10. Growth, Affluence, and Government
a. The Problem of Growth
In recent years, economists and journalists alike have been heavily emphasizing a new concept, growth,
and much economic writing is engaged in a numbers game on what percentage or rate of growth we should have next year or in the next decade.
The discussion is replete with comparisons of the higher rate of country X, which we must hurriedly counter, etc.
Amidst all the interest in growth, there are many grave problems which have hardly been touched upon.
First and foremost is the simple query, what is so good about growth?
The economists, discoursing scientifically about growth, have illegitimately smuggled an ethical judgment
into their science, an ethical judgment that remains unanalyzed, as if it were self-evident.
But why should growth be the highest value for which we can strive? What is the ethical
justification? There is no doubt about the fact that growth, taken over as another dubious metaphor
from biology, sounds good to most people, but this hardly constitutes an adequate ethical analysis.
Many things are considered as good, but on the free market every man must choose between different quantities of them and the price for those foregone.
Similarly, growth, as we shall presently see, must be balanced and weighed against competing values.
Given due consideration, growth would be considered by few people as the only absolute value.
It is completely illegitimate for the economist
qua-economist simply to endorse growth.
What he can do is contrast what growth means in various social conditions.
In a free market, for example, every person chooses how much future growth he wants as
compared to present consumption.
Growth, that is, a rise in future living standards, can be achieved, as we have implicitly
made clear throughout this volume, only in a few definable ways.
Either more and better resources can be found, or more and better people can be born, or
technology improved, or the capital goods structure must be lengthened and capital multiplied.
In practice, since resources need capital to find and develop them, since technological
improvement can be applied to production only via capital investment, since entrepreneurial
Individual skills act only through investments, and since an increased labor supply is relatively
independent of short-run economic considerations, and can backfire in Malthusian fashion by
lowering per capita output, the only viable way to growth is through increased saving
and investment.
On the free market, each individual decides how much he wants to save, to increase his
future living standards, as against how much he wants to consume in the present.
The net resultant of all these voluntary individual decisions is the nation's or world's rate
of capital investment.
The total is a reflection of the voluntary free decisions of every consumer, of every
The economist, therefore, has no business endorsing growth as an end.
If he does so, he is injecting an unscientific, arbitrary value judgment, especially if he
does not present an ethical theory and justification.
He should simply say that, in a free market, everyone gets as much growth as he chooses
What happens if the government decides, either by subsidies or by direct government ownership,
to try to spur the social rate of growth?
Then the economist should point out the entire situation changes.
No longer does each person elect to grow as he thinks best.
Now, with compulsory saving and investing, investment can come only at the expense of
the forced saving of some individuals.
In short, if A, B and C grow because their standard of living rises from compulsory investment,
They do so at the expense of D, E and F, the ones who were compelled to save.
No longer can we say that the social standard of living, the standard of living of each
active person, rises.
Under compulsory growth, some people, the coerced savers, clearly and demonstrably lose.
They grow backward.
Here is one reason why government intervention can never raise society's rate of growth.
For when individuals act freely on the market, every one of their actions benefits everyone,
and so growth is truly social, that is, participated in by everyone in the society.
But when government acts to force growth, it is only some who grow, at the expense of
and the Retrogression of Others.
The Wertfrei Economist is therefore not permitted to say that society grows at all.
Growth therefore is demonstrably not the single absolute value for anyone.
People on the market all weigh growth against present consumption, just as they weigh work
against leisure and all goods against one another.
If we fully realize that there is no such existent entity as society apart from individuals,
it becomes clear that society cannot grow at the expense of imposing losses on some or
most of its members.
Suppose for example that a community exists where the bulk of the population do not want
to grow.
They would rather not work very hard or save very much.
Instead, they would lull under the trees, pick berries, and play games.
To advocate the governments coming on the scene and forcing these people to work and
save in order to grow at some time in the future means to advocate the compulsory lowering
of the standard of living of the bulk of the populace in the present and near future.
Any sort of achieved production under this scheme, however great, would not be growth
for society.
Instead, it would be retrogression, not only for some, but for most people.
An economist, therefore, cannot scientifically advocate compulsory growth, for what he is
really doing is attempting to impose his own ethical views.
For example, more hard work and saving is better than more leisure and berries on the
other members of society by force.
These members greatly lose utility as a result.
Furthermore, it must be emphasized again that in cases of coerced saving, the saver reaps
none of the benefit of his sacrifice, which is instead reaped by government officials
or other beneficiaries.
This contrasts to the free market, where people save and invest precisely because they will
reap some tangible and desired rewards.
