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The New Industrial State, John Kenneth Galbraith, 1972 (2nd ed), Harmondsworth: Penguin

Part I: The History and Nature of the New Industrial State

Change and the Industrial System

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.”[1] 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.

The Imperatives of Technology

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:

  1. It takes far longer to complete any task,
  2. There is a large increase in the amount of capital required, beyond that needed for increased production – increased time means increased inventory, increased knowledge is required, more specialised equipment is used at each stage of manufacture,
  3. The process becomes ever more inflexible, designs must be known long in advance and not changed,
  4. Specialised manpower is required, with deep knowledge of a tightly limited area (not necessarily manpower with more aptitude or skill),
  5. The need for organisation increases as a function of specialisation, and organisation becomes a specialised role in itself,
  6. Planning becomes much more important as a consequence of the increased investment of time and money, the inflexibility of the commitment, the need for complex organisation and the intolerance of the market for defective products.

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

The Nature of Industrial Planning

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:

  1. The market can be superseded. This can be achieved by vertical integration. This is especially common when an industry centrally relies on a raw material, such as petrol on oil, steel on iron ore, aluminium on bauxite, etc. For an oil company to acquire a drilling operation greatly reduces its dependence on the market price of its input.
  2. The market can be controlled by buyers or sellers. This is done in the case of oligopolistic markets. A sufficiently large company can set prices without considering the views of its suppliers or customers. Its suppliers can be replaced with in-house supply if necessary, consumers can be softened up with advertising, in the knowledge that none are powerful enough to demand a reduction in price.
  3. The market can be superseded for definite periods by specific contracts. It is in the interests of large firms to agree contracts by which both can extend certainty into the future, choosing by arrangement to ignore the market altogether. The government also makes such arrangements, for example by fixing agricultural prices – a case in which firms too small to control market uncertainty nevertheless require a stable price, and are forced to look to government for assistance. The government also does this for large firms where necessary, in weapons and increasingly in civilian markets such as transport aircraft, high-speed ground transport and nuclear energy. In these cases the state guarantees a price sufficient to cover costs and pledges compensation under circumstances of contract cancellation.

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.”[2] 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.

Planning and the Supply of Capital

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.

Capital and Power

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.”[3] 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.”[4] 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.

The Technostructure

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.”[5]

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.

The Corporation

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.”[6]

The Entrepreneur and the Technostructure

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.

A Digression on Socialism

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.”[7]

The Approved Contradiction

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

The General Theory of Motivation

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:

  1. Compulsion: the stick. Bad consequences if the individual does not pursue the organisation's goals,
  2. Compensation: the carrot. The individual receives money for serving the organisation's purposes,
  3. Identification: the individual is convinced that the organisation's goals and/or methods are superior to his own, that working for the organisation is a more effective means of achieving his ends than working alone, and
  4. Adaptation: the individual sees working for the organisation as an effective means of altering the organisation's goals to more accurately reflect his own.

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.”[8] 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

Motivation in Perspective

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.

Motivation and the Technostructure

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:[9]

  1. Primarily, obviously, he believes that the organisation shares his goals,
  2. The prestige of the organisation is widely perceived,
  3. There is frequent interaction between individuals comprising the organisation,
  4. Many of the individual's needs are met by the organisation, and
  5. Competition between members of the organisation is minimised.

“All of these requirements are met in the large corporation, and increasingly so in the inner circles of the technostructure.”[10] 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.

The Principle of Consistency

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

The Goals of the Industrial System

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:

  1. The preeminent goal of any organisation or organism is survival. Corporate survival relies on a secure minimum of earnings. If this requirement is not met, the corporation's autonomy is vulnerable to two threats:
    1. Interference from stockholders – struggles for control of corporations are observed only when suffering losses or meagre earnings, and
    2. In the absence of insufficient retained profits, the need to appeal to outside sources of investment capital invites disagreeable scrutiny of the technostructure's activities.
  2. The secondary goal of the technostructure is growth, measured in sales volumes. This, two, is an act of self-preservation on the part of the technostructure. A contraction in sales volumes in the mature corporation threatens the secure tenure of members of the technostructure. Even those not immediately vulnerable to unemployment will be far more adverse to seeing member of the technostructure made unemployed than they would be of blue collar workers. Decisions to make people redundant must be made within the technostructure itself, and “do not have the agreeable impersonality which is associated with firing someone at a greater distance, or of a different social class.”[11] The main defence mechanism against contraction is a modest expansion – thus sales growth represents a solid survival strategy for members of the technostructure. Moreover, growth represents a key means of maximising pecuniary return for members of the technostructure. An expansion of the technostructure within the corporation provides more opportunities for promotion and usually greater remuneration, and those employees responsible for the growth are likely to be the favoured candidates. Sales growth, far more than dividend growth, is in the personal financial interest of the technostructure.
  3. No further goals can be allowed to interfere with the first two, but if both of the first two goals are met, then further aims are possible. The third is likely to be technical virtuosity. This is often appreciated by members of the technostructure in its own right. It also reinforces the position of the technostructure – the technostructure came to power on the back of technological complexity, and ever-expanding technological complexity assures the corporation's ever-increasing dependence on the technostructure. However, serious research and development is often risky, and a goal such as technical virtuosity cannot possibly be allowed to conflict with the primary goal of securing a minimum income. Consequently, the cost and risk of technological development is passed off to the state.
  4. Of similar importance to (3), and with a conscious concession to economic orthodoxy, an increase in the rate of dividends is clearly amongst the corporation's goals. However, it is clear that this goal must not be allowed to interfere with (2). “Nothing better suggests the primacy of growth to profit than the vehemence with which the sacrifice f growth to profit would be condemned as unsound business practice.”[12]
  5. If all of the above four can be achieved, then there will be space for the corporation to pursue any number of more whimsical goals to which it may be attracted:
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.”[13] 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.

