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The New Industrial State, John Kenneth Galbraith, 1972 (2nd ed), Harmondsworth: Penguin
Change in the economic sphere has been very great in recent history. It is a curiosity that although this is accepted, what has changed is perceived to be strictly limited. For instance, the essential features of American capitalism remain perfect throughout.
The increasing application of sophisticated technology to production is perhaps the most obvious change. The corporation used to be very much the instrument of its owners, now it is under professional and much less identifiable management. The federal and state governments are now much more active participants in the economy, together accounting for 23 per cent of production (1969). The state is perceived to be responsible for maintaining aggregate demand within the economy at a high enough level to ensure minimal unemployment through Keynesian measures. Before World War II, serious recession was seen as a normal part of the business cycle; since the war there have been only two years in which output failed to expand.
Less frequently celebrated, there has been a vast increase in the human effort expended in advertising. “In its cost and the talent it commands, this activity is coming increasingly to rival the effort devoted to the production of goods.” Union membership is no longer increasing, having peaked at 25.2 per cent of the workforce in 1956 and having declined since. There has been a large increase in enrolment in higher education, and a somewhat lagging increase in funding.
These changes should be seen holistically. In sum, they create the need and the opportunity for large industrial organisation. Economic systems tend to converge on the large, bureaucratic industrial system. There shape is thus more determined by technology and organisation than by ideology.
The traditional and pedagogically convenient view of America as a free market capitalist economy dominated by small firms with little capital is a poor representative of a substantial part of the economy. It is a reasonable description of many remaining industries, such as agriculture, truck mines, painting, musical composition, much writing, the professions, some vice, handicrafts, some retail trade and a large number of repairing, cleaning, refurbishing, cosmetic and other household and personal services. However, this is not the sector of the economy under change. The Industrial System as we shall call it, consisting of 500-600 corporations in sectors such as communications, production and distribution of electricity, transportation, manufacturing and mining, much retail trade and entertainment is very different in character, poorly described by economists and the source of the visible and important changes in the economy. The industrial system is a dominant feature of the Industrial State.
Technology means the systematic application of scientific or other organised knowledge to practical tasks. –p31
The application of technology requires the subdivision of activity into small enough tasks that they can be analysed using scientific or engineering knowledge. Nearly all of the consequences of technology derive from this need to divide tasks, to bring knowledge to bear on these tasks, and to combine the finished product. There are six consequences of real importance:
These requirements continue to increase as technology advances. In some instances, it is becoming difficult for corporations to meet these challenges, especially when timescales are so long, capital invested in research and development phases so great, and the tasks being attempted so complex that it is not known whether solutions can be found, that projects become extremely risky. One solution to this problem is for the state to intervene to absorb the major risks.
Technology, under all circumstances, leads to planning; in its higher manifestations it may put the problems of planning beyond the reach of the industrial firm. Technological compulsions, and not ideology or political will, will require the firm to seek the help and protection of the state. –p38
Until the end of the Second World War 'planning' was viewed with some approval. Since then, the Soviet emphasis on planning has ideologically coloured the word. However, planning is now a central component of the industrial system.
Under market conditions, there is some degree of price elasticity of supply. The market price is sufficient to stimulate production and supply, or at worst, by offering a premium production and supply can be encouraged. Within the industrial system this is no longer realistic. A product that requires three years of research and development to produce cannot simply be had today by increasing the price that the consumer is willing to pay. And so with a firm's inputs – it is not always possible to go to the market and obtain highly specialised labour and arcane materials in order to meet a demand that was not anticipated. Instead, in order for such production to exist at all, long-term planning is necessary.
Unfortunately, alongside the existence of long-term planning, a functioning market system is a danger to those involved. A capricious market may make the fruits of an expensive research and development effort worthless. Thus, when supplying a product which is so technologically advanced as to make planning inevitable, it is perfectly rational for the firms involved to seek to stabilise the quantity which will be bought and the product's price in order to reduce their own risks. There are three ways of doing this:
There is a clear association between planning and size. The large corporation can cope with market uncertainty through diversification, can contract out of uncertainty, can vertically integrate, can control prices and consumer demand, can enter contracts to reduce uncertainty with other large firms, whilst the small firm cannot. Although small firms can appeal to the state for help, so too can large corporations.
There is still a myth amongst economists that the increasing concentration of large firms within the economy is an attempt to seize industrial power – use monopoly power to increase prices. It is not recognised that large corporations are the only unit of organisation capable to manage planning on a scale appropriate to contemporary high-technology ventures. A world without large corporations would be a world without technologically advanced products.
Secondly, “the enemy of the market is not ideology but the engineer.” Advanced technology and specialisation are leading to increased bureaucratic planning in both the Western and Soviet worlds. This is not the result of ideology, but is made necessary by the requirements of the technology we are coming to take for granted.
It is a feature of all planning that, unlike the market, it incorporates within itself no mechanism by which demand is accommodated to supply and vice versa. This must be deliberately accomplished by human agency. Such is true of the supply of savings for capital formation. –p52
A surviving economic myth holds that individual workers make the decision to spend or save their earned income, the part that they save funding industrial investment. This is not true. In 1969, $38 billion was saved by individuals, $99 billion by business firms. In 1950, the poorest two thirds of the population did not, as a group, save at all. More than half private savings were made by those in the top five per cent. There might be some considerable contradiction in a system which had to whip the mass of society into a consumeristic frenzy and then relied on them to forgo some part of their consumption for adequate saving. Thus, money for investment is saved mostly by corporations, the remainder by the very rich. The consequence of this is that within the industrial system, there is no longer a market for capital. Corporations, where possible, retain earnings for investment. They do not borrow or lend at a market rate – they plan to save the money they themselves need for future investment. They do this for the same reason that corporations always seek to supersede and evade the effects of the market – uncertainty is inimical to efficient planning. In the Soviet economies, state planners decide how much money be reserved for new investment; in America, that decision is made by corporate managers. The two processes are different in many respects, but in neither is a market mechanism involved.
Savings are also, in ordinary circumstances, superfluous in quantity. Whereas in a country such as India, capital formation is of vital importance to growth, in America a rather different situation occurs. Here, the primary problem is ensuring that all of the money saved is invested – where investment falls below saving, not all of the product of the economy can be sold, demand lags production and the economy sinks into recession. The planner's solution is state intervention – the government's budget deficit stands ready to spend any differential between saving and investment to ensure that aggregate demand rises to the level of production. There are very important consequences of the abundance of capital within the industrial state, which is the subject of the next chapter.
The discussion of the different factors of production – the basic categories of inputs from which economic goods are made (land, labour, capital and entrepreneurship) – is an extremely familiar topic in economics. It is rather surprising, then, that one aspect of their interaction is very rarely discussed – that of what gives one or other factor of production power within the economy.
There have been two broad shifts in power between factors in history. Prior to the industrial revolution, and during the period in which Smith and Ricardo were writing, power was unquestionably held by landowners. Malthus and Ricardo were convinced that labour would regulate its own abundance such that it would always be available at more or less a subsistence wage – it was never conceivable that labour might have any power. Entrepreneurship was of no use – one might even say that it had not been invented yet. And capital was of little importance – those who had land were invariably capable of commanding the minute capital that was required to work it efficiently, and capital alone was of little productive use to anybody without land. The market for land was informally controlled by a landed class who rarely traded land, preferring to pass their estates intact to their heirs. In 1800, the governments of Britain and America were dominated by the landed gentry. The modern meaning of 'democracy' initially indicated a government controlled by landed men, as the landless could not vote until later.
This changed in the course of the nineteenth century, in the Anglo-Saxon world at least. The scarcity of land was finally being broken by the new cultivation of America, Canada, South Africa and Australia. Moreover, the industrial sector was growing in importance – it was becoming possible to create economic organisation with capital, labour, the new invention of entrepreneurship and only the tiniest amount of labour. Anybody with money could buy land. Power was shifting from land to capital as capital became the economic “factor [that was] hardest to obtain or replace.” By the 1840s, capital was so represented in the British parliament that the Corn Laws were repealed, confiscating a guaranteed income to landowners and lowering industrial (subsistence) wages by driving down the cost of living. By 1900, the British and American governments were dominated by industrialists and businessmen.
