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Outline and critically assess

Neo-classical economics (i. e. traditional textbook economics) views capitalism as a market system with government intervention where necessary (most often when markets fail). Power is spread between each small firm and decisions are made independently of each other. J. K. Galbraith in his 1967 book “The New Industrial State” argued that traditional textbook economics (that is neoclassical economics) was wrong as it referred to the market system as if it was the whole economy. Galbraith acknowledged that there were two parts of the economy: the market system and the planning system.

This market system (according to Galbraith) works, for the most part, in the same way neoclassical economics says competitive markets work. It is made up of many small firms. Firms in the market do not have much control over their prices as they are largely affected by market forces. They are dependent on money from banks for expansion. This means that their business decisions are influenced by the banks willingness to lend them money. Small firms do not have the resources to advertise globally and nationally, they only have the ability to inform and the most they can hope for is local advertising e. g. radio.

They also do not have the resources to influence government decisions i. e. to employ professional lobbyists. Some may say that firms in this market are pretty powerless and may go as far as to say that they are just putty in the hands of big firms, however small firms continue to and will continue to survive in capitalist economies. In the EU alone small and medium sized firms make up about 99% of all firms (www. wikipedia. org). Galbraith explained that their survival was for three reasons: firstly, the personal touch of the individual is still highly important .

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Secondly, the government in a country may pass legislation which prohibits businesses from exceeding a certain size. Lastly ………… see lecture slides Before we explain what the planning system is we must first say why there was a need for it in the first place. Galbraith thought that the planning system had developed due to the world becoming increasingly technical. During the 1900’s the gestation period from when a product was being developed to actually getting the product on the market was only a few months.

Little workers and very few specialised machinery were needed to produce the product, however fast forward 60 years later to the time Galbraith was writing, the gestation period had widened. Now the time from preparation to production of for example cars, takes years. Also much more workers are needed and the number of specialised machinery has increased greatly. Due to the fact it takes several years to manufacture goods, the cost to the large corporation is a lot higher, than if it were to be several months.

Suppose after years of preparation, a product would hit the market and not sell. For this and many reasons Galbraith said that large corporations dealt with the uncertainty of their market environment by ‘planning’. This way they could have control over their prices, consumers’ tastes and their costs. Galbraith thought that the bigger the firm the bigger the need to plan, and the more freedom they had from the company’s shareholders and the company’s financier. The planning system is made up of very large firms and the government.

‘Planning’ refers to a term Galbraith coined which indicates the corporation’s attempts to first of all predict and then shape the company’s future and their market environment. Firms in this system work hand in hand with the government. These large firms are often transnational or multinational in size. Galbraith argued that this “planning system” drove the economy. Firms in this system have the resources and the ability to make decisions and as a result they control and often dominate their market environment. Due to their size they have control over their prices, their suppliers and even their rivals.

They are not dependent on banks (as small firms are) because they are able to use there retained profit for expansion. Consequently they are not affected by market forces. They are able to afford national and global advertising campaigns and as a result can not only inform but also shape (through persuasive advertising) consumers wants and needs. They can also afford to hire lobbyists to influence, and sway government decisions in their favour. …… US defence industry example As mentioned above the planning system also includes the government.

This is because there are certain things that even very large firms cannot plan or regulate, so the government will step in to complete the overall planning process. Large corporations cannot control the size of the economy, so the government have the power to control aggregate demand (total spending in the economy). Large firms also cannot control inflation; this is another job for the government to complete. Lastly, large firms can train but they cannot educate workers, so the government supply the skilled persons they need through university funded education.

Galbraith believed that these large corporations were not run by managers of the firms as it is popularly believed and so the term technostructure was coined. This term refers to a group of highly skilled technicians which Galbraith believed were the real puppet masters of large corporations. Accountants, economists, marketers, lawyers, scientists, engineers and lobbyists all belong to a technostructure. Galbraith held that the technostructure had considerable power over the company’s “decisional and directional process” as managers had to consult the technostructure before making any decisions about the company’s future.

In his book ‘The New Industrial State’ he argues that unlike neoclassical economics there goal for the company is not to maximise profit (due to the simple fact that they are paid a salary). Instead their aspirations were of three hierarchical phases. Firstly, their goal was to make certain of the company’s survival. In lehman’s terms, avoid losses at all costs and take no risks. This is because taking risks could mean job cuts and consequently damage to the techonostructure which are described as the ‘brain’ of the big corporation.

Job security is therefore on top of the agenda for the technostructure. Their second goal is to maximise growth. This means economic growth and could consist of expansion. Expansion could lead to a larger technostructure, and a larger technostructure leads to a more solid planning process. In this process the firm plans its future and increases its workforce (through training). Also it strengthens its relationship between its rivals, its consumers (through advertising and lobbying) and the government (also through lobbying).

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