J. K. Galbraith’s American Capitalism, published earlier this year, is the most important of a number of efforts to take a new look at that fabulous invalid, American capitalism— which, while it fulfilled all the worst predicted for it by its critics up to 1940, has since been doing much better than expected. DANIEL BELL, who here reviews Mr. Galbraith’s book in the light of the economic discussions of the past fifteen years, is now an editor of Fortune magazine. 

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It is a striking cultural phenomenon, especially for anyone with a sharp memory of the 30’s, that American capitalism has obtained grudging regard and a new theoretical definition from critics, especially Keynesian ones, who once were hostile. The term “American capitalism” points to a necessary distinction, for neo-classical economics, which marked out the ground rules for capitalism in general, has never lacked competent intellectual spokesmen. The case for the free market propounded most sharply in our time by Frank Knight—the proposition that a competitive society is the indispensable model to obtain both efficient allocation of resources and free consumer choice—has proved itself a compelling one. It has been accepted even by socialist theoreticians like Oskar Lange and A. P. Lerner who, turning the table, argued that only a socialist society, by removing the structural rigidities inherent in a large corporate economy, could restore the free market.

Who, however, was prepared to justify the American capitalist reality, the salient feature of which was an (apparently) paralyzing corporate giantism? By 1940, the majority of the younger economists were convinced that our economy was entering a phase of “secular [in the sense of long-term or permanent] stagnation.” The prophet of this new creed was Alvin Hansen of Harvard, but its patristic source was clearly John Maynard Keynes. Although for decades a chorus of Marxian economists had chanted a requiem for the aging capitalist system, in less apocalyptic fashion Keynes located the reasons for degeneration. The system was not functioning, he said, because savings (meaning, on the whole, profits) were not passing over smoothly into investment (which expands pro duction) but were piling up and choking the economic mechanism.

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Keynes had sketched the outlines of the modern “stagnation theory” in his famous Economic Consequences of the Peace, written in 1919. The argument, novel then, is familiar now. The compelling social myth that held society together, said Keynes in a metaphor, was the “non-consumption of the cake.” Workers were “cajoled by custom, convention, authority” into accepting a small share of the increasing production of the 19th century, while the capitalist, free to consume it, made “the duty of ‘saving’ nine-tenths a virtue, and the growth of the cake the object of true religion.” Thus a huge share of production was saved for investment. This tied in with the reality of the 19th century: a growing population, which needed food, clothing, shelter, and employment; new sources of foods and raw materials, which demanded exploitation; the development of technology, which permitted new industries. Under these circumstances the entrepreneur could go on “baking cakes in order not to eat them.”

But this was, after all, said Keynes, only an extraordinary episodic period in economic history. By the 1920’s, population growth had slowed down, investment opportunities were vanishing, the spirit of the entrepreneur was flagging. And, perhaps most important of all, savings were losing their social function. The habitual holding back of large sums from consumption no longer had the useful effect of increasing production; rather it led to economic crises—and stagnation.

Keynes’s writings in the next fifteen years were a detailed effort to document his analysis. The root evil was the bourgeois “virtue” of thrift (“the penny wisdom of Gladstonian finance”) and the necessary intellectual task of the generation was to exorcise that ghost. Keynes’s great work on Interest, Money and Employment was not only an economic tract but equally a savage sociological polemic against the “puritanism . . . which has neglected the arts of production as well as those of enjoyment.”

His aim was the “euthanasia of the rentier,” enjoying a free and unhampered consumption in a “quasi-stationary” community which, because it had no desire or need to grow, also had little use for savings. But since this psychological revolution against saving was difficult to effect, only one force could effectively guarantee the movement of stored, useless capatal into channels that would revive economic activity—and that was the state. With one bold stroke, thus, Keynes reintroduced the study of political economy, which for him meant a statement of human aims to be defined consciously by an organized consensus (die social interest), as against “pure economics” or the “natural laws” of distribution, as determined through the market by the sum total of individual decisions. The political problem of how to reach a consensus, and apply its decisions, which for us raises many difficult questions of bureaucratization and power, did not trouble Keynes. Writing in the full stream of English political thought, with its sense of homogeneity and the image of a “common will embodied in the policy of the State,” he felt such problems could be solved simply and rationally. His program, “moderately conservative in its implications,” excluded any question of the ownership of the instruments of production; all that it required, he wrote blandly, was a “somewhat comprehensive socialization of investment” in order to assure full employment.

