From Galbraith to Schumacher via Mises
William F. Wendt, Jr.
(slightly edited from Nomos, Summer 1984)

However profoundly I disagree with the economics of John Kenneth Galbraith, perhaps the most widely read exponent of the Keynesian approach, there is much in his paean to bigness, The New Industrial State, that I can use to profound advantage in disabusing some bugaboos of free market economics. In Galbraith’s collection of half-truths there is to be found a more vivid and concrete picture of the unplanned, unrigged market economy than that painted by most free market economists, even if must for the most part be seen indirectly. In that picture can be found a key to realizing E. F. Schumacher’s Small Is Beautiful.

Big business is commonly thought to be the product of economic determinism or economic Darwinism. Schumacher, for example, excoriates “economic calculus” for producing overgrown technology. What Galbraith describes, however, is an elaborate system of subsidy and protection for big business, the “mature corporation” with its “high technology.” Unlike the “entrepreneurial corporation” of a simpler time with its simpler technology, the mature corporation cannot cope with the ebb and flow of supply and demand in a market economy. The use of high technology, according to Galbraith, requires a commitment of heavy capital outlays so far in advance of production that the anticipated demand may well evaporate by the time production is completed. The large discretionary income enjoyed by an affluent economy only makes demand that much less predictable and thus increases the problem.

If demand in the market economy is too unpredictable to allow use of high technology without unacceptable risk, then demand must be made predictable. The market economy must be supplanted by a planned economy. The staff of life for the mature corporation is management of demand. Production no longer exists to satisfy demand; rather, demand is manipulated to accomodate production. Advertising, particularly radio and TV, can manage demand in the Galbraithian scheme of things, but the heavy work of ensuring a sufficiently high level of demand for the industrial system as a whole falls to the state. Government spending must provide demand in ample and predictable quantity; government spending is necessary to underwrite the capital outlays and risks of high technology. Without “regulation of aggregate demand,” disaster would ensue:

“The regulation of aggregate demand, it will be evident, is an organic requirement of the industrial system. In its absence ... planning would be gravely impaired; capital and technology would have to be used much more carefully and much less effectively than now. ... There is an impression ... that the business firms that comprise the industrial system have been hostile to (regulation of aggregate demand). This on closer examination turns out to have been far from the case.” (Chapter XX)

Critics of big business most often feel as if they were King Canute trying to command back the tides. Big business is hardly so inevitable as the tides, however, and this is what Galbraith reveals beneath the braggadoccio. His logic is far from impeccable, but he does make it rather clear that big business owes its present form to the political process, not to the economic process. The economics of scale are so outweighed by the diseconomies of excessive scale that big business without massive state aid would quickly collapse. The economic power of big business is a myth; its power is political, not economic.

What kind of big business can survive in a free market remains to be seen; in its present form, however, it can survive and flower only in a greenhouse erected and maintained by the state. While Galbraith justifies high technology on grounds of high physical productivity, he offers no means of comparing the benefits obtained with the admitted, even flaunted, high costs incurred. Galbraith describes the situation which would result were government not to underwrite the cost of high technology; in 1967 he could make it seem like the end of the world, but within a decade many would take his predictions just the other way:

“Size is the general servant of technology, not the special servant of profits. The small firm cannot be restored by breaking the power of the large ones. It would require, rather, the rejection of the technology which since earliest consciousness we are taught to applaud. It would require that we have simple products made with simple equipment from readily available raw materials by unspecialized labor. Then the period of production would be short; the market would reliably provide the labor, equipment, and materials required for production; there would be neither possibility nor need for managing the market for the finished product. If the market thus reigned, there would be and could be no planning. No elaborate organization would be required. The small firm would then, at last, do very well.” (Chapter III)

Very significantly, Galbraith concedes to the free market not only an ability to regulate itself, adjusting to the ebb and flow of supply and demand with “no elaborate organization required,” but also to use “unspecialized labor,” the same labor frozen out of the planned economy in Chapter XXI! It is not Galbraithian high technology per se, however, which must be rejected, but rather its financing.

Galbraith’s distinction between planned and market economies is taxation and government spending. The direct effect of taxation at any level is to diminish the viability of the activity it is imposed upon. For those just barely making it, any increase in taxation will be the straw that breaks the camel’s back, pushing under the shoestring operators likely to hire, or themselves be, “unspecialized labor.” The indirect effect of taxation, by pushing under the weaker enterprises or by curtailing their expansion, is to reduce the competition for the stronger ones. As John D. Rockefeller noted, an American Beauty Rose is created by pruning all the buds from a stem save one. Government spending, of course, is necessary to prop up the mature corporation, as Galbraith never lets his reader forget. Thus heavy taxation and government spending amount to a tariff against the weak and protection for the strong.

Galbraith flaunts the rigidity of high technology as if it were a virtue. Schumacher, on the other hand, sees a more explicit virtue in the flexibility of simple technology. He speaks symbolically of the one-pound workplace and the 1000 pound workplace, suggesting that the 100 pound workplace would be far more productive than the first, and, with a given amount of capital, put far more people to work than the latter. (Part III, Sec. 2)

Rigidity is the historic enemy of the poor; the rigidity of mercantile, pre-industrial England displaced thousands for whom the factories were the only refuge. On the other hand, as W. A. Paton noted, “the truly free and competitive market is a model of sensitive adaptation, automatically, to the ebb and flow of the attitudes, needs, and varying circumstances of the participants.” Big business can be rigid and bureaucratic, Mises and Hayek point out, because the income tax stifles capital accumulation by small, dynamic competitors. Taxation reduces the flexibility of the market and produces a rigidity in the costs of living and doing business, which hurt the poor most of all.