The second shift in power has been occurring over last fifty years (to 1970) and is not yet finished. Nevertheless it has not yet been recognised. This is not particularly surprising, as the reign of capital, just like the reign of land before it, is seen as eternal. Ricardo believed that the process of improving technology would increase the rent of land indefinitely, that all other factors would remain in the same miserable condition forever. However, corporations are no longer influenced by their stockholders, they are able to find funds sufficient from their needs in retained earnings. The following are symptoms:
the loss of power by stockholders in the modern corporation, the impregnable position of the successful corporate management, the dwindling social magnetism of the banker, the air of quaintness that attaches itself to the suggestion that the United States is run by Wall Street, the increasingly energetic search for industrial talent, the new prestige of education and educators… –p73
In the industrial state, the scarcest factor of production is “the association of men of diverse technical knowledge, experience or other talent which modern industrial technology and planning require.” This is not the same as labour. Labour has won some power over its pay and working conditions but none over the enterprise, and it still tends to be in abundance. When insufficient savings are invested and aggregate demand dips below production, unemployment is the result. When savings are used, one consequence is automation and the replacement of workers with no or standard skills with machines. Thus labour and capital suffer from the new abundance of capital. Nor is this new factor the same thing as entrepreneurship, which is of little and diminishing value within the industrial system. It is a genuinely new factor of production, and it already holds unrivalled power within the industrial society.
Individualism is still highly glorified within our culture, but within the industrial system, the decisive unit of decision-making is the group, specifically the committee. There are three main reasons for this.
Firstly, the technology involved in corporate decision-making requires information to be provided and interpreted by specialists in various different fields merely for a single decision to be made. Although in almost all cases it would be possible for an exceptionally capable individual to gain simultaneous specialist knowledge in multiple diverse fields in order to be capable of making such a decision without relying on further experts, this is an inefficient use of expertise and talent, the scarcest resource in modern business. Better to assemble a group of separate experts of ordinary talent. The results will be more predictable. “The real accomplishment of science and technology consists in taking ordinary men, informing them narrowly and deeply and then, through appropriate organisation, arranging to have their knowledge combined with that of other specialised but equally ordinary men.”
Secondly, the degree of planning required to organise even modest tasks within the industrial system requires an amount of work which cannot be completed by an individual. The replacement of the free market with a planned solution puts action and decision-making beyond the reach of individuals.
Thirdly, coordinating a range of specialised talent is a complex process in itself. It requires a delicate group dynamic in which a committee develops the experience it needs to vet the information it requires to make decisions. It will learn to take some sources of information at face value, treat others at an appropriate discount, and develop mechanisms to probe and test potentially spurious sources.
Thus, significant decision-making in all large corporations is undertaken by groups. This has lead to a fundamental change in the form of bureaucratic hierarchy. The main difference is that it is no longer realistic for a superior to overrule a group decision, as it is for a superior to overturn a decision made by an individual. In the absence of committee decision-making, it is generally feasible for a manager to reappraise any decision made by a subordinate, assess all of the information used to make that decision personally, and overturn the decision if appropriate. It is almost never possible for an individual to adequately appraise a committee decision – otherwise a committee would not have needed to be formed in the first place. Only a second committee containing a similar range of talent and expertise would be in a position to do so, and in practical terms this is almost never a remote possibility. Thus, ultimate power in decision-making is now becoming firmly embedded within groups somewhere in the middle of the hierarchy of corporations. Whilst upper management retains the formal power to ratify decision-making, in truth he cannot competently decide anything, and indeed interference in committee decision-making can be dangerous – it can easily undermine the efficient process of group decision-making. The only power that remains with those above such committees in the hierarchy is that of selecting the men that comprise the committees, constituting and reconstituting these groups. The Technostructure is suggested as a collective term for all those involved in group decision-making and the organisation which they form.
Dominant trends in the development of the corporation have been ignored by economics, although there are great differences between different types of corporation. It will be useful to distinguish between the Entrepreneurial Corporation, in which due to limited requirements planning it is still feasible for the corporation to be understood and managed by a single individual, and the Mature Corporation, in which effective control has passed decisively and irrevocably to the technostructure.
The most obvious requirement of planning is size. This is not properly understood. Economists have suggested that corporations are large because of technical economies of scale or because of a desire to use market power to inflate prices. Both are partial answers. Technology dictates large size but does not explain wide diversification. Planning in a sense requires market power, but it is the power to control supply that is often inadequately provided by the market, the stabilisation of demand, provision of capital and the general minimisation of risk. The larger the corporation, the easier this planning becomes.
The corporation has come efficiently to protect the technostructure by preventing interference in its decisions. The idea of state interference is taboo. Although the influence of stockholders is maintained in myth, it is now almost impossible for stockholders to impose its will on management in even the most extreme cases: stock is too diversely held, there are various sundry impediments to stockholders attempts to intervene, and most importantly, the knowledge required to appraise the firm's activities or make useful judgements about its operations is impossible to obtain, the company's operations being too complex. The influence of capitalists is lessened by the abundance of capital, enabling large firms to obtain finance without losing any control; it is enhanced by the complexity and opacity of operations which make it impossible for financiers to understand enough to add conditions to finance; but it is generally removed entirely by financing the majority of new investment with retained profits. The only circumstances under which the autonomy of the technostructure is threatened is a failure of earnings. The obvious solution being, of course, that the mature corporation almost never fails to turn a profit. “From 1954 to 1969, there was only one year in which as many as three of the hundred largest industrial corporations lost money.”
Typically, there comes a point in the development of a corporation in which the operation becomes too technologically advanced and the requirements for planning so extensive and diverse, that effective control by a single entrepreneur becomes simply impossible. Typically, power is peacefully transferred from the individual who created and agglomerated a large corporation to a technostructure which maintains it in its maturity. The rare cases in which this transfer is resisted by the entrepreneur illustrate the inevitability of this progression, particularly Henry Ford's attempts to cling to power in the late 1930s and 1940s. It is customary for the myth of rugged individual entrepreneurship to be handed down to the new generation of managers, but it is not hard to spot the absurdity.
Individualism is the note that 'sounds through the business creed like the pitch in a Byzantine choir.' 'They're bred to race. It's the same with people. It's something that's born into you.' 'Business is tough – it's no kissing game.' These characteristics are not readily reconciled with the requirements of the technostructure. Not indifference but sensitivity to others, not individualism but accommodation to organisation, not competition but intimate and continuing cooperation are the prime requirements for group action. –p106
Modern executives in mature corporations are highly replaceable men of modest talent. They are ignored by financial markets whilst in office (unlike entrepreneurial leadership in smaller firms) and by everybody else the moment they leave the company. The names of Rockefeller, Morgan, Duke, Harriman, Guggenheim, Durant, du Pont, Chrysler, Hartford and Hilton are remembered, their successors are not.
In any industrial enterprise, power rests with the decision-makers. In enterprises committed to the use of advanced technology and planning, decision-making and thus power must have passed, inevitably and irrevocably, to the technostructure. Outside interference with this decision-making process will inevitably be arbitrary and therefore almost invariably damaging.
Thus, the socialist faces a choice in the administration of the nationalised firm. Either autonomy must be largely ceded to the firm's technostructure, in which case management will be effective and efficient but not subject to democratic control, or else tight control can be maintained by ministers, in which case ignorant interference with poorly understood technical decisions will make the firm inefficient and unsuccessful.
In the British post-war adoption of socialism, the British parliament, with its “superior instinct for administration, recognised the need for autonomy of the nationalised industries.” This was largely granted, and the results were successful. Parliamentary questions were not permitted on the decisions of the technostructure.
