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Galbraith on marketing and the marketplace.

Galbraith on Marketing and the Marketplace:

John Kenneth Galbraith, author of The Great Crash: 1929, The Affluent Society and The New Industrial State among other works, is one of the most influential economists and social critics of our time. He has served Presidents Roosevelt, Kennedy, and Johnson as adviser, administrator, and diplomat; has been president of the American Economic Association; and has, for many years, taught economics at Harvard University.

Professor Galbraith sees himself as a commentator on the American social and economic scene in the tradition of Thorstein Veblen, a social critic who combined anthropology, economics, and sociology to make incisive comments on American society. Veblen is best known for his iconoclastic book, The Theory of the Leisure Class (1899), which criticized false values and "conspicuous consumption" in America. Like Veblen, Galbraith has been critical of the American market-driven economy.

In the following interview, which has been abridged and edited for publication, Professor Galbraith discusses his recent re-evaluations of previously published views on the American free-market economy, the relationship between the American political system and capitalism, and the influence of the new internationalism upon the American economy.

Question: In The New Industrial State, you wrote that economists had been too influential in defining progress in terms of Gross National Product (GNP), because it's so easily measurable. It is correct to say that you feel we need a new definition of progress, and what would that definition be?

Galbraith: In The New Industrial State, I basically argued that the annual production of goods and services was the thing that gave prestige to the power structure of the country. Therefore, if you measure success by the GNP, you accord a privileged, prestigious position to the people who bring it about. And one of the curiosities of economic life is that when we have a slump - a recession or depression - we never miss the goods; all we miss is the flow of income from the production of the goods - the employment. Therefore, a better test of the success of a society is its ability to have a continuing flow of income or perhaps, more simply, a higher level of employment rather than a particular increase in GNP.

When you measure employment rather than GNP, you discover causes of unemployment - deficiencies in education, workers in the wrong location, the need for training. Above all, you explore the problems of minority and urban unemployment in the cities, which we now know are beyond the corrective effect of an increase in GNP. That was what I had in mind at that time - something I would emphasize even more now.

Q: Yes, you had mentioned that progress was defined in terms of GNP because it was easy numerically. But could you, for instance, as a measure of social welfare and progress, look at such statistics as crime rates, infant morality ...

Galbraith: ... housing, health care ...

Q: ... literacy rates?

Galbraith: I would argue without any hesitation that these, in the aggregate, are far more important than GNP - far more important measures of well-being than what happens to the Gross National Product. One the other hand, I wouldn't be particularly concerned to see them aggregated into some kind of an index; I don't think that's possible.

We have had, these last years, a steady increase in the Gross National Product, but an appalling problem of homelessness in the cities, increasing inequality, and an increasing poverty rate. The poverty rate now is still substantially higher than it was when Reagan took over.

Q: You seem to be critical of the modern establishment, just as Veblen was in his day. Is it a fair assessment to say that you have expanded on Veblen's ideas of business exploiting people's emulative and acquisitive instincts in creating demands for things?

Galbraith: Well, I wouldn't call it "acquisitive instincts." What I would say is that what modern industry does is invade the notion of consumer sovereignty. Nothing is more central to economics than the notion of consumer sovereignty, which provides the justification for the system: here's what people want and here's what the system provides.

I have argued, particularly in The New Industrial State but also in The Affluent Society, that we now have the producing firms going beyond the market to create the demand for what they produce as a matter of course. So they have to some degree replaced consumer sovereignty with producer sovereignty. And we have an enormous art form, advertising craftsmanship, that is devoted to that purpose. This is something which economists instinctively resist because it takes away much of the rationale of economic performance. No argument that I have made in my life has been quite so resisted as this. No argument that I have made have I enjoyed so much for its inconvenience.

Q: One question which follows from what you've just said is: What happens to the marketing concept? The marketing concept states basically that as a marketer one goes out and attempts to find out what the consumer wants, what the consumer needs, and then goes back and produces these goods.

Galbraith: I'm sure that is true to a certain extent, but marketers also go out to see by what methods the consumer can be influenced and managed and manipulated. Much more marketing is of the second sort than of the first. The hours of television advertising are not devoted to the discovery of what people want. They are devoted to the creation of the wants and desires for the product.

Q: But of the new products that come out into the market, some people have said that as many as nine out of ten fail. If the advertisers and producers are so able to manipulate the market, why would nine out of ten fail?

