Business roundtable; The new industrial state

The following program is made possible through a grant from nation's business. This is a business roundtable a program of current comment from leading members of America's business community. Today. Dr. Robert Lanza Lotty chairman of the Department of Economics at Michigan State University and Dr. Reed Moyer professor of marketing Michigan State University will explore the question the new industrial state with series host Alfred L. Seeley. Dean of the Graduate School of Business Administration at Michigan State University. The new industrial state a bestselling book by economist John Kenneth Galbraith of Harvard University. Is causing much discussion in business academic and government circles. He performs the useful service of raising questions about the

conventional wisdom according to Professor Galbraith inevitable technological forces ever resulted in large industrial giants. The 500 largest companies comprise his idea of the new industrial state from this well known and recognized fact. He concludes the following. By planning the modern corporation is able to increasingly predetermine both the quantity and the price of the goods it offers and will actually sell in the marketplace. Advertising being one of the important techniques to achieve this and competitive markets as we have known them in the past are dead. The federal government through fiscal policy make sure that total demand in the economy is sufficient to provide high employment and growth. Hence a continuous flow of profits. Thus Galbraith

argues business has a vital interest in a high level of government spending. Just as the competitive market place as a regulator is a myth. So was our antitrust policy in the new industrial state. No longer can it be effective as a preserver of a free and competitive market. And finally the modern large corporation can generate its own capital requirements from profits and does not need to borrow funds. Therefore it is not subjected to pressure to maximize its profits. This is the Galbraith The View. That new industrial state. Dr. Lanza Loni. What in your opinion what's new about the new industrial state. What do you see really. Not much really. Many of the developments that Professor Galbraith talks about

actually have become part of the conventional economic wisdom. That he re-examined in this book the matters you referred to earlier such as the separation of ownership from management. And the internal financing by a corporation. The importance of concentration in the economy. The domination of certain industries by a few firms. These are developments that economists have talked about for years. But there's always one Professor Galbraith reworks or ground he comes up with a new and more impressive package. And to a large extent he's done this in this particular war with some wit and some satire omissions and a great deal of exaggeration. Let's take his concept that the marketplace is dead. We have usually thought for example in our type of free enterprise prize economy that

different firms are competing in the marketplace at the price of which they can sell their goods as determined by competition if the consumers wanted at that price they buy it. If they don't they buy a competitive or substitute product. Dr. Moir as a marketing specialist What do you think of this concept. Well the last time I looked at the market was very much alive. And I think if you ask of the presidents of the leading industrial firms who have gone through a minor recession in the early part of this year they will agree with that statement. There certainly is no guarantee that profits will be maintained that sales will continually rise as evidenced by our experience in the recessions in the past few years. Admittedly these recessions are minor or less severe than they were years ago but they still exist nonetheless. Price Competition still exists. Firms must compete with other firms. When business begins to

slacken off. Firms tend to reduce prices and this tends to reduce profits. We also see firms rising and falling. There are firms in the top 50 in the country today that didn't exist 50 years ago and if they did exist many of them were quite small. If you look at rosters of the leading firms today against the roster of the leading industrial firms 25 or 30 years ago we see new firms on the list and old perms awful In other words even taking his 500 largest corporations in the United States in the industrial sector. This is shifting and changing. The site is continually shifting because the consumer and consumer tastes are changing in very gross terms and also with respect to one term with respect to another sometimes within an industry will arise and other firms that industry will fall and whole industries will rise and fall back on Saturday I think that.

Along the same line. That a large corporation can decline today. Or is it pretty well assured of its place in the market. Which is one of the points that Galbraith argues. Well I would agree with both Professor Galbraith and Professor Moore you're on this. It places me on safer ground. To the extent that some firms certainly have lost ground in particular markets or particular lines of production. But Galbraith is talking in this particular work about the importance of. Industrial farms in our society and to that extent he's talking about the cooperation in productive activity generally. And it is true the earth that allows some farms do drop out that for competitive reasons for competitive reasons some for reasons of poor management or. Inability to maintain or attract and maintain good managers.

For a variety of reasons including the competitive facts. Some firms do lose out but I think that there is an element of truth here that he exaggerates. I think of the importance of the particular corporation and the extent to which they exercise influence over the life of this society. But I must say that we have to keep in mind that ya break this talking Professor more your stress the industrial corporation. He is not talking about the retail firms but Dr. Moore one of the items that Galbraith brings out is the tremendous importance of advertising you know and this concept that there is less competition this ties into his idea that large expenditures of advertising by large corporations will in a sense force people to buy the product.