This autonomy is necessary both for small decisions and what appear to be large questions of policy. Whether to rely on atomic energy for power is, assuredly, a question of policy. But the comparative advantages of atomic and molecular reactions for the generation of electricity are decided only by a variety of scientific, technical, economic and planning judgements. Only a committee, or more precisely a complex of committees, can combine the knowledge, training and experience that must be brought to bear. –p112
Elsewhere, in particular in the former British and French colonies, socialistic policies were implemented rather differently, with government maintaining much tighter control of nationalised firms. The results have been far less successful. One particular tendency in India is for parliament to pressure firms for lower prices and higher wages. Nationalised firms in India and Ceylon almost invariably operate at a loss and, significantly, are not able to accumulate earnings to be used in investment – the principle means by which the Indian economy is likely to grow. The technostructure would surely make different decisions if allowed greater autonomy.
Democratic socialism in the industrial system is now as impossible, on technical grounds, as entrepreneurial capitalism. However there is “more to the case for the autonomous public corporation than the modern socialist now sees. Public ownership increases the amenability of the firm to social goals.”
The assumption of profit maximisation lies at the heart of orthodox economic theory. Before the consequences of the increase in the power of the technostructure can be analysed, corporate motivations must be examined; before that is possible, the enduring assumption of ubiquitous profit maximisation must be challenged.
This assumption comes in two distinct flavours. In the competitive sector, it is assumed that profit maximisation is ruthlessly imposed by the market – that a lack of commitment to this goal over all others will make it impossible for a firm to remain abreast of profit-maximising competition, forcing the firm out of business. In sectors in which the corporation enjoys significant market power, the situation is recognised to be different. In such situations, it is recognised that the firm has some potential discretion in selecting its goals – it could, technically, pursue other objectives and remain in business. Here, the assumption of profit maximisation is more abstract. It is usually assumed that although other options exist, they are never exploited – the firm always uses any market power it can gain in order to drive profits as high it possibly can.
In fact, many economists are not so dogmatic, and yet the consequences of the qualifications they place on this theory are not explored. Dorfman, for example:
On balance, the maximisation hypothesis is not as firmly grounded in the facts of life as a fundamental scientific hypothesis should be. But substantial and prolonged divergences from the behaviour it implies are rare, particularly in industries with many participants. –Robert Dorfman, 1965, The Price System
It is not uncommon for economists to vaguely concede that the assumption may not apply to the industrial system, as though that didn't matter.
The first major problem with profit maximisation concerns the managerial revolution: that is, the transfer of control from the owner of the firm to a professional entrepreneurial leadership. In this case, there is a clear paradox in applying the assumption that economic agents maximise their returns: it would be rational for senior management to maximise their own returns in the form of wages, bonuses, stock options, pensions, rather than the profits of the firm. In the early development of the corporation, particularly in the 1930s, this problem aroused substantial concern and there were numerous examples of successful attempts by management to fleece their employers. One result was legislation limiting their power to do so, partly by requiring disclosure of pay and benefits. However, at the time this was portrayed by some as a fundamental contradiction which would destroy the capitalist system, although such consequences were never realised. In fact, in the majority of cases such exploitation of the firm by its management never occurred, and in most cases the possibility for management to vote itself further increases in remuneration survived throughout and still to this day. Such exploitation was simply not in accord with “the accepted canons of behaviour.”
If the subsequent shift of power from an entrepreneurial leadership to a broad technostructure is also accepted, then the assumption of profit maximisation suffers even further. Additionally, the conditions under which the technostructure operates – specifically, the pervasive use of group decision-making, which creates conditions under which all employees actions, and frequently thoughts, are widely known and subject to peer review – makes personal profiteering very much subject to the prevailing culture, which broadly disapproves of it.
The members of the technostructure do not get the profits that they maximise [under the assumption of profit maximisation at firm level]. They must eschew personal profit-making [because they are under the scrutiny of their peers]. Accordingly, if the traditional commitment to profit-maximisation is to be upheld, they must be willing to do for others, specifically the stockholders, what they are forbidden to do for themselves. It is on such grounds that the doctrine of maximisation now rests. It holds that the will to make profits is, like sexual intercourse, a fundamental urge. But it holds that this urge operates not in the first person but the third. It is detached from self and manifested on behalf of unknown, anonymous and powerless persons who do not have the slightest notion of whether their profits are, in fact, being maximised. In further analogy, one must imagine that a man of vigorous, lusty and reassuringly heterosexual inclination eschews the lovely and available women by whom he is intimately surrounded in order to maximise the opportunities of other men whose existence he knows of only by hearsay. Such are the foundations of the maximisation doctrine when there is full separation of power from reward. –p129
There is clearly a need for a better understanding of the motivations of the technostructure; this in turn ought to unlock explanations of corporate behaviour more generally. In this context, we are examining why an individual would choose to adopt an organisation's goals over his own – why he would work on behalf of an organisation. We introduce a framework in which the individual's reasons for adopting organisational goals divide into four main categories:
The interaction of these goals is clearly of interest, and some reasonably strong observations can be made. Compulsion and compensation are usually found together. The amount of compensation usually rises as the level of compulsion falls. There is also a typical relationship between the balance between these two and (a) the wealth of society and (b) the economic position of the individual involved. Poor individuals in poor countries typically face extreme hardship on losing employment. Their pay is correspondingly small. The richer the country, the better unemployment compensation and welfare is provided to lessen the compulsion to avoid unemployment. The wealthier the individual, the better the prospects for finding another job.
There is an interesting association with slavery. In a very poor society, the difference between serfdom, wage labour and slavery may be slight. “The choice between hunger and flogging may be a matter of taste.” As an economy develops, and the condition of wage labour improves the motivation of slaves to escape will grow and the costs of associated with maintaining slaves will increase. Thus there will be a level of economic development at which the maintenance of slavery ceases to be economically viable. Naturally, at this point the society will congratulate itself on its newfound civilisation:
In the absence of the Civil War, slavery in the United States could have lasted only a few more years…As in other countries, at a similar stage in their economic development, slavery would have been given up. The reform would have been attributed to the innate humanity of man to man. By 1880 or 1890 at the latest, the more respected philosophers would have been congratulating the nation on having accomplished peacefully what men once feared could only have been done by war. –p145-6
Identification and adaptation usually come together – the more one identifies with an organisation's goals, the more concerned he will be to perfect them, and the more one hopes and expects to be able to correct an organisation's goals, the more he will support them. Adaptation is, to an extent, a matter of taste. Some agitate for change more than others. It is also a more likely motivator the more power an individual has.
Identification and adaptation, taken together, are also associated with the compulsion-compensation continuum. The higher is compensation relative to compulsion, the higher will be these two motivations. For those who face only tiny compulsion and superfluous compensation such as senior executives or important members of the technostructure, identification and adaptation may be the dominant motivations.
Significant levels of compulsion will almost invariably drive out any tendency for an individual to be motivated by identification or adaptation. One who is forced to support an organisation is unlikely to believe in its goals or hope to change it from within, although there are partial exceptions. The prisoner will not hope to change the goals of the prison, but the draftee may come to support the goals of the war he is compelled to fight.
This framework also explains the nature of labour relations under different conditions. In poor countries in an organisation employing low-skill workers compulsion will be high and will alienate the worker from his employer – identification and adaptation will correspondingly be negligible. Labour relations will be harsh and angry and the employer will make no effort to cultivate loyalty. In a richer country, and amongst better paid workers, everything is more benign. The element of compulsion is much smaller and it will be more useful for the employer to cultivate identification with the firm.
