TCS Daily


Stuck on Galbraith

By Arnold Kling - February 9, 2006 12:00 AM

"With the rise of the modern corporation, the emergence of the organization required by modern technology and planning and the divorce of the owner of capital from control of the enterprise, the entrepreneur no longer exists in the mature industrial enterprise."
-- John Kenneth Galbraith, The New Industrial State, chapter vi

The role of entrepreneurs is one of those issues that divides people politically. If you value entrepreneurship, then it is difficult to be a statist. If you are a statist, then it is difficult to value entrepreneurship.

John Kenneth Galbraith represents the quintessential statist. If we were literally stuck on 1968, then Galbraith's The New Industrial State would still be on the best-seller list. In that work, Galbraith correctly pointed out that bureaucratic organizations are averse to risk and uncertainty. However, nearly every other major thesis in his book was wrong. Yet his view of the economy, like much of the conventional wisdom of 1968, has remained embedded in the folk beliefs of the Left.

For Galbraith, the concept of an entrepreneur was a quaint myth. As he saw it, all of the important economic activity takes place within giant corporations. Their challenge is to manage large capital investments in complex projects, like a nuclear power plant or a new passenger jet. This in turn requires a thick bureaucracy, which Galbraith dubbed the "technostructure."

Propositions that followed from this thesis include:

-- The United States is not really a market economy, but a planned economy.
-- Wages and prices are artificial, so that the government is right to intervene to control them.
-- Because we are a planned economy, the ideology of free enterprise serves only to "starve" the public sector, which could invest resources more wisely.
-- Consumers are passively manipulated by the "technostructure" into serving the needs of big corporations, rather than the other way around.
-- The classical economic concept of competitive struggle is an anachronism, because firms control their environment and are immune to competitive pressure.

The Internet Revival

The death of the entrepreneur was greatly exaggerated. Over the past two decades, the strength of entrepreneurialism has been unmistakable. The economy has been much more dynamic than Galbraith would have predicted. Many of the industrial giants, which in Galbraith's view were self-perpetuating, have fallen. The steel companies, chemical firms, and aerospace firms of yesteryear have shrunk, with most of them merged out of existence. On the other hand, companies like Microsoft, Intel, and Wal-Mart, which were not part of the economic landscape in 1968, are now more important than the old industrial base.

More important, the Internet has brought about the revival of the entrepreneur. Mixing metaphors with abandon, the Net has fostered a Free Agent Nation, in which an Army of Davids representing The Long Tail is operating Under the Radar.

The world of Galbraith has been turned upside-down. Large capital projects are not the driving force in the economy. Thick bureaucracy loses to trial-and-error innovation. Prices are competitive. Old firms go out of business. New firms come out of nowhere.

The Lagging Sectors

Not all sectors of the economy are open to the forces of competition. In higher education, colleges and universities maintain their grip on the accreditation process. Exit never takes place, and entry only occurs at the margins of the industry.

Health care, too, is relatively immune to competition. Limits on entry into key health care fields are strictly maintained. I suspect that a one-year trade school could train a pretty decent physical therapist. But at the rate things are going, soon you will need a doctorate to practice legally.

Today's Mainstream Left

Most of the economics profession has lapsed into a mysterious silence concerning the role of entrepreneurs in the economy. Visit the web site of Berkeley economist Brad DeLong, and you can see how the economy looks to someone on today's mainstream Left.

You will find yourself in a world where innovation "diffuses" (like molecules of gas put into a larger container). In 2002, DeLong saw this "diffusion" taking place in Europe any day now, as if it did not require any of the entrepreneurial activity that Euroregulation so effectively thwarts.

In DeLong's world, income is distributed (very unequally), not created or earned. With more entrepreneurs, I would expect to see more variation in income. As Paul Graham put it, "Economically, you can think of a startup as a way to compress your whole working life into a few years." For DeLong, this is an outrage.