I'm reminded of a comment that presser Stigler made reviewing Galbraith's book. He said that if this were true that the Pennsylvania railroad would have advertised the automobile off the highway nine hundred ten. This is another exaggeration. There is some truth to the statement but not much. And is also an illogical component here. If it's true that a firm can advertise and maintain its market position. Then it must be true if it's true of one firm it must be of true of another firm within that industry. And yet as I've indicated we see firms within an industry rising and falling. Why is it not true then that every firm that seeks to advertise and maintains it mark my words. More of a question of how effective is the advertising and the relationship of a good product rather than advertising. I think Galbraith is confusing what firms would like to do with what they

in fact can do. They would like to manipulate market demand so that they have an assured outlet for their goods. They in fact do not succeed sometimes they do but sometimes they do not succeed. Therefore this the problem is not in a secure position as Galbraith would would have. Well that point could I interrupt there. I think that you touched another theme. That recurs in the book. Galbraith moralize is to a large extent about perhaps the deterioration or the rarity. Value system of our society at least he'd be deplored the fact that we are as concerned as we should be about air and water pollution. About the urban poverty and retraining programs etc.. Now I think that many of us are concerned about these things Galbraith feel that the ordering of priorities here is not what he under his value system

would prefer to see. But he is I think proper sizing. And I think there's a lot in this book that constitutes a kind of prophecy about where certain developments in the industrial scene appeared to be leading us. He may be delighted by these developments. He may not I think he is to a certain extent this gives him the opportunity to then talk about the necessity of certain other changes being made in the way in which we arrange our economic affairs. Well let's look at another facet of this problem. He mentions the planning function also in relation to the market forces being dead. And he brings up the concept that a large company with careful planning can bring out a new product. Which then with massive advertising will be successful. Dr. Moore a marketing

specialist. Is this usually true. Again we have no I say it's not true. Gobert would it again would have us believe that the firm decides what to produce and then convinces the consumer through advertising that he should consume that product. I think he used the example the Mustang. He's completely turned us around. The Ford Motor Company in this instance determines what the. Consumer wanted. He recognized that there was a large and growing segment of young people. They recognize also that you know if a motor company was able to capture the purchase the first purchase of a young person that the chances of maintaining that customer loyalty in the future with future purchases of that company's cars would continue their for there.

They designed a car that would appeal to young people in other words saying with this car running was going out and doing market research to find out what the consumer wants I see a market this is what market research is all about determining what the consumer wants and then the and the more successfully than that a company discovers exactly what the consumer wants and brings out that kind of product or course they're going to be successful. Precisely. But I don't think any of us would deny here in our point that Galbraith is making that the large infusion of funds into the advertising media certainly influence the taste of consumers. I don't think the tastes are completely divorced from the bombardment on their television screens and other ad what do you mean by the taste of consumers their preference for certain goods. I don't think any of us any of us could could. Flying job in air are to the extent that he is calling attention to the fact that our taste our influence or our buying preferences if you will.

Influenced by advertising because as you pointed out earlier this is precisely what the advertiser is attempting to do. Now I'm not passing judgment on I'm merely trying to state as a matter of fact. Are we influenced by and well you know. And I think we have to say that we are. It bothers me a little bit that the consumer and I concludes I suppose Russell Galbraith is treated as a puppet to be manipulated by the advertising agency. This is a rather I think cover low view of the intelligence of the American consumer. I think the American consumer on the whole is an intelligent rational individual. He can his influence. He may be influenced partly I think by advertising appeals but he basically buys those things that for one reason or other he thinks he needs and wants. Look that was two things are not inconsistent now and I don't have to stoop to deprecate the level of intelligence that the average television viewer to make the point that some viewers indeed many viewers perhaps even most

are to a certain extent influenced by advertising the imitative aspects of it. The aspirations that are associated with certain types of advertising. I agree with you that in this instance as in other instances Galbraith has exaggerated the point isn't advertising an informational source. It gives the consumer information about products and the information may result in the consumer buying a product but they aren't going to buy it again if the product isn't satisfactory in terms of their evaluation of that product. That's correct. The advertising of course perform several services one of which is informational. Most economists I think including Galbraith would argue that this type of advertising is his useful or necessary but he objects to the incessant bombardment over television screens and through other media.