On both sides the motivational system both allows and rewards more agreeable behaviour. This mellowing of relations, the result of wealth, will, however, be attributed to more humane instincts, greater employer enlightenment, more responsible unions and the spread of industrial statesmanship. –p147
There has historically been an association between the dominant resource and the dominant form of motivation. The epoch in which land dominated other factors was associated chiefly with compulsion, with feudalism and slavery. Compulsion lends itself to agricultural production and the associated dispersion of workers; it is poorly suited to town and city environments. At the beginning of the industrial revolution, it was cheaper to run a factory on wage labour than it would have been to use slave labour. The shift from compulsion to compensation naturally followed from the shift in dominance from land to capital. But the old reverence for compulsion died hard, and respect for its superior efficiency remains. The opinion is still widely held that Nazi Germany and the Stalinist USSR reaped great benefits from their ability to force labour by compulsion; in fact it is difficult to discern any significant difference. The extra labour Germany extracted from workers brought into Germany from occupied Europe under degrees of compulsion was matched by Britain's drive to encourage women and domestic servants into industry. Compulsion remains in contemporary (1972) America in the form of the military draft. A mercenary army would likely be at least as effective.
Similarly, with the transition of power from capital to the technostructure, the primary motivational force has shifted from compensation to the combination of identification and adaptation. Considering that the reverence for the value of compulsion has not yet died, the task of convincing economists that compensation has given way to new motives within a substantial part of the economy will not be easy. Yet, within the technostructure, this has already happened to a striking and decisive degree.
The traditional view of the power hierarchy within a corporation runs something like that depicted in Figure 1.
[pic] Figure 1: Traditional view of Corporate Hierarchy
Power is supposed to stem from shareholders through the board of directors. But power no longer lies with anonymous shareholders or in a board of directors that is now largely subservient to senior management. Instead, the bulk of decisions stem from groups within the technostructure. We might alternatively depict the corporation as shown in Figure 2. Rather than illustrate the supposed flow of power, this separates participants by their level of commitment to and investment in the corporation. There is a clear association between these and the varying motivations for involvement with the corporation. On the periphery are shareholders, whose interests are purely pecuniary and who would generally move their capital to another corporation instantly if they supposed that it would earn a better return. The next circle represents production workers, whose motivation varies by corporation. In those in which work is monotonous and uninteresting, in which the corporate ethos appears to value profit above all else, which enjoys little respect within the community and in which layoffs are common, production workers are likely to be motivated primarily by compensation. In corporations in which work is more skilled, varied and interesting, which perhaps have a more social role in society, which enjoy the respect of the community and which have a proven commitment to the job security of all their staff, it is likely that part of the production worker's motivation will come from identification with the firm. It is highly unlikely that he will have any illusion that he can influence the firm, so adaptation is an unlikely motivator. However, for those employees in the central core, identification and to an increasing extent adaptation are likely to dominate compensation as motivators.
[pic] Figure 2: Suggested diagram of motivational division within the corporation
Professors Simon and March suggest the following circumstances which induce identification of the individual with his organisation:
“All of these requirements are met in the large corporation, and increasingly so in the inner circles of the technostructure.” The power of adaptation as a motivating force is greatly enhanced by the human instinct to parochialism – to perceiving the sub-universe of the organisation in which his life exists as the only realm of any importance in the world.
It is asserted that there is a general principle of consistency between the motivations and goals of individuals, of organisations in which they operate and society as a whole. It is not possible for these goals to be greatly at odds with one another, because of the process by which they interact. At present the dominant organisational system is the industrial system and the dominant individuals within it are the technostructure. Thus, to a large extent, corporate goals are consistent with (and guided by) individuals' goals, and social goals are consistent with (and guided by) the goals its largest corporations. This is, to an extent, a two-way process – society does impose goals on corporations and thereby on individuals, but the extent to which social goals are formed by the technostructure via corporations is substantial. The individual is particularly motivated to work for a corporation which is perceived to faithfully serve society's goals. This remains true even if society's goals have been shaped by corporations to align with the private goals of the individual member of the technostructure.
For both individuals and corporations, pecuniary interest will be a strong motivator beyond a sufficient threshold. Above that threshold, it will be less important than other motivations. The technostructure, in its day-to-day involvement with the tasks of producing goods and managing demand for those goods, believes strongly in these goals. Thus, society values production as an article of faith, even if this production has negative consequences:
From a detached point of view, expansion in the output of many goods is not easily accorded a social purpose. More cigarettes cause more cancer. More alcohol causes more cirrhosis. More automobiles cause more accidents, maiming and death; also more pre-emption of space for highways and parking; also more pollution of the air and the countryside. What is called a high standard of living consists, in considerable measure, in arrangements for avoiding muscular energy, increasing sensual pleasure and enhancing caloric intake above any nutritional requirement. Nonetheless, the belief that increased production is a worthy social goal is very nearly absolute. –p172-3
Successful planning in high technology areas requires state intervention – this too is viewed as a laudable social goal, especially if the goods so produced have a military function.
This process is highly successful in our time. Much of what is believed to be socially important is, in fact, the adaptation of social attitudes to the goal system of the technostructure. What counts here is what is believed. These social goals, though in fact derived from the goals of the technostructure, are believed to have original social purpose. Accordingly, members of the corporation in general, and of the technostructure in particular, are able to identify themselves with the corporation on the assumption that it is serving social goals when, in fact, it is serving their own. Even the most acute social conscience is no inconvenience if it originates in one's own conscience and is identical therewith. –p172
To reiterate, the conventional wisdom has a narrow conception of the goal of economic agents: maximisation of personal pecuniary return (unless they happen to be working for a corporation, in which case they will naturally maximise the pecuniary return of an anonymous shareholder). This is also politically reassuring, placing the consumer – the public – in the position of preeminent power within the production system. The consumer is sovereign, the producer is a servant. Within such a framework, the idea that corporations pursue their own goals or shape those of society is more or less unthinkable.
If [the reader] suspects that economics, as it is conventionally taught, is in part a system of belief designed less to reveal the truth than to reassure students and other communicants as to the benign tendency of established social relations, he will…be right.
For it is so. Modern economic belief is the servant, in substantial measure, of the society which nurtures it. And not the least of its services to that society is to render instruction to the young which, rather systematically, excludes speculation on the way the large economic organisations shape social attitudes to their ends. Nor is the service less important for being rendered, in the main, in innocence and in the name of scientific truth. On the contrary, were it arranged and paid for, it would cease to be of much effect. The wiles of the prostitute can be far more professional and superficially compelling than those of her artless competition, but many more men succumb to the latter. –p175
Now the goals of the technostructure, and therefore the industrial system can be enumerated in more concrete fashion:
Building a better community; improved education; better understanding of the free enterprise system; an effective attack on heart ailments, emphysema, alcoholism, hard chancre or other crippling disease; participation in the political party of choice; and renewed emphasis on regular religious observances are all examples of such further goals…
Nearly all economists, and a great many others, dismiss pursuit of such goals as irrelevant window-dressing. This is an error. So long as their subordinate role is clearly recognised, including the limitations imposed by cost, they are a perfectly plausible expression of the goals of the individual members of the technostructure and, thus, collectively of the mature corporation. What has been called the 'social corporation' is a logical manifestation of the mature corporation and the motivation of its members. –p184
These goals of the technostructure, and in turn of the corporation, are usually reflected in the values of society. The principle of the autonomy of the corporation is perhaps as great as any.
The grounds on which this autonomy is defended are palpably bogus. It is held that nothing must interfere with the independent operation of the market mechanism to which the firm is subject. The reality of the case of the mature corporation, as we have sufficiently seen, is that prices are substantially controlled by the firm and the latter goes on to exercise influence on the amounts that are purchased and sold at these prices. –p178
The growth of the corporation is in accord with the central importance of growth in GNP to society, which is agreed without question to be the primary goal of society throughout the world, including the Soviet world and the ancient civilisations of China, India and Persia, although this is partly due to anachronistic reverence for increased production. Technical progress is similarly coveted: “One would encounter less dispute, on the whole, by questioning the sanctity of the family or religion than the absolute merit of technical progress.” Luckily, this predisposes the state to generously support the more risky and expensive areas of research and development that would threaten the firm's survival if attempted in the private sector. Profitability, and offering an increasing return to the shareholder is similarly held in high esteem by society. The member of the technostructure can therefore feel fuzzy in the knowledge that his service to his corporation ultimately serves the highest aims of society, remaining conveniently less aware of the extent to which these aims are shaped, in turn, by the personal needs of the technostructure.
