EDITOR’S NOTE: This essay was prepared for the Free Economic Society of Russia's 50th anniversary commemoration of the publication of The New Industrial State .
The New Industrial State was my father’s great work of theory. First published in 1967, nearly a decade after the triumph of The Affluent Society, The New Industrial State went beyond criticism of orthodox economics, beyond Marx and beyond Keynes—toward a full alternative, a complete substitute for neoclassical thought. In this book, John Kenneth Galbraith forged a vision of the business firm as an organization, and of an economics of organizations that together form the “planning system.”
The economics of organizations stands in opposition to the economics of markets. In what Galbraith called “the accepted sequence,” consumer preferences come first. Firms place their products before a discerning public, sell what they can, discount the rest, and then repair to study how it might be done better next time. In his own “revised sequence,” large firms start with the design and technology of new production. They see what is possible, they conduct “market research,” they decide what they like. They then engage their advertising and consumer-finance staffs to ensure that the result can be sold.
For Galbraith, this was reality; he did not oppose it. Complex technology dictates that markets must be controlled. The products that define modern life—automobiles, jet aircraft, electric power, microchips, and cable television—cannot be produced except over long lead times and by the integration of vast networks of engineering talent. This requires planning. Sometimes the planning goes wrong, and sometimes a company must strike out into the unknown. But not often. Had Boeing doubted that the 787 Dreamliner could be sold, that airplane would not have been built.
Large business firms often replace the market altogether. They do this by integration: replacing activity previously mediated by open purchase and sale with activity either internal to the corporation, or between a large, stable enterprise and its small, specialized suppliers, to whom risk is transferred. People reduce uncertainty neither through clairvoyance (“perfect foresight”), nor by confident exploitation of probability (“portfolio diversification”). They do it by forming up into structured groups large enough to forge the future for themselves. In politics these are countries and parties; in economics, corporations.
Once control passes to the organization, Galbraith wrote, it passes completely; the economics developed to describe the small firm and its owner-entrepreneur becomes obsolete. That form of economics celebrates the rational act of maximization, which consists of finding the shortest path to a given destination. But organizations do not have destinations. They have members, participants, stakeholders, all with a diversity of talents, interests, and purposes. Decisions are made by committees; the leadership of those on top is circumscribed by the need to get the underlings to go along. Individuals, the very focal point of traditional economics, no longer matter very much. Power in the firm belongs to what Galbraith called the “technostructure.”