Man, Economy, and State with Power and Market

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.89 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.90 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.91

Although The Affluent Society is replete with fallacies, backed by dogmatic assertions and time-honored rhetorical devices in place of reasoned argument,92 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.93

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?94

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.95 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.96

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.97

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. ...”98

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.99

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.100

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.101 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”!102

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.103 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.104

• 89This 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)
• 90John Kenneth Galbraith, The Affluent Society (Boston: Houghton Mifflin Co., 1958).
• 91“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.
• 92Galbraith’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.
• 93In 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.
• 94For more on determinism and the sciences of human action, see Rothbard, “Mantle of Science,” and Mises, Theory and History.
• 95Professor 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)
• 96Recent 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.
• 97On 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.
• 98Galbraith, 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.
• 99Since 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.
• 100Amidst 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.
• 101See pp. 944ff., of this chapter.
• 102A 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.
• 103Hayek, 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. 38 f.
• 104De Jouvenel, Ethics of Redistribution, especially pp. 67 ff. 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. 515 ff.