Weekend Reading: James Meade: On John Kenneth Galbraith's "New Industrial State". Via David Glasner
Indeed, there is a great hiatus in his analysis of the economic system as a whole or, perhaps more accurately, in his implied analysis of what the economic system as a whole would be like when virtually the whole of it was controlled by large modern corporations. Professor Galbraith asserts that each modern corporation plans ahead the quantities of the various products which it will produce and the prices at which it will sell them; he assumes we will discuss this assumption later that as a general rule each corporation through its advertising and other sales activities can so mould consumers’ demands that these planned quantities are actually sold at these planned prices. But he never explains why and by what mechanism these individual plans can be expected to build up into a coherent whole....
In short, if all individual plans are to be simultaneously fulfilled they must in the first instance be consistent. But Professor Galbraith never considers this problem. It is a strange oversight in a modern professional economist-to overlook the problem of general, as contrasted with particular, equilibrium. (pp. 377-78)
Professor Galbraith writes always as if planning meant deciding in advance what should be produced and sold, in what quantities, at what cost and at what prices, and then taking effective steps to ensure that quantities and prices of inputs and outputs developed in precisely this way, and as if the market mechanism meant taking no thought for the morrow, taking no initiative in planning ahead the introduction of new products and processes, but just waiting for consumers to come to the firm and order a new car of such-and-such a bespoke design. It is by silly contrasts of this kind that Professor Galbraith pokes fun at his professional colleagues. (p. 382)
In the modern complex economy there are two major forces at work. One of these is that which Professor Galbraith rightly emphasises, namely the increased need for careful forward planning in a system which involves the commitment of large resources to inflexible uses over long periods of time.
But there is a second and equally important trend, which he entirely neglects: namely, the increased need in the modern industrial economy for a price mechanism, that is to say for reliance on a system of prices as a signaling device to indicate to producers and consumers what is and what is not scarce. This increased need for a price mechanism arises because in the modern industrial system input-output relationships have become so complex and the differentiation between products (many of which are the technically sophisticated inputs of other productive processes) has become so manifold that simple quantitative planning without a price or market mechanism becomes increasingly clumsy and inefficient. Moreover, this increased need for a signaling system through prices is occurring at a time when advances in mathematical economics and in the electronic and other technologies for measuring and metering have made a great extension of the price mechanism possible. Public authorities begin to make serious quantitative cost-benefit studies where previously pure hunches would have had to serve; and we nowadays seriously consider as, for example, in electronic metering devices for charging for the use of road space by motor vehicles-extensions of the use of pricing which would previously have been considered technologically impossible.
The particular brand of conventional wisdom which Professor Galbraith promotes in his recent book overlooks all these increased needs and opportunities for the use of the price mechanism. But many of the planned socialist societies are not falling into this error. Experiments which they are making in such devices as setting the maximisation of profit as the success criterion for the managers of socialised plants, in the direct use of the free market as in Yugoslavia, and generally in an increased reliance on price-mechanism indicators for many decentralised decisions constitute an undoubtedly significant development. The use of the price mechanism is, of course, not the same thing as the use of a market mechanism. A completely planned socialist economy could theoretically be run without any markets at all but with a complete system of ‘shadow prices’ to measure relative scarcities and to be used as the decisive indicators for the adjustments to be made in the economy’s quantitative planned inputs and outputs. But in many, though not of course in all, cases an actual market mechanism will be found to be institutionally the best way of operating a price mechanism. There are many degrees and forms of such extensions of the market; for example, in some cases the prices at which transactions take place might be centrally controlled and adjusted, while in others they might be freely determined by supply and demand in the market. But in one form or an-other increased reliance on a price mechanism does imply increased reliance at least on something closely analogous to a market mechanism.
Professor Galbraith expressly denies that recent developments in the socialist countries have any significant connections with the use of the market as a controlling device. This denial would, by the uncouth, be called drivel-if I may be permitted to use Professor Galbraith’s own expression. But he has to hold this view simply because the socialist countries continue to plan while he, drawing no distinction between the price mechanism and a market mechanism, believes that one can have either planning or a market-price mechanism but not both. In fact, ‘planning and the price mechanism’ not ‘planning or the price mechanism’ should be a central theme of every modern economist’s work. (pp. 391-92)
And David says: "Galbraith believed that the book he published in 1967...
...The New Industrial State was going to demonstrate the market economics was a snare and a delusion, because both the Soviet Union and the US were moving toward an economic system dominated by huge enterprises that engaged in long-term planning and were able to impose their plans on unwilling consumers and workers.
The most devastating review of Galbraith’s book was published in the June 1968 edition of The Economic Journal by James Meade... a kind of market socialist, or a self-described LibLaberal. The entire essay is worth reading....
Marcus Nunes informed us a few days ago that Meade explicitly advocated targeting nominal GDP writing as follows:
I have told this particular story simply to make the point that the choice between fiscal action and monetary action must often depend upon basic policy issues which should certainly be the responsibility of the government rather than of any independent monetary authority. Perhaps the best compromise is an independent monetary authority charged so to manage the money supply and the market rate of interest as to maintain the growth of total money income on its 5-per-cent-per-annum target path, after taking into account whatever fiscal policies the government may adopt....
Was Meade right or left? And was he on the winning side or the losing side?