There is a stark contradiction between the standard analysis of the dominant market structure of the industrial system and the reality, both in terms of its treatment by public policy and its achievements.
Economic orthodoxy has long viewed monopoly as an evil. Monopolies overcharge and underproduce. In so doing they rob the consumer and distort the proper allocation of resources by sending away capital and labour which could more effectively be used in raising their output. Economic theory, in turn, views oligopoly as little more than an imperfect form of monopoly, in which each of its ills is present in somewhat diluted form. Prices are still excessive, output is still restrained – although there are additional inefficiencies. Prices under oligopoly are also artificially stable, firms are unwilling to raise prices for fear that the other dominant firms won't follow suit and unwilling to lower prices for fear that other firms will follow. Thus prices remain at a stable level, even when efficiency requires that they be changed to adapt to changing conditions (costs and preferences). Moreover, the dangers in using price competition lead firms to rely more than ever on 'unproductive' forms of competition: the oligopolist “remodels, repackages and, on occasion, seeks to improve his product in order to entice customers from his rivals.” In particular, saturation advertising is typical of oligopoly markets – a quintessentially unproductive form of competition. A monopolist would not so waste resources.
Yet oligopoly is the staple market formation of the industrial system. “Markets for primary aluminium, copper, rubber, cigarettes, soap and detergents, whisky, glass, refrigerators, cellulose fibres, photographic equipment, cans, computers, sugar, [automobiles] and numerous other items are each dominated by four firms.” So here is the contradiction: microeconomists denounce oligopoly as inefficient and wasteful; macroeconomists gush praise for the industrial system's unstoppable progress and ever-increasing efficiency. The management of prices is denounced as an unforgivable attempt to subordinate the market, and yet the technology which is the engine of improvements in efficiency relies absolutely on that management.
There is an equal contradiction in the present antitrust law. It forbids combination by merger and explicit collusion in price-fixing. It permits large firms to continue to dominate their markets and to increase in size through investment and growth in sales, and implicit collusion in price-fixing. A firm may grow to have a fifty per cent share in its market, but two firms may not combine to form fifteen per cent. In most cases explicit collusion could not make price-fixing any more effective or binding. In these markets it is practised with immunity. In a few, particularly markets for big-ticket specialised products for which no standard prices ever exist, it is extremely difficult motivating executives to collude in order to mitigate the risks of unpredictable sales levels and prices – in these cases such collusion is prosecuted. Antitrust law therefore picks at the edges of the problems of market power, whilst entirely ignoring the total dominance of the entire industrial system by oligopoly. In so doing it serves better to maintain the illusion that the sovereignty of the market is preserved than to actually prevent the accumulation or continuation of market power: “They do not preserve the market. They preserve rather the illusion of the market.”
The main contradiction between a price theory that condemns oligopoly and the consistent efficiency and gains of an industrial system based on this structure can be resolved through a better understanding of the role of prices in industrial planning.
The most basic need of the technostructure – to prevent its revenue source from falling beneath a lower threshold – requires the control of prices. This need is made acute by large and long-term investments in technology – prices, demand and revenues must be guaranteed into the future in order to protect the firm from heavy losses.
Further, far from fixing prices to serve only the textbook monopoly goal of profit maximisation, prices will instead by set to serve the goals of the technostructure. These call for a compromise between competing goals. First of all, prices must be stable – this is a requirement of successful planning. Were the price for cars determined by market forces, it would be impossible for large automotive manufacturers to plan with sufficient accuracy to avoid, on occasion, disastrous losses. If the markets for automotive components and labour similarly capricious, the corporate planner's task would be impossible. But beyond stability, the general level of prices is dictated by secondary goals of the technostructure. Growth in sales requires a low enough price to encourage increasing demand – but also a high enough price to guarantee sufficient revenue to cover new investment in capacity. Prices must also be high enough to maintain a sufficient return to shareholders, whatever that is deemed to be by the corporation. Thus a balance is maintained through compromise between competing needs. This is the reason that price control by the large corporation is associated with efficiency and economic success – it is a precondition of the technological deployment and planning that are required for modern industrial enterprise. The ideology of the market is strong enough to make it difficult to perceive that the control of prices by corporations can have a positive effect, but all successful industrial states use this corporate price control in some measure – apart from in Canada and Britain it usually appears in more open form. Socialist industry also works within a framework of controlled prices.
When price control is seen to be directed towards ensuring the security of the technostructure, as serving also the goal of growth and, more than incidentally, also providing a stable numerator for planning decisions, there is no longer anything startling in its de facto exemption from the antitrust laws…
The mature corporation has taken control of the market – not alone the price, but also what is purchased – to serve not the goal of monopoly but the goals of its planning. Controlled prices are necessary for this planning. And the planning, itself, is inherent in the industrial system. –p201-202
The industrial system relies on its control of prices in the markets in which it operates to make long-term planning possible, by guaranteeing an acceptable level of revenue. But clearly, the volume of products each corporation is able to sell at its fixed price is equally important to the security of this revenue. It would be inconsistent of corporations to invest effort in securing stable prices and do nothing to manage consumer demand.
In fact, demand is very actively managed. This function of the firm covers not only advertising functions – itself accounting for $20 billion a year – but also for many other general functions of management and production: devising a sales strategy, devising a product or features of a product around which a sales strategy can be built, product design, and model change in order to provide strong selling points.
The purpose of demand management is to ensure that a sufficient quantity of product is bought at the controlled price. Not all advertising is devoted to this end, which is of importance to avoid overstatement. There are forms of advertising such as classified adverts whose purpose are merely to inform an otherwise ignorant consumer of the existence and price of a product for sale. This does not, of course, imply that the role of all advertising is merely to provide information about products. ”[A]s I have noted on earlier occasions, only a gravely retarded citizen can need to be told that the American Tobacco Company has cigarettes for sale.”
Economic theory associates advertising with oligopoly – here it is a wasteful zero-sum game in which firms compete with one another for market share because of their inability to compete on price. “These large advertising budgets, like heavy armaments, largely cancel each other out. Not even the oligopolists benefit from them.” This is nonsense. This advertising effort shifts demand to the industry from other industries, it shifts the overall pattern of demand such that more goods of this class are demanded than would otherwise be so. In doing so, it shifts a part of the ultimate decision – the 'sovereignty' – as to what is to be purchased and therefore produced in the economy from the consumer to the corporation. It also serves to stabilise the demand faced by each individual firm – advertising effort will be redoubled in the firm with stagnating or falling sales, whilst in the successful firm efforts to create new campaigns or redesign their products will be more lax. In this way, the share of demand between different firms will be, to some extent at least, self-rectifying, making planning easier. Again, in order to avoid overstatement there will be exceptions – occasional products which the consumer will not accept not matter how large the marketing effort. The novelty of these cases serves to illustrate the point – this process is imperfect but nevertheless strong and reasonably reliable and is not disproved by its exceptions.
In recent times, those with lower levels of literacy have joined the class of individuals with excess money available to spend on satisfying psychic rather than physical wants. Thus it has been necessary to extend advertising methods from print advertisements which were previously sufficient to manage the demand of the minority of society who had a malleable demand to the remainder of the population – radio and television advertising has filled this gap. It is now of great importance. “The industrial system is profoundly dependent on commercial television and could not exist in its present form without it.”
The management of demand is a mass phenomenon rather than an individual one, and is relatively subtle. It is perfectly possible for an individual to contract out of its influence, and this is often used as proof that it cannot possibly exist: “I know it is not true of me, and I do not fancy myself cleverer than the next man in this regard.” Whilst it is true that some people do not watch television, and that nobody is forced to watch, the fact remains that the majority do.
