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T.N. Vance

The Counterfeit Concept of
Countervailing Power

(May 1954)

From The New International, Vol. XX No. 3, May–June 1954, pp. 99–113.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

The key to the psychology of mid-twentieth century capitalism is the fear of depression. This fear, or sense of insecurity, has been a basic fact of political and social life since the crisis of 1929. Any economist who has any claim whatsoever to being a theorist has been forced to attempt an explanation of the reasons for depressions and, above all, to reassure himself and society at large that there is no need to fear a recurrence of severe depression.

John Kenneth Galbraith – currently Professor of Economics at Harvard University and author of American Capitalism: The Concept of Countervailing Power [1] – is no exception. As a matter of fact, he begins by stating:

The present organization and management of the American economy are also in defiance of the rules – rules that derive their ultimate authority from men of such Newtonian stature as Bentham, Ricardo and Adam Smith. Nevertheless it works, and in the years since World War II quite brilliantly. The fact that it does so, in disregard of precept, has caused men to suppose that all must end in a terrible smash ... It is with this insecurity, in face of success, that this book, in the most general sense, is concerned. (Italics mine – T.N.V.)

The reason, consequently, that Galbraith’s concept of countervailing power has created somewhat of a stir in certain academic and liberal circles is that he has written a book aimed at reassuring the bourgeoisie and its supporters that there is really nothing much to worry about, that capitalism is functioning on the whole quite well, and that this is almost if not quite the best possible of all possible worlds. The difficulty, according to Galbraith, is that all classes in society have been victims of false or outmoded economic theories. All that is necessary is to change the theory, accept the validity of countervailing power, and presto chango the fear of depression will disappear.

While this represents a rather touching tribute to the power of ideas in molding men’s lives, it constitutes a real distortion of how ideas develop and how they influence the evolution of society. The entire presuppositions of Galbraith’s theory are laid bare by the following extensive quotation from the end of his first chapter:

Here then is the remarkable problem of our time. We find ourselves in these strange days with an economy which, on grounds of sheer physical performance, few are inclined to criticize. Even allowing for the conformist tradition in American social thought, the agreement on the quality of the performance of American capitalism is remarkable. The absence of any plausibly enunciated alternative to the present system is equally remarkable. Yet almost no one feels secure in the present. The conservative sees an omnipotent government busy altering capitalism to some new, unspecified but wholly unpalatable design. Even allowing for the exaggeration which is the common denominator of our political comment and of conservative fears in particular, he apparently feels the danger to be real and imminent. At any given time we are but one session of Congress or one bill removed from a cold revolution. The liberal contemplates with alarm the great corporations which cannot be accommodated to his faith. And, with the conservative, he shares the belief that, whatever the quality of current performance, it is certain not to last. Yet in the present we survive. With the present, given peace, no one is intolerably unhappy.

It can only be that there is something wrong with the current or accepted interpretation of American capitalism. This, indeed, is the case. Conservatives and liberals, both, are the captives of ideas which cause them to view the world with misgivings or alarm. Neither the structure of the economy nor the role of government conforms to the pattern specified, even demanded, by the ideas they hold. The American government and the American economy are both behaving in brazen defiance of their rules. If their rules were binding, they would already be suffering. The conservative, who has already had two decades of New and Fair Deals would already be dispossessed. The liberal, who has already lived his entire life in an economy of vast corporations, would already be their puppet. Little would be produced; we should all be suffering under the exploitation and struggling to pay for the inefficiency of monopoly. The fact that we have escaped so far means that the trouble lies not with the world but with the ideas by which it is interpreted. It is the ideas which are the source of the insecurity – the insecurity of illusion.

Whether the average individual is as worried as Galbraith thinks he is about the possibility or imminence of depression, is difficult to ascertain. Galbraith’s worry, however, is genuine. It stems from the destruction of the economic foundations of American liberalism. Capitalist liberalism historically was a nineteenth century phenomenon. With the growth of state monopoly capitalism and of monopoly in general the base of liberalism narrowed until it has reached the point where it has virtually disappeared and genuine liberals are as scarce as hen’s teeth. Sooner or later economic theory must correspond to the facts of economic life. In other words, the superstructure, i.e., the world of ideas, flows from the foundation, i.e., the reality.

Liberalism is the child of competitive capitalism, of free enterprise in the true sense of the term. As competition decreased and monopoly grew, it became increasingly difficult for liberals to maintain a theory of liberalism.

Such a theory was badly in need once capitalism entered the stage of permanent crisis following the first world war – and once the authoritarian theories of fascism and Stalinism became fashionable. In the 1930’s the man who saved the day for the liberals was John Maynard Keynes – an English banker who became the bourgeois theorist of the depression era. For it was Keynes who provided the rationale, the justification for state intervention which was absolutely indispensable for the survival of capitalism. In the process, Keynes demolished his predecessors, the classicists and neo- classicists alike.

In an interesting chapter, entitled The Depression Psychosis, Galbraith displays a rather penetrating understanding of Keynes’ rôle. He states:

The ideas which interpreted the depression, and which warned that depression or inflation might be as much a part of the free-enterprise destiny as stable full employment, were those of John Maynard Keynes. A case could easily be made by those who make such cases, that his were the most influential social ideas of the first half of the century. A proper distribution of emphasis as between the role of ideas and the role of action might attribute more influence on modern economic history to Keynes than to Roosevelt. Certainly his final book, The General Theory of Employment, Interest and Money, shaped the course of events as only the books of three earlier economists – Smith’s Wealth of Nations, Ricardo’s Principles of Political Economy and Marx’s Capital – have done.

The development of mass unemployment during the Great Depression of the 30’s not only demanded state intervention to preserve capitalism, but demolished the classical theories of free competition that had presumably guided the actions of the American bourgeoisie until that time. Keynes’ system permitted acknowledgment of the existence of unemployment, predicted its development, and appeared to provide a solution to the problem. To quote Galbraith:

The major conclusion of Keynes’ argument – the one of greatest general importance and the one that is relevant here – is that depression and unemployment are in no sense abnormal. (Neither, although the point is made less explicitly, is inflation.) On the contrary, the economy can find its equilibrium at any level of performance. The chance that production in the United States will be at that level where all, or nearly all, willing workers can find jobs is no greater than the chance that four, six, eight or ten million workers will be unemployed. Alternatively the demand for goods may exceed what the economy can supply even when everyone is employed. Accordingly there can be, even under peacetime conditions, a persistent upward pressure on prices, i.e., more or less serious inflation.

Full employment, which the classicists assumed, did not exist. It was so remote that Keynes relegated it to the status of a special and rare case in equilibrium analysis. More often than not, asserted Keynes, the economy would achieve an equilibrium below the level of full employment. This, of course, was heresy to the conventional “vulgar” economists who promptly denounced Keynes. It was, however, rather difficult to ignore the political potential of millions of unemployed. The state had to intervene to try to bolster demand by various pump-priming processes. In the course of providing theoretical justification for state intervention, Keynes had to demolish what was known as Say’s Law – an ancient shibboleth according to which each commodity produced automatically generated the purchasing power required to take that commodity off the market. Keynes discovered something that had been more accurately described by Marx and many others; namely, that a portion of the value of a finished commodity went to the owner of capital and that this value (or, more accurately surplus value in the form of profit, interest or rent) did not necessarily have to be invested in new production. The resultant increase in savings could and periodically did “result in a shortage of purchasing power for buying the volume of goods currently being produced. In that case the volume of goods would not continue to be produced. Production and prices would fall; unemployment would increase ... And this equilibrium with extensive unemployment might be quite stable.”

Once Keynes had established that depressions could and did exist, and that investment did not automatically provide the necessary offsets to savings, the remedy in the form of public spending was clear. As Galbraith puts it:

“Insufficient investment has become the shorthand Keynesian explanation of low production and high unemployment. The obvious remedy is more investment and, in principle, it is not important whether this be from private or public funds. But the expenditure of public funds is subject to central determination by government, as that of private funds is not, so the Keynesian remedy leads directly to public expenditure as a depression remedy.”

The Great Depression has been succeeded by the Permanent War Economy. In this development is rooted the ultimate crisis of liberalism. Neither war nor a war economy is conceivable without rigorous, large-scale state intervention in the economy. The Keynesian theories, as Galbraith is at pains to point out, lose their attractiveness. That is why, in many respects, Galbraith’s American Capitalism reads like the confessions of a liberal. The old theories have been demolished twice over by remorseless reality. A new theory is needed: one that will explain what is apparently transpiring and one which justifies the status quo. Galbraith is attempting to fill the void left by the decline of Keynesianism.

The first point in establishing the nature of the void is to show that the climate is, indeed, different. This is not difficult to do, of course, although Galbraith fails to draw the necessary conclusions. It is only in passing that he reveals any understanding of what has happened, when he states that: “The Great Depression of the Thirties never came to an end. It merely disappeared in the great mobilization of the Forties. For a whole generation it became the normal aspect of peacetime life in the United States – the thing to be both feared and expected.” What is this if not an unconscious reference to the Permanent War Economy?

Even though depressions (and Keynes) are passé,

The depression psychosis not only contributed deeply to the uncertainty and insecurity of Americans in the years following World War II, it also deeply influenced economic behavior ... nearly every major business enterprise in the United States has been operated in the last five years in the expectation that sooner or later there would be a major slump. In late 1946, some 15,000 leading business executives were asked by Fortune magazine if they expected an “extended major depression with large-scale unemployment in the next ten years.” Fifty-eight per cent of those replying (in confidence) said they did. Of the remainder, only twenty-eight per cent said no. Organized labor’s preoccupation with measures to maintain employment and the farmers’ preoccupation with support prices have both reflected the search for shelter from depression. During the last fifteen years, the American radical has ceased to talk about inequality or exploitation under capitalism or even its “inherent contradictions.” He has stressed, instead, the unreliability of its performance.

Keynes provided a theory of depressions and a remedy therefore. Depression, however, is no longer the real danger; in fact, depression – according to Galbraith – is virtually an impossibility.

Given peace, and also freedom from the force majeure of large expenditures for armed forces, considerable confidence could be placed in the Keynesian formula. We could expect it to work [states Galbraith] because we could look forward to the kind of economy in which it is capable of working. Unhappily the prospect is not so favorable. [The PWE dominates the scene.] Although Keynes provided a plausible solution to the problem of deflation and depression, the application of his formula to the economy is not symmetrical. It does not deal equally well with the problem of inflation ... And unfortunately, inflation, not depression, is the greatest present and well may be the most persistent future tendency of the American economy.

Fiscal policy (tax rate manipulation, etc.) and built-in stabilizers (social security, etc.) have done away with depressions and thereby with Keynes. This is a pity, according to Galbraith, as depressions can always be controlled, but then Keynes would still reign supreme and there would be no need for Galbraith to develop his fraudulent concept of countervailing power. Lest we be accused of doing an injustice to Galbraith on this important point, let us quote two more passages. First he states:

Speaking with all the caution that broad generalization requires [sic!], the experience of these years [post-World War II] suggests that there are no problems on the side of depression or deflation with which the American economy and polity cannot, if it must, contend. (Italics mine – T.N.V.)

Then, in the next breath:

A reading of recent experience has suggested that the American economy is unlikely soon to find, on the side of depression and deflation, any problems with which it cannot contend and none which would require an extension of the scope of centralized decision beyond the impersonal guidance provided by the Keynesian formula. Moreover the same experience of the years between 1945 and 1950 would lead one to expect that it would be against deflation that, most probably, the Keynesian formula would have to be invoked. There are some hitherto unsuspected virtues in deflation. We know it can be countered; it provides the context in which the internal regulators work best. Thus we have a formula which insures a favorable over-all performance of the economy; that formula involves no revolutionary or even very drastic change in the economy or the relation of government thereto; the outlook is for the moderate deflationary tendencies in which both the economy and the formula can be expected to function well. (Italics mine – T.N.V.)

Unfortunately, Galbraith finished his book after the Korean war had broken out. He was consequently forced to recognize that

military expenditures are increasing rapidly. There has also been a considerable modification of the depression psychosis ... Accordingly, inflation must now be considered not a possibility but a probability. (Italics mine – T.N.V.)

These rather lengthy quotations from Galbraith’s economic outlook have been necessary to provide the proper setting for analyzing the concept of countervailing power. First, however, it is necessary to explore what Galbraith means by the term, countervailing power.

Market power has been a central feature of capitalism and competition has been the regulator of markets. These pivotal characteristics of capitalism have been recognized by all economic theories. Classical and neo-classical bourgeois theorists, in fact, centered all attention on market price, its causes, fluctuations and its impact (through the benign regulatory force of competition) on economic equilibrium and growth. The supply-demand equation governed price, and competition among sellers or among buyers (each of whom exercised no effective control over total output or market price) produced the “right” price that assured efficient allocation of resources, full employment and the best possible society. Galbraith succinctly expresses the traditional theory as follows:

In all cases the incentive to socially desirable behavior was provided by the competitor. It was to the same side of the market and thus to competition that economists came to look for the self-regulatory mechanism of the economy. (Italics mine – T.N.V.)

But competition was noticeably weakening throughout the twentieth century. By the time of the Great Depression, the presence of monopoly as an important, if not crucial, characteristic of the economy was most difficult to ignore. Theories were being developed on “imperfect” and “monopolistic” competition. In any event, competitive theory as an interpreter of what was happening and as a guide to action was losing adherents with each passing day. This was the climate that nourished the growth of Keynesianism. But Galbraith, from the vantage point of the Permanent War Economy (although, without beginning to realize its implications), seeks a new explanation – one that not only explains what happened in the 1930’s and 1940’s, but one that justifies the status quo of the 1950’s.

The following extensive excerpt from Galbraith’s American Capitalism provides us with the author’s understanding of the background leading to, as well as his definition of