VOLUME 8 (2006/2007) - ISSUE 13 (BI-YEARLY)

John Kenneth Galbraith, The Affluent Society, And Social Capital


Otto STEIGER is an Economist and Professor at the University of Bremen, Germany.

Alexi DANCHEV is a Professor of Economics at Fahti University Istanbul, Turkey.

Patrick HUNOUT is the President and Founder of The International Scope Review and The Social Capital Foundation.

Dear readers,

In 2006 passed away two major economists, John Kenneth Galbraith and Milton Friedman. Their respective approaches were perhaps the most opposed in the field of economics. While Milton Friedman incarnated monetarism and the neo-liberal presuppositions of mathematical economics, John Kenneth Galbraith had developed a socioeconomic approach to the making of consumption, production, and economic development. Their double depart may herald a time where the need for new paradigms will be felt more strongly.

Classical and neo-classical economics assume that corporate decisions regarding the volume of production are based on consumer demand without, however, telling about the material basis, the property-foundation of this demand. The meeting of collective demand and collective supply is expected to determine the level of production. Galbraith's first major book, published in 1952, American Capitalism: The Concept of Countervailing Power, argued that giant firms had replaced small ones to the point where the perfectly competitive model no longer applied to much of the American economy, by far the largest and most modern at that time. But, he argued, the power of large firms was offset by the countervailing power of large unions and consumer organizations, so that consumers were protected by competing centers of power.

In his most famous work, The Affluent Society (1958), Galbraith's main argument is that as society becomes relatively more affluent, private business must "create" consumer wants through advertising and price policies, and while it generates artificial affluence through the production of commercial goods and services, globally the "public sector" becomes neglected as a result. He pointed out that markets alone will underprovide or fail to provide at all for many public goods, whereas private goods are typically overprovided due to the process of advertising creating artificial demand above people basic needs.

In the mid-1960s, Galbraith’s thesis on the affluent society favoring private business at the cost of social capital, was discussed in an opposite direction by the theory of property rights, today known as new institutional economics. This school did not lament about the neglect of the «public sector” but, on the contrary, tried to convince people that this sector is inefficient because it is based on “common property”. With this type of property, new institutional economics claimed, agents cannot exclude others from an inefficient use of resources. Therefore, one has to favor “private property” which later became the leading principle for how to establish development programs for the Third World and former socialist countries. However, as the school of property economics has demonstrated since the mid-1990s, such proposals are unsuitable because in those countries neither common nor private property does exist, only a regime of common possession, with some type of individual possession. Such possession-based regimes are unable to develop a sustainable economy like a system based on private property but they have the advantage of relying to an inherent institution (although on a level far from any affluence) which the property system first has to create by civic engagement, trade unions and other forms of countervailing power: the social safety net or social capital which in this regime has to be based on common property. Therefore, without the preservation of social capital by allowing for common property people in possession-based regimes will be hostile towards the introduction of private property. And, one could add, people in the property-based affluent society would no longer defend private property as soon as the society’s social capital seriously is eroded. By implementing in his analysis the insight that social capital is not a self-given institution like in possession-based regimes but has to be created and defended in the property-based regime, Galbraith’s thesis could have been formulated more convincingly.

Almost forty years later, he updated his approach in a book entitled The good society, the humane agenda (1996), in which he deplored the worsening of the inequalities in the American society. He explained that American society has become obsessed with the overproduction of the consumption goods, and that this increases the risk of inflation and recession by creating an artificial demand for useless products. However, he remained optimistic on the possibility to improve the situation of the less fortunate: the rich will stay rich, he argued in 2004, but the poor do participate in the political system.

Galbraith's magnum opus was his 1967 book, The New Industrial State, in which he argued that the American economy was dominated by large firms and introduced the concept of a “technostructure”. "The mature corporation," wrote Galbraith, "had readily at hand the means for controlling the prices at which it sells as well as those at which it buys." This work expanded on Galbraith's theory of the firm, arguing that the orthodox theories of the perfectly competitive firm fell far short in analytical power. Firms, Galbraith claimed, were oligopolistic, autonomous institutions vying for market share (and not profit maximization), which wrested power away from owners, regulators and consumers via either conventional means (e.g. vertical integration, advertising, product differentiation) or less conventional ones (e.g. bureaucratization, capture of political favor). The issue of "political capture" by firms was expanded upon in his 1973 Economics and the Public Purpose, but new themes were added - notably, that of public education, the political process and stressing the provision of public goods.

Although too much influenced by Keynesianism and social-democrat statism, some of Galbraith's major proposals are close to the stands taken by The Social Capital Foundation. TSCF proposes a renewed, interdisciplinary paradigm that includes some aspects of Galbraith's analysis. We support similar views when he advocates for taxation based on consumption rather than on labor or land, or for the formation of a large, educated middle-class (through a program he called "investment in men"). Galbraith in effect advocated developing a "New Class" of citizens, "with its emphasis on education and its ultimate effect on intellectual, literary, cultural and artistic demands..."; he wished to entrust the future of America into the hands of the members of this class, asserting that their ability to see beyond "the conventional wisdom" entitled them to govern.

Similarly, when he argued that American post-war success arose not out of "getting the prices right" in an orthodox sense, but rather of "getting the prices wrong" and allowing industrial concentration to develop, which could only be regarded as successful provided there is a "countervailing power" against potential abuse in the form of trade unions, supplier and consumer organizations and government regulation – this countervailing power can be assimilated with the development of social capital based on the organization of civil society and on the strength of civic engagement. Many have since argued the formula for East Asian success later in the century was based precisely on this combination of oligopolistic power and "countervailing" institutions, and most of Galbraith’s analysis can be enlarged to the globalized concentration process that developed through national and international mergers and acquisitions in the last two decades.

