Rereading Galbraith

Originally published June 13, 1983

I HAVE BEEN rereading, 25 years later, John Kenneth Galbraith’s The Affluent Society, Galbraith is one of the great economists of our time, and this is one of several great books he has published. It has changed our way of looking at things. Even those who affect to sneer at the author for being funny must take it seriously. Attempts to dispute its thesis, such as F.A. Hayek‘s essay “The Non Sequitur of the ‘Dependence Effect,’ ” end by missing the point.

Galbraith’s attack on what he calls the conventional wisdom moves against its unquestioning acceptance of two propositions: (1) that production is per se desirable, and (2) that consumer choices, through the market, guide production into channels that society values. The first proposition leads to the current worship of the GNP, some of whose absurdities I mentioned in this space last month. Exposure of the second proposition’s failure, in an affluent society, is the great contribution of Galbraith’s book. He writes that “our concern for goods … does not arise in spontaneous consumer need. Rather … it grows out of the process of production itself. If production is to increase, the wants must be effectively contrived. In the absence of contrivance, the increase would not occur. This is not true of all goods, but that it is true of a substantial part is sufficient.”

It is sufficient for his argument, because if advertising or other means of persuasion have any effect at all, they must increase demand at the margin. And “since the demand for this part [of production] would not exist, were it not contrived, its utility or urgency, ex contrivance, is zero.” Hence “the marginal utility of present aggregate output, ex advertising and salesmanship, is zero.” From this it follows that private production is not sacrosanct, and it becomes possible to consider the likelihood that a clean environment may be more valuable than a newly packaged detergent.

In his attempted rebuttal, Hayek grants that “the tastes of man, as is true of his opinions and beliefs and indeed of his personality, are shaped in great measure by his cultural environment.” That is not exactly Galbraith’s point, yet on the basis of it, Hayek finds it impossible to judge some tastes less urgent than others, though he himself puts great store by “the novels of Jane Austen or Anthony Trollope or C.P. Snow.” Thus he undercuts his own position. If there is no way of judging relative wants, then there can be no way of judging the success of the economy in satisfying those wants, nor any way of making things either better or worse. Economics becomes a waste of time – as much of what passes for economics certainly is.

Although many are uneasily aware that The Affluent Society is a book on morals, few note that it is a history book. Consequently, those who think that economics is an immutable science of unchanging laws have trouble with it. Galbraith observes, for example, that “bad kings in a poorer world showed themselves quite capable, in their rapacity, of destroying or damaging the production of private goods by destroying the people and the capital that produced them.” In such circumstances, laissez faire was a reasonable response. Galbraith shows, however, that what was reasonable then is not reasonable now. The world moves.

The world continues to move, and as a result one of the minor or incidental arguments of The Affluent Society has been superseded. It is not central to the main thesis, but is a recommendation of a particular strategy for practical politics.

Galbraith contends that many measures for the public good are lost because liberals insist on raising “the essentially unrelated issue of equality.” In the debate over progressive vs. regressive taxation, for instance, a coalition of conservatives and simon-pure liberals defeats the socially desirable program. As Voltaire said, the best is the enemy of the good. Galbraith therefore urges liberals to get on with the programs and live to fight another day on the equality question.

Whether deliberately or not, the Democrats did in effect follow Galbraith’s strategy in 1981. The Republicans were encouraged, even outbid, in “reforming” the tax laws to their liking. Did they then acquiesce in the expansion of national programs for the public good? Not that anyone noticed. The sight of blood drove them mad. Even Budget Director David Stockman was shocked at their greed. It would appear that at some times and with some people a civilized accommodation is impossible.

A convenient and scary summary of what has happened to the tax laws is given in a booklet by Robert S. McIntyre and Dean S. Tipps of Citizens for Tax Justice. The study, entitled Inequity and Decline, is published by the Center on Budget and Policy Priorities, 236 Massachusetts Avenue NE, Washington, DC 20002. (I give the address because you won’t find the booklet in regular bookstores; the publishers will send you a copy free, though they wouldn’t object to your making a modest donation.)