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The theory of “oversavings,” which Keynes had formulated as the key to depression, was picked up enthusiastically by the younger economists and became the guiding conception of the Temporary National Economic Committee investigations and monographs of the late 30’s. Where Keynes’s General Theory had been analytical, the American school sought to add a historical dimension as further proof of the impending “secular stagnation.” The lead was taken principally by Alvin Hansen and the materials summarized in Hansen’s major work, Fiscal Policies and Business Cycles, in 1941.

His theory, built on the statistical investigations largely of the German economist Spiethoff and the Russian Kondratieff, stated that the 19th century was a unique era wherein a fateful combination of factors had combined to create an industrial explosion. We were, however, said Hansen, beached at the end of a series of “long waves” whose force was now spent. Mid-19thcentury America (1840 to 1870) had been propelled by the age of the railroad; the first part of the 20th century (1890 to 1930) had been the age of electrification and the automobile. But we cannot now “take for granted,” Hansen wrote, “the rapid emergence of new industries as rich in investment opportunities. . . .” Other factors also tended to create stagnation: chief of these was a decline in population growth, the disappearance of new territory, and the growth of monopoly and imperfect competition, which, by protecting prices, inhibited the introduction of new machinery which a competitive process would have stimulated.

Within the operational machinery of the capitalist system itself certain internal forces worked to calcify the society. Keynes had not been concerned with industrial organization. Hansen was. He argued that “bigness” was a cause of depression since large corporations tended to accumulate huge depreciation reserves for replacement of plant and equipment, which remained unspent and also reduced the need for outside money. In addition, the growth of “capital-saving” (as opposed to labor-saving) machinery, which meant a long-term tendency to lower the ratio of capital to output, added to the piling up of idle capital. Hansen’s conclusions provided a rationale for New Deal policies: state intervention to move the idle capital, attempts to break up “monopolies,” and a shift to a high-consumption, low-growth economy.

This then was the image of capitalism in the early 40’s: the capitalist was an old miser sitting on his pile of sterile bullion, which strangled the economy. Since he found it impossible to inject it into an economy which needed it if that economy was to provide jobs and the standard of living it was technologically capable of producing, the government would have to force him to disgorge it—or tax it away and spend it on useful projects.

II

The conservative counterattack arose on the question of “politicalizing” the economy. The lead-off book was Frederick Hayek’s The Road to Serfdom. Hayek, like his master Ludwig von Mises, regarded laissez-faire economics as producing an automatic equilibrium. Crises arose primarily because of the arbitrary tampering with the economic system by the state. In their desire to pay off debts cheaply and to make money, governments and banks have inflationary proclivities; the result is an overexpansion of credit, and the interest rate is deflected from its true purpose of allocating savings either into investment or consumption. The state, in Hayek’s view, was not an executive committee of a ruling class, but (in a view derived from Schmoller and Max Weber) an independent bureaucratic force which, by its essentially leviathan nature, was anti-freedom.

The business community hailed the Hayek volume with alacrity. But the appreciation was more for its catch-phrase title than for its prescriptions. After all, what businessman was prepared for the complete elimination of tariffs, “fair-trade” pricing, price “umbrellas,” and similar props to eliminate competition? On the other hand, the liberals, while sensitive in the abstract to the dangers of “statism,” could see in Hayek only some stale Liberty League cliches and refused the challenge to measure governmental “welfare” steps against the dangers of concentrated power. In short, except as an ideology, no one really wanted “economic liberalism.”

Because of the ideological use to which his book was put, it soon became apparent that Hayek could never become a convincing adversary of Keynesian thought.

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If there was one conservative theoretician who could take the measure of Keynes, and possibly even of Marx, it was Joseph Schumpeter. Schumpeter’s Capitalism, Socialism and Democracy, published in 1942, received notice only in a small circle. Only in 1946, with a new edition and under the cumulative weight of four years critical appreciation, did the volume gain wider attention. By the time of his death in 1950, a stream of exegetical writing had already begun to appear and a number of Schumpeter’s early works and collected essays were being issued in book form.

