The New Industrial State: Review

Halfway through John Kenneth Galbraith’s most famous (and controversial) book, and thought of writing up the main thesis of the whole thing. There are two kinds of social analysis: one based on a set of axiomatic rules, and another is based on empirical investigation. Galbraith is of the latter category, and always seeks to undermine the former, in extremely enjoyable prose (I would put it almost at the same level as Bertrand Russell’s prose!).

I had written some time ago about how liberalisation looks at the ground level, when the gloss of Times of India / NDTV / CNBC coverage is not present. Galbraith’s main thesis is on the same lines, with obviously more content and better form. One of the intentions is to provide a candid view of the Industrial system as it existed in the ’60s, another is to undermine the ‘theology’ of conservative economics and (even contemporary) economic pedagogy.

The reason conservative economists like Hayek get irritated with Galbraith is that he is, first of all, not given to using equations for everything, and often indulges in ‘lesser’ subjects like sociology and psychology to supplement his analysis, and not purely economic theory (with its implicit preconceptions). His broad generalizations can cause his arguments to seem unfounded, but a person with first hand experience with the corporate (like most reading this) will definitely strike a chord with his reasoning and arguments.

Profit maximization, pre-eminence of capital, informed choices by a consumer, free markets, firms being subordinate to the consumer by the working of the market mechanism are some of the fundamental notions that any standard economics textbook would try to instill in a reader. However, to say that this represents reality is a matter of faith and not fact, argues Galbraith. He takes the Corporation as a case study to drive home the point.

The structure, behavior, motivation, goals of the modern corporation, when studied without the rose-colored glasses of what Samuelson or anyone else teaches, shows how divorced economics is from reality. Economists have grudgingly admitted to some points, but they refuse to face reality in the face of decades of work going to waste. Galbraith also questions two social goals that we have only recently taken for granted (He analyzed the USA, whom we faithfully copy with increasingly decreasing phase lag) : The pursuit of growth for its own sake, and development of advanced technology. To think about it for a second, growth is a fundamental necessity for any modern corporation, both to keep its stockholders happy and for money to drive further growth. Fast changing technology also, in most cases, is a corporate goal, which contributes to the former goal in no small measure nowadays. Thus, instead of the corporation responding to accepted social goals, the corporations of considerable size actively work to shape social attitudes. This is in part a result of the members of the corporation to feel that they serve some social purpose. Another is of course to ‘create’ markets, which is what planning is all about.

In places like Bangalore, where the white collared elite are no longer in a desperate search for daily bread, alternate (some would like to call it ‘higher’) goals take their place. The corporation, with its immense reach and resources provides individuals the opportunity to influence a larger mass than it would be possible to do individually. Once an individual is persuaded that the corporation can be moulded in accordance with his/her inputs ( This is definitely true, since decision making is fundamentally a group activity and some individuals are, as always, more equal than others), aligning with corporate goals is easy. You would notice that loyalty to an organization increases with amount of time spent in it, which derives from the fact that you ‘matter’. Making sure that the corporation takes care of all the needs of the employee (financial, social, psychological) is an important part of the way a corporation behaves. Once all needs are taken care of within, there will be no need for an employee to look outside.

The past two paragraphs enumerate various facets of corporate behavior, which are driven by the need to reduce unreliability of markets. Any firm will require adequate supply, predictable labor behavior and reasonably reliable consumption of its products. Without these, planning for the future is almost impossible. There is no way a corporation can plan sales targets without all these factors of production and consumption being reliable. Most large corporations are in the habit of meeting or even exceeding previously set targets. This is not possible if the consumer is left to his/her own faculties to make a buying decision and if supply of labor or raw materials are not reliable, ie, left to the working of the market mechanism. Thus, large corporations must try to control behavior of markets if they are to invest large amounts of capital, which is a given in this time and age. A Reliance can hardly invest a few thousand crores in a refinery unless it is allowed certain concessions from market behavior. BIAL wants no other airport around for the same reason. More the competitors, lesser the power of a single competitor, and lesser their capability to plan.

To be fair, there are many markets (like those of clothing, FMCGs) where influencing consumer behavior is difficult due to a large amount of choices. But Galbraith’s focus is on the large corporation, which along with other large corporations constitute an oligopoly. In a corporation, the tenet of profit maximization fails for the simple fact that if every employee looked to maximize¬† profit, chaos would result. Thus, instead of personal profit maximization, stockholder profit maximization is the aim. This can hardly be called acceptable behavior in conventional terms. Thus, motivations of the corporation and its employees cannot be profit maximization. Similarly, consumer can no longer be called king, since there are various devices employed to bias his/her behavior. The tenets of economics, due to their lack of recognition of power as a fundamental factor in real-life economic behavior, fail quite a few reality checks.

Due to their reliance on high technology and an organised workforce to realise the same, the power now has moved from capital to organization of people and information. Thus, the class struggles of our times are no longer between those who have capital and those who do not, but those who have skills valued by the corporation and those who do not. This essentially boils down to an Engineering degree in Bangalore’s context. Anyone familiar with Bangalore will have seen how those with lesser education, organised in various groups, vent their frustration in the form of cultural and lingual pride.

A joining letter that my friend received from Oracle had the following sentence (paraphrased): “Oracle believes the the faster the employee is assimilated into the Oracle culture, the sooner the employee will be productive”. Oracle obviously does not have many bright bulbs in its HR department, but compliments to their candidness. The only other context where I have seen ‘assimilated’ being used is by the Borg in Star Trek. Obviously, the large corporation is not very different. I had once, on another blog, used ‘The Borg’ in this sense. Intuition, combined with some touch with reality, is always an eye-opener.

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2 thoughts on “The New Industrial State: Review”

  1. Kindly check the links once again.

    OHT post, will take some time to digest this. Keep it coming though :-)

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