Much of the conventional wisdom lives or dies on this point. If demand does not arise autonomously from consumers' inner desires, but rather is created through a complex sociological process in which both consumers and producers have a measure of influence, then the free operation of the industrial system comes under question. It cannot be defended on the basis that it is serving the 'higher purpose' of society's true needs. It cannot be protected from government interference or regulation on the basis that this will distort the discipline of the market. And indirectly the aggregate effect of advertising is to constantly reaffirm the value of goods, the value of production, the value of the industrial system and the value of the technostructure – to place material production at the top of society's goals.
When viewed not in the context of absolute virtue but in the narrower context of industrial planning, it will be evident that advertising and its related arts have a large social function. This extends on from the management of demand, the necessary counterpart of the control of prices, to the shaping of attitudes necessary for the performance and prestige of the industrial system. For advertising men it has long been a sore point that economists dismissed them as so much social waste. They have not quite known how to answer. Some have doubtless sensed that, in a society where wants are psychologically grounded, the instruments of access to the mind cannot be unimportant. They were right. The functions here identified may well be less exalted than the more demanding philosophers of the advertising industry might wish. But none can doubt their importance for the industrial system, given always the standards by which that system measures achievement and success. –p215
In the traditional view, market conditions (demand) are determined by the inherent desires of the consumer; the firm is forced to respond helplessly to those conditions. The consumer is sovereign, the firm subservient. Let this be known as the Accepted Sequence.
The accepted sequence persists in the competitive markets outside of the industrial system. Within the industrial system, it provides only a partial explanation. There is a separate mechanism, by which corporate functionaries create and distort consumer preferences, as well as market prices, so that market demand is managed by corporations. Let this latter be known as the Revised Sequence.
I do not suggest that the revised sequence has replaced the accepted sequence…Within the industrial system the consumer can still reject persuasion. And, in consequence, through the market he and his fellows can force accommodation by the producer. But consumers, and the prices at which they buy, can also be managed. And they are. The accepted and revised sequences exist side by side in the manner of a reversible chemical reaction. –p217
There are enormous consequences of challenging the accepted sequence. The defence of the free market from interference or regulation is no longer justified by the higher authority of the individual's right to buy what he wants – instead only the seller's right to manage the individual remains as a means of defending corporate autonomy, which seems to lack a some of the rhetorical charm of the former.
The accepted sequence, with its emphasis on the assumed power of the individual, serves in other ways to sanction organisation. Men accept the disciplines of the great industrial enterprise in order to serve the ultimate interests of the individual consumer. By bowing to rules, subordinating their personality to organisation, being good members of the team, they help to enlarge the range of choice of individual consumers. It is proper that they subordinate their lesser liberty to that greater one. Or such is the justification from conventional economics.
Much more is so justified. Industrial squalor, air and stream pollution, sacrifice of aesthetic values – even the rhymed commercials and billboards which are part of the process of consumer management – expand the quantity and variety of product. So they increase the scope for exercise of the sovereign power of the consumer. Again, it is held, lesser values are subordinated to the greater liberty that is allied with the ultimate and controlling power of the individual in an economic system with a maximum range of choice. Again economics renders service to industrial purpose.
None of these contentions survives the revised sequence. There is no case for subordinating the lesser liberty of the organisation man to the greater liberty of the consumer unless that latter liberty exists. If that has already been subordinated to the organisation, the argument lapses. Industrial squalor serves not the larger liberty of the consumer. It serves industrial convenience. –p221-222
Consumer sovereignty is often explained with analogy to political democracy – that by casting his ballot in the market-place, the consumer makes the ultimate decision as to what is produced. The analogy rather loses its appeal when it is understood that the corporation, through consumer management, is able to cast a number of the votes – indeed, it begins to serve better as a condemnation of the logic of the economic system than a justification for it.
The problem of regulating aggregate demand is of much greater scale than the problem of managing demand for an individual corporation's product – it is of commensurate significance to the industrial system.
The problem is specific to the industrial state. In a more primitive state of development, savings are insufficient and urgently needed. What is saved is invested, thus Say's law holds – all income is either spent in consumption or via saving in investment and the market clears. In the industrial state, the majority of saving (in 1969 $99 billion compared to $38 billion) is done by corporations, only a minority by high-income individuals. The relation between retained earnings and industrial investment is therefore a planning decision in the hands of the technostructure – there is no mechanism by which it is stabilised. Indeed, it is frequently the case that a failure in aggregate demand leads to a more than proportionate reduction in investment to protect the technostructure from the dangers of insufficient revenue. In such circumstances, the system is not self-stabilising but chaotic – a downward impulse in aggregate demand begins a spiral. Under Say's mechanism, a failure of aggregate demand leads to a reduction in prices and the market clears. In the industrial system prices are a variable of planning and are not reduced. Instead output and employment falls.
Aggregate demand can only be managed by the state. By increasing spending and/or reducing taxation, aggregate demand can be boosted when it lags, the opposite operation can reduce aggregate demand when it is excessive. This requires a large state sector to make such changes practical. Swings in government demand are often of the order of $10 billion in a single year – the state infrastructure needs to be far larger than this in order to make such changes practical. In practice, increases in public expenditure are practical whilst reductions are not – to be politically viable spending must be seen as useful, and useful spending is taken for granted as soon as it is established. Instead taxation is the primary mechanism by which this is achieved in the post-war world, through progressive personal income tax and a corporate tax that, whilst not progressive, acts as such, since corporate profits are amongst the most volatile indicators of aggregate demand.
There is a perception that this increase in the role of the state has been opposed by business. It has largely been opposed by entrepreneurial businessmen, on whom the increased tax burden disproportionately falls and who are far less vulnerable to the failure of aggregate demand (they are able to respond by laying off production workers and are not reliant on long-term planning). It has not been opposed by the industrial system, who are highly dependent on it. Business generally opposes social spending, but never military spending which is understood to be vitally important to the technostructure and accounts for between 55 and 60 per cent of government expenditure in the 1960s. The role of military spending in assisting the advance of crucial technology is indispensable – this expenditure could not simply be replaced by civilian government or private expenditure.
In much social comment, including that of numerous economists, there has been a tendency to minimise or ignore the role of military expenditures in the regulation of demand. There is much that is unsettling about dependence on such outlays. That weaponry in the higher megaton ranges of destructive power has an organic relation to the performance of the economic system leads to unpleasant introspection. It seems also a poor advertisement for the system and lends comfort to a frequent allegation of Marxists. –p234
There is a firm trend within the industrial system to reduce the requirement for blue-collar workers whilst expanding the technostructure. This is not simply a matter of cost minimisation, although that is a component in some cases. The technostructure also values technical virtuosity for its own sake when circumstances allow, and the continual growth of the technostructure protects them from unemployment and increases their importance within the firm and within society. It is natural for those who have decision-making power to approach problems with solutions borne of their own specialisations and talents – a highly educated engineer seeks a solution involving complex and ingenious top-down automated processes, rather than improvements in working practice that might occur to the assembly-line operative, were he responsible for improving production. There are also important implications for planning. A large blue-collar labour force, especially when under the influence of a powerful union, is an unpredictable factor of production. The planner's ability to deal with the uncertainty of capricious labour relations is limited. It is therefore attractive to reduce the power of unions and the influence of labour by replacing unpredictable workers with highly predictable automated processes – even if automation is more expensive, the elimination of risk is worth the extra cost.
It is important to distinguish here between education and skill. Skilled and unskilled blue-collar workers alike are becoming redundant; the technostructure is composed of highly educated individuals. For those in the educational elite, skills may be reacquired relatively easily – with a college education retraining for a new job is comparatively easy. But even the most skilled blue-collar worker is in a very poor position to retrain for a different function. Formal education is flexible as a base for any of a number of roles in the technostructure – the skills of the uneducated are often vulnerable to technological advance.
