation and unemployment. Galbraith, however, views this differently. He sees the modern capitalist economy as being a dual economy comprised of the corporate and the competitive sectors. The corporate sector is made up of “industrial giants“ - enterprises, which possess economic and political power over the market and are not subject to supply and demand. The market is replaced by long term management planning by “technocrats“ whose objective is growth rather than profit maximization. In order to grow, they must depend on the expansion of demand for their products, which they create through advertising and the media to create mass wants. They have power over costs, thereby controlling resource and labor markets. They set their prices to reflect these costs, and they have considerable influence over government policies, which affect them.
The competitive sector, which consists of individuals and firms, is subject to control by the market. Prices are set by forces of supply and demand, and the goal of each enterprise is to maximize profits within the limits of the free competitive markets. They have no market or political power. They can neither compete with the corporate sector for resources, which cause an insufficient share of social resources, nor for advertising, which decreases demand and output for their product. There is underproduction in the competitive sector, and overproduction in the corporate sector.
However, Galbraith prefers to focus on “the heartland of the modern economy“ where 500 of the largest corporations produce almost 59% of all goods and services yearly in the U.S. “Nearly all communications, nearly all production, and distribution of electric power, banking and insurance, rail and air transportation, most manufacturing and mining, a substantial share of retail trade and a considerable amount of entertainment are conducted or provided by large firms. . . .This is the part of the economy, which we automatically identify with the modern industrial society. To understand it is to understand that part which is most subject to change and which, accordingly, is most changing in our lives. . . .The two parts of the economy - the world of the technically dynamic, massively capitalized and highly organized corporations on the one hand and of the hundreds of thousands of small and traditional proprietors on the other - are very different. It is not a difference of degree but a difference, which invades every aspect of economic organization and behavior, including the motivation to effort itself. . . .The name for this part of the economy, which is characterized by the large corporations. . . .is the Planning system.“ This planning system is the “dominant feature of the New Industrial State.“
The basis of this planning system is growth. This is also the prime objective of the “technocrats“, or planners, who act in their own self interests, rather than that of the stockholders. The stockholders are too numerous so they tend to have an impersonal force on the decisions of the corporation. As long as they receive satisfactory dividends, they are content. The real force is the managers, who control the day-to-day affairs of the corporation. Since profits only go to the shareholders, and management does not represent the majority of shareholders, they see no reason in maximizing profits. Instead, they seek to maximize sales, for a growth of sales contributes more to the corporate image and prestige of the technocrats, than large profits and small sales. “If the technostructure. . maximizes profits, it maximizes them.. .for the owners. If it maximizes growth, it maximizes opportunity for. . .advancement, promotion and pecuniary returns for itself. That people should so pursue their own interests is not implausible. The technocrats decide on the rate of expansion and use their market and political power (media and advertising) to create mass wants (market manipulation to increase supply). In this way, they ensure expansion of demand. They try to plan a permanent system of wage and price controls through long term contract with labor unions and suppliers of inputs so that inputs are available at a cost consistent with price. They also seek to finance their own investment through retained earnings, so that they are not subject to the investment market. In this way, the firms replace market mechanisms with planning.
According to Galbraith, to the neoclassicist, “the best society is the one that best serves the economic needs of the individual. Wants are original with the individual; the more of these that are supplied the greater the general good. Generally speaking, the wants to be supplied are effectively translated by the market to firms maximizing profits therein. If firms maximize profits, they respond to the market and ultimately to the sovereign choices of the consumer. This, however, is not realistic. He believes the power of the giant corporations is missing from this. The consumer is not sovereign. Once developed economies fulfill their elementary needs (food, shelter, clothing), further increases in GNP occur through the production of goods consumers are forced to want. In reality, industrial output is determined by manipulating wants of consumers through advertising and political power. Thus welfare may not be increased. This then becomes a question of the quality of life.
American society is deluged with the many different kinds of consumption goods that “ what is called a high standard of living consists, inconsiderable measure, in arrangements for avoiding muscular energy, increasing sensual pleasure and/or enhancing caloric intake above any conceivable nutritional requirement. This creation of wants by the planning system causes output of giant corporations to be overproduced and that of competitive industries to be underproduced. The present system should lead to an excessive output of automobiles, an improbable effort to cover the economically developed sections of the planet with asphalt, lunar preoccupation with moon exploration, a fantastical expensive and potentially suicidal investment in missiles, submarines, bombers and aircraft carriers, is as one would expect. These are the industries with power. Although “Galbraith‘s perspective is much in harmony, especially with the reform-oriented liberalism that can be associated with pre-Keynsianism,“ he has not had much of an impact on mainstream economics mainly because his ideas cannot be incorporated into the neoclassical paradigm.
One of his major critics is Professor Robert Solow of MIT, who thinks that Gaibraith‘s theory is weak. That the market mechanism is lost to the modern corporation is an exaggeration. That advertising has taken away consumer‘s sovereignty is implausible. That profit maximization means nothing to the corporations is also an exaggeration. If management is too preoccupied with their own self-interest moving away from profit maximization, they may find their jobs threatened.
the original authors.