The laws of history Book

There have been a number of books recently about the failures of market economics. You could be forgiven for thinking this is a recent concern following the global financial crisis (what the US calls the Great Recession). But this debate has been raging for decades, with one of the key contributors being John Kenneth Galbraith. Galbraith’s core conclusion in this book is that "left to themselves, economic forces do not work out for the best except perhaps for the powerful.’ (p ix)

Galbraith notes that much public policy is based on the assumptions of classical economics where market prices are established in competitive markets with many buyers and sellers. However in practice, the majority of economic activity falls outside the market system and occur in the ‘planning system’ where markets are determined by few sellers (what economists refer to as oligopolies). Neo-classical model denies the existence of corporate power whereas the accumulation and exercise of power over consumers and the states are key characteristics of entities operating in the planning system. This is more than evident to day in the concentration of players in certain industries (eg aviation, automotives, supermarkets, pharmaceuticals), the extent of corporate lobbying, and the size of government activity in the economy.
The relationship between the planning and the market systems, their unequal rate of development, and the exploitation of market forces by oligopolies and the resulting inequality in returns, are the central concern of this book.’ (p128) In the planning system power passes from the consumer to the producer. This results in: irrationally excessive production; distortions to income distribution; threats to the environment; and exploitation of consumers.
By their nature, oligopolistic entities operating in the planning system have two fundamental purposes:
1. protect their earnings; and
2. growth.
As organisations increase in size, they have increasing power in the markets, over community attitudes and in relation to the state which helps to protect their earnings.
Above a certain size, ‘members of the technostructure’ are rewarded by growth and scale rather than profits. This also results in a focus on acquisitions rather than organic growth. Galbraith argues that this explains the rise of the conglomerates, driven not by scale economies but simply by scale itself - propelled by CEO salaries determined by organisational size not shareholder returns.
One of the consequences of the level of activity occurring in the planning system is the increased role for the state. In neo-classical economics the state had a small subsidiary role. In oligopolistic markets the state is a large purchaser of products and services and has the potential to be decisive for the development of particular industries. The distribution of public resources reflects the power of the planning systems over the state. Locking in contracts, often with the state, becomes a core activity to protect an oligopolies profits, rather than production of sales.

Galbraith’s cogent arguments were being advanced during a period where the debate was between the free-market economists of the Chicago School (most notably Milton Friedman and Friedrich Hayek) and the neo-Keynesians (including Galbriath and Joan Robinson). Ultimately, Galbraith implicitly, and correctly, argues that the absence of true market economies means that there is a role for government regulation and public policy to address the

However he prescribes the wrong intervention. Galbraith concludes that because of the difference in economic powers the structure of the planning systems requires general wage and price control. These were adopted by Nixon in the US in the 1970s, but soon abandoned because they didn’t work.

With his focus on oligopolies, Galbraith ignores other free-market assumptions which in some ways offer an even more compelling argument for intervention: market failure (eg imperfect information) , externalities (such as pollution and environmental damage), and behavioural economics. These are much richer areas to outline why we need to temper free market economics and provide a guide to effective public policy.

Although written in the 1970s the arguments in this book as are important for people to understand now as they were almost half a century ago.