The nature of unemployment in the industrial state has changed. No longer is it attributable to a failure of aggregate demand and no longer are the unemployed composed of those willing and able to work if work were available. There is now a structural component of unemployment – jobs are available that require highly educated personnel, whilst the unemployed consist primarily of those who have not completed high school. Superposed on this, a cycle of unemployment related to aggregate demand persists, but it is no longer the only feature. One consequence is that simple unemployment statistics are no longer sufficient to describe the important features of current unemployment.
The requirements of the economic system of the educational system have changed, and there is a lag in the response. An increase in investment in education and changes which encourage a greater quantity to complete higher levels of education is resisted. Partly it is resisted by business outside of the industrial system, whose need for highly educated personnel has not significantly changed, and who will nevertheless be forced to pay for the increased government expenditure. Partly it is in the nature of social response that there is a lag whilst culture and attitudes adjust. Unemployment in Western Europe has been significantly lower than in the US partly because aggregate demand has remained higher, partly because the industrial system is of less importance, but also because this adaptation of the education system has been swifter and more effective. Countries such as Germany, France and Switzerland have been successfully importing unskilled migrant workers, so successful has their ability been to educate their own populations for higher-skilled positions.
This rise in the importance of education is so important that it is possible to say that it has changed the nature of class conflict in the United States. The significant division is now no longer between the affluent and the poor but between the educated and the uneducated.
In recent times education has become the difference that divides. All who have educational advantage, as with the moneyed of an earlier day, are reminded of their noblesse oblige and also of the advantage of reticence. They should help those who are less fortunate; they must avoid reflecting aloud on their advantage in knowledge. But this doesn't serve to paper over the conflict. It is visible in almost every community…
Politics also reflects the new division. In the United States suspicion or resentment is no longer directed to the capitalists or the merely rich. It is the intellectuals – the effete snobs – who are eyed with misgiving and alarm. This should surprise no one. Nor should it be a matter for surprise when semi-literate millionaires turn up leading or financing the ignorant in struggle against the intellectually privileged and content. This reflects the relevant class distinctions in our time. –p248-9
There are two influential conceptual bases for the mechanism by which persistent inflation becomes established. The only important one for the industrial system, and therefore the most important one for the industrial state, is 'cost-push inflation', or the 'wage-price spiral'. When the economy is near full employment and aggregate demand is strong, trade unions find themselves in a strong bargaining position. There are likely to be a few unfilled positions amongst blue-collar positions. Recruitment is difficult. In the event of a strike, the workforce cannot be replaced en masse. The unions therefore press for wage increases. The technostructure fear the unpredictable consequences of a strike. They recognise that wage increases will make recruitment for unfilled positions easier, and improve employee retention. Further, because the corporation is not profit maximising – and as is accepted by all economists – the technostructure knows that it can pass on increased wage costs to its customers through higher prices. Union arrangements are usually to some extent industry-wide – all firms are likely to accept similar rises in wages and prices will rise uniformly across the industry, so no firm will lose out. “And, finally, the technostructure with which the decision resides, does not itself have to pay.” So, when aggregate demand is adequate, the technostructure will readily accept wage demands, passing on costs to consumers. The price index rises as a result, leading to a further round of wage claims in the course of time. Inflation persists.
Outside of the industrial system the situation is different: here the concept of 'demand-pull inflation' is more appropriate. The entrepreneurial firm already maximises profits – wage demands cannot be passed on to the consumer and must be paid for out of the entrepreneur's earnings: “Again there is the special poignancy in paying when the individual has himself to pay.” Wage claims will be fiercely resisted. Prices will only rise when aggregate demand outstrips the industry's ability to supply, when profit maximisation leads the entrepreneur to increase prices. This will not happen until aggregate demand is excessive rather than sufficient, although the definition of these points is somewhat hazy.
The point is that the wage-price spiral begins before the economy reaches capacity – it can only be avoided by reducing demand so much that an unacceptable level of unemployment results. Persistent inflation and significant unemployment are both unacceptable. The only solution to this problem is state control of wages and prices within the industrial system. This has been highly effective whenever it has been tried – in the US to a greater or lesser extent since the Second World War (rigid controls from 1941 through to the end of the war, then again during Korea, followed by informal but significant pressure under Kennedy and a sudden and rather embarrassing return to formal controls previously denounced as little short of un-American under Nixon) – but has somehow never convinced economists of its effectiveness.
For economists, as will be sufficiently evident, a massive intellectual vested interest was involved. As noted, nearly all teaching and technical discourse assumed markets win which producers sought to maximise their return. To admit of the need for price or wage control was to admit of the inadequacy o this system and the associated theoretical apparatus…Instead of revealing to students by precise and rational diagrams the prices that would maximise profits for a producer, it would be necessary to consider what price a bureaucrat might believe consistent with wage and price stability. Economist would be reduced to the level of political science. Truth has its obligations to dignity. –p254
Wage and price controls are traditionally opposed by the entrepreneurial firm and unions. For the entrepreneurial firm, the only purpose of price and wage controls could be to reduce profits – resistance is rational. Within the context of the entrepreneurial firm, unions feared that wage controls meant wage restraint at the behest of the bosses:
[The entrepreneurial firm] had a strong interest in resisting union demands. It had privileged access to newspapers, public opinion and the state. Any wage regulation, other than that establishing minimum wages, would be, it was felt, for the purpose of keeping wages down. –p254
However, there is no serious reason why those in the industrial system – both the technostructure and the unions – should resist wage and price control. In principle, the government would ensure that corporations kept prices within the industrial system remained stable, and in return the unions would agree to press for wage increases no larger than the trend rate of productivity increases within their firm or industry. For the technostructure, this makes planning easier by reducing uncertainty (albeit an uncertainty that is relatively easy to deal with). For unions, this removes the need for a sustained organising effort merely in order to win gains sufficient to keep real wages constant.
With minimum prices established by the firms, demand that is managed by them for specific products, demand that is managed in the aggregate by the state and maximum levels established by the state for wages and prices, the planning structure of the industrial system is effectively complete. All that remains is to ensure that everyone, at all times, refers to it as an unplanned or market system. –p261
Outside the industrial system wage and price controls are not wanted or needed. This sector is not responsible for the wage-price spiral and will only lead to inflation if aggregate demand extends beyond the economy's capacity. Since controls in the industrial system are effectively supported by everyone in the industrial system, the power which the state needs to implement them are not particularly large. They have enjoyed success in the past with inadequate infrastructure or even through informal arrangements such as those introduced by Kennedy.
The union is of much less importance in the industrial system than it is in the context of the entrepreneurial firm. Most of the broad changes that have lead to the importance of the industrial system have also contributed to the loss of power and influence of the union:
Although the original role of the union is waning in the industrial system and the numbers of unionised employees is clearly in decline, new and useful roles for the union have emerged in this context. In some ways, unions in the industrial system are becoming more similar to those in the Soviet system – in which unions must be allowed to persist as a symbol of worker power but cannot be allowed to interfere with workers' identification with the goals of the firm. The union has emerged as an infrastructure through which grievances about the fairness of an increasingly complex pay structure are aired and settled. In some cases unions have supported the adoption of new technology, and have constructively negotiated settlements for reducing employment as part of these adjustments. They now provide a convenient voice to proclaim the needs of the technostructure: whereas it is uncomfortable for the technostructure to demand increased defence spending for its own enrichment and security, it is more acceptable for unions to advocate such spending to protect jobs and the wellbeing of the community in which most workers are employed. “On support for the Vietnam war and on spending for highly technical weapons some union leaders, in recent years, have been far less inhibited than management.”
Finally, the union is capable of delivering industry-wide wage agreements, and is a viable mechanism by which its members can be induced to accept such agreements – in other words, by which wages can be reliably controlled. This reduces the threat of one firm within an industry managing to reduce wages beneath those of its competitors and thereby underselling the industry. It also makes the state's problem of agreeing wage controls to prevent inflation far more manageable.
