Notes on “The Affluent Society”
This is the seminal text of John K. Galbraith (1969), an economist who did most of his work around the Vietnam era. An iconoclastic economist, he critiqued Keynesian modernization theory and Monetarism alike, and disputed whether individuals consumed in their rational self-interest. He wrote in a very bombastic but clear style, and dealt with issues ranging from the American military industrial complex to the Great Depression. Another outline exists, probably more well written than this, here.
My outline is structured around his definition of the term “the conventional wisdom” and the context in which he uses the phrase. To sum it up:
1) The conventional wisdom is the predominant set of ideas motivating fiscal policy in a country. It attracts the patronage of intellectuals, public figures, and businessmen alike, and stays afloat until proven wrong by circumstances.
In this sense, on dimension of the conventional wisdom is that it articulates the spirit of “institutional inertia” – the theory that unless “pushed” (either by means of political intervention or the danger of obsolesce), a given institution tends to go about the same goals using the same design.
2) The context of the phrase comes with a shift from one norm to another with the Great Depression. Prior, neoclassical liberalism was a-okay. But then the wisdom was betrayed by the Depression. The Keynesian reaction too has become a conventional wisdom, but has over the years been subverted by corporate interests, shedding away fiscal expenditures for the sake of private gain. Due to political problems (read: its inability to react to stagflation), the sexy new economic “magic” of monetarism may emerge as a new conventional wisdom.
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I.
1) General question: What is the relationship between events and ideas?
2) Economic behavior seems irrational
3) Plurality of views
4) In the competition of ideas, audience approval is imperative. More so than veracity.
5) In the short run, acceptability creates consensus.
6) Acceptability?
a. Ideas that reinforce an individual’s self-interests and do not entail transaction costs are acceptable.
b. What people most understand is most acceptable.
7) Familiarity’s power makes acceptable ideas most stable.
8) “It will be convenient to have a name for the ideas which are esteemed at any time for their acceptability, and it should be a term that emphasizes predictability. I shall refer to these ideas henceforth as the conventional wisdom.” (8)
II.
9) Party discipline hinges on acceptability too. (e.g. for the US, the conventional wisdom is bipartisan)
10) The conventional wisdom is articulated among intellectual elites, and has been made with more or less scrupulously rigid academic standards.
11) For the conventional wisdom, originality itself can be substituted for a plea for originality.
III.
12) Why is acceptability important? Serves the ego and the motive for power to evangelize.
13) The recitation of the conventional wisdom is a comforting ritual, and “its purpose is not to convey knowledge but to beatify learning and the learned.”
14) Due to high demand, a large part of our society is devoted to rearticulating the conventional wisdom, and it is “a prerogative of academic, public, or business position.”
15) It is a reasonable expectation that public officials reiterate the conventional wisdom.
16) It is a reasonable expectation that reciting the conventional wisdom is perceived as a means of achieving business success.
IV
17) Argumentation does not conquer the conventional wisdom, events make it irrelevant. “The shortcomings of economics are not original error but uncorrected obsolesce. This has occurred because what is convenient has become sacrosanct.” (4)
18) Liberalism emerged as mercantilism was rendered irrelevant.
19) The conventional wisdom contemporary to Galbraith is the welfare state, with wisdom imparting that the processes “civilize” capitalism, when in reality the policies encompassed a break from classical liberalism.
20) Original conventional wisdom held the balanced budget as supreme.
21) Events changed to make the balanced budget a red herring.
22) Deficit spending during the great depression reversed the country’s fortune, despite the balanced budget remaining part of the conventional wisdom.
23) With the advent of Keynes and The General Theory of Employment Interest and Money, circumstances had finally triumphed over the conventional wisdom. But at the same time, Keynes “was also on his way to constructing a new body of conventional wisdom, the obsolesce of some parts of which, in its turn, is now well advanced.” (16)
V.
24) All societies need to be protected from the ossification of popular ideas. “Ideas need to be tested by their ability, in combination with events, to overcome inertia and resistance. This inertia and resistance the conventional wisdom provides.”
