We live in a strange time. In the late 1960s, at the absolute apogee of leftist political ambitions, if someone had told me that I would live to see the day that our government would take over Wall Street (meaning, take over any of our major investment banks,) I would have thought this most unlikely. And if that someone had said that this takeover would occur under the direction of the most conservative Republican administration in recent history--that a Republican Secretary of the Treasury would be begging a reluctant Democratic Congress to take over Wall Street--I would have wondered what kind of hallucinogenic drugs they were using. Yet in 1968, I had already read Galbraith’s The New Industrial State, which offered a vague premonition of this turn of events to those who understood what he was saying. I‘ll return to that point shortly.
A couple years ago I read a piece about the work of the late economist Hyman Minsky, who spent his life developing models proving that capitalism (the “free market system,” if you prefer) is inherently unstable. According to Minsky, market based systems have to be tightly regulated, and even when very tightly regulated, they occasionally crash and have to be bailed out anyway. There is no avoiding it—it’s in the nature of the beast. If there were any justice in the world, Minsky would still be alive today. He would find it quite gratifying to hear former FED chairman Allen Greenspan testify that he was “shocked and dismayed that simple self-interest did not prevent the bankers from acting foolishly.” But Minsky was not alone in his opinions; he was simply a Keynesian.
John Kenneth Galbraith, certainly a more famous Keynesian, maintained to the end that capitalism was systemically unstable, but didn’t waste his time trying to prove it. Having begun his career in the Great Depression, he would have considered this effort equivalent to proving that water is wet. And if there were any justice, Galbraith would also be alive today, and so would Milton Freedman. But alas, Galbraith spent his last years seeing Freedman accept a Nobel Prize for showing that markets were self-regulating, (and if government didn’t get in the way, everything would work perfectly.) If the two men were both alive today, I’m sure Galbraith would derive a certain well-deserved schadenfreud at seeing Freedman testify before Senator Henry Waxman’s committee, trying to explain why the ideas that had won him a Nobel Prize didn’t actually work.
Yet, though the government bailout of the finance industry was astounding, the event I find more interesting was the bailout of the auto industry. Oh, they argued about it and wrung their hands over it for a while, but eventually, congress passed this bailout. There really wasn’t any choice. The barriers to entry in auto manufacturing are so absurdly high that, once gone, the American auto industry would be gone forever. The American public would then be dependent on foreigners not just for fuel, but for cars as well. We would spend the next century sending dollars overseas for cars that could as easily have been made by American workers. Some will tell you that we would still have American-made cars—just produced by Toyota and Honda. I beg to differ. What we would have is American assembled cars. And the foreign companies owning these factories would pay no American taxes, because by manipulating the price paid to themselves for component parts, they could insure that no profit was ever made in this country. And in any economic downturn, when faced with a choice between laying off American workers or Japanese workers, what do you think they would choose? It is true that for a long time, Japanese companies provided us high quality cars at a competitive price. But this was part of a long-term strategy to put the Big Three out of business. Once this was accomplished, we would get whatever quality they chose to supply at whatever price they chose to charge.
In The New Industrial State, at the height of the cold war, Galbraith argued that if you were to tour a new factory in the Soviet Union and one making the same product in the West, you wouldn’t notice much difference. We both used almost the same technology. Yet every technology has its own requirements as to what kind of political, social, and economic structures it needs to support its continued function. A good example of this would be ancient Egypt. At one time, the Egyptians had little or no government at all. Five hundred years later, they had pharaohs with god-like power. The pharaohs used that power to build great monuments, but that’s not how they got their power. What happened is that the climate dried out, and they needed massive irrigation works to survive. One man with one shovel cannot divert the course of the Nile. But a million men and a million shovels can—if they all work under a single authority. So the Egyptians made a radical change in social systems because that’s what was needed for the change in technology. Technology trumps ideology. So today, when East and West both adopt the same technologies, then they are both destined to move in the same direction in many other ways as well.
Galbraith pointed out there is not, and never has been, any such thing as a pure market economy, or a purely socialist economy. Every economy is a mixed economy, employing several aspects of capitalism and socialism. We, and the Soviets, he argued, had a wide range of choices as to what kind of mix of systems we wanted. But as technology evolves and makes more demands, the range of choices must become narrower for us both. As we both adopt the same technology, then we both end up moving toward the same point in social and economic systems as well. He predicted that ideological purists on both sides would be loath to accept some of the coming changes. But their objections would be over-ruled. Technology will trump ideology.
Twenty years ago, when the Soviets made an attempt to make a massive shift to market-based economics, it was done because the kind of classic socialist incentives and Marxist industrial organization in use no longer supported the modern industry they were trying to build. But they completely over-shot the mark. The result was a disaster. The Russians are now re-trenching, moving to a system that is about half-way between where we were and where the Soviets were in 1968. This is about what Galbraith would have assumed. But technology put limits on us too, as well as it did for the Soviets.
As to how technology places constraints on social systems, Galbraith gave the following explanation: If a large corporation (he cited General Motors as an example) decides to launch a new product, the lead time may be 3 to 4 years, and the sunken investment is enormous. In 1910, there were 200 car companies, and new ones coming into existence every year. Barriers to entry were minimal, and only a few months of lead time was needed to market a new product, and capital investment was modest.
But now (writing in 1968) Galbraith says, just designing the car will take over a year and tens of millions of dollars. In fact, even the alloys of sheet steel used may need to be custom designed to accommodate the specific draw-dies used to make stampings for a particular design. And after the patterns and tooling are made, another multi-million dollar campaign is needed to sell the product. And even if a product is successful, it may take at least a three year production run to return capital costs. So when deciding to launch a product, a company is building for a market seven or eight years into the future. Once it has committed this capital, what if the future it has prepared for doesn’t happen?
What happens is that the company goes broke. But what if the company is too big to be allowed to fail? In 1910, a dozen car manufacturers went broke every year, and this loss rarely affected anyone except the investors who owned them. And even when Studebaker went down, it only trashed South Bend, Indiana. But if GM goes down, this would affect over 50 host communities, hundreds of suppliers all over the country, millions of workers, and trillions of dollars in stranded assets—it would be a national disaster. No country is rich enough to write off that big a loss. So there would have to be a bailout. But bailouts of this magnitude are also too big for any country to afford very many of them.
So what has to happen? What has to happen is that once the money for a new product for a future market is committed, government has to ensure that this future actually happens, if it can do so. But what if it can’t.? Well, the other thing that has to happen is that there must be sufficient oversight by government to see that any business plans used by very large corporations fall within the range of futures which government can deliver. (i.e., if a product requires cheap oil, and government isn’t sure it can deliver such a future, then it must veto any plan to build 8 mpg SUVs.) Also, if taxpayer money is to be promised for any bailouts that may become necessary, then executive perks and total compensation must be well within limits which typical taxpayers would regard as reasonable.
It appears that in certain industries, we will end up with a quasi-public, quasi-private, industrial landscape that looks very much like what Galbraith saw in 1968. And no one of any political stripe is going to like it—and Galbraith saw that too.
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