Well isn't that a question to ask of a value judgment on a great target is and I think much an individual much of the book centers around value judgments Eisley it and I think if we disagree with Galbraith it's partly because we disagree with his value judgments and want to place ours and in stead of his letter than I think as some commentators have mentioned about this book. Galbraith by calling attention to some of the ills or weaknesses or the developments in our industrial society. Feels that there should be a reordering of priorities a change in emphasis and he would like to have us use it. His priority system which he thinks is eminently better than some others I have a little trouble with that. But I think many people do. But this is an example isn't it true that our industrial system is the pride of the world. It's considered the most efficient and the most effective. And that other countries actually are very

envious of our productivity and that this is brought this industrial structure has brought us the highest standard of living in the world. Well I think that one could agree to that and still except the problems that Galbraith is posing for us and this I think is the strength of the book. This is why I believe it is an influential book. It has already been influential. I think that Galbraith in his own witty way with his satire this turn of a phrase expressions he uses is calling attention to some of the by products of this marvelous industrial machine we have that somehow or other have bypassed or at least we have not developed the kind of emphasis on some of the finer values of life that Galbraith would like to see as emphasized. And here is where I think we get into the value judgment problem proper. But I think this is one of the stranger what does that what does the structure of the industry have to

do with that. Well I think it has a whole lot to do with I think this is the her point that Galbraith is talking about that if we if we have now a society which is dominated by large corporations mind you are not accepting all of the arguments but following along his line of thinking and that the large industrial corporation being run by the so-called techno structure of the pros these pros are making all the decisions in life and their orientation is toward what rephrasing Galbraith would be the more materialistic aspects of life then I think if this is true. I'm not I'm not stating that I agree with all of this because I say Galbraith as prophesied if it is true then there is reason for concern. If it is not true as Galbraith points out in the last chapter if the industrial state constitutes a declining influence and our life then we have no reason for concern. He would agree with your statement that this is an afficionado and governor would agree with my

beliefs as I please with I would agree with DC. I regret that that's the main emphasis of this country is on production that we are a highly productive economy. Some point makes a very amusing comment that. Though the industrious would have us believe that when St. Peter read you at the gate he asked What if you contribute to the GNP. Precisely to the gross national and other gross national product and he would like to have us feel that people can produce more than just goods they contribute exactly. Contribute something to society beyond honor. Oh I know we contributing to society by running a business firm and patiently and actively and providing employment and providing good wages and good working conditions. And isn't it up to their forward to the individual in terms of his value judgement of how he spends his leisure hours time. I think we're missing a point here now. On the planning function that Galbraith

referred to and the one that we have commented on only briefly gob raise is saying that the cause of the development of the industrial corporation in our society its ever increasing importance in society. That power of the corporation results from the large scale nature of activity that is necessary in order to do the job. Then additionally Galbraith says that the power that results from this in the marketplace is a necessary prerequisite to their accomplishing the job. Now if you if you fall along again and accept these premises which you may not but if you recall I thought you I thought you didn't accept this premise. Dr Alonzo out here in earlier when you as I understood it didn't think the marketplace was dead. I don't think the market is dead right. As I pointed out earlier I think we should still believe in the vitality of the

marketplace and be concerned about some of the things that apparently concern Galbraith and impelled him to write a book with some exaggerations and some emissions in order to make the point he wishes to make. The market I think is alive. And I wouldn't begin to pass a categorical judgement that it is. I don't think that we need to we need to go to the extent of saying that everything that Galbraith has said is wrong. Parts of the book are wrong and this is what I think some reviewers have done. All right then let's turn to another facet of the subject. He brings out the fact that in our society today that the government our federal government accepts as one of its functions using our all of its different powers and resources to maintain as high employment as possible and growth in our economy now from this he then argues this makes

possible a continuing flow of profits for business. I guess we would all accept the fact that it is a function of government to do those who are doing well. One thing it's embedded in the in the in legislation in the Full Employment Act 1946 and our people would basically agree with the right of public policy the federal government is to maintain as nearly as possible full employment. And again this gets back to one of the main points in the book and that is that government and the Industrial Society is his moving hand in hand. That their interests are common and that is economic growth. When the economy grows the individual firm grows and then the individual in our society prospers officer surrender. There's nothing bad about this as well. I don't see any bad about it. I think it's delightful. And I don't know I don't mess with sure the government would disagree with this. I don't think that he is complaining about the desire to have an