Galbraith: I'm not suggesting that this manipulation is perfect by any means. In the absence of advertising, in the normal course of events, a lot of people fail. But any notion that advertising isn't given to creating at two levels, both the social psychology of the consumer economy and the demand for the particular product, seems to me to be wholly erroneous. Our economists have reacted by saying, "General Motors advertises this, and Toyota advertises this, and Ford advertises this, and they cancel each other out." I think that this is an extreme form of special treatment.

Q: So the great art form in America is advertising?

Galbraith: Not exclusively American. I would say that in the economy of high affluence, where the marginal utility of goods has declined substantially and therefore people are open to persuasion as they wouldn't be for just food and clothing and shelter, advertising does become, well, if not an art form, a major exercise in craftsmanship.

Q: There is something that you were reported to have said a number of times about being very tall: since you're tall, your behavior has to be all the more perfect because everybody sees you. Could you apply that concept to the marketers and advertisers of the world because they're so visible? Shouldn't their behavior be more exemplary than that of the rest of business?

Galbraith: Well turning it around, doesn't business behavior become better when it becomes more directly involved with public persuasion, as compared with what the steel industry, the chemical industry, the tire industry, and the machine tool industry could do in the past when it was an exercise in anonymity as regards the ultimate consumer? I think there is something to that; yes, I think the characteristic consumer-serving corporation has to be more concerned with its public image, the safety of its products, the safety of its working conditions - its public reputation, generally. It has before it the evidence of such disasters as Robbins with the Dalcon Shield, things of that sort. I think there is something to your point.

There was a possibility of arrogant exercise of power by the steel industry, for example, 50 or 75 years ago, but that isn't possible even for General Motors now.

Q: Your description of the "affluent society" seems in some ways to parallel Veblen's ideas in The Theory of the Leisure Class. Do you feel that, either by accident or by design, you have extended the influence of Thorstein Veblen?

Galbraith: I would say that I have certainly sought deliberately to extend the influence of Veblen - first, by mood. Nothing was more important to Veblen than puncturing the stuffed shirt, invading the contentment of people who were otherwise extraordinarily self-satisfied. I've loved doing that.

The second was to stump for specific ideas of Veblen. Some think Veblen was totally wrong. The notion that the engineers could take over the price system, that business management was somehow a great engineering achievement, is an idea that has not taken hold and couldn't, but it is of the essence of economic development that you have management embracing the engineers and the scientists. But on other matters, I would imagine, as you say, The Affluent Society was a projection in some measure of Veblen's image of the leisure class. And finally and very specifically, I've sought to bring Veblen's memory back into our culture.

Q: Advertisers say that in many cases, if not in most cases, advertising reduces the cost of goods because with increasing demand there is an increase in production, which lowers the per unit fixed cost and therefore really drops the price of goods. Would you agree that advertising lowers prices?

Galbraith: There may be such examples. Yes, I would suppose that the advertising of personal computers and calculating machines led to their mass production and reduced prices. I wouldn't deny that. But what one needs to be warned against is taking a small truth and making it into a total truth.

Q: What is the relationship between the market-driven economy and the political system in which it operates?

Galbraith: I think this is essentially a pragmatic matter. There are some things which only the state can do, and there are some things which it is quite reasonable to leave to the market. There's no overriding theory either in favor of socialism or in favor of the free market. The much harder question is a judgment as to which works best. And this is a problem as far as we're concerned, where we have, particularly at the moment, an ideological fixation on the market, but persistent awareness that there are some places, many places that the market doesn't work or doesn't work in a fashion tolerable to the people involved. In the Soviet Union, they struggle with the fact that there are a great many places where Socialism doesn't work. So you have to get back to some sort of market function.

This is one of the great developments of our time - the onslaught of practical circumstances on both markets - free enterprise and socialist ideology.

Q: One thing that's certainly changed in your lifetime is the increased competition for world markets. At the end of World War II, I think the United States had something like 25 or maybe even 30 percent of the world's GNP, and that has shrunk to approximately 16 or 17 percent now. But when we try to compete overseas now, we have much more competition from abroad, and also we see Japan just having a field-day here. How do you feel the U.S. could better compete in the world marketplace?

Galbraith: Well, there is no simple answer to that. In some products we shouldn't try - a point that has been made by Milton Friedman in the past, and where he's right. There is a natural tendency, an inevitable tendency, for industrial activity, particularly in mass production and repetitive industry, to move to the younger countries. That was the advantage which we once had over the British, which the Germans had over the British, which the Japanese now have over us, and which Korea and the newer countries now have over Japan increasingly. On the other hand, there are some things where we still have a great advantage and which should be our guide. Anything involving a high educational or a high degree of artistic quality is still very much on our side. This, in turn, suggests that investment in education, including an investment in the arts, is very much in our favor.

