Running Business Like a Government - Research Paper Example

Are modern market economies really driven by the sovereign power of consumers or by corporate power Examine this view in the light of J.K. Galbraithsanalysis of the large corporation Introduction John Kenneth Galbraith was an institutionalist to the core and was opposed to neo-classical economic thought. His neo-Keneysian lean in economic thought was so pervasive in almost all what he wrote on the subject. His main ideological attack was on the "conventional wisdom" sought to be promoted by neo-classical economists of his time and those who precede him in that tradition. Thus the dichotomy of conceptual paradigms associated with the sovereign power of the consumer and the corporate power, have to be delineated against this larger picture of Galbraith's ideas (Friedman, 1977). In short Galbraith's penchant for criticism of the so called conventional wisdom of neo-classical economic theory was essentially characterized by a greater degree of leaning by him on the concept of "affluent society". This is where the overlap between the rising influence of the modern corporate entity (i.e. the business organization) and the Galbraith's concept of the neo-Keneysian institutionalist theory occurs. Galbraith discussed extensively the concept of "dependent effect' which refers to the power of the business organization to influence the decision of the consumer. Thus according to him wants are created by the corporate entity and the consumer depends on the latter for satisfaction of his/her wants (Stretton, 1999). In short these wants are necessary for the consumer to achieve a higher degree of satisfaction that in itself is created by the business organization. Galbraith touched the nerve center of neo-classical theory by asking how the free market could bring about an optimum in resource allocation through the satisfaction of the sovereign consumer's demand when it's the very system that creates those wants anew. Analysis The dispensation of the capitalist economic system according to Galbraith is basically focused on the creation of affluence through the imposed requirements for goods and services by consumers. According to Galbraith the ownership and the management of the firm are divorced and therefore the average stockholder or shareholder has very little or no say in the day-to-day affairs of the company (Harvey, 1990). All big business organizations are run in this fashion while the shareholder has to be satisfied with whatever the dividend or interest at the end of the year. Indeed this idea about the big business organization acting like a behemoth with little re4gard for the society in which it operates is old-fashioned now. Despite the agency problem which illustrates how the composition of the capital structure of the firm causes divisions between agents (i.e. managers) and owners (i.e. shareholders) and costs, Galbraith's view of the firm has very little relevance to the modern analysis of the firm as a socially responsible entity located in the midst of the very society in which it operates (Michael, 2004). On the other hand the neo-classical theory of the firm holds that its main aim is to maximize profits. Therefore it's obvious that it (the firm) would not hesitate to buy resources at the lowest possible cost so that it might be able to maximize the difference between cost and the selling price (Galbraith, 1963). Galbraith counters this assumption by saying that this is something which can be accepted in the market sphere but not in the planning sphere. In the market sphere even the smaller firms can survive the onslaught of bigger corporations because they are well managed but not so in the planning sector where as shown above the firm is controlled by managers who are paid hands with their own private agendas. This view of Galbraith of the day-to-day management of the firm has very little or n o acceptance among many modern day management gurus who believe that the corporate entity irrespective of its size has to act in accordance with the dictates of the market - i.e. the market of resources and the market for final products (Roehrich, 1984). Any empirical evidence of the corporate giant controlling the market and the planning sectors simultaneously is very hard to come by. In the first place Galbraith wasn't clear about his division between the planning sector and the market sector. His reference was in fact to the capital structure of the firm as pointed out above (Henley, 2007). He almost ignored the fact that the modern firm depends on debt capital to obviate the need for equity capital, thus effectively permitting the manager to have control over the total affairs of the company. Irrespective of the value of the company and its determination process through share trading in the open market, the manager wouldn't hesitate to do anything within his power to keep the decision making process under his purview. According to Galbraith the technocrats who are the managers of the firm would have little or no incentive to produce big enough profits for the greater benefit of the shareholders. In other words there is a protective purpose in running the business organization in a way to just make some minimal profits (Earl & Wakeley, 2005). This is the survivalist requirement of the manager. By implication there is no such effort on the part of the industry to fix prices or to restrict output in order to