Galbraith on Globalization
Commentary: The work of the late economist can
still provide vital insights into today’s global economy.
By Thomas Palley
May 5, 2006
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Article created by the The Century
Foundation.
John Kenneth Galbraith died on April 29, 2006 at the age of 97, having
led a life filled with honor and accomplishment. Unfortunately, his ideas
are largely ignored by today’s economics profession. His recent death
marks an occasion for spotlighting the continuing relevance of those ideas
and the ideological narrowness of a profession that makes no space for
them.
The period 1890–1940 includes the Progressive (1900–1916) and New Deal
(1932–1940) eras. During this fifty-year period America came to grips with
the problems that arose with its transformation into a mechanized,
industrialized, urbanized society. Whereas the Progressive era highlighted
the human excesses of raw capitalism and took the first tentative steps
toward taming them, the New Deal era confronted the instability of
capitalism and enacted reforms that saved the system from itself.
Today’s era of globalization is showing signs of problems similar to
those seen earlier. In labor markets there has been a decline in workers’
bargaining power, while the global economic system has shown proclivities
toward financial instability and deflation. These parallels suggest that
there are lessons to be learned from reflecting upon the reforms of the
Progressive and New Deal eras. Such reflection inevitably leads to John
Kenneth Galbraith’s analysis of that period, published in 1952 under the
title of American Capitalism: The Concept of Countervailing Power.
The core problems of the Progressive and New Deal eras were the
callousness of the economic system and its inability to maintain
sufficient purchasing power for full employment. Behind this lay the
problems of monopoly and deflation. By charging high prices, monopoly
erodes purchasing power. So too does deflation because it increases the
value of debts. The New Deal tackled these problems through a combination
of regulation and the creation of modern fiscal policy.
Regulation served the twin purposes of controlling monopoly and putting
a floor under prices. Not only did it extend to key industrial sectors, it
also included labor markets through legislation establishing the minimum
wage, the forty-hour week, and the right to join unions. This established
a wage floor that, in one swoop, tackled both the Progressive era problem
of callousness and the Depression era problem of inadequate purchasing
power. Side-by-side, modern fiscal policy was built upon an expanded
government sector whose purchasing power was more stable, and which could
also be mobilized in downturns to offset declines in private sector
spending.
These policy interventions reinforced stabilizing features within the
system. This is where Galbraith’s concept of countervailing power enters.
The problem of monopoly arose with the emergence of large powerful
corporations. However, the system partially addressed this problem itself
through the development of large corporations on both sides of the market.
Consequently, big buyers confronted big sellers, thereby generating
countervailing power between buyers and sellers that helped keep prices
down and stable.
In labor markets, it was the development of trade unions that created
countervailing power. This ensured that workers were also represented by
big sellers that could go head-to-head with big buyers. In this regard,
New Deal labor legislation was critical since it promoted unions. Prior to
the legislation, employer opposition had stalled union coverage at about
fifteen percent of employment. Afterward, it rose to almost thirty-five
percent.
A Galbraithian lens suggests that the countervailing power equilibrium
that prevailed after World War II has been dislodged. In labor markets,
the process started with the inability of unions to organize the expanding
service sector. At the same time that the service economy was growing away
from unions, manufacturing started going mobile through the development of
multinational production methods.
Additionally, a retail revolution was taking place through big box
discount stores exemplified by Wal-Mart. These discounters have adopted a
global sourcing model that scours the world for the lowest price—the
so-called “China price”—and then requires American manufacturers and
workers to meet it or lose the business. This model now extends to every
retail segment, and it creates a race to the bottom by putting the entire
consumer goods manufacturing sector in global competition. To stay
competitive, American manufacturers must either slash pay at home or move
production offshore. Moreover, this global sourcing model is now being
applied in capital goods manufacturing, with assemblers like Ford, General
Motors and Boeing adopting it.
A Galbraithian analysis points to the need to rebuild countervailing
power. That requires organizing workers in the service sector and in firms
such as Wal-Mart. American businesses also have an interest in the
re-building of countervailing power as global sourcing has undermined the
position of sellers. Enabling domestic suppliers to compete in a
globalized economy calls for new institutional arrangements limiting
unfair international competition based on labor exploitation,
environmental neglect, and under-valued exchange rates. The bottom line is
that Galbraith’s economic analysis remains as trenchant and relevant as it
was fifty years ago, and the logic of countervailing power provides vital
insights into today’s problematic of globalization.
Thomas Palley was formerly Chief
Economist of the U.S.–China Economic and Security Review Commission.
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