Above all, DeLong looks to expand government's role, in order to protect ordinary wage-earners from the "risks" that people will suddenly be able to create a lot more wealth, leading to inequality. Of course, as Graham points out, the only way to "even out" the inequality is to stifle the upside for the entrepreneur.

I cannot imagine DeLong or other contemporary economists explicitly endorsing Galbraith's view that "the entrepreneur no longer exists." However, they appear to be a long way from being able to acknowledge the role that entrepreneurial activity plays in the innovation process. With its statist philosophy and lack of appreciation for entrepreneurs, today's Left is still very much stuck on Galbraith.

Arnold Kling is author of Learning Economics.

Categories:

23 Comments

Entrepreurs
Well said, Arnold.

In my opinion, entrepreneurialism is expanding even into the world of what is normally called labor. A well paid worker in today's service economy is often one who recognizes a need, develops the necessary skill set, and then markets that skill set. It is still possible to get a job by walking to the plant gates and dropping off an application, but not nearly as probable as 50 years ago, and not nearly as well paid.

Spelling
Not sure I've ever spelled entrepreneur the same way twice.

The Brave New World
Had Galbraith had his way, the "Brave New World" would have arrived right on schedule, in 1984.

Excessive licensing - thank you Arnold for mentioning it. It would great for you to do a full artic
This:

'Health care, too, is relatively immune to competition. Limits on entry into key health care fields are strictly maintained. I suspect that a one-year trade school could train a pretty decent physical therapist. But at the rate things are going, soon you will need a doctorate to practice legally.'

Is so true and so seldom poined out.

Excessive licensing sold as consumer protection is killing people.

Entrepreneurial Aversion
Funny, but investors and entrepenuers are ALSO AVERSE to risk and uncertainty, often opting for easy but dillutive strategies.

Hollywood: Sequels, remakes, and knock-offs with "big name" directors and actors are the rule, not the exception. Few investors have are willing to stomach the risk of an uncertain project.

Detroit: Behind for decades in robotic automation, fuel economy, and safety improvements, the big three emphasized milking the lucrative trend of Trucks & SUV to the exclusion of small cars and hybrid engines. The future will always be uncertain and the real risk is short-term thinking.

In the end, the entrepenuer and the investor are neither hero nor goat, but part of a team that needs to cooperate with researchers, engineers, employees and consumers to be successful.

averse to innovation
In any industry, the large incumbents tend to be averse to innovation. That is why you need vigorous competition, and you need to keep government from stepping in to protect the incumbents.

Mutant Enterpreneur
Thanks again Arnold for another good, insigthful commentary.

The enterpreneur is a person or group of people (as astutely pointed out by another contributer) who join the best of their labors and capital to first recognize, then strategically respond to a need. This involves risk taking and the ultimate result can be failure or happy externalities that beget yet other benefits to individuals, communities, governments, shareholders and other stakeholders.

The enterpreneur is the ultimate product of intellectual and physical evolution - a person who competes and adapts and who may discover things or provide services that materially better the human condition.

Government interference
If I may add, even government actions intended to hinder the incumbants often end up protecting them. E.g., regulations designed to make corporations conform to various standards have the effect of adding to the cost and/or risk of startups which might compete against the incumbants.

Aversion changes by dollar
The aversion you have to putting your first dollar of savings into a high risk venture is generally high. The aversion you have in putting your millionth dollar of savings into a high risk venture is usually much lower. Past a certain point (past where the admin costs eat up all the benefits), everybody suggests that diversification is a vital strategy for wealth maximization. You stick some money in safe bonds and put some money in safe stocks and a little "mad money" goes to high risk, long-term ventures. You don't expect it to work every time but you expect the rate of return on the 10% that do work out to make enough to cover the 90% losses you suffered to find your winner.

As people become wealthier, the propensity to invest some funds in a high risk venture gorws and as tehy grow even wealthier, the amount (though probably not the %) of their money in high risk entrepreneurial investment will grow.

The bottom line is that the wealthier we become, the more capital will be available for highly profitable, innovative, entrepreneurial ventures. This creates a virtuous circle because those ventures will drive further increases in wealth.