I think that we could invest more effectively and have a substantial improvement in our aged bureaucratic industries, if we recognize that there is an adolescence factor in management that needs to be overcome. But I would see our greatest advantage in investment in design, investment in the arts, investment in scientific and technological development - and back of that, in education. Nobody can touch us in education. I was down at the Harvard University campus the other day, and I would guess that a third of the summer school students at Harvard, and this is just a rough guess, must be Oriental, including people who come from overseas. We're still pre-eminently the best university there is, and that's the kind of advantage that we should cultivate.

Q: What in The New Industrial State do you consider out-of-date now?

Galbraith: Well, I would say, in the main, that The New Industrial State has two things that I would now extensively rewrite. It looked on the corporate world, what I call the planning system, as to some extent a closed system. I was not prepared for the intrusive movement of Japan on the ordered world of the multinational corporations. That is something that I did not foresee, so that the certainty of the planning by the large enterprise has been substantially reduced.

Secondly, I did not see adequately the aging process of what I call the technostructure - the tendency for it to become bureaucratically rigid, ossified as we have seen it happen in the steel industry and to some extent in the automobile industry, the chemical industry, and others of the old industries of the last 20 years. I should have seen it, because I ran price-control in World War II and was in daily communication with corporate executives. I was fully aware of the mental rigidities of people in the old industries. I formed in those days what I hoped would be called Galbraith's law, which was that corporate executives came to resemble intellectually the products they manufactured.

Q: In this modern age, where we have technological products, people like An Wang in a sense exemplify almost what Veblen wanted - that the engineers would take over. Aren't they doing that now?

Galbraith: Not particularly - no. I think they are probably more influential than they were 50 years ago, and engineers do rise to the top, particularly in the so-called high-tech area as you would expect. By and large, the art - craft - of management is a force, a requirement, in its own right, far more important than Veblen thought it was.

Q: If you replace the engineers by perhaps what we would look upon now as the scientific managers, those who are very quantitatively oriented, could you say that the engineers have taken over as scientific management has? You wouldn't agree with that?

Galbraith: I wouldn't agree with that. I would say that there has been some professionalization of management, but I wouldn't say the engineers have taken over the price system, as Veblen thought they should, nor would I urge it.

Q: Do you think this is an error in Veblen's thought?

Galbraith: Yes.

Q: Veblen spoke of a conflict between industrial efficiency and business profits. Where is American business now in this conflict?

Galbraith: As I say, I don't think there's a conflict; I think Veblen was in error there.

Q: Why in the past have most economists chosen to leave out marketing and advertising from their models of macroeconomics?

Galbraith: Because it is inconsistent with the notion of consumer sovereignty. No question about that.

Q: Also, you spoke of the influence of Japan as something you hadn't seen in The New Industrial State. If you go back to the idea of the countervailing powers, this also assumes a closed system of business.

Galbraith: To some extent, yes.

Q: If you were to rethink that now, would you perhaps add some dimension of external influence from abroad, something outside the system influencing your countervailing powers?

Galbraith: I expect I would, yes. I hadn't thought of that, but I'm sure I would. The book on countervailing powers is now a long time in the past, and I haven't looke at it for 20 or 30 years, I guess. But I think that, without question again, it characterized the American economy as it was at that time with very slight external influence, except as we created it by what we imported and were subject to some external influence by the prices that we had to pay for commodity imports.

Q: According to Max Lerner, Veblen was first a theorist and only secondarily a reformer. Do you consider yourself a theorist primarily or a reformer?

Galbraith: Well, I would not accept either of those. I would like to consider myself a commentator - somebody who tries, particularly when it is inconvenient, to expose the reality. I don't consider that I've ever built a full theoretical system. I've certainly been on the side of reform when it was required and called for, but I certainly haven't put my full life on that.

P. Everett Fergenson is Associate Professor of Marketing at Iona College in New Rochelle, New York. Laraine R. Ferguson is Professor of English at the Bronx Community College of The City University of New York.
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Title Annotation:interview with John Kenneth Galbraith
Author:Fergenson, P. Everett; Fergenson, Laraine R.
Publication:Review of Business
Article Type:interview
Date:Dec 22, 1989
Previous Article:Theoretical and operational marketing information systems.
Next Article:U.S. Commercial Opportunities in the Soviet Union.

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