The Last Institutionist: John Kenneth Galbraith

For old-timers like me there has been no better U.S.Ambassador to India than Prof. John Kenneth Galbraith, who passed away recently, on 29th April 2006, at the ripe old age of 97. Appointed to the post by President J.F. Kennedy, Galbraith and his wife endeared themselves to Indians by their constant travels and interactions with the people of India. His extraordinarily tall figure that news photographers often happily captured during his official travels in India and his incisiveness and sympathetic perceptions of Indian social and economic conditions, made Galbraith a figure most familiar to Indians almost next only to our then Prime Minister Jawaharlal Nehru. And they were great friends, each an intellectual giant in his own way.

The Harvard professor Galbraith was considered “The Last Institutionist”. Though this controversial economist of international repute wrote nearly two dozen books, the ones that became internationally famous are “The Affluent Society” (1958) and “New Industrial State” (1967) which debunked ‘consumer sovereignty’ and ‘ideally competitive firms’. They basically related to the American society. However, on a larger canvas, how he looked at capitalism and communism that were in a competition to spread their tentacles across the globe in the twentieth century is the subject matter of this article.

It is strange that economists, academics and writers are still using the terms ‘capitalism’ and ‘communism’ as if they were some pure breeds forgetting the strong hybridization and cross fertilization that they have undergone. Galbraith, the perceptive savant, is reported to have said : “Capitalism is the exploitation of man by man and Communism is the opposite of that”. That is a laudable bipartisan view when the general view in the west had been that “capitalism created wealth, and communism distributed poverty equally”.

Galbraith was one of those few who clearly saw the blurring of the capitalist and communist forces in the historical context, without adhering to doctrinaire positions. Galbraith’s socio-economic acumen came out most strikingly as I went through the book “Capitalism, Communism and Coexistence –from a bitter past to a better prospect” (1988) which is essentially a record of an intellectual conversation between him and Dr.Stanislav Menshikov, a highly regarded Soviet scholar. This was a great book to read in the context of American and Soviet economic history through most of the twentieth century. Insights given below are those essentially culled from this book.

Galbraith understood the futility of the Cold War and said in the book, “… in the aftermath of a nuclear war, the difference between capitalism and communism is not going to be evident even to the most committed ideologist”. When the west is seen today to be wasting so much time, energy and resources in grappling with terrorist phantoms imagined to be capable of destroying the world, the true problems of this world as enunciated in this book, with which we all would tend to agree, are narcotics, alcoholism, environment, energy and population explosion.

Dr.Menshikov is seen to be sticking to the usual dogmatic communist views somewhat tempered by the recent Soviet experiences of “perestroika” (economic restructuring) and “glasnost” (openness). However, Galbraith takes us through a veritable truth-way leading the reader to understand the historical forces that led to the “Marxization” of American Capitalism and the “Capitalistic” transformation of Soviet Communism.

To take the USSR first, after Stalin’s death, Malenkov and Khruschev started promoting consumer goods. Khruschev opened Siberia to agriculture and introduced large-scale housing construction. But in the 70s and 80s, the USSR went through a decline. The main reasons were low investments in agriculture, lack of linkage between agriculture and agro-industry, lower labour productivity, the oil shock of 1973 and decreasing investments due to higher consumption.

The USSR’s problems were further compounded by factors such as continuing over-centralized planning, ignoring of consumer goods production, vested interests of bureaucracy in creating scarcity, and scarcity leading to corruption and shadow economy. Thus followed Gorbachev’s reforms which in terms of “perestroika” and “glasnost” accounted for partial dismantling of the centralized planning, giving of autonomy to public enterprises in marketing, exports, and appointment of chief executives, and the opening of the economy to foreign investments up to 49 percent equity.

The taming of communism towards market orientation outlined above witnessed a parallel development across the Atlantic where American capitalism was getting tamed with Marxist ideals. Galbraith identifies four major developments in the USA that vastly reduced the exploitation of labour by capitalists. They are the growth of trade unions, the development of the welfare state with the New Deal and the Social Security Act of 1935 that covered housing, medical care and education for workers, the application of Keynes’s principles during the Great Depression of the 1930s and lastly the “Corporate Revolution” that saw the appointment of professional managers in lieu of the “greedy” capitalists who were made to stay away. Galbraith calls them “four transforming factors” of American capitalism.

For those needing a little more clarification, as per the economist Keynes, there should be increased spending by the government in order to create employment which in turn will result in higher demand for goods to match the supply position so that economic activity improves during the period of a depression. This was the precise remedy followed since the multinationals/corporates had already set up huge production capacities and there was over-supply in the face of lack of demand for goods and prevalent unemployment during the Great Depression.

It may be mentioned here that Reagan’s reforms (Reaganomics) were more in the nature of the Monetary theory advocated by Milton Friedman where government spends less in order to control inflation and the interest rates are raised to increase savings and investments. What Reagan did in order to reduce high unemployment and reduce inflation, was to effect a steep reduction in individual and corporate taxes to improve purchasing power, reducing of government spending to contain inflation and increasing of interest rates to reduce inflation. Government regulations like price controls were also eased out.

Galbraith was a qualified admirer of capitalism and a reasoned critic of the deficiencies in US capitalism. He identified the following as the major reasons for deficiencies in US capitalism: (a) Over-bureaucratization in big corporates, which he called “corporate sclerosis” (b) Failure of corporates to constantly innovate (c) Price-wage spiral in major industries such as steel and automobile (d) Diversion of capital and R. and D. to the military areas (e) Shifting structure of the economy towards media and entertainment and (f) Failure of supply-side economics that promise more investments and more supply when tax reduction takes place.

The reconciliation between capitalism and communism was something that did not take Galbraith by surprise. The Cold War is indeed gone but as Dr.Menshikov said, nearly a third of the world’s people have adopted socialism. The world needs to make still enormous adjustments to tackle its multifaceted economic problems including those arising from globalization. The policy makers of the west could do better taking a leaf from Galbraith instead of resorting to postures of threat and aggression on those disagreeing with them.