Galbraith

I'm going to step aside from the small war that's evolved over my immigration letter to deliver some sad news.

John Kenneth Galbraith died on April 29th, 2006. He was 97. He was also a monumental influence in the world of economics. It's because of much of his work in The New Industrial State that Industrial Organization (IO) Economics now focuses primarily on oligopolistic models instead of those of perfect competition.

Now, that probably means something close to zero for most of you, and about even less for the rest. Well, think of it this way. Before Galbraith came onto the scene, most industries were assumed to act under the aegis of perfect competition.

There is a significant difference here. Under the "rules" of perfect competition, firms can't influence prices...they're considered "price takers." They take whatever price the market offers for them. That market, of course, is composed of lots of buyers, none of whom have enough influence to single-handedly "make" the price. Everyone - in a world of perfect competition - is subject to market forces; no one can game the system.

The original example that every student of economics learns is the agriculture market. You have hundreds upon thousands of sellers (farmers) and hundreds of thousands of buyers (humanity). If someone buys a whole lot of...say...corn, the demand won't stretch supply to the brink of a shortage. By the same token, if one more member of the city folk decides to go into farming, after being inspired by the terrific game Harvest Moon, then the supply won't be so enormous that the price of corn will crash. Everyone's a price taker.

Well, think about the runs on the gold market. Or how labor unions constrict who can be hired. Or the car industry, with a dozen-odd car companies ruling the market. Or how U.S. Steel dominated the market for decades, with only a few fringe companies even hoping to compete. Or how OPEC openly conspires to raise or lower supply to directly influence the price of oil. Or...you get the idea. In all these instances, the markets were assumed to be under the guise of "perfect competition" with all players operating at similar levels of achieving "economic profits," i.e. earning the same return on their investments as everyone else.

Raise hands everyone who thinks that $200 for Microsoft Office is fair competitive market value.

Mm-hmm. Didn't think so. But some early economists would have.

Enter Galbraith. Now you have more widespread adoption of the models that restrict markets to only a few players instead of dozens or hundreds.

But he also had another contribution, too. When you look at early economic models of competition and markets, you'll notice there are two entities which are starkly devoid in those models: unions and the government. Until Keynes - and a lesser extent Galbraith - the only purpose that unions and government had were to create unemployment (by raising the cost of labor above the equilibrium wage and making firms reluctant to hire workers) in the former case and screw up markets (such as rent control, which causes demand to outstrip supply in the real estate market) in the latter. Galbraith showed that, in fact, most industries were far from perfectly competitive.

Galbraith saw something different. He saw that big business, big labor (well, labour - he was Canadian by birth) and big government could work together to dominate the economy.

His biggest contribution, though, was in the realm of infrastructure. In 1958, The Affluent Society, Galbraith said the following:

"The line which divides our area of wealth from our area of poverty is roughly that which divides privately produced and marketed goods and services from publicly rendered services. ... In the years following World War II, the papers of any major city - those of New York were an excellent example - told daily of the shortages and shortcomings in the elementary municipal and metropolitan services. The schools were old and overcrowded. The police force was under strength and underpaid. The parks and playgrounds were insufficient. Streets and empty lots were filthy, and the sanitation staff was underequipped and in need of men."

Look at the quote above and tell me that the very same statements he made in 1958 don't resonate now.

Galbraith's work on the need for massive investment of public infrastructure was one of the driving forces behind the "War on Poverty" of the 1960s, as Galbraith was a major advisor to JFK and LBJ...he also worked for the government during FDR and Truman. He was a major influence in those administrations and whether you agree with those policies or not, Galbraith was a big factor in the push to increase public investment in goods & services.

He wasn't without his detractors. The notion of the business/labour/government trifecta dominating the economy ran counter to many laissez-faire economists; he and Milton Friedman had a number of sparring matches. Galbraith's ideas were seen as pro-aristocracy, with an out-of-touch elite making decisions instead of market forces alone.

Despite his critics - many of whom had some valid points - Galbraith was a giant of economics and his passing will be sorely missed. There aren't many like him anymore and we should all mourn his death.