In a regime of coerced growth, then, society cannot grow, and conditions are totally different
from those of the free market.
Indeed, what we have is a form of the free-rider argument against the free market and for government.
Here, the various free-riders band together to force other people to be thrifty so that the former can benefit.
Even if we set these problems aside, it is doubtful how much the coercing free-riders can benefit from these measures.
Many considerations treated earlier now come into play.
In the first place, the growth and success of the compulsory free riders discourage production and shift more and more people and energy from production to the exploitation of production, that is, to compulsory free riding.
Secondly, we have seen that if government itself does the investing out of the confiscated
savings of others, the result, for many reasons, is not genuine investment, but waste assets.
The capital built out of coerced savings then, instead of benefiting the consumers, is largely
wasted and dissipated.
Even if government uses the money to subsidize various private investments, the results are
still grave.
For these investments, being uneconomic in relation to genuine consumers' demand and
profit and loss signals on the market, will constitute malinvestment.
Once the government removed its subsidies and let all capital compete equally in serving
in Consumers, it is doubtful how much of this investment would survive.
Although we have no intention of dealing here to any extent with an empirical problem like
Soviet economic growth, we may illustrate our analysis by noting the hullabaloo that
has been raised in recent years over the supposedly enormous rate of Soviet growth.
Curiously, one finds that the growth seems to be taking place almost exclusively in capital
goods, such as iron and steel, hydroelectric dams, etc., whereas little or none of this
growth seems ever to filter down to the standard of living of the average Soviet consumer.
The consumer's standard of living, however, is the be-all and end-all of the entire production
and Process. Production makes no sense whatever, except as a means to consumption. Investment
in capital goods means nothing, except as a necessary waystation to increased consumption.
When capital investment takes place in the free market, it deprives no one of consumption
and Goods, for those save who voluntarily choose investment over some present consumption.
No one is required to sacrifice present consumption who does not wish to do so.
As a result, the standard of living of everyone rises continually and smoothly as investment
increases.
But a Soviet or other system of compulsory investment lowers the standard of living of
In short, government investment, as we have noted, turns out to be a peculiar form of
wasteful consumption by government officials.
In many cases these investments are not simply bureaucratic errors, they pay welcome gains
to government officials in prestige.
Every underdeveloped government seems to insist on its steel mill or its dam, for example,
regardless whether it is economic or not, therefore usually not.
As Milton Friedman astutely points out, the Pharaohs raised enormous sums of capital to
to Build the Pyramids.
This was capital formation on a grand scale.
It certainly did not promote economic development in the fundamental sense of contributing to
a self-sustaining growth in the standard of life of the Egyptian masses.
Modern Egypt has, under government auspices, built a steel mill.
This involves capital formation, but it is a drain on the economic resources of Egypt.
Since the cost of making steel in Egypt is very much greater than the cost of buying
it elsewhere, it is simply a modern equivalent of the pyramids, except that maintenance expenses
are higher.
There is another consideration that reinforces our conclusion.
Professor Lockman has been diligently reminding us of what economists generally forget, that
Capital is not just a homogeneous blob that can be added to or subtracted from.
Capital is an intricate, delicate, interweaving structure of capital goods.
All of the delicate strands of this structure have to fit and fit precisely or else malinvestment
occurs.
The free market is almost an automatic mechanism for such fitting, and we have seen throughout
this volume how the free market, with its price system and profit and loss criteria,
adjusts the output and variety of the different strands of production, preventing any one
from getting long out of alignment.
But under socialism, or with massive government investment, there is no such mechanism for
for fitting and harmonizing. Deprived of a free price system and profit and loss criteria,
the government can only blunder along, blindly investing without being able to invest properly
in the right fields, the right products, or the right places. A beautiful subway will
be built, but no wheels will be available for the trains. A giant dam, but no copper
These sudden surpluses and shortages, so characteristic of government planning, are the result of massive malinvestment by the government.
As P.T. Bauer writes, if development has meaning as a desirable process, it must refer to an increase in desired output.
Governmental collection and investment of saving affect production which is not subject to the test of voluntary purchase at market price.
Increased output through this method is at best an ambiguous indicator of economic improvement.
If the capital is not provided voluntarily, this suggests that the population prefers an alternative use of resources,
whether current consumption or other forms of investment.
The current controversy over growth is, in a sense, the result of a critical error made
by right-wing economists in their continuing debate with their left-wing opponents.
Instead of emphasizing freedom and free choice as their highest political end, the rightist
Most economists have stressed the importance of freedom as a utilitarian means of encouraging
saving, investment, and therefore economic growth.