Galbraith's writings
It's hard to understand how such a smart guy (Galbraith) could get so much wrong while living in a society and country which directly contradicts much of what he wrote.

Just amazing.

Allow me to restate what I think is your point
You state that as people grow wealthier, they become more willing to bet on risky investments.

I believe that this is only partly true.
People are usually only willing to invest from their spare income. (Income that is not needed to cover the basics, food, shelter, clothing, etc.)

As you get wealthier, the amount of money needed to cover these basics shrinks as a percentage of your income. You tend to buy more expensive food, clothing, shelter, etc., but the cost tends not to rise as fast as income rises.

Also, as your income rises, the amount of money needed to invest in a particular endeavor also shrinks as a percentage of your income. Bill Gates may be more willing to invest $10,000 than I am to invest $10, but that $10K is probably a smaller fraction of his income, than the $10 is of mine.

Galbraith is full of crap, I work for an entrepreneur.
I realize that stupid ideas have staying power. But reality always seems to bleed through. Galbraith and his ilk can not argue with the millions of people across the entire western world who work for entrepreneurs. How many more folks work for entrepreneurs and small business vs S&P 500 companies? How may more folks work for small businesses owned by women vs the S&P 500?

More importantly, these giant companies have a fraction of the impact they have had in previous times. Look at GM and Ford and the airlines. They are all close to bankruptcy and the economy does not even blink.

And you know it is all GOOD. So forget Gabaraith and keep progressing forward.

The dark side
Many wonder why Galbraith and other lefties appear to believe what is obviously contrary to manifest economic and social evidence.


The darker side of human nature has evolved from a propensity to dominate and/or eliminate one's neighbors. We all have it to a degree. Some of us deal with it, and are happy with our neighbors' successes. Others, called Democrats, cannot or will not subdue these control-freakish impulses and work all their lives to use government, and other ploys, to achieve power over the rest of us. We need to develop better civilizing institutions to protect those of us who value personal freedom and liberty; from the power of some to coerce others to do their bidding.

Its a Lifestyle Choice not a Job
I have been an (US) entrepreneur for the last 12 years - in the formal sense: starting companies, selling them, etc. My day job is CEO of whatever my latest venture is. Today it is a mobile phone software company that i established in the UK. In two years it may be something else. I like it because I like be in control of my fate. This is sometimes a scary proposition - not for everyone - i just happen to like it. I like the fact that I know that my organization can always out-innovate a larger more "statist" organization. Not a boast but a fact borne out by the fact that larger organizations buy smaller organizations based upon that "hot house" fact.

The Left sees looks at capital as if it were a finite supply of "magic" beans. And that these magic beans come from the state. Profits on the other hand are a fiat of the state and because of this the state can determine good & bad profits. Current bad profits are made by oil companies since all they look at is the whole number, "billions & billions" vs. the net return on capital invested - modest to underwhelming.

The left's view will never change - it is usually masked in the cliche of "fairness" . I believe it is a much deeper psychological fear of rejection and failure - stock in trade for most active entrepreneurs. They don't see that failure is just part of the entrepreneur's feedback loop - the step to getting it right the next time. For most on the left there will never be a next time - no risk, no glory. Most leftists i have debated the subject with seem to suffer from a deep seated narcissism. The notion that just because I was never picked for the baseball team cannot have anything to do with my ability as an athlete but must have something to do with my gender or skin color or a myriad of other excuses. It couldn't possibly have something to do with the fact that I refuse to get off my ass and practice.

The Magic, Descriptive Word
Thanks ming666. "Narcissism" hit the bullseye. I would just add to "high-functioning" because the altruistic and user-friendly packaging is what makes their worldview more palatable to the unsuspecting.

Good luck in all of your ventures.

trends
It seems to be human nature to assume that whatever we are most familiar with is the natural order of nature.

If we live in a city, we assume the whole world is crowded.
If we live in an industrial society, we assume that industrialism is the natural form for the economy.