Prices in the Industrial System

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.”[14] 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.”[15] 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.”[16]

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

Footnotes

[1] p23.

[2] p51.

[3] p71.

[4] p74.

[5] p77.

[6] p96.

[7] p116.

[8] p144.

[9] James March and Herbert Simon, 1958, “Organisations”, Chichester: Wiley

[10] p162.

[11] p180.

[12] p183.

[13] p183.

[14] p187.

[15] p186-7; in each case the largest four firms had at least 60 per cent of the market in 1963.

[16] p202

[17] Theodore Levitt, “The Morality of Advertising”, Harvard Business Review, July-August 1970.

[18] p208.

[19] Robert Dorfman, “The Price System”, Hemel H: Prentice Hall, 1965, p102

[20] p213.

[21] Robert Solow, “The New Industrial State or Son of Affluence”, Public Interest, No 9, Autumn 1967.

[22] “As a related technical point, indifference curves do not survive the revised sequence. The indifference map reflects, at any given time, the comparative effectiveness of the sales strategies behind the products in question. It will change as these change. The logic of the indifference curve requires that it be original with the individual whose preferences it describes.” –p219.

[23] p252.

[24] p251.

[25] ”[W]ith the advent of the Republican administration in 1969, their ideological weakness became for a time decisive. The Nixon economists were strongly committed to the antique market beliefs; they affirmed strongly their belief that they could combine stable prices with high employment without any direct intervention on wages and prices. Controls, voluntary or otherwise, were specifically eschewed. As frequently before, reality showed its power in opposition to ideological preference. While demand was curtailed and unemployment rose, prices continued to rise. Instead of combining high employment with stable prices, insufficient employment was predictably combined with wage-price inflation. After a year and a half – in the summer of 1970 – Mr Nixon's economic advisers were compelled to concede the role of the wage-price spiral and to plead for restraint.” –p260.

[26] “We have here another example of the way the industrial system accommodates belief to its convenience. It has been the lurking conviction of quite a few unions that technical change is an instrument adverse to their interests and thus to be resisted. This attitude has been uniformly deplored as wrong and regressive and no more fitting of civilised advocacy than sodomy, self-flagellation and the refusal to use soap. All right-thinking people should accept machines and participate in the general fruits of progress. In fact, the instinct of the unions was sound. And, from the point of view of those immediately involved, the tactic of resistance may also have been sound. Over a longer period, of course, the resisting unions have been outflanked by competitive change – as the anthracite miners were outflanked by oil and the railroad brotherhood by automobiles, trucks and planes.” –p268

[27] The existence of a large pool of unemployed people who were willing and able to replace any industrial worker was a central feature of capitalist exploitation for Marx. “Relative surplus-population is…the pivot upon which the law of demand and supply of labour works. It confines the field of action of this law within the limits absolutely convenient…to the domination of capital.” –“Capital”, Ch 25. He also believed that full employment would be absolutely intolerable to the capitalist. “One imagines that Marx would have regarded a full employment policy, if successfully pursued over any length of time, as having radical implications for his system, the class struggle and the laws of capitalist accumulation.” –p271.

[28] p279.

[29] “There is no good term for this large group which is associated with education and scientific research apart from that undertaken by the technostructure. In political discourse they are grouped with writers and poets and referred to either as intellectuals or eggheads. The first term is too restrictive in its connotations and if not too restrictive, too pretentious. The second is insufficiently solemn.” –p283.

[30] College and university teachers numbered 24,000 in 1900 and are expected to number 920,000 in 1977. Growth measured by student numbers or expenditure is similarly meteoric. See p285.

[31] p286.

[32] p290.

[33] Further: ”[W]hat may be called reputable social science no longer has overtones of revolution. Rather it denies the likelihood, even the possibility. This too is the result of the intricate web of change which we are here unravelling. The revolution, as delineated by Marx, assumed the progressive immiseration of the working class. Instead of the expected impoverishment there has been increasing affluence. Marxists, themselves, no longer deny this or convincingly suggest that worker well-being is illusory or transitory. The revolution was to be catalysed by the capitalist crisis – the apocalyptic depression which would bring an entrepreneurial already attenuated structure down in ruins. But the industrial system has, as an integral requirement, an arrangement fore regulating aggregate demand which, while permitting it to plan, gives promise, with minimal management, of preventing, or at least mitigating, depression. So, the danger of an apocalyptic crisis seems more remote. The trade union, militantly expressing the power of the worker, was to be the cutting edge of the revolution. But the industrial system mellows and even absorbs the union. Most important, perhaps, of all, the revolution has occurred in some countries. And there the lineaments of industrialisation – planning, large producing organisations, the resulting discipline, the measures of success by economic growth – no longer seem as different as they did in the fears and hopes of half a century ago. Everything on which the revolution seemed to depend, and even the revolution itself, has disintegrated.” –p290-1.

[34] p292.

[35] p300.

[36] p317.

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