We have seen that conservative opponents of the progressive income tax have often fallen
into the trap of treating saving and investment as somehow a greater and higher good than
and Consumption, and therefore of implicitly criticizing the free market's saving-consumption
ratio.
Here we have another example of the same lapse into an implicit arbitrary criticism of the
market.
What the modern leftist proponents of compulsory growth have done is to use the venerable arguments
of the Conservatives as a boomerang against them, and to say in effect to their opponents,
very well, you have been maintaining that saving and investment are of critical importance
because they lead to growth and economic progress, fine, but as you yourselves implicitly grant,
the free market's proportion of saving and investment is really too slow.
Why then rely upon it?
Why not speed up growth by using government to coerce even more saving and investment,
to speed up capital further?
It is evident that conservatives cannot counter by reiterating their familiar arguments.
The proper comment here is the analysis we have been expounding.
In short, A, by what right do you maintain that people should grow faster than they voluntarily
We Wish to Grow
B. Compulsory growth will not benefit the whole of society as will freely chosen growth,
and it is therefore not social growth.
Some will gain, and gain at some distant date, at the expense of the retrogression of others.
C. Government investment or subsidized investment is either malinvestment or not investment
What in point of fact is economic growth?
Any proper definition must surely encompass an increase of economic means available for
the satisfaction of people's ends.
In short, increased satisfactions of people's wants, or as P.T. Bauer has put it, an increase
in the range of effective alternatives open to people.
On such a definition, it is clear that compulsory saving, with its imposed losses and restrictions
on people's effective choices, cannot spur economic growth, and also that government
investment, with its neglect of voluntary private consumption as its goal, can hardly be said to
add to people's alternatives. Quite the contrary. On Soviet economic growth, P. T. Bauer and Basil
Yemi make this salutary comment. The meaning of national income, industrial output and capital
Formation is also debatable in an economy when so large a part of output is not governed
by consumers' choices in the market.
The difficulties of interpretation are particularly obvious in connection with the huge capital
expenditure undertaken by government without reference to the valuation of output by consumers.
Finally, the very term growth is an illegitimate import of a metaphor from biology into human action.
Growth and rate of growth connote some sort of automatic necessity or inevitability,
and have, for many people, a value-loaded connotation of something self-evidently desirable.
Concomitantly with the hubbub about growth, there has developed an enormous literature about
the economics of underdeveloped countries. We can here note only a few considerations.
First, contrary to a widespread impression, neo-classical economics applies just as fully
to underdeveloped as to any other countries. In fact, as P.T. Bauer has often stressed,
The economic discipline is in some ways sharper in less developed countries because of the extra option that many people have of reverting from a monetary to a barter economy.
An underdeveloped country can grow only in the same ways as a more advanced country, largely via capital investment.
The economic laws which we have adumbrated throughout this volume are independent of the specific content of any communities or nation's economy, and therefore independent of its level of development.
Secondly, underdeveloped countries are especially prone to the wasteful, dramatic, prestigious
government investment in such projects as steel mills or dams, as contrasted with economic
but undramatic private investment in improved agricultural tools.
The following quotation from Bauer's study on India is instructive for its analysis of
of Central Planning as well as Development.
As a corollary of reserving a large and increasing sector of the economy for the government,
private enterprise and investment, both Indian and foreign, are banned from a wide range
of industrial and commercial activity.
These restrictions and barriers affect not only private Indian investment, but also the
The entry of foreign capital, enterprise and skill, which inevitably retards economic development.
Such measures are thus paradoxical in view of the alleged emphasis on economic advance.
Bauer's chief defect is a tendency to underweigh the role of capital in economic development.
It is fascinating to discover, in 1925 and 1926, before Soviet Russia became committed
to full socialism and coerced industrialization, Soviet leaders and economists attacking central
planning and forced industry, and calling for economic reliance on private peasantry.
Under 1926, however, the Soviet planned economy deliberately planned uneconomically for forced
heavy industry in order to establish an autarkic socialism.
Finally, the term underdeveloped is definitely value-loaded to imply that certain countries
are too little developed below some sort of imposed standard.
As James W. Wiggins and Helmut Schirk point out, undeveloped would be a more objective
term.
Because of its spectacular burst of popularity, something must here be said of the recent
Stages of Economic Growth doctrine of Professor W. W. Rostow.
Highly recommended as the answer to Marx, as if Marx had never been answered before,
The show defines five stages of economic growth through which each modern nation passes.
