John Kenneth Galbraith was born on October 15, 1908, a Canadian Scottish. He graduated from the University of Toronto and then received a Master of Science and a Ph.D. from the University of California. In his early life of studying, he taught in Harvard University, University of Cambridge, where his thought was influenced by John Maynard Keynes, and Princeton University. Apart from his role as a famous economist, he was also the post of chief economist for the American Farm Bureau Federation, high positions with the U.S. government during World War II, membership on the board of editors of Fortune magazine, ambassador to India during the Kennedy administration, and chairman of the Americans for Democratic Action. Galbraith is also a novelist and an expert on Far Eastern art (Brue, 1999). Although he was influenced by Keynes¿½¿½ theory in early life, his later major works started to reject neoclassical economics by stating that the maths model and technical analysis approach to it were far from reality. For this apparent reason, Galbraith was an iconoclast in other economists¿½¿½ point of view (Stanfield, 2002). Galbraith (1973) criticise neoclassical economics is a ¿½¿½conventional wisdom¿½¿½, Brue (1999) then explain it is ¿½¿½a set of ideas that is familiar to all, widely accepted, but no longer relevant¿½¿½. Galbraith challenged orthodox economics by his two institutional theories: the dependence effect and the behaviour of the firm. This essay will focus on these two notions, discuss Galbraith¿½¿½s idea about it and then derive the criticism arise from them, finally draw to a conclusion.
The Dependence Effect
In the neoclassical economics theory, consumers are sovereign in the society. It is their need which creates the demand for goods and services then pass on to production to satisfy such needs (Schor, 2006). However, Galbraith and his theory do not admit this process of maximizing consumers¿½¿½ utilities. He argues that (1958) as we are moving from an age of poverty to an age of affluence, there is no urgent wants in the society. Instead of that, as resources are abundant, consumer demand is now created by the efforts from producers such as advertising and salesmanship. In that case, the neoclassical welfare model collapses (Schor, 2006), as welfare in a society does not necessarily rise when production is increased. Because a higher level of production leads to an even greater wants which requires for a greater satisfaction (Brando, 2009). This is what Galbraith called ¿½¿½The Dependent Effect¿½¿½: more wants is created when depending on production to satisfy it (Brando, 2009). Brando (2009) cited that John Maynard Keynes support Galbraith¿½¿½s theory ¿½¿½the production as a creator of wants¿½¿½ by saying ¿½¿½one man¿½¿½s consumption becomes his neighbour¿½¿½s wish¿½¿½.
Besides the concern about ¿½¿½The Dependent Effect¿½¿½, the overprovided private goods and services subtract the resources allocated for public sector which results in ¿½¿½private affluence, public squalor¿½¿½ (Brue, 1999). Galbraith called this situation ¿½¿½social imbalance¿½¿½. A classic example for this is that the increasing purchase and use of vehicles requires for more roads, highways, insurances, pollution control regimes and traffic control system. In order to mend such imbalance, Galbraith suggests imposing heavier consumption taxes on certain goods and services rather than land taxes or labouring taxes (Brue, 1999). However, the conflict does not only exist between private sector and public sector, but also between powerful private sector and general interests (Galbraith, 1958). Some evidences for this are government might spend much more on defence and highways rather than poverty relief, health and education. Because it might change the social class structure (Stanfield, 2002). This great market power can refer back to firms¿½¿½ behaviour in the introduction.
Galbraith’s Theory of the Firm
In neoclassical economics theory, firms have different behaviours due to different objectives. For example a self-run business¿½¿½s objective is to maximize its profit, so their will sell the goods and services at marginal cost. This type of business is categorized by Galbraith into market sector (Brue, 1999). However, there is a far more complex and important type of business called planning sector, control and ownership are separated. These large or even giant firms have numerous owners, they are shareholders. Most of these shareholders only take a negligible part of the whole company, therefor they have no control over the company. Instead, large corporations usually hire a group of experts in different area such as managers, designers, engineer, or economist. These people will form a board of director to direct the whole company. On the other hand, shareholders can only switch their money from one company¿½¿½s share to another. Therefore, in order to keep the funds, board of directors will try their best to maximize shareholders¿½¿½ return or dividend. Their objective is much more complex than profit maximizing. Brue (1999) cited that Galbraith categorized their objectives as protective and affirmative.
The main idea of protective purpose is to remain in the market, in other words, survival. So they make a sufficient profit returning to the shareholders to keep their money stay with the company. And keep the retained profit as the funds for company¿½¿½s growth. Under such circumstance, many large firms will try to escape from competition by either fix the price directly or by its understanding of other similar companies in the industry (Brue, 1999). A neoclassicist will view this as maximizing joint profits by limit the quantity of production, while Galbraith treat this less-than-maximizing profit as an assurance for rivals to survive.
The core of affirmative purpose is to keep the company growing in revenue, sales and profits for bonus to the board of directors like the managerial behaviour to some extent. In orthodox theory of firm¿½¿½s behaviour, oligopolists lower their output to increase profits, however, Galbraith (1973) pointed out profit maximizing is not these firms¿½¿½ purpose. Instead, their huge investment in advertising and hardware aim to gain market share, which perfectly match its growth objective.
Galbraith¿½¿½s attacks on orthodox economics were rejected by many other economists. The idea of passive consumers believe in advertising denies their active willingness. An example cited by Schor (2006) is cultural products. Artist might deliver his thought when create the work, but audiences will not simply take the words rather than digest them and plot a new picture in their own minds. Same thing happens in advertising, consumers are active taker, transform and interpret the meaning of the advertisement by their own is more likely to happen.
The non-profit maximizing purpose also draws critics. A firm with non-profit maximizing purpose in long run will give the public a negative image about their ability to make future earnings. So that its share price will lower than it could be because of the non-profit maximizing purpose. In such circumstance, if any company would like to offer an higher price to the shareholders, the whole company will be easily taken over.
Galbraith was one of the first orthodox economists, his attacks on conventional economics theory cause more back fire made him an economist with public stance. His main ideas made neoclassicists pause to think about their study, though it is not that powerful. As an orthodox economist, he needs more complete models and theories to developed new members. The inspiration his idea gave us as the public is to be cautious to the media and advertisement. Although people are not passive and devoid to take any thought others promote. But how can one make sure his or her free choice is ¿½¿½free¿½¿½ enough after so many years of ¿½¿½brainwash¿½¿½.