The outline of Schumpeter’s main theoretical statements had already been firmly laid down in a major work, The Theory of Economic Development, written in 1912 at the young age of twenty-seven. Thirty years later the time was ripe for these ideas to gain acceptance. On the one hand, U.S. business, as a result of its prodigious production effort during the war, was experiencing a tremendous surge of self-confidence. At the same time, through writers like Peter Drucker and the editors of Fortune, it was gaining a new rationale based on its sense of social responsibility and the discovery that, unlike its avuncular European kin, American capitalism had still untapped dynamism and drive. On the other hand, the intellectuals, now frightened by the implications of statism, which they once accepted uncritically, and impressed by the lack of the recession every Keynesian economist had so confidently predicted would follow the war (“sixty million jobs” was reached in 1947), were increasingly silent or disoriented.

Schumpeter was important as an intellectual lodestar because he posed his arguments on the very grounds that American Keynesians (and Marxists) had set as the conditions of the debate: he spoke not of the problems of maximum production under the perfectly equilibrated competitive balances of classical economics, but of the concrete social organization, capitalism, operating in historical time. His purpose was to understand the capitalist social organism by examining sociologically and historically the conditions of its emergence, growth, and decline. For this reason among others he was disdainful of Keynes, who, for all the radical implications of his work, operated fundamentally within the framework of a static economics abstracted from concrete history. Keynes dealt with “phenomena whose range is limited by his assumption that techniques of production remained unchanged.” But it was just the fact that techniques of production, under capitalism, do change rapidly that was decisive for Schumpeter.

Schumpeter’s defense of capitalism took, as the crucial starting point, the fact that capitalist society was characterized by a constant rate of productive expansion. “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing effort.” Using rough computations, Schumpeter pointed out that productivity had been increasing the wealth of American society at a compound rate of 2 per cent a year. But increase in productivity was possible only through the activity of entrepreneurs, the engineers of social change. By cutting costs, opening new markets, creating new types of production, in short through innovation, the entrepreneur is able to achieve a temporary monopoly position which is the source of his profit. Capitalism can continue only if it maintains entrepreneurial rewards whose “short-run inequity” is the price that the masses must pay for the long-run rising living standards that capitalism can achieve.

Schumpeter’s iconoclasm extended too to the defense of “bigness.” Bigness was a virtue because only big companies could afford the huge and sometimes fruitless outlays for research which were necessary for technical change. Bigness, in that sense, represented the social price for technical change.

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But what of the Great Depression? Schumpeter denied that the period from 1929 to 1932 represented a decisive break in the propelling mechanism of capitalist production, as he described it. Contrary to the views of most economists, classical or Keynesian, he calmly accepted depressions as natural, inevitable, and even therapeutic for the growth of the economy. Technological revolutions periodically reshape the existing structure of industry. “The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standards of life of the masses. It does so through a sequence of vicissitudes, the severity of which is proportional to the speed of the advance.” Any process of change provides disruption; a depression is a normal process of readjustment and displacement, a “shaking out” of the antiquated, the marginal, and inefficient. The depression of 1929 remained for him a special case (because of the “speed of advance” in the 20’s and because it capped a long wave” of economic growth) matched only in relative severity by the depression of 1873-79. Recovery was slower in the U.S. than, say, France because a new social atmosphere and new fiscal policies in the 30’s held down private investment. The effort of economic policy to redistribute income and increase consumption had, according to Schumpeter, only inhibited progress.

Against the pessimism of Hansen, and Keynes, regarding the possibilities of an expanding economy, Schumpeter held a vision of new frontiers. “Technological possibilities,” he wrote, “are an uncharted sea.” It might take the form of great innovations through a new “age of chemicals,” which would succeed electricity as a source of investment, or it might be a multiplicity of new products no single one of which might match the impact of, say, the automobile, but which collectively could provide the stimulus toward new growth.

The future, however, rested on the entrepreneur. In his theory of the entrepreneur Schumpeter confronts Marx, and Keynes, and in fact the entire classical school of economics. For Marx, economic growth was a product of the accumulation of capital ever seeking new outlets; Keynes saw these savings as piling up and stagnating without government intervention and direction. Schumpeter denied the theoretical basis for chronic oversavings, and his answer to Marx, and Keynes, rested on a historical foundation. For him, the expansion of industry arises not from the “push” of capital, but the “pull” of the entrepreneur. For Schumpeter, industry is financed typically by banks and by the expansion of credit. The entrepreneur works with “other people’s money.” To collect money from old and unproductive channels, and to command resources, he pays interest. His reward is profit. The function of government, therefore, is not to direct investment, as Keynes saw it, but to encourage the entrepreneur.