ever increasing flow of goods and services national product and help put. I think that Galbraith is referring to the fact alone with this development along with the rise of the industrial corporation which has been a slow and slow process it certainly isn't anything that has suddenly occurred. And that we have had certain other developments that may or may not be. Caused by the importance of the industrial corporation and here's where I would disagree with them I'm not at all sure that there are urban problems are a function of the rising importance. If that is true of any industrial corporation certainly air pollution could be and little pollution and I would agree with them to the extent that the industrial farms pollute our waters. But they're not the only polluters of our waters. Let me if I may conceivably touch on what I think is a fatal weakness in the book. Galbraith builds

throughout the book the theme that the firm needs to plan much more than it formally did for various reasons. That it is essentially an autonomous organization free from outside influence that it can in effect guide its own destiny its guided internally by a self-perpetuating management instead of the old time capitalists that we used to know of as an entrepreneur. It controls prices as we've indicated. So it's free from that outside influences gallery's artisanal that argument. Through demands or through advertising it can manipulate consumer demand it can rely on internal financing as you've indicated and does not need to rely on the outside world for that. It has the act it's a part of the government through research and development expenditures and also through the maintenance of overall demand. And it even has the the connivance if you will of the labor union to seize its interest served also by the corporation so it views the firm as a kind of

a self-sustaining autonomous unit. The large firm capable of going on presumably forever. You see without without falling now the problem with that argument seems to be is that if you destroy any one leg of this for five legged chair the whole chair fall down. And we've indicated I think enough weaknesses in the in the conception that the market is not dead. That advertising is not as all powerful as garbage would have us believe to lead me to believe that the Galbraith theme is is essentially weak. Well now would you with a chair I think it was it was not the one that I think you want to stress at least one that you didn't stress. Earlier I think that certain of those assumptions that he makes are very crucial to the to the entire book. That is if the market has lost its vitality if the

market can no longer be expected to provide the allocation of resources by acting the way in which we have traditionally expected it to act independent firms acting competitively in the pricing system performing its its a necessary role. If that particular claim by Galbraith is an error and I believe it is. I believe that in certain markets some firms definitely exercise influence over the marketplace. I mean I don't think any economist studied the industrial scene would deny it but I think Galbraith exaggerates that and to the extent that he exaggerates that one I do believe that his thesis does have a very serious weakness on some of the other things. I'm not sure that they damage or damage it too much. Dr John Slaughter is one of our country's leading authorities and antitrust. What about Galbraith statement that and I trust is really dead it is not a fact you and I are as you know our anti trust laws have been and acted

by our federal Congress as rather rules of the game in the industrial scene. Well I disagree with Galbraith on this point. If I understand Galbraith correctly he argues that antitrust policy is something of a charade that is acted on for the benefit of British socialists and liberals in the United States in an attempt to convince them that the market is still extent. I think that Galbraith badly exaggerates this and he's even in error on this point he argues that. A corporation saying the chemical industry that might have attained 30 40 percent of the market may go on its merry way without being challenged whereas if two smaller firms decide they wish to emerge to challenge the position of the larger company then the end of trust agencies will step in and do something about it. I think Gary's point to a dilemma here what do you do about. The fact that some firms have already reached and transpositions those are not easily reachable by antitrust

policy today where as mergers are and have been since 1950 very effectively reached. When I begin to think the rules of the game where the regard to industrial competition is pretty effective. Yes and I care more. Dr. Lanza Loni thank you very much for appearing on the Business Roundtable and an interesting discussion of the new industrial state. If I interpret your remarks correctly you think Galbraith had a very interesting book primarily intuitive and not based upon research evidence or quantitative data. Participating in today's business roundtable where Dr. Robert Lanza Lotty chairman of the Department of Economics Michigan State University and Dr. Reed Meyer professor of marketing Michigan State University also for the

program with Alfred L. Seeley and dean of the Graduate School of Business Administration at Michigan State. The topic for next week's business. Roundtable is international business and American prosperity. Guests on the program will be right. Our effort past chairman of the board Rose corporation and Dr. Mordechai crane and professor of economics at Michigan State University. This program was produced by the Graduate School of Business Administration and the Broadcasting Services of Michigan State University under a grant from nation's business a publication of the Chamber of Commerce of the United States. Business Roundtable is distributed through the facilities of national educational radio. This is Annie are the national educational radio network.