These center around the take-off, and include preconditions of take-off, drive from take-off
to maturity, and, as the final stage, high mass consumption.
Perhaps some of the popularity may be due to the term take-off, which is certainly in
in tune with our aeronautical and space-minded age.
In addition to committing the common fallacy of assuming some sort of automatic rate of
growth, Rastow adds many others of his own, among which are the following.
A. The resumption of the futile modern search for non-existent laws of history.
B. The discovery of such laws by way of that hoary fallacy of late 19th century German
in Thought, Stages of History, with each arbitrary stage somehow destined to evolve automatically
into the next, c. the undue stress, here as in other ways closer to Marx than most critics
realize, on sheer technology, on sheer technology as the funds at origo of economic development,
D. The deliberate mixing of government and private firms as equally capable of entrepreneurship
and E. Reliance on the fallacious concept of social overhead capital, which must be mainly
supplied by the government before take-off is achieved.
Actually, as we have seen, there are not different stages of economy, each subject to its own
Laws, but one single economics which applies to any level of development and explains any
degree of growth, Rostow's final stage of high mass consumption is particularly open
to question.
What was more characteristic of the early take-off stage of the Industrial Revolution
B. Professor Galbraith and the Sin of Affluence
In the early part of the 20th century, the main indictment of the capitalist system by
its intellectual critics was the alleged pervasiveness of monopoly.
In the 1930s, mass unemployment and poverty, one-third of a nation, came to the fore.
At the present time, growing abundance and prosperity have greatly dimmed the poverty
and Unemployment Theme, and the only serious monopoly seems to be that of labor unionism.
Let it not be thought, however, that criticism of capitalism has died.
Two seemingly contradictory charges are now rife.
A, that capitalism is not growing fast enough, and B, that the trouble with capitalism is
that it makes us too affluent.
This wealth has suddenly replaced poverty as the tragic flaw of capitalism.
This performance leads one to believe that Schumpeter was right when he declared,
Capitalism stands its trial before judges who have the sentence of death in their pockets.
They are going to pass it, whatever the defense they may hear.
The only success victorious defense may produce is a change in the indictment.
At first sight, these latter charges appear contradictory, for capitalism is at one and
the same time accused of producing too many goods, and yet of not increasing its production
of goods fast enough.
The contradiction seems especially glaring when the same critic presses both lines of
attack, as is true of the leading critic of the sin of affluence, Professor John Kenneth
Galbraith.
But as the Wall Street Journal has aptly pointed out, this is not really a contradiction at
all, for the excessive affluence is all in the private sector, the goods enjoyed by the
consumers.
The deficiency, or starvation, is in the public sector, which needs further growth.
Thus Galbraith deplores the government's failure to invest more in scientists and scientific
Research to promote our growth, while also attacking American affluence.
It turns out, however, that Galbraith wants more of precisely that kind of research which
can have no possible commercial application.
Although Galbraith's book, The Affluent Society, is replete with fallacies, backed by dogmatic
assertions and time-honored rhetorical devices in place of reasoned argument, the book warrants
presents some consideration here in view of its enormous popularity.
Galbraith's major rhetorical device may be called the sustained sneer, which includes
a. presenting and opposing arguments so sardonically as to make it seem patently absurd with no
need for reasoned refutation, b. coining and reiterating veblinesque names of disparagement,
for example, the conventional wisdom, and c, ridiculing the opposition further by psychological
ad hominem attacks, that is, accusing opponents of having a psychological vested interest
in their absurd doctrines, this mode of attack being now more fashionable than older accusations
of economic venality, the conventional wisdom encompasses just about everything with which
which Galbraith disagrees.
As in the case of most economists who attack economic science, Professor Galbraith is an
historicist who believes that economic theory, instead of being grounded on the eternal facts
of human nature, is somehow relative to different historical epochs.
Conventional economic theory, he asserts, was true for the eras before the present,
which were times of poverty.
Now, however, we have vaulted from a centuries-long state of poverty into an age of affluence,
and for such an age, a completely new economic theory is needed.
Galbraith also makes the philosophical error of believing that ideas are essentially refuted
by events.
On the contrary, in human action, as contrasted with the natural sciences, ideas can be refuted
One of Galbraith's gravest flaws is the arbitrariness of the categories which pervade his work, of poverty and affluence.
Nowhere does he define what he means by these terms, and therefore nowhere does he lay down standards by which we can know, even in terms of money.
Nowhere does he define what he means by these terms, and therefore nowhere does he lay down
standards by which we can know, even in theory, when we have passed the magic borderland between
poverty and affluence that requires an entirely new economic theory to come into being.