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And yet, said Schumpeter paradoxically, the vision of Marx was correct; capitalism is indeed doomed, but not for the reasons Marx advanced. Capitalism decomposes because its mentality creates a social atmosphere hostile to its functioning, and because, at the same time, the bureaucratization of business atrophies its driving force, the entrepreneurial function.

Paradoxically, capitalism is destroyed by its success. The creation of an open society arouses greater wants and expectations than even capitalism can fulfill. After all, even in the ideal circumstances of America it is still not possible to increase productivity by more than 2-3 per cent a year. If the case for capitalism rests on its long-run achievements, in the short run it is the profits and inefficiencies that dominate the picture, and these continually offer ammunition for its critics. And capitalism itself fosters the criticism that threatens it. “The capitalist process,” writes Schumpeter, “rationalizes behavior and ideas, and by so doing chases from our minds, along with metaphysical belief, mystic and romantic ideas of all sorts. . . .” The critical turn of mind that such rationality creates knows no bounds, and it turns against all institutions, against all accepted tradition and custom, against all authority; it culminates logically in the creation of the “intellectual.” The intellectual is both critic and Utopian: he needs a hero. The capitalist unheroically estimates rather than gambles, appraises rather than acts. “The stock exchange,” as Schumpeter says wryly, “is a poor substitute for the Holy Grail.” And so the intellectual, the product of capitalist rationalism, turns his back on the system, and infects the rest of the society with his disappointment. Similarly, the state, responsive to the anti-capitalist temper of the society, enacts legislation which is restrictive of the entrepreneurial spirit.

The capitalist system is also menaced from within. The first reason, already alluded to, is the replacement of the entrepreneur, the man who broke “the cake of custom,” with the “executive.” Even innovation is routinized, and technology becomes the business of a team of specialists; economic progress tends to become depersonalized and automatized.

The change in the nature of the enterprise means, too, the replacement of family property by large institutions whose profits are distributed to an enormous mass. Now property and the family have been the twin pillars of bourgeois society. Through the family, wealth was conserved, property maintained, status established and goals defined. The capitalist accumulated rather than spent for the sake of the family enterprise. Today, with skill rather than property as the fulcrum of power and position, with a different evaluation of marriage and the familv, the rationale and the driving power which infused the bourgeois temper has gone. Inevitably, the bureaucratization of capitalism chokes it.

Schumpeter’s appeal for the old “left” intellectual is apparent. Here was a rarity: an economist with a tragic sense of life. Moreover his doctrine allowed capitalism’s critics to have their cake and eat it too: capitalism was good, but it had now become depersonalized and bureaucratized—the very charges they had themselves levied against the system. And yet, for the plain and prosaic tasks of understanding the specific problems ahead, Schumpeter’s insights are of limited help. In his brilliant book, Schumpeter talks of “capitalism,” rather than, like Keynes, of “economies.” He does not talk, however, of concrete capitalist societies. It was thus not easy to notice that in his analyses he selected the economics of American industry and the sociology of European society, and derived his justifications for capitalism from the first and his apocalyptic visions as to its fate from the second. As David McCord Wright has pointed out, Schumpeter is able to predict the destruction of capitalism only because he conceives of democracy within the framework of the European philosophical tradition, as the rule of the “masses,” always tending to break up and level the superior orders of society. American democracy, with its philosophical roots in Jeffersonianism and its development into a multigroup society, may have very different consequences for capitalism from those of European democracy. But this Schumpeter did not see.

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III

If we are to obtain a realistic picture of what is happening to capitalist society, the inherent contradictions between the visions of Keynes and Schumpeter will have to be resolved. For while both agree that traditional capitalism is giving way, their theories as to the reasons for the change are so divergent as to give rise to directly contradictory proposals for policies that might save it. It is one of the virtues of J. K. Galbraith’s American Capitalism (published by Houghton Mifflin) that the problems common to Schumpeter and Keynes are posed in less apocalyptic and more manageable terms and some implicit attempt at reconciliation is made.1

