The New Industrial State
Encyclopedia
The New Industrial State is a 1967 (2nd, revised, edition in 1972) book by John Kenneth Galbraith
. In it, Galbraith asserts that within the industrial sectors of modern capitalist
societies, the traditional mechanism of supply and demand
is supplanted by the planning of large corporations, using techniques such as advertising
and, where necessary, vertical integration
.
The book followed Galbraith's 1966 series of BBC Reith Lectures - a series of six radio broadcasts, also titled The New Industrial State, in which he explored the economics of production and the effect large corporations could have over the state.
Galbraith argues that this is made necessary by the long-term planning required for production processes involving advanced technology (and that these same technological challenges were answered with similar types of planning in Soviet societies) which involve substantial additional risk
. One of the results of this is, according to Galbraith, that perfect competition
as generally understood in classical economic theory
is no longer a useful explanation of the industrial sector (although it is still useful in sectors of the economy that are still dominated by small firms).
Galbraith argues that the "industrial system" - by which he means (in general terms) the companies which control around two-thirds of output in key sectors of the economy - are controlled in practice by a technostructure
rather than shareholders; he claims that the technostructure does not act to maximise profit (as that involves the risk of failure) but principally to maintain the organisation and, as a secondary aim, to ensure its further expansion.
He says that a key aim of the technostructure is to maintain its control over the company, and so it prefers financing via retained profits to bank borrowing; thus returns to shareholders are lowered to ensure the company does not risk its self-reliance. Furthermore the companies of the industrial system facilitate a system of informal price-fixing and price stability to ensure long-term planning is feasible.
Galbraith also asserts that the traditional notions of risk most closely associated with small enterprise become less relevant to large industrial enterprises and conglomerates
. Risk is diminished, Galbraith says, by advantages large enterprises have in securing longer-term supplier and labor contracts, and by the use of financial instruments
such as commodity futures to mitigate volatility
in raw materials prices. Political influence of large industrial concerns in governmental economic and labor policy is cited as another factor that tends to create the stable market conditions that are necessary for corporations' long-term planning of production.
The New Industrial State covers much of the same ground as Galbraith's 1958 work, The Affluent Society
but substantially expands and extends those ideas.
John Kenneth Galbraith
John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...
. In it, Galbraith asserts that within the industrial sectors of modern capitalist
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
societies, the traditional mechanism of supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
is supplanted by the planning of large corporations, using techniques such as advertising
Advertising
Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...
and, where necessary, vertical integration
Vertical integration
In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to...
.
The book followed Galbraith's 1966 series of BBC Reith Lectures - a series of six radio broadcasts, also titled The New Industrial State, in which he explored the economics of production and the effect large corporations could have over the state.
Galbraith argues that this is made necessary by the long-term planning required for production processes involving advanced technology (and that these same technological challenges were answered with similar types of planning in Soviet societies) which involve substantial additional risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
. One of the results of this is, according to Galbraith, that perfect competition
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...
as generally understood in classical economic theory
Strategic bombing survey
The United States Strategic Bombing Survey was a board tasked with examination and analysis of the United States' involvement in the World War II. Its primary purpose was to determine the effectiveness of Allied, and more specifically American, strategic bombing campaigns in Europe and in Asia...
is no longer a useful explanation of the industrial sector (although it is still useful in sectors of the economy that are still dominated by small firms).
Galbraith argues that the "industrial system" - by which he means (in general terms) the companies which control around two-thirds of output in key sectors of the economy - are controlled in practice by a technostructure
Technostructure
Technostructure is a term coined by the economist John Kenneth Galbraith in "The New Industrial State" to describe the group of technicians within an enterprise with considerable influence and control on its economy...
rather than shareholders; he claims that the technostructure does not act to maximise profit (as that involves the risk of failure) but principally to maintain the organisation and, as a secondary aim, to ensure its further expansion.
He says that a key aim of the technostructure is to maintain its control over the company, and so it prefers financing via retained profits to bank borrowing; thus returns to shareholders are lowered to ensure the company does not risk its self-reliance. Furthermore the companies of the industrial system facilitate a system of informal price-fixing and price stability to ensure long-term planning is feasible.
Galbraith also asserts that the traditional notions of risk most closely associated with small enterprise become less relevant to large industrial enterprises and conglomerates
Conglomerate (company)
A conglomerate is a combination of two or more corporations engaged in entirely different businesses that fall under one corporate structure , usually involving a parent company and several subsidiaries. Often, a conglomerate is a multi-industry company...
. Risk is diminished, Galbraith says, by advantages large enterprises have in securing longer-term supplier and labor contracts, and by the use of financial instruments
Financial instruments
A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....
such as commodity futures to mitigate volatility
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
in raw materials prices. Political influence of large industrial concerns in governmental economic and labor policy is cited as another factor that tends to create the stable market conditions that are necessary for corporations' long-term planning of production.
The New Industrial State covers much of the same ground as Galbraith's 1958 work, The Affluent Society
The Affluent Society
The Affluent Society is a 1958 book by Harvard economist John Kenneth Galbraith. The book sought to clearly outline the manner in which the post-World War II America was becoming wealthy in the private sector but remained poor in the public sector, lacking social and physical infrastructure, and...
but substantially expands and extends those ideas.