Another tendency is to assume that whatever trends we are witnessing around us, will continue forever.

So for someone who lives in a rapidly industrializing city, it is natural to assume that this industrializing process is the natural order of life, and will continue forever.

Real intelligence requires us to remember our limitations, and the limitations of our data, so as to avoid making these mistakes.

Another tendency is to assume that whatever we are involved in, studying, is as important to others, as it is to us. The longer one stays in academia, the more apt one is to fall prey to this particular mental disorder.

Given the above tendencies, it is quite natural, and unfortunately quite frequent, for academics, even really smart ones, to make incredibly stupid predictions.

This trend is further amplified when you spend all of your time with people who think like you do. As is becoming the norm in modern academia.

Stay hungry, stay foolish
Yes being an entrepreneur is lifestyle choice, but it's not a specialized ideological niche reveserved to conservatives.

For example, you might be familiar with a CEO by the name of Steve Jobs, who founded Apple, NeXT, Pixar, and then returned to Apple as CEO and produced the iMac iBook & iPod.

Transcript of Commencement Speech at Stanford given by Steve Jobs

...Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer was beautifully hand-calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this ... None of this had even a hope of any practical application in my life. But ten years later when we were designing the first Macintosh computer, it all came back to me, and we designed it all into the Mac. It was the first computer with beautiful typography...

...When I was young, there was an amazing publication called The Whole Earth Catalogue, which was one of the bibles of my generation. It was created by a fellow named Stuart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late Sixties, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and Polaroid cameras. it was sort of like Google in paperback form thirty-five years before Google came along. I was idealistic, overflowing with neat tools and great notions. Stuart and his team put out several issues of the The Whole Earth Catalogue, and then when it had run its course, they put out a final issue. It was the mid-Seventies and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath were the words, "Stay hungry, stay foolish." It was their farewell message as they signed off. "Stay hungry, stay foolish." And I have always wished that for myself, and now, as you graduate to begin anew, I wish that for you. Stay hungry, stay foolish.

http://slashdot.org/comments.pl?sid=152625&cid=12810404

Keep revisiting these predictions
This is a great service, Arnold. Socialist theories have been around for many decades at least, and capitalist ones for over a century, so we are now in a position to really explore the predictions each style of theory has made. We don't have to sit here and imagine future scenarios -- we can look how these theories have played out in the past.

That's great that you are going back and taking a close look. Keep 'em coming, and keep being honest in your assesments!

X-prize
Paul Allen invested heavily in the first private manned rocket system.
Branson is planning to start a space tourism business.

Cyclone Grinder
Check out the Ingesoll Rand's Cyclone Grinder project. They, like Toyota, have discovered that large corporations need to unleash the innovative spirit of their employees to make products their customers want and need, rapidly and efficiently.
GM and Ford have yet to figure out how to do that.
Entrepreneurial spirit can exist within corporations as well if the management promotes it.

DeLong Countdown - place your bets
How long 'til DeLong throws one of his trademark hissy-fits and labels Arnold as 'stupid', or the 'stupidest person in the world' ?
__________
If you're not sure of what I'm getting on about, check-out his site - http://www.j-bradford-delong.net/

As everyone knows, only stupid people disagree with Brad DeLong because by definition, stupidity is that with which Brad DeLong disagrees.

DeLong is obviously a bright guy, but I would never trust his counsel. He argues like a child and seems much more interested in establishing and enforcing conventional wisdom than in pursuing original analysis.

Tokens all
sure. there are a few token liberals or is the new word progressives? (wouldn't want to frighten the folks at home) who are entrepreneurs - thats the beauty of our random universe - u know, shakespeare's monkies and all that? sorry - nice pretty speech. made by someone who can now afford to make nice pretty speeches.

They change
True entrepreneurs can't stay 'in charge' for long.
What I find disheartening are the CEOs that support government regulations of the market.
CEOs tend to side the democrat/socialist camp, I guess, to restrict competition.

TCS Daily Archives