The educational estate has grown fortyfold over the past 80 years. This growth has responded to the importance of trained talent as the most scarce vital resource in the industrial society.
Prior to the significance of the industrial system, the educational establishment was largely under the influence of the entrepreneur. Much of the money which sustained the few schools and colleges that existed came directly from rich benefactors, who believed in “the doctrine of financial paramountcy – of the ultimate power of those who paid the bills”, although this was never fully accepted in the academic community. Indeed, a significant tension always existed between the private sector who felt financial measures the uncontroversial measure of success and academics who, failing dismally by such measures, tried to assert goals that were “intellectually more demanding or aesthetically more refined”. This tension was complicated by academia's tendency to be the dominant source of social innovation – a realm in which corporations have always been notably sterile. Whilst inconvenient views were often voluntarily muted or suppressed, nevertheless legislation and policy antithetical to the entrepreneurial enterprise originated in the universities:
Laws against monopoly, regulating access to the capital markets, n support of a wide range of welfare measures, in support of progressive taxation and on behalf of unions, owed much to such origins. –p288
During these years the academic community has been regarded as having been bullied and dominated by business. Much of this view reflects the fact that the history has been written by academia. Moreover, the influence of money is usually rather brutal and unsubtle.
Proposals for reform, by contrast, begin as seemingly eccentric and implausible suggestions. Gradually they gain adherents; in time they emerge as grave needs; and then they become fundamental human rights. It is not so easy to attribute power to those who set this process in motion. –p288
The needs of the technostructure and the modern educational estate are much more closely aligned. The technostructure is dependent on the educational estate not only for a constant supply of talent, but for information about current technological innovation. There are more acute risks associated with direct criticism of academics. Moreover, academic ideas are not as threatening to the technostructure as they were to the entrepreneur. The costs of “improvements in medical care, guaranteed incomes for the poor, protection or salvaging of the environment, regeneration of slums” can be passed on to either consumers or shareholders, and the burden of coping with regulation can be passed on to professional lawyers, accountants and industrial relations specialists where once these burdens fell squarely on the entrepreneur. “The burden of regulation like that of taxation is appreciably lessened by having it fall on someone else.” Some recent developments that have come from academia have proved invaluable to the needs of the technostructure – particularly the regulation of aggregate demand and the more nascent attempts to control prices and wages.
The question remains to what extent the educational estate has reconciled its goals to those of the industrial system. There is no single answer as the educational estate is importantly heterogeneous, but there is a trend for the degree of reconciliation to vary across subjects. ”[E]conomics, as a discipline, has extensively and rather subtly accommodated itself to the needs of the industrial system.” So, to a significant but lesser extent, have the hard sciences and engineering – who often work closely with the technostructure and often receives money from them. Much less so the classics, humanities and some social sciences and a natural tension has grown up between the two cultures.
Despite this reconciliation, there remain three main points of conflict between the educational estate and technostructure:
The market for soap can only be managed if the attention of consumers is captured for what, otherwise, is a rather incidental artefact. Accordingly, the smell of soap, the texture of its suds, the whiteness of textiles treated thereby and the resulting esteem and prestige in the neighbourhood are held to be of highest moment. Housewives are imagined to discuss such matters with an intensity otherwise reserved for unwanted pregnancy and nuclear war. Similarly with cigarettes, laxatives, painkillers, beer, automobiles, dentifrices, packaged foods and all other significant consumer products. –p293-4
The educational and scientific estate views the effort with distain, even though, as the technostructure responds, these efforts are necessary for the effective management of the economic system.
Thus the paradox. The economy for its success requires organised public bamboozlement. At the same time it nurtures a growing class which feels itself superior to such bamboozlement and deplores it as intellectually corrupt. The subculture which requires such obfuscation for its existence can only be regarded with disdain. That culture responds with a sense of hurt and guilt and the indignation which comes from the knowledge that its needs sustain and nourish its academic critics. –p294
The relationship between the entrepreneurial firm and the state, like all relationships of the entrepreneurial firm, primarily pecuniary and generally zero-sum. By purchasing influence the entrepreneur could gain various profitable concessions: protection from foreign competition, railway and public utility franchises, licenses to export mineral rights and other natural resources, exception or mitigation of taxes and armed support against some of the excesses of workers' ambitions. Equally, the entrepreneur had every reason to fear state power, particularly in the form of taxation and regulation. Entrepreneurial influence over government was direct, pecuniary and very great – to the extent that business was perceived to have bought government. Influence came in the form of purchased votes and legislators. Large corporations dominated the states in which they were based: “California of the Southern Pacific, Montana of Anaconda, Pennsylvania or the steel and coal companies, Michigan of the automobile companies”.
During the 1930s, there was a wide perception that this relationship – of business dominating the state – was being reversed. It was largely blamed on the unions who, with the support of the intellectual elite, were enlarging the power of the state by encouraging it to adopt roles in the management of aggregate demand and greater support for working people. In fact the enlargement of the state that was occurring very much met the needs of the emerging industrial system.
The relationship between the state and the industrial system is far from antagonistic. As already discussed, the state meets the industrial system's need for educated talent, stable aggregate demand, controlled wages and prices and support for the most costly and risky areas of long-term development of technology. Moreover these policies are not paid for with money extracted from the technostructure – as was the case with the entrepreneur – but by taxes which can be passed on to the shareholder and consumer. These policies are of minimal value to the entrepreneurial firm.
Government has clearly adapted itself extensively to the needs of the industrial system, and yet the industrial system is much less capable than the entrepreneurial class to directly purchase the allegiance of the legislature. Corporations cannot donate funds directly, but entrepreneurs can pay themselves dividends and then offer that money as a private donation. Such arrangements are most easily made between individuals, but the technostructure operates through group structures. And the entrepreneur had enough to gain financially to risk being caught in immoral dealings, whereas salaried technocrats seem less likely to relish the risk.
Power has passed to the industrial system in a very different way – in much the same way that power has passed from upper management into the bowels of the technostructure. In defence, for example, which accounts for more than half of government activity, it is barely possible to distinguish between public and private organisation. The extent of planning and the requirements of technology ensure that services and the corporations that supply them work together in effectively permanent relationships in which real decision-making emanates from specialist committees as likely who are as likely to be composed of members of the private sector, and are as likely to perceive importance in the goals of the private sector, as they are to be public servants with purely public interests at heart. Identification and adaptation dominate the motivational systems of everybody involved – but those working, strictly speaking, in the private sector identify just as closely with the public service they are supplying as they do with their own firm, and vice versa. The result is that the needs of the corporation are embedded just as surely in the real decision-making of defence services as the needs of the defence service itself (and in fact, the two will share many goals: not least the need to increase the budget and scale of their operation). The industrial system comes to influence government by integrating itself so seamlessly with the outer functions of government that it becomes artificial to draw a line between the public and private sectors. Rather than the influence government decisions, the technostructure makes government decisions. In defence above all, decisions made by committees composed of members of the armed services alongside scientists, engineers and managers from private firms are passed up to legislative houses that are in no position to adequately appraise them and are forced merely to ratify.
One consequence of this is that the industrial system cannot be concerned with party politics in the way that entrepreneurs were and still are. The industrial system is more akin to the civil service – it must get along seamlessly with whoever is in power and can rarely afford even to criticise government.
[The corporation] can help shape the highly technical choices which, in turn, govern the demand for its own military and other products. It will have access to the decisions on military strategy which establish the need for such products. And it will help to shape the current beliefs or assumptions on foreign policy. These, obviously, are a far more important power. It is the difference between the formal grandeur of the legislative hearing and the shirt-sleeved rooms with blackboards and tables heavy with data, drawings and tapes where the important decisions, bit by bit, are actually made. The technostructure selects its theatre of influence with discrimination and intelligence. –p316