The present book, and most other economic works, make it evident that economic science
is not dependent on some arbitrary level of wealth.
The basic praxeological laws are true of all men at all times, and the catallactic laws
of the exchange economy are true whenever and wherever exchanges are made.
Galbraith makes much of his supposed discovery, suppressed by other economists, that the marginal
Marginal utility of goods declines as one's income increases, and that therefore a man's
final $1,000 is not worth nearly as much to him as his first, the margin of subsistence.
But this knowledge is familiar to most economists, and this book, for example, has included it.
The marginal utility of goods certainly declines as our income rises, but the very fact that
that people continue to work for the final $1,000 and work for more money when the opportunity
is available demonstrates conclusively that the marginal utility of goods is still greater
than the marginal disutility of leisure foregone.
Galbraith's hidden fallacy is a quantitative assumption from the mere fact that the marginal
When the marginal utility of goods falls as one's income and wealth rise, Galbraith has somehow concluded that it has already fallen to virtually, or really, zero.
The fact of decline, however, tells us nothing whatever about the degree of this decline, which Galbraith arbitrarily assumes has been almost total.
All economists, even the most conventional, know that as incomes have risen in the modern world,
workers have chosen to take more and more of that income in the form of leisure.
And this should be proof enough that economists have long been familiar
with the supposedly suppressed truth that the marginal utility of goods in general
tends to decline as their supply increases.
But, Galbraith retorts, economists admit
that leisure is a consumer's good,
but not that other goods decline in value
as their supply increases.
Yet this is surely an erroneous contention.
What economists know is that as civilization
expands the supply of goods,
the marginal utility of goods declines,
and the marginal utility of leisure foregone, the opportunity cost of labor increases, so that more and more real income will be taken in the form of leisure.
There is nothing at all startling, subversive or revolutionary about this familiar fact.
According to Galbraith, economists willfully ignore the spectre of the satiation of wants.
Yet they do so quite properly, because when wants, or rather wants for exchangeable goods, are truly satiated, we shall all know it soon enough.
For at that point, everyone will cease working, will cease trying to transform land resources into final consumers' goods.
There will be no need to continue producing, because all needs for consumers' goods will have been supplied, or at least all those which can be produced and exchanged.
At this point, everyone will stop work, the market economy, indeed all economy, will come to an end, means will no longer be scarce in relation to ends, and everyone will bask in paradise.
I think itself evident that this time has not yet arrived, and shows no signs of arriving.
If it someday should arrive, it will be greeted by economists as by most other people, not
with curses, but with rejoicing.
Despite their venerable reputation as practitioners of a dismal science, economists have no vested
interests, psychological or otherwise, in scarcity.
But in the meanwhile, this is still a world of scarcity.
Scarce means have to be applied to alternate ends.
Labor is still necessary.
People still work for their final $1,000 of income and would be happy to accept another
$1,000 should it be offered.
We would venture another prediction.
An informal poll taken among the people asking whether they would accept or know what to
to do with an extra few thousand dollars of annual real income would find almost no one
who would refuse the offer because of excessive affluence or satiety or for any other reason.
Few would be at a loss about what to do with their increased wealth.
Professor Galbraith, of course, has an answer to all this.
These wants, he says, are not real or genuine ones.
They have been created in the populace by advertisers, and their wicked clients the
producing businessmen.
The very fact of production through such advertising creates the supposed wants that it supplies.
Galbraith's entire theory of excess affluence rests on this flimsy assertion that consumer
The consumer wants are artificially created by business itself.
It is an allegation backed only by repetitious assertion and by no evidence whatever, except
perhaps for Galbraith's obvious personal dislike for detergents and tail fins.
What is more, the attack on wicked advertising as creating wants and degrading the consumer
is surely the most conventional of the conventional wisdom in the anti-capitalist's arsenal.
In addition to wicked advertising, wants are also artificially created, according to Galbraith,
by emulation of one's neighbor, keeping up with the Joneses.
But in the first place, what is wrong with such emulation, except an unsupported ethical
judgment of Galbraith's?
Galbraith pretends to ground his theory, not on his private ethical judgment, but on the
alleged creation of wants by production itself.
Yet simple emulation would not be a function of producers, but of consumers themselves,
unless emulation too were inspired by advertising, but this reduces to the criticism of advertising
discussed in the text.
And secondly, where did the original Jones obtain his wants? Regardless of how many people
have wants purely in emulation of others, some person or persons must have originally
had these wants as genuine needs of their very own. Otherwise, the argument is hopelessly
circular. Once this is conceded, it is impossible for economics to decide to what extent each
Each want is pervaded by emulation.