maximize profits for the whole industry as explained by neo-classical theory. Just as much as one firm in the industry would be better off by earning survival or protective profits, all firms in the industry would only be happy to allow each other to earn normal profits. This approach is in the collective interest of all firms and therefore there is no gainsaying the fact that neo-classical theory according to Galbraith is a mere exposition of the behavioral instinct of the individual firm to maximize profits. Then there is the affirmative purpose for the existence of the firm, i.e. corporate growth. According to Galbraith the manager would only be happy to make his active contribution to the security and survival of the capital of the firm by promoting its growth, sales and revenue volumes. According to the orthodox theory of the firm, there is a great compulsion on the part of the manager to restrict output so that sales would increase and profits would rise. Here according to Galbraith the oligopoly firm would fix prices at a lower level in the expectation of increasing sales (Sennett, 2007). When the firm has effectively ensured that there are sufficient profits earned this way the next step would be to carry out extensive advertising and promotion campaigns. This is all intended to increase market shares. Next the firm would not hesitate to merge with other firms and acquire new firms. But nevertheless according to Galbraith all this is a waste of resources. Galbraith just puts it bluntly that the neo-classical theory of the oligopoly firm as a business entity which tries to maximize profits by restricting output and thus driving up the price is a dream. According to him it simply does not happen because the assumed purpose of profit maximization does not exist. In this context the concept of consumer sovereignty acquires a new dimension. If consumer sovereignty exists then the consumer's power to make decisions on his purchases must be real. According to Galbraith as the above neo-classical theory of the firm explains there is no such reality (Krasner, 1999). However the neo-classical theory of the concept of consumer sovereignty holds that the consumer is free to decide as to what he/she would buy if at all he/she buys. The oligopoly market is a purely theatrical market stricter that presumes the existence of sticky prices and restricted outputs by individual firms. The kinked demand curve theory of the oligopoly firm assumes that no firm in the industry would have an incentive either to increase the price or cut down on it because in the former case rival firms would not follow suit and in the latter case the rival firms would all cut prices thus leading to a price war. In the latter case those low cost firms would survive while all other firms would be thrown out of the industry. Galbraith probably misunderstood the real argument of the neo-classical theory. In the first place consumer sovereignty is a highly academic concept with many underlying nuances. In a free market economy the consumer would decide if he/she is going to buy a good or not. However, beyond this the compulsion to buy comes from a variety of influences such as psychological, social, economic, political and even corporate (Galbraith, 1970). In this latter sense of the concept, Galbraith has provided some logical thought on the subject. His argument that the firm spends a disproportionate amount on advertising and promotion is true. However he had completely ignored the fact that even the corporate giants like Enron and World Com failed because they could not do anything other than to advertise and promote to influence the sovereign consumer. Indeed he wrote 30 odd years ago though he died in 2006 much after the failure of the above named companies. However Galbraith's theory of the firm goes further than this. For example his assertion that the remedy proposed by neo-classical model against the growing power of corporate entities by way of antitrust legislation, cannot be accepted because antitrust remedies as proposed by neo-classical theory will never harm the corporate interest (Miller & Upton, 1986). In other words the techno-structure of the firm does not sit idly when its own interests are threatened. If as the neo-classical theory suggest the firm would allow its powers to be curtailed through antitrust policy of the government there would not be problems for the European Union (EU) courts. The recent case of Microsoft Company violating EU antitrust laws shows the extent to which the practical burdens on the existing legal system to prove misuse and abuse of power by a corporate entity would go. In other words Galbraith has not succeeded so much in pointing out the real dilemmas of the law enforcement authorities in establishing and empowering the concept of consumer sovereignty. In fact what he has done is "to touch and go". This is regarded as one of his ideological misinterpretations (Galbraith, 1973). For example when he was questioned about suggestions for reinforcing social welfare and consumer sovereignty, he totally opposed a policy of laissez- faire. In his book "Economics and the Public Purpose" he argued that a policy of laissez-faire could in fact harm the public interests because free economic forces as advocated by neo-classical model would only serve the interests of the powerful. According to Galbraith the planning sphere of the economy exercises overriding powers over the consumer's ability to engage in more meaningful decision making. In other words the government should act as an agency of the public by taking control of the planning sector of the economy from the techno structure (North, 1990). This is rather a repetition of what Keynesian theory originally suggested. Public agencies to control prices and wages were first suggested by supporters of the Keynesian theory. Galbraith was highly influenced by the institutionalism of neo-Keynesian theory. He advocated the creation of government institutions to ensure that consumer sovereignty would not be eroded by the planning sector's unequal power structures. He went on to suggest public control over executive pay, progressive taxes and minimum wage grants in order to redistribute incomes. However these arguments by Galbraith did not show any improvement either theoretically or empirically because there was very little acceptance of such government intervention in the economic planning sector (Utton, 2006). With the fall of the former Soviet Union Galbraith's propositions were further eroded. However Galbraith successfully focused his attention on the concept of consumer sovereignty with regard to its new developments. In the first instance it was Galbraith who pointed out that the firm had overriding powers in deciding both the output and the resource planning. In this respect the firm disregarded what the public would desire such as which type of goods. However the conceptual underpinning of the argument shows that Galbraith viewed consumer sovereignty as an exclusive concept. In other words neo-classical theory points out that consumer sovereignty is a relative concept that can be varied in significance and application in different economic contexts. The modern corporate entity is not only powerful but also decisively oriented towards profit maximization (Galbraith & Berner, 2001). That is why Galbraith could not effectively focus his attention on the planning sector. In fact his argument about the planning sector presumes the existence of a schism between the consumer's needs and the firm's motive. Assuming that the profit maximizing motive of the firm is determined by the planning sector's exigencies, then the firm would not seek to exercise control over resources to the total exclusion of the consumer because it is the consumer who would ultimately pay the price. Thus Galbraith missed the point by focusing attention on the firm's overriding interests in the planning sector to the total exclusion of consumer satisfaction. According to Galbraith profits are not so divisible in to long run and short run. In fact his theory was not clearly stated in respect of the firm's desire for maximizing the long run profits. In fact he had the confusion about monopoly and oligopoly (Whitley, 1999). The profit maximizing monopolist would not take trouble to bring down the price below the short run average cost while the oligopolist would not adopt any other pricing strategy than what is dictated by the market. Galbraith seemed to reconcile with the idea that the modern firm in a monopoly market would exactly behave as demonstrated by the neo-classical theory. This in itself is open to doubt because the monopolists gradually loses his monopoly power through government legislation. Finally Galbraith has been proved wrong by the modern socially responsible corporate entity. For example corporate social responsibility (CSR) concept has been gaining rapid popularity among even the corporate giants. Therefore it is unlikely that the planning sector alone would determine the relative power relations between the consumer and the firm. CSR policies and initiatives adopted by firms have shown the extent to which Galbraith's description of the monolithic power structure of the modern business organization has the freedom to go. Beyond this point consumer sovereignty alone prevails though it is not possible for researchers to identify a particular physical point on the scale of operations undertaken by the firm. Conclusion In conclusion it must be said that modern market economies are in fact driven by the concept of consumer sovereignty to the extent that the corporate power is curtailed and limited by government legislation like antitrust laws and above all the consumer's decision to buy or not to buy. In fact the corporate power concept comes to an end when the consumer sovereignty concept operates as shown in the neo-classical model. Galbraith's institutionalism has failed to factor in some of the very important changes such as the growth of antitrust legislation and the failure of corporate giants in a modern economy as we are living in today. REFERENCES 1. Earl, PE & Wakeley, T 2005, Business Economics: A Contemporary Approach, McGraw Hill, New York. 2. Friedman, M 1977, From Galbraith to economic freedom, Institute of Economic Affairs, London. 3. Galbraith, JK 1963, American Capitalism, Penguin, London. 4. Galbraith, JK 1970, 'Economics as a System of Belief', American Economic Review, vol. 60, no. 2, pp. 469-78. 5. Galbraith, JK 1973, Economics and the Public Purpose, Penguin, London. 6. Galbraith, JK & Berner, M (ed.) 2001, Inequality and Industrial Change: A Global View, Cambridge University Press, Cambridge. 7. Harvey, D 1990, The Political-Economic Transformation of Late Twentieth Century Capitalism, Blackwell Publishers, Massachusetts. 8. 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