Reciprocally, TSCF’s recent publications have emphasized how social capital is eroded by the penetration of individualist, consumerist and hedonist values into the most intimate areas of social life. To a large extent, these values are market values associated with the technostructural economy. Although the erosion of social capital has its skeptics, just like climate warming has had its own, it is not doubtful today that social capital is declining in most countries with a developed economy. It is not doubtful either that this evolution is negative for our society.

Does the intensity of social capital in turn influence economic performance? Several articles of this issue, in which we continue to publish contributions presented at the 2005 Malta conference, support this view by underlining the importance for economic development of a cohesive society based on a strong social capital.

The article by Becky Hsu examines the effect of religious beliefs on the economic life. It gives precious insights into issues like the rate of the economic development, the different types of corporate leadership, or the determinants of consumer taste. Religious environments, the author argues, promote shared values in a way that gives rise to distinct types of social ties, bringing about specific consequences for entrepreneurship, philanthropy, and consumer spending. Three cases inform the argument. First, the activity of informal lending groups with Islamic origins leads to surprising levels of entrepreneurship in Indonesia. Second, a Buddhist charity organization headed by a charismatic nun in Taiwan generates hundreds million dollar worth donations. Third, the social networks found in national women’s prayer group based in the United States explain motivations underlying consumption patterns.

John Sudarsky’s article contains an updated description of an instrument for measuring social capital: the Colombian barometer of Social Capital (BARCAS). With this it was possible to analyze Colombia’s social capital and compare it with other nations as the BARCAS is built with elements of the World Value Survey.  With the results of this analysis, policies were implemented in Bogotá, the capital of Colombia, which included participatory planning and political maps to establish the representation of localities in the Municipal Council and its accountability. Additionally, to gauge the civic society that should exert social control on the local governments, its density and articulation was measured. Although the global downward trend identified since 1997 was not reversed, it was possible to detect some instances of positive change.

In her contribution, Jenny Job reminds that the interest in social capital has been prompted by empirical work showing large declines in trust over the last few decades. However, how trust is developed is not well understood. Robert Putnam, the prominent social capital theorist, maintains that civic engagement is a key factor in the building of social trust and social capital. This study examines the role of civic engagement in building both social trust and political trust through the lens of the competing rational choice and socio-psychological theoretical perspectives. Analysis of a survey of a random sample of Australian citizens shows little support for civic engagement in the building of trust, but would rather suggest that social bonding is necessary for the building of trust, which, in turn, may favor civic engagement.

How true is it that social capital has an impact on improving democratic life? The article by René Millan and Fiorella Mancini considers four aspects along this line of investigation: in the first place, it reviews the concept of social capital within the Mexican context; in the second place, it determines the levels and forms of trust and reciprocity within distinct social, political and economic contexts in Mexico; in the third place, it differentiates the extent and intensity of associativeness in those regions, finding out also the type of motivations and benefits related to formal civic participation; and finally, it analyzes the civic obligations as a modulating factor characteristic of each region of the country. Data suggest that although social capital is indispensable in coordinating actions and facilitating cooperation, its final effectiveness is modulated by civic engagement.

Other articles emphasize the vitality of the community link as a basis for developing an integrative society. Thus, Omar Bourouh’s article examines the meaning of the concept “social capital” in relation to early Arab immigrants work experiences and integration into Canadian society. Part of the article identifies some dimensions and aspects of social capital that are relevant to understanding immigrant integration. The other part tackles some methodological considerations for researching the case of early Arab immigrants’ work experiences and integration in Canada. In this context, it makes the case of the relevance of qualitative research methods in historical studies of social capital. It argues that the concept “social capital” is both theoretically and methodologically significant in the study of immigrant integration.

The article by Bruin, Cook & al. focuses on the vitality of the rural communities. Data from over 900 local informants in 134 small rural towns in the Midwestern United States were used to test a model examining the relationships between social capital, housing development, and community vitality. Forty percent of the communities had 500 or fewer residents. To increase local housing supplies in rural communities requires persistent engagement on the part of local leadership. Strong networks of social relationships among leaders on behalf of these communities represent important social capital. The findings suggest that social capital is a powerful predictor of rural community vitality; that is, the presence and quality of community leaders whom informants trust represent an essential social resource in community economic and social development. A second factor important to predicting rural community vitality was improvements to the housing inventory. The authors surmise that if within rural communities a small pool of individuals is creative, forward-thinking, and attentive to both the housing needs of potential newcomers as well as existing residents, this leadership constitutes social capital available to the community and necessary for its future success.

Finally, Rosa McManamey discusses findings from a thesis study which explores the relationship between community newspapers and social capital by analyzing the newspaper content and investigating the timing of the establishment and production of independent community newspapers published in Tasmania between 1910 and 2000. It argues that growth rates of community papers noted both in literature and in the study findings support increasing resources of social capital. The article further argues that based on social capital theory, structure and models, content analysis may contribute to expanding modes of understanding the concept and its practice.

TSCF does not believe that the necessary reconstruction of social capital can be solely the responsibility of the experts and the policymakers. We do not want to build a new technostructure dedicated to social capital, nor do we think that public bridging policies could efficiently thwart the erosion of the social bond. We suggest that the policies carried forward by the current power, namely promoting individualism, multiethnicity and the technostructural economy, are to be reoriented if we are to avoid this society a somber future.