Galbraith’s starting point is the remarkable “failure of nerve” by all strata of American society regarding the future of capitalism at a time when actually the productive apparatus is expanding at a faster rate than at any previous period in U. S. history. The business community seems almost to have been mesmerized by Marx into believing that capitalism is inherently unstable. The industrial managers, no less than the liberal economists, expected a sharp economic collapse on V-J day and each year thereafter; hence, the low inventory policy, the limited dividend policy and building of huge reserves, the jagged behavior of the stock market. All this in the “face of record income and yields,” as Galbraith writes. The farmer, and Congress, revealed similar concerns. “These were bonanza years such as few had ever dreamed of,” yet for five years following the war Congress was tinkering with price supports and crop guarantees. Meanwhile, the liberals were bemoaning the increasing concentration of economic power which World War II allegedly accelerated, the conservatives were conjuring up ghastly visions of the Omnipotent State which would reduce their freedom and install an oppressive bureaucracy. Yet if all these dire predictions were true, Galbraith observes, the conservative after twenty years of Democratic rule would have long since been dispossessed, the liberal become a “mere puppet” in the business society.

Truth is, none of these pictures even closely approximates present reality. Then why these strong idées fixes; why this high degree of illusion and insecurity? The answer, says Galbraith, is that both camps are “captives of ideas which cause them to view the world with misgivings or alarm.” These ideas come out of the system of classical economics and its theory of power.

Classical economists rooted their system in a fear of concentrated power. A liberal society, therefore, was one that diffused power. In the economic realm, no single individual or group should be able to dictate what was to be produced and who would do it. They envisaged a market society in which prices fluctuated readily in response to supply and demand, where producers were free to enter or depart from business, etc. The corollary assumption, operating from economic deterministic premises, is that free markets make free men. If economic power were fragmented, then political power would be atomized as well.

The fact is of course, that in the major industrial areas of production oligopoly, i.e., the dominance of a few, is the prevailing feature of the society. Prices are “administered” rather than set in the market; other firms follow this price leadership,” entry into the business is exceedingly difficult, etc. The liberal, seeing this concentration of economic power, believes it to be dangerous and seeks to break it up.

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The singular point that Galbraith makes, following the lead of Schumpeter, is that while oligopoly does exist, few of the consequences the liberals fear actually eventuate. The pattern of oligopoly is natural and almost inevitable in a high-investment economy, and turns out to be not the product of any conspiratorial plot, as the early Money Trust investigations and later Fecora and TNEC investigations thought, but of the market itself. In most manufacturing enterprises the maximum advantages of mass production are possible only through giant size. As a result, entry into industry is easy only when it is very new. As an industry grows, the firms already in operation grow, realizing the technical efficiencies gained by large-scale production. The established firms also gain from “the economics of experience.” A, new firm, when it can mobilize the capital, faces the additional handicaps of lack of personnel, untried executives, etc. So new competition is difficult. Oligopoly in any industry is likely to be achieved in the short space of a few years, and once equilibrium has been achieved, the degree of concentration remains remarkably stable, as M. A. Adelman points out in a revealing study of industrial concentration (Review of Economic Statistics, November 1951). “If there has been any strong and continuing tendency to a greater concentration in manufacturing . . . these statistics do not show it.”

Against the yardstick of a pure theory of price, the result may be some distortions and inefficiencies in the allocation of resources. But the compensation lies in the technological progress fostered by the large corporation. “It is admirably equipped for financing technical development. Its organization provides strong incentives for undertaking development and for putting it into use. . . . The power that enables the firm to have some influence on price insures that the resulting gains will not be passed on to the public by imitators (who have stood none of the costs of development) before the outlay for development can be recouped. In this way market -power protects the incentive to technical development.” In those areas where the competitive model still obtains, notably agriculture, the farmer does almost no research on his own behalf, the job is left to the state experiment stations and the U.S. Department of Agriculture.

Here is a strong and sophisticated defense of bigness on the criteria of performance. But— and this is where Galbraith seeks to explain why businessmen and liberals are captives to the old phantoms—the businessman cannot admit he exercises tremendous economic power. “This is partly a matter of tradition; it is also an invitation for attention from the public and from the anti-trust section of the Justice Department. Hence, in order to justify his unwillingness to accept federal regulation, he has to deny his exercise of economic power altogether, and maintain the ideology of competition.”

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The other side of the coin is the phantasm of the liberal: the specter of untrammeled , corporate power standing firm on the “commanding heights of the economy.” Against this view, Galbraith develops his theory of “countervailing powers,” a phrase which in its imaginative simplicity crystallizes a feeling a number of observers have had about our society. Generally this feeling has been summed up in the image of “functional blocs,” such as industry, labor, farmers, that confront and check each other.

Galbraith’s view is more subtle in its characterization. “Dogmatically stated . . . private economic power is held in check by the countervailing power of those who are subject to it. The first begets the second. The long trend toward concentration of industrial enterprise in the hands of a relatively few firms has brought into existence not only strong sellers, as the economists have supposed, but also strong buyers, as they have failed to see.” The self-regulation of the market in America today comes not from the competition of producers, where oligopoly prevails, but the self-genera ting counterpower of buyers and sellers.

The theory is most evident in the labor-relations field where strong unions have arisen to check the power of corporations in wage determination. But it operates in other areas as well: great buying chains like Sears, Roebuck were able to avoid the oligopolistic domination of rubber prices because of their bulk purchases; A & P, by threatening to go into the processing business, could bring down the price of food supplies. (Galbraith writes, “There are no consumer co-operatives of any importance in the United States . . . because the chain stores preempted the gains of countervailing power first.”)

The power of the auto companies curbed steel. (Until recently, when the general practice was outlawed, Detroit was the only city in the United States not subject to the discriminatory basingpoint pricing in steel.) In some instances, like the building trades, the powers that should oppose each other have entered into collusion, with a consequent loss of economic efficiency.

These economic valences developed in the 20’s when buyer combined against seller. Where groups like farmers and workers were unable to generate such balances, the state was forced to step in and help. In the case of the farmers, the effort was begun by Hoover, whose Federal Farm Board undertook to sponsor a system of national co-operatives. In general, however, the New Deal established the countervailing power of the disadvantaged groups. From this theory, the substitution of countervailing power for competition as the regulator of private economic power, Galbraith seeks to establish a yardstick for state action, not for regulation, or even “trust-busting,” but for the development, where needed, of countervailing power.

In all this, Galbraith has skillfully developed a realistic theory of political economy, more suitable than the old competitive one to a world of economic behemoths. And yet, Galbraith is enough of a Keynesian to know this is not enough. “We have within the economy no mechanism which acts autonomously to insure proper performance; it is sadly evident from experience as well as from theory that the peacetime norm of the American economy is not necessarily stability at a high level of production and employment.” The need, therefore, is for some form of centralized government decision, namely in the area of fiscal policy so as to influence the total demand for goods through taxation or government spending. “If the Keynesian formula is workable, then the last of the major reasons for alarm over American capitalism dissolves.”

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IV

Yet the book fails in a singular manner. It never answers its own question: why are the business community and the left captives to a description of reality that no longer exists; why, in effect, is the myth more compelling than the reality? To reply, as Galbraith does, by supplying a truer picture of the reality is merely like telling a neurotic that his fears are groundless; they may be, but the answer cannot convince the neurotic of the fact until the sources of the fear are laid bare. The sources involve an examination of some dialectical processes which raise the question not only of the new nature of capitalist reality, but some quite new challenges to its survival.

Perhaps the most important fact, sociologically, about the American business community today is the insecurity of the managerial class. The corporation may have an assured continuity; its administrators have not. This is a consequence of the swift and remarkable breakdown of “family capitalism” and the transformation to corporate capitalism. Of modern writers, only Schumpeter (in his Imperialism and Social Classes) has understood the class system of Western society fundamentally as a family system. Yet this was central in the thinking of older moralists. William Godwin attacked the major institutions of bourgeois society by calling for the abolition of marriage and private property. Malthus, his great adversary, knew these as the “twin pillars” of society. The family was a means of maintaining status, marriage a means of conserving property. (Love, a romantic concept, was an extracurricular activity.) Through inheritance, property was legally transmitted. The family and property system maintained a class system. It gave its members a common set of values, it provided a milieu for marriage and the transmission of status. In European society, the property and family system still frames the society; the remarkable fact about American capitalism is the breakdown within two generations of the family system. Despite Ford, Swift, Grace, and du Pont, America’s “Sixty Families” are a fact of the past.

The new class of managers that has succeeded them, recruited from the general grab bag of middle-class life, lacks the assured sense of justification which the older class-rooted system provided. Hence the growing need of achievement as a sign of success and the importance of ideology as a means of justification. Ideology serves as a social cement, binding the business class together. The corporations are today largely independent of the money markets and are less subject to the overt coordination practiced by finance capitalists of the early decades of the century. But the process of action is now mediated, albeit with greater imprecision and with more internal clash of interests, through a common ideology.

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Since the new managers are insecure and deo fensive about their status, the need to retain the older justifications of capitalism is strong. These are, in a sense, the only justifications the managers know. (Only recently, with the emphasis on productivity and performance, are new justifications appearing. As in industry we have had a movement from “ownership” to control,” so in the symbolism there is a parallel move from “property” to “enterprise.”) At the same time, the shift in power from the economic realm to the political also strengthens the need to retain a system of justifications—the competitive model of capitalism—which emphasizes the system of decentralized power and minimizes the role of the interventionist state.

These reasons would apply primarily to the managers. Among the middle-sized business concerns—more of whom are predominantly family enterprises—other factors enter. The very amorphousness of society, the rise of new and threatening interest groups, the emergence of social movements and of ideologies, heighten the anxieties of people who, within their small ponds, once had power and now find themselves in the currents of swift-moving streams. It is among this group that one finds the fierce Taft partisans, the crabbed “small-town” mind.

The amorphousness of society poses a problem, too, for the liberal. For in the past decade, or more precisely since the beginning of the war economy, the liberal, too, has not shared power, at least not to the degree he once did in the early days of the New Deal. The polity has become like a Calder mobile, in rough and uneven balance as different parts swing around to the winds of war mobilization. More often than not, the crucial decisions, for example, the distribution of government contracts and the allocation of metals, are technical decisions, motivated by the simple need of commanding available resources with the greatest speed. But the sense behind technical decisions is not generally known, and it is easier to see or hunt for some hidden reason or power source behind the decision.

Hence the social compulsions among different groups to deny the new reality of “countervailing power.”

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But in addition, the countervailing system of modern society, both in its political and economic aspects, is itself in the process of being shattered by inflation and war. Countervailing power operates within a framework of relative scarcity of demand—that is, where the buyer calls the tune. Under inflation, where a seller’s market prevails, the buyer is helpless, and the seller’s price is passed along to the market. The threat of inflation itself arises, principally, from war. And the combination of the two provides the greatest danger to a presentday capitalism defined and justified as a system of decentralized economic decisions. For inflation and war tend to centralize power in the state to compensate for the disappearance of countervailing power in the society. Administrative decision rather than “rationing by purse” becomes the chief means of allocating resources and making the production and consumption decisions in the economy.

Curiously, the problems caused by a permanent war economy Galbraith avoids almost completely. The “creeping socialism” of which the Republicans complain so bitterly is the product not of any willed, ideological plan, but the hardly conscious response of the society to the challenge of war. The most important change in the American economy in the last decade has been the growth of the federal budget. During the New Deal decade, government expenditures never went higher than seven billions a year, yet in peacetime 1953 they will reach 85 billion dollars. Of every dollar spent in 1953, eightyeight cents will be for defense and payment of past wars; social security, health and welfare, education and housing comprise 4 per cent of the budget. A Republican administration cannot affect appreciably the total magnitude of spending; it can, through tax policy, only effect the distribution of the burden. Thus, the key economic decision—the size of the budget—is, in a war economy, out of the full reach of the business community or that of any other single group in the country.

The degree of freedom in a capitalist economy—and the working out of countervailing power—depends on the degree of mobilization necessary to meet the needs of war. For while individual companies and powerful groups may be able to gain special advantage, the main organizing features of the system impose a technical logic that can only be ignored at peril.

A war economy involves a detailed coordination of diverse items which can only be achieved by requisitioning. It means not only the allocation of basic metals, for example, but the detailed scheduling which controls the literal dayto-day operations of the company. In a modern industrial economy, the whole society turns, as the nursery rhyme, on the “want of a nail.” So detailed are the technical requirements of direct planning that in the case of nickel, one of the critical “nails” last year, the NPA was forced to allot the precise quantity of nickel for the individual steel melt necessary for each ingot which the manufacturer produced.

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For the moment, a complete war economy is still some distance away. But if the “readiness economy” through which we are now passing provides for more freedom than a war economy, it also creates greater problems for a capitalist market society. For under conditions in which a stable and not overwhelming percentage of the national production is used for war goods, a question that has been left moot for twelve years is beginning to reassert itself: whether the marvelous productivity of the American economy can be utilized to the full without war orders.

The argument is made that since we can produce for war we can produce for peace. But production for war implies one kind of society and production for peace another. It is easy to harness the productive power for war since there is only one single, huge buyer who requires only a limited number of items, and who sets his own prices. A market economy, involving multiple consumer choices and wide varieties of products, inevitably creates waste and disequilibrium when demands are sated and tastes shift. Who can guarantee, for example, a constant rate of consumer demand for television so that the industry, as with war orders, can budget its capital and material needs for a period of time and make calculations regarding future investment? A certain amount of “frictional” unemployment is always inevitable in a more or less free and somewhat flexible economy; it is the price for free consumer choice (although we can try to reduce the friction by unemployment insurance, severance pay, retraining programs, etc.).

The postwar experience is of limited value in pursuing the debate. From a peak of 135 billions in 1944, government expenditures dropped to only 25 billion dollars in 1946; despite this major contraction of demand, total output in the economy fell only 15 per cent. A large backlog of consumer demand, steady rebuilding of depleted inventories, and new plant expansion had taken up the slack. In early 1947, the economists were again pessimistic, as consumption goods (textiles, shoes, clothing) began to slump. The export market that had held up also began to slip. But the Marshall Plan and a boom in home building created counterpressures.

In a basic sense, the economy is more resistant to shock than it was after World War I. Firm farm-price supports plus a limited redistribution of income (through veterans payments, social security, and the like) provide a minimum planking. Structural changes in the corporation are significant: during 1946-48, corporations reinvested 62 per cent of their profits after taxes, as compared with 31 per cent in 1929 and 41 per cent three years before the war. Contrary to the gloomy predictions of the demographers, the American birth rate is steadily rising and one of the chief factors behind the steady expansion of late 19th century economy has been reestablished. (Alvin Hansen based his theory of secular stagnation principally on the falling birthrate.)

These are structural facts on the plus side of the ledger. On the minus side, new instabilities are being introduced into the economy mostly by political countervailing forces. Antiquated industries, like Northern textiles, utilize political pressure to maintain outmoded and dilapidated plants. Wage rates tend to be “sticky” so that prices cannot fall or readjust easily and so an employer will tend to cut production instead. The pressure for spending creates a longrun inflationary swell which strands, in the side waters, significant salaried and rentier segments of the society. Most important, the growth of a permanent war section of the economy creates need for its permanent maintenance lest its abrupt suspension create, as it would in the aircraft and electronic industries, a terrific slump.

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The interesting fact is that American ideologues are finding virtues, many of them proper ones, in American capitalism at a time when the basic features of the society are undergoing decisive changes, not under the corrosive acid of “creeping socialism,” but the continued pounding of the garrison economy. Oddly, the best of these ideologues—the writers of Fortune’s “Permanent Revolution” as well as Galbraith—fail to discuss (Fortune even to mention) the question of a permanent war economy.

The key question remains one of political economy. On a technical level, economic answers to the organization of production, control of inflation, maintenance of full employment, etc., are available. Political answers, in an interest-group society like ours, are not so easy. But in the long run, the problems of the distribution of burdens and the nature of controls cannot be deflected. The statist impulses of a semi-war economy with its technical imperatives must clash with the restless antistatist attitudes of the corporate managers—with labor standing uneasily along the sidelines. It is hard to see how the first Republican administration in twenty years, even though it represents these anti-statist corporate managers, is going to be able to change very drastically the course of our economic development. The international situation imposes the same imperatives on Republicans as on Democrats, and the semi-war or war economy that is made necessary bv it inevitably casts government in the role of controller and dominator of the economy. The real political question in domestic affairs will then become which of the groups will bear the costs of the added burdens.

The intellectual rehabilitation of American capitalism is being completed while the reality itself is rapidly changing; the newest ideologies may become outmoded and require new revisions long before they have had time to get themselves widely understood and accepted.

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1 Since the Keynesian economic model is essentially static, and the Schumpeterian economic model primarily historic, an exact reconciliation is extremely difficult. Schumpeter thought of Keynesian “oversaving” as a “special case” within his own system. In recent years, a number of English economists, particularly J. R. Hicks and Roy Harrod, have sought to extend a dynamic system from the staples of Keynesian concerns. A synthesis of the two systems which would unite the Keynesian problems of income, output, and employment, with the Schumpeterian emphasis on entrepreneur, innovation, and equilibrium, would be extremely fruitful.

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