In The New Industrial State, Galbraith does not use “regulation of aggregate demand” in the standard Keynesian sense of expanding or contracting credit, a subject he curiously avoids. Manipulation of credit, however, is an extremely powerful and subtle financial practice with vast repercussions on technology and concentration of business. The effects of credit expansion as described in Ludwig von Mises’ theory of business cycles dovetail, curiously enough, quite closely with those attributed to Galbraithian “regulation of aggregate demand.” Credit is expanded through bank loans on demand deposits, money which is payable on demand but which the banks have tied up in loans of varying liquidity. In essence the banks are running overdrafts, writing rubber checks. The newly created loan money depresses interest rates, thereby stimulating time consuming investments (per Mises’ theory) or, in Galbraithian terms, stimulating heavy capital outlays far in advance of production.

A baker buys flour one day and sells it as bread the next; interest rates over such a short period of time are of little consequence. The expenditures for mining iron ore are not returned until the ore has been through a blast furnace, a steel mill, a stamping plant, an assembly plant, wholesalers, and a retail outlet. Working capital must be available at each step of the process for the purchase and resale of unfinished products; high interest rates would be greatly reflected in the purchase price, probably pricing the product out of the market. The long processes require vast amounts of wealth set aside for benefits that can only be realized in the remote future, a point Galbraith frequently makes. Creating credit by bookkeeping entry, however, does not create this wealth. It merely transfers wealth from processes serving more immediate needs to those serving more remote needs, a point at the core of Mises’ theory.

If the market be compared to an election, inflating the currency is equivalent to stuffing the ballot box. Those investments most stimulated by a lowering of interest rates are those most removed in time from final sale to the consumer: mining, raw materials, and heavy industry. Interest rates lowered by capital accumulation will allow such investments to be made with enough capital left over to also build up the areas closer to consumer sale. Interest rates lowered by credit expansion, however, squander the economy’s capital resources on the overbuilding of the more remote investments. Mises compared the effect to that of a builder overestimating the material on hand, overbuilding the foundation, and not having sufficient material for the superstruture.

Mining has been the source of innumerable and ecological objections. The oil industry is particularly capital intensive; were it not subsidized by credit expansion and preferential taxation, alternate sources of fuel and chemicals, such as fermentation technology, would have long enjoyed greater commercial success. South Africa, mineral treasure house of the world, would have a very different economic structure without the overemphasis on mining; its economy should be identified with paper rather than gold. With a more even proportioning of investment it would be forced to develop agriculture and processing industries to earn foreign exchange, thus becoming more subject to world markets and world opinion.

Galbraith does not discuss the role of consumer credit in the management of demand. John J. Raskob, chairman of the General Motors financial committee and a major power in the Democratic party, estimated in the 1920s that without consumer credit 10 million rather than 25 million automobiles would be on the road. The automobile industry could boast of its independence from the banks in pointing to its fixed capital, but it must borrow the working capital for production and distribution of automobiles. Steel production went largely into capital goods before the automobile and appliance industries became important. First financed by business loans, then heavily financed indirectly by consumer loans, the steel industry was heavily financed by artificially created credit.

If consumer credit cannot meet the capital needs of the steel industry, then government spending can. The automobile and appliance industries convert readily to war production. The government becomes the banking system’s major borrower. Galbraith emphasizes the role of military expenditures in the “regulation of aggregate demand.” In another work, The Age of Uncertainty, he says in so many words that Hitler’s war preparations brought the Keynesian remedy “with a rush.” Few wars or military establishments could be financed without paper money.

If King Canute could have controlled the movements of the moon, he could indeed have commanded the tides to recede. Heavy taxation and bank credit expansion are hardly as inevitable as the lunar orbit. Tax rebellion confronts the courts and legislatures. The banks can write only so many rubber checks before they become unable to pay depositors, or until the currency becomes worthless through runaway inflation. Money as a store of value is a matter of what people are willing to accept and hold, not what government decrees and economists theorize. People become less and less willing to hold eroding currencies, preferring gold, silver, art objects, etc. Before we are reduced to such desperate currencies as cigarettes, candy, coal, or even cocaine, we can create a market for hard money services as have existed in fledgling form. We need not function in the market process merely as voters; we can function as election judges, at least in those transactions not subject to court enforcment. In court, unfortunately, money is still a matter of what the government decress through legal tender laws, however unconstitutional.

The socialists are legion who think that economic justice can be accomplished only by expropriation of the means of production. The means of production, however, have already been expropriated through institutionalized force and fraud. The monumental study History of the Great American Fortunes by socialist Gustavus Myers is hardly a story of free exchange, of social arrangememts built upon mutual agreement, of building a better mousetrap. It is instead the story of rampant expropriation through political means. Myers himself said the government was the tool of the plutocratic class, hardly an argument for more intervention. Frederic Bastiat, on the other hand, described economics as the science that teaches workers to keep what they earn.

Let us try to hold on to the precious capital which is slipping through our fingers! Under free exchange benefits freely chosen will be compared to costs freely borne, and demand will be a matter of what people freely pay for. Supply will not be dissipated or distorted through boondoggles; interest rates will serve to conserve capital for more immediate and pressing needs; workers who wish to own the means of production will be able to buy their own and make a decent living from them. As those who promote it are beginning to realize, alternative technology will be ineffectual without major shifts in financial arrangements. Establish an alternative, non-political, unrigged and free market financial system; then capital-conserving alternative technology will take care of itself.

William Wendt is a legal researcher, frelance writer, and rugby enthusiast living in Chicago. This article is based on a chapter in his (still) forthcoming book, Crucified on a Cross of Paper.