Wednesday, July 01, 2009

A Good Book, Overconsumption and Really Big Firms

I am half way through Justin Fox's excellent book on the development of the idea of efficient financial market "The Myth of the Rational Market."

A line on page 157 caught my eye:

"Galbraith(Gary's note: he is referring to Harvard economist John Galbraith)...likened American corporate executives to Soviet apparatchiks: the bureaucratic administrators of a vast system geared toward overconsumption and waste."

Galbraith of couse is concerned about the bigness of some American enterprises. But it is totally wrong-headed to compare such large corporations in the US with those giant sized SOEs found in the former Soviet Union. To see where Galbraith went wrong, just think that the size of a firm in the US is a result of competition, not imposed from above as some divine order by the planners at the top of the Soviet government. To miss this point leads one to question Galbraith's understanding of basic economics.

More generally, the Institutionalists of which Galbraith belong worry that economic theory which has been built upon a period where firm sizes are small would not be applicable to a situation where firm sizes are large. So they are worry about the divergeent of interests between managers and shareholders. True. But if they just go a step further, based upon the economic theory the applicability of which they questioned, they should see the conflict between managers and shareholders also implies an opportunity for someone to figure out a profitable way to resolve such conflict. There is a five dollar bill on the sidewalk as they say. Indeed, the emergence of the market for corporate control and institutional investors where shares of publicly listed firms are once again concentrated in a few hands are attempts to resolve such conflict in a profitable manner.

I have always found the attack on capitalism for its encouragement of over-consumption puzzling?

Who set the dividing line beyond which consumption becomes excessive? God? Or John Galbraith or some other government official? And what's wrong with over consumption? If the person in question places a higher value on the stuff he or she consumes than the rest of the society, what's wrong if her or his consumption level exceeds the dividing line? Of course, I realize there are a lot of objectives other than attaining the best use of resources, but those ain't and should not be part of the research focus of economists in my humble opinion.

1 comment:


Can't agree more, Gary. Your comment on Galbraith's agrument make me think of Professor Cheung's comment on using tax approach to study share tenancy. That's what he said

"...... with a tax, the government is not contracting to maximize wealth. In other words, the tax-equivalent analysis fails to offer any explicit treatment of the terms in a share contract which the participating parties must mutually agree to abide by when the contract is formed.”