There are many fallacies in Galbraith's conventional attack on advertising.
In the first place, it is not true that advertising creates wants or demands on the part of the
consumers.
It certainly tries to persuade consumers to buy the product, but it cannot create wants
or Demands because each person must himself adopt the ideas and values on which he acts,
whether these ideas or values are sound or unsound.
Galbraith here assumes a naive form of determinism, of advertising upon the consumers, and like
all determinists, he leaves an implicit escape clause from the determination for people like
If there is determinism by advertising, how can some people be determined to rush out and buy the product, while Professor Galbraith is free to resist the advertisements with indignation, and to write a book denouncing the advertising?
Secondly, Galbraith gives us no standard to decide which wants are so created and which are legitimate.
By his stress on poverty, one might think that all wants above the subsistence level are false wants created by advertising.
Of course, he supplies no evidence for this view, but as we shall see further,
Further, this is hardly consistent with his views on public or governmentally induced wants.
Thirdly, Galbraith fails to distinguish between fulfilling a given want in a better way and
inducing new wants.
Unless we are to take the extreme and unsupported view that all wants above the subsistence
line are created.
We must note the rather odd behavior attributed to businessmen by Galbraith's assumptions.
Why should businessmen go to the expense, bother and uncertainty of trying to create
new wants when they could far more easily look for better or cheaper ways of fulfilling
wants that consumers already have?
If consumers, for example, already have a discernible and discoverable want for a no-rub
cleanser, it is surely easier and less costly to produce and then advertise a no-rub cleanser
than it would be to create some completely new want, say for blue cleansers in particular,
and then work very hard and spend a great deal of money on advertising campaigns to
to try to convince people that they need blue cleansers because blue is the color of the
sky or for some other artificial reason.
Professor Lawrence Abbott, in his important book on competition, quality of products and
the business system, put it this way, the producers will generally find it easier and
and less costly to gain sales by adapting the product as closely as possible to existing
tastes and by directing advertising to those whose wants it is already well-equipped to
satisfy than by attempting to alter human beings to fit the product.
In short, the Galbraithian view of the business and marketing system makes little or no sense.
Rather than go to the expensive, uncertain, and, at bottom, needless task of trying to
find a new want for consumers, business will tend to satisfy those wants that consumers
already have, or that they are pretty sure consumers would have if the product were available.
Advertising is then used as a means of a, conveying information to the consumers that
What the product is now available and telling them what the product will do, and b. specifically trying to convince the consumers that this product will satisfy their given want, for example, will be a no-rub cleanser.
Indeed, our view is the only one that makes sense of the increasingly large quantities of money spent by business on marketing research.
Why bother investigating in detail what consumers really want if all one need do is to create the wants for them by advertising?
If in fact production really created its own demand through advertising, as Galbraith maintains,
Business would never again have to worry about losses or bankruptcy or a failure to sell automatically any good that it may arbitrarily choose to produce.
Certainly there would be no need for marketing research or for any wondering about what consumers will buy.
This image of the world is precisely the reverse of what is occurring.
Indeed, precisely because people's standards of living are moving ever farther past the
subsistence line, businessmen are worrying ever more intensely about what consumers want
and what they will buy.
It is because the range of goods available to the consumers is expanding so much beyond
and simple staples needed for subsistence in quantity, quality and breadth of product substitutes
that businessmen must compete as never before in paying court to the consumer, in trying
to obtain his attention, in short, in advertising.
Increasing advertising is a function of the increasingly effective range of competition
for the consumer's favor.
Not only will businessmen tend to produce for and satisfy what they believe are the
given wants of consumers, but the consumers, in contrast to voters, as we have seen, have
a direct market test for every piece of advertising that they confront.
If they buy the cleanser and find that much rubbing is still required, the product will
soon fade into oblivion.
Thus any advertising claims for market products can be and are quickly and readily tested by the consumers.
Confronted with these facts, Galbraith could only maintain that the aversion against rubbing was itself generated in some mysterious and sinister fashion by business advertising.
On the alleged powers of business advertising, it is well to note these pungent comments of Ludwig von Mises.
It is a widespread fallacy that skillful advertising can talk the consumers into buying everything that the advertiser wants them to buy.
However, nobody believes that any kind of advertising would have succeeded in making the candle-makers hold the field against the electric bulb,
Advertising is one of the areas in which Galbraith curiously and in glaring self-contradiction
treats private business differently from governmental activities.
