Mother Jones: John Kenneth Galbraith and the economics of the corporation

Posted on: Tue, 12/12/2006 - 16:27 By: Tom Swiss features commentary by James K. Galbraith on his father John Kenneth Galbraith's book The New Industrial State, in which he considers the large company not just as a seeker after profits but as an organization:

Corporations exist to control markets, and often to replace them. Business leaders reduce uncertainty not through clairvoyance (or "perfect foresight," as the economics textbooks call it), nor by confident exploitation of probability ("portfolio diversification"). They do it by forming organizations large enough to forge the future for themselves. In politics these are countries and parties; in economics, big corporations.

...Tasks must be subdivided so that organized knowledge—chemistry, metallurgy, optics, physics, genetics—can be brought to bear. The subdivided tasks must then be assembled. Customers must be found, and if possible committed, well in advance. These are the tasks of the Technostructure: the network of professionals who actually run organizations. Sometimes the planning goes wrong. But the uncertainties are mainly technical and organizational, rather than caused by the market. In an interesting example, Airbus has firm customers for its A380 at present; what it lacks are the actual planes.

Once control passes to the organization, Galbraith wrote, it passes completely; the economics developed to describe the small firm and its owner-entrepreneur becomes obsolete. Corporations work for themselves, not for their shareholders. In particular, they do not maximize profits merely to pass them along. To think otherwise, he wrote, "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 maximize the opportunities of other men whose existence he knows of only by hearsay." Years later, when a few mainstream economists began to study the extreme detachment of shareholders from management, they called it the "principal-agent problem." The language wasn't as colorful, and the insights weren't any deeper.