25) Conventional wisdom shaman are rewarded materially; s/he only risks posterity by espousing the conventional wisdom.
VI.
26) While the conventional wisdom protects continuity in social thought and action, it bars societies from reacting to circumstances.
27) “The rule of ideas is only powerful in a world that does not change. Ideas are inherently conservative. They yield not to the attack of other ideas but to the massive onslaught of circumstance with which they cannot contend.” (19)
CONTEXT OF IDEA
A. Economic ideas from a time of poverty, yet today is an age of affluence. The iron law of wage, defined as natural v. market price continued to exist as the pinnacle to the Ricardian argument that capitalism ought to exist because it helps the impoverished.
B. Capitalism also aids the wealthy, leading to some skepticism and backlash against mechanisms for accumulation – monopoly and inheritance. Competition was conceived to be the mechanism for redistribution, but it too could be influenced. Finally, depression swayed popular opinion against the self-correcting machinery of the market.
C. On the right, the American take (via Veblen) on the market was that financial crisis was a natural part of the organic market (51). Popularity of Social Darwinism gave market competition its own pillar of importance. It could only operate in America unhindered by the government.
D. On the left, Marx modified the iron law of wages, arguing that impoverishment is a necessary means to ensure their position in society, one that is in turn advantageous for the capitalists. Argues against competitive model that it reinforces inequality, which in turn increases strife. Productivity, inequality and insecurity remained preoccupations.
E. Although originally promoted as key for capitalism, equality is declining in importance because some of the most severe problems related to inequality have been eliminated. The major turn was when Marxist prognostications did not become realized, and the wealthy increased in number and stopped advertising their wealth. Inequality became less of a popular issue.
F. Economic security tied to productivity. Private production is what matters, acting as a measure of achievement. Public production is of little importance. Matters of production may actually be low priority, but due to inertia we keep to traditional means of development. “We do little or nothing in peacetime to increase the rate of capital formation or the rate of technological progress in background industries despite the clear indication that these are the dimensions along which large increases in output are to be expected. We would not deplore the production we lost in depression. We are protected from this loss far more by the threat of depression to economic security.” (132)
G. Defense of production comes from how economists approach the theory of consumer demand. Wants are not cumulatively satisfied as more of them are satisfied, and the origin of wants ought to be taken for granted. From these theories came the notion of diminishing marginal utility: although a product can be in demand, as it becomes more ubiquitous its price can fall. Economic goals become less important with affluence. As per Alfred Marshall, there is no segregation between necessary and unnecessary goods. Firms operate on this presumption through diversity of products. “So long as the consumer adds new products – seeks variety rather than quantity – he may, like a museum, accumulate without diminishing the urgency of his wants.” (141) This presumption remains central to the conventional wisdom.
H. Due to the nature of consumer demand, that firms are dependent on product diversity to avoid the problem of diminishing marginal utility, “production only fills a void that it has itself created.” (147). “As society becomes increasingly affluent, wants are increasingly created by the process by which they are satisfied… Increases in consumption, the counterpart of increases in production, act by suggestion or emulation to create wants. Or producers may proceed actively to create wants through advertising and salesmanship. Wants thus come to depend on output. In technical terms, it can no longer be assumed that welfare is greater at an all-around higher level of production than at a lower one. It may be the same. The higher level of production has, merely, a higher level of want creation necessitating a higher level of want satisfaction. There will be frequent occasion to refer to the way wants depend on the process by which they are satisfied. It will be convenient to call it the Dependence Effect.” (152)
I. For public actors – politicians, businessmen, and intellectuals – production no longer means secure prestige, rather, it depends on the prestige of the goods. The modern liberal does not point to production as related to political success. Instead, GNP is the main determinant of success, despite the true measure of common masses’ quality of life being subjective.
J. With want expansion comes debt expansion. This cycle is a necessary component of modern capitalism. But an interruption to the process, an interruption to debt means an actual reduction in the demand for goods. “Poorer and poorer credit risks can be accommodated, but at last it becomes necessary to exclude the borrower who, as a matter of principle, does not choose to pay.” (174) Whereas government borrowing is mercurial, consumer spending is reliable, reacting predictably in response to real investment. “The encouragement to indebtedness which the society accords to the wan who wants to buy an automobile or even take a trip is matched by the stern mistrust with which it views the local government that might want to borrow for a school.” (179).
K. There is a battle over inflation. Galbraith claims it occurs when market demand is somewhere near the capacity of firms and available labor force to supply them. Production reaches capacity; increased output will need increase in capacity. Increased investment will mean more wages, investment into primary materials, return to capital, and profits, and these add to purchasing power and demand for goods, but this occurs before capacity is added to the firms. Thus, as production attempts to cater to demand, it also increases pressure to current capacity and the prospect of inflation prices increases. (186-7). This is the major part of the wage, price and profit spiral, and starts where strong market position is married to a strong countervailing force, ala unions (191). Meanwhile, firms without market position and workers who aren’t organized will suffer. This is really an issue in an affluent society because it is in conflict with the binding of production with the imperative of economic security (195).
L. Monetarists address inflation by restricting business investment. They do this by having the Federal Reserve increase the interest rate. This hurts small firms who cannot afford to pass the price to consumers. But because it is helpful for those with money to lend, it remains part of economists’ tool kits, albeit a blunt and crude part.
M. Fiscal policy – liberal; monetary policy – conservative. The former is part of the conventional wisdom. It works by raising taxes to reduce demand. Public spending, esp. for important functions, is done wastefully, and it cannot generally be reduced by reducing expenditure. Public services are also tempered by its lack of talent recruitment funds, for there lag time between public pay scales and the increase in prices. However, reducing demand comes into conflict with the production imperative. When full employment and full use of capacity is taken as the norm of an economy, countercyclical repression of demand is taken as a problem. Hence the promise of monetary policies. But these have to be specific monetary policies (read: interest rates and money supply) because price and wage controls are too manipulative for conservative interests. Politically speaking, conservatives disguise conflict between monetary policy and production through the “magic” of monetary policy; (Keynesian) liberals disguise conflict between fiscal policy and production at full employment by trenchant stubbornness, refusal to face problems. Liberals thus surrender to monetary policy, when fiscal policy can be used to solve the problems.
N. The conventional wisdom has that communities establish what amount of resources they want to devote to public goods. This is the social balance, a balance between private firms and funds used to provision the public good. It is reckless to practice self-denial and segregate public and privately produced goods when we have established that any particular goods do not necessarily satisfy real desires. “But given the dependence effect – given that consumer wants are created by the process by which they are satisfied – the conventional wisdom is not true. Consumers do not independently determine whether they prefer private or public goods. Private employment does protect against inflation – a process via monetary policy that is privately driven, but does not offer as much security as public employment.
O. Education drives technological advancement, so to this degree human capital is important. Education also seems to be part of the end of the want-synthesis process, elevating wants beyond material fetters through broader values. “The ultimate consequence is that the values of the affluent society, its preoccupation with production as a test of performance in particular, are undermined by the education that is required in those that serve it.” (249) The want synthesis process may one day break down. Indeed, this may occur as people question the teleology of the brand of capitalism that the affluent society embraces.
P. So long as we have a link between production and income security, inflation will remain a problem, and will continue to harm social balance. We ought to increase unemployment compensation and lengthen eligibility duration. Second, we ought to offer a source of income unrelated to production. The second can be provided when a minimum income is offered to individuals for their survival, generated through income taxes. Third, there ought to be wage or price controls, but there are obvious problems to this. Although the conventional wisdom holds that price/wage controls ought to be comprehensive, it is not actually true. Only large corporations need to be held to this standard, for they are the origin of the wage-price spiral.
Q. Social balance is also important because it ends the self-perpetuation of poverty. We don’t take corrective action because there is, purportedly, less quantitative precision. But insistence on precision is a tautological device which the proponents of the conventional wisdom use to insulate themselves.