Thus, while business is supposed to be creating consumer wants through advertising, thereby
by generating an artificial affluence.
At the same time, the neglected public sector
is increasingly starved and poverty-stricken.
Apparently, Galbraith has never heard of
or refuses to acknowledge the existence of
governmental propaganda.
He makes no mention whatever of the hordes of press agents,
publicists and propagandists working for government agencies,
Bombarding the taxpayers with propaganda which the latter have been forced to support.
Since a considerable part of the propaganda is for ever greater increases in the particular
government bureau's activities, this means that G, the government officials, expropriate
T, the bulk of the taxpayers, in order to hire more propagandists for G, to persuade
the taxpayers to permit still more funds to be taken from them, and so forth.
It is strange that, while waxing indignant over detergent and automobile commercials
over television, Professor Galbraith has never had to endure the tedium of public service
commercials beamed at him from the government.
We may pass over the Washington conferences for influential private organizations that
that serve as transmission belts for government propaganda to the grass roots, the inside
briefings that perform the same function, the vast quantities of printed matter subsidized
by the taxpayer and issued by the government, etc.
Indeed, not only does Galbraith not consider government propaganda as artificially want-creating,
And this is a realm, let us remember, where consumers have no market test of the product.
But one of his major proposals is for a vast program of what he calls investment in men,
which turns out to be large-scale governmental education to uplift the wants and tastes of
the citizenry.
In short, Galbraith wants society's objective to be the deliberate expansion of the new
New Class, roughly intellectuals, who are blithely assumed to be the only ones who really
enjoy their work, with its emphasis on education and its ultimate effect on intellectual, literary,
cultural and artistic demands.
In proposing this large-scale creation of an intellectual class, Galbraith virtually
ignores the artificiality of educating people beyond their interests, capacities or job
opportunities available.
It seems evident that while the free market and business are accused of artificially creating
consumer wants, the shoe is precisely on Galbraith's own foot.
It is Galbraith who is eager to curtail and suppress the consumers freely chosen wants
and who is advocating a massive and coercive attempt by the government to create artificial
wants, to invest in men by educating them to redirect their wants into those refined
and artistic channels of which Professor Galbraith is so fond.
Everyone will have to give up his tail-fins so that all may be compelled to read books.
like the affluent society, for example.
There are other grave and fundamental fallacies in Galbraith's approach to government.
In particular, after making much adieu over the fact that, with poverty conquered, the
marginal utility of further goods is lower, he finds that everything somehow works in
reverse for governmental needs.
Governmental needs, in some mystical way, are exempt from this law of diminishing marginal
wants.
Instead, mirabile dictu, governmental needs increase in urgency as society becomes more
affluent.
From this flagrant and unresolved contradiction, Galbraith leaps to the conclusion that government
must compel the massive shifting of resources from superfluous private to starved public
needs.
But on the basis of diminishing marginal utility alone, there is no case for such a shift,
since all wants at a higher real income are of lower utility than the wants of the poverty
stricken.
And when we realize that if we talk about created wants at all, governmental propaganda
is vastly more likely to create wants than is business, a case, even in Galbraith's
own terms, can be made for just the reverse, for a shift from the governmental to the private
sector.
And finally, Galbraith, in his lament for the starved and underprivileged public sector,
somehow neglects to inform his readers that whatever statistics are used, it is clear
that in the past half-century, government activity has increased far more than private.
Government is absorbing and confiscating a far greater share of the national product
Galbraith also airily assumes, in common with many other writers, that many governmental
services are collective goods and therefore simply cannot be supplied by private enterprise.
Without going further into the question of the desirability of private enterprise in
these fields, one must note that Galbraith is quite wrong.
Not only is his thesis simply a bald assertion unsupported by facts, but, on the contrary,
every single service generally assumed to be supplyable by government alone has been
historically supplied by private enterprise.
This includes such services as education, road building and maintenance, coinage, postal delivery, fire protection, police protection, judicial decisions, and military defense, all of which are often held to be self-evidently and necessarily within the exclusive province of government.
Since this would take us far afield indeed, we can mention here only one reference to the successful development of the road and canal networks of 18th century England by private road, canal and navigation improvement companies.
There are many other important fallacies in Galbraith's book, but the central thesis of the affluent society has now been discussed.
Thus, one of the reasons why Galbraith sees great danger in the present high consumption
is that much is financed by consumer credit, which Galbraith considers in the conventional
manner to be inflationary and to lead to instability and depression.
Yet, as we shall see further, consumer credit that does not add to the money supply is not
inflationary.
It simply permits consumers to redirect the pattern of their spending, so as to buy more
of what they want and ascend higher in their value scales.
In short, they may redirect spending from non-durable to durable goods.
This is a transfer of spending power, not an inflationary rise.
The device of consumer credit was a highly productive invention.
Predictably, Galbraith pours much of his scorn on the supply and demand explanation of inflation,
and especially on the proper monetary explanation, which he terms mystical.
His view of depression is purely Keynesian, and assumes that a depression is caused by
a deficiency of aggregate demand.
Galbraith is an increase in prices, which he would combat either by reducing aggregate
demand through high taxes or by selective price controls and the fixing by compulsory
arbitration of important wages and prices.
If the former route is chosen, Galbraith, as a Keynesian, believes that unemployment
would ensue.
But Galbraith is not really worried, for he would take the revolutionary step of separating
income from production.
Production, it seems, is important only because it provides income.
We have seen that government activity has already affected a considerable separation.
He proposes a sliding scale of unemployment insurance provided by the government to be
The payment in depression rising almost to the general prevailing wage.
For some reason, Galbraith would not go precisely as high because of a lingering fear of some
disincentive effect on the unemployed's finding jobs.
He does not seem to realize that this is merely a way of aggravating and prolonging unemployment
During a Depression and Indirectly Subsidizing Union Wage Scales Above the Market.
There is no need to stress the author's other vagaries, such as his adoption of the conventional
conservationist concern about using up precious resources, a position, of course, consistent
with Galbraith's general attack on the private consumer.
Amidst the tangle of Galbraith's remaining fallacies and errors, we might mention one,
his curious implication that Professor von Mises is a businessman.
For first, Galbraith talks of the age-old hostility between businessmen and intellectuals,
backs this statement by quoting Mises as critical of many intellectuals, and then concedes that
Most businessmen would regard Mises as rather extreme.
But since Mises is certainly not a businessman, it is odd to see his statements used as evidence
for businessman intellectual enmity.
This peculiar error is shared by Galbraith's Harvard colleagues, whose work he cites favorably,
and who persist in quoting such non-businessmen as Henry Hazlitt and Dr. F. A. Harper as
As we have indicated, there is a problem of the public sector.
Scarcities and conflicts keep appearing in government services and in these fields alone.
For example, juvenile delinquency, traffic jams, overcrowded schools, lack of parking
space, etc.
We have seen that the single remedy that proponents of government activity can offer is for more
funds to be channeled from private to public activity.
We have shown, however, that such scarcity and inefficiency are inherent in government
operation of any activity.
Instead of taking warning from the inefficiencies of government output, writers like Galbraith
Galbraith turned the blame from government onto the taxpayers and consumers, just as
government water officials characteristically blame the consumers for water shortages.
At no time does Galbraith so much as consider the possibility of mending an ailing public
sector by making that sector private.
How would Galbraith know when his desired social balance was achieved?
What criteria has he set to guide us in knowing how much shift there should be from private
to public activity?
The answer is none.
Galbraith cheerfully concedes that there is no way of finding the point of optimum balance.
No test can be applied for none exists.
But after all, precise definitions, precise equilibrium are not important, for to Galbraith
it is crystal clear that we must move now from private to public activity, and to a
considerable extent.
We shall know when we arrive, for the public sector will then bask in opulence.
And to think that Galbraith accuses the perfectly sound and logical monetary theory of
of Inflation, of being mystical and unrevealed magic.
Before leaving the question of affluence and the recent attack on consumption, the very
goal of the entire economic system, let us note two stimulating contributions in recent
years on hidden but important functions of luxury consumption, particularly by the rich.
F. A. Hayek has pointed out the important function of the luxury consumption of the rich at any given time in pioneering new ways of consumption and thereby paving the way for later diffusion of such consumption innovations to the mass of the consumers.
As Hayek puts it, a large part of the expenditure of the rich, though not intended for that end,
thus serves to defray the cost of the experimentation with the new things that, as a result, can later be made available to the poor.
The important point is not merely that we gradually learn to make cheaply on a large scale
And Bertrand de Juvenel, stressing the fact that refined aesthetic and cultural
and Cultural Tastes are concentrated precisely in the more affluent members of society, also points out that these citizens are the ones who could freely and voluntarily give many gratuitous services to others, services which, because they are free, are not counted in the national income statistics.
If all housewives suddenly stopped doing their own housework and instead hired themselves
out to their next-door neighbors, the supposed increase in national product, as measured
by statistics, would be very great, even though the actual increase would be nil.