One of the virtues of this booklet is its demonstration that what happened in 1981 was not an isolated event but had a history stretching back to the Nixon years and in several respects earlier. Especially illuminating is the analysis of the tax “revolt” that broke out in California in 1978 and spread throughout the country, contributing, probably decisively, to the Reagan election and to the Reagan-Kemp-Roth tax laws that followed.

As Mclntyre and Tipps show, the revolt had legitimate grievances that were skillfully misdirected. In California, homeowner property taxes had increased 61 per cent in the three years from 1975-78, the year of Proposition 13. In the same period, taxes on business, industrial and agricultural property were down 5 per cent (for reasons for this decrease, see Eliminating Frictional Unemployment,” NL, March 7).  The revolt, though, was not against the shift of the tax burden; it was against taxes in general, accompanied by vague cries of “waste” and “fraud.” The upshot was a greater movement away from business taxation.

THE SAME THING happened on the national level. A number of big-business lobbyists known as the Carlton Group (because they met for breakfast at the Sheraton-Carlton in Washington) had headed a loose coalition in blocking President Carter’s tax-reform proposals and in widening various loopholes. This preliminary success encouraged the group to refine its strategy and led to its devastating victories in 1981. Here are some of the results of its earlier and later lobbying, as culled from the booklet:

Item: In the years 1969-80 average hourly wages went up 6 per cent in constant dollars, while top executive salaries went up 71 per cent.

Item: “By 1981, one-quarter of all taxpayers had more Social Security taxes withheld from their wages than they paid in Federal incomes taxes.” Social Security taxes are, of course, regressive, and of course this year’s “reform” has increased them.

Item: The Reagan-Kemp-Roth tax cuts, coupled with the 1983 Social Security tax hike, have produced a tax increase of 22 per cent for those whose income is less than $10,000 and a tax decrease of 15 percent for those whose income is more than $200,000. (For those with incomes between $20,000-$30,000, the situation is about a stand-off.)

Item: The rate on capital gains is now lower than the marginal income and Social Security tax rate paid by a wage earner with a family of four earning $20,000.

The main concern of Inequity and Decline is with corporation taxes and their loopholes. You are probably aware that corporations – especially the Fortune 500 and the Forbes 500 – pay a smaller share of the Federal taxes than they used to. Back in 1950, when Harry Truman was President, the corporate income tax produced 26.5 per cent of the Federal revenue; by fiscal year 1983 the figure had dropped to 5.9 per cent. The fall has been steady, in response to growing pressure from businessmen and bankers and their publicists, who have been careful to insist that they really are not greedy but are anxious to increase investment in productive enterprise, for the advantage of us all.

Long before President Reagan’s ironically entitled Economic Recovery Tax Act of 1981, United States business was taxed much more lightly than that of Japan or of any Western European nation – with one exception. This fact and its exception should give pause to hard-nosed, pragmatic men of affairs accustomed to judging things by how they really work rather than by how someone who has never met a payroll says they ought to work. For the exception was Britain, which was also the only one of all those nations whose productivity grew less than ours in the 1970s.

That brings us back to The Affluent Society. Our recent experience shows that the question of progressive vs. regressive taxation cannot be postponed to some more propitious time, nor can it be safely separated from wider social concerns. Conservative tax policies are as destructive as conservative social policies; one leads to massive and degrading unemployment, the other to an impoverished society.

When he wrote The Affluent Society, even when he published the third edition in 1976, Galbraith could not imagine that the conservatives would be so blind and so brutal as to throw 14 million of their fellow citizens out of work and complacently plan to keep them there. Although sarcastic and witty at the conservatives’ expense, he was more generous in his opinion of them than that. He was, in fact, generous to a fault, the only fault in his great book.

 The New Leader

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