Academic journal article Review of Social Economy

The Great Retrenchment and the New Industrial State

Academic journal article Review of Social Economy

The Great Retrenchment and the New Industrial State

Article excerpt

Introduction

The tiger hunts for itself not for its masters, and when game is scarce, will hunt them (Tawney, 1948, p. 76).

By the middle of the twentieth century, the U.S. economy had become remarkably different both from its nineteenth century frontier parent and from its theoretical formulation in the neoclassical textbooks. A few underground economists -- institutionalists, Marxists, and one or two unusually astute Keynesians -- had begun to recognize this dual divergence, but one economist in particular was able to construct a clear theoretical treatment of the new economy. That economist was John Kenneth Galbraith, and the theoretical formulation was his New Industrial State. His was a remarkable contribution to the theoretical foundations and policy applications of economics. Would that the theoreticians and politicians had heeded him. But they did not. Instead, the siren song of Monetarism and the promised free lunch of Reaganism proved irresistible. The result was the Great Retrenchment. And the revenge of Galbraith has been terrible indeed.

In his 1967 book, The New Industrial State, Galbraith explained how the U.S. economy had evolved into a planned economy of giant corporations on one hand and into a market economy of small firms on the other hand. The planned economy was dominated by the technostructure whose goals were maximum growth and autonomy and this part of the economy set the pace for the rest. The planned economy had become inordinately powerful. As Galbraith put it, "we are becoming the servants in thought, as in action, of the machine we have created to serve us" (Galbraith, 1967, p. 7). We needed new policies to deal with this powerful new growth. Galbraith proposed wage and price controls to fight the permanent threat of inflation, aggressive fiscal policy to stabilize aggregate demand, and the increased political participation of the educational and scientific estate as a countervailing power against that of the technostructure. These new policies, Galbraith argued, would make it possible for us to live the good life by turning the economic power of the technostructure toward serving the public purpose (Galbraith, 1973).

We did not implement Galbraith's policies. Instead, we implemented the Great Retrenchment. President Carter appointed Paul A. Volcker to head the Federal Reserve Board's fight against the inflation induced by the energy crisis of the 1970s. Volcker applied a Monetarist, demand-pull solution to a petroleum, cost-push inflation and ushered in the Great Retrenchment. While Volcker pushed up interest rates to the highest level since the Civil War, Jimmy Carter added to the Great Retrenchment by starting the deregulation of the American economy. In the midst of the mounting malaise, Ronald Reagan promised us a free lunch, and we believed him. When elected President, he continued deregulating, he slashed taxes, and then he raised military spending. He had promised that the result would be a balanced budget and growth that would lift all boats, but the result was an even deeper slide into the Great Retrenchment. The Bush Presidency has done nothing to reverse the retrenchment policies of his predecessors, and even though the Fed under Allan Greenspan has brought interest rates back down, the effect has been that of pushing on a string (Further analysis of the Great Retrenchment is in Dugger, 1992 and Peterson, 1992).

During the Great Retrenchment, the New Industrial State changed fundamentally. Before the Retrenchment, the managers deep within the Technostructure had been operating in a power vacuum. Because of the separation of ownership from management that came with the mature corporation, managers had become free to pursue their own objectives. They did, but those objectives were not too horrible -- growth and autonomy are not as bad as personal aggrandizement and power. Galbraith had argued that the power vacuum which gave the technostructure its freedom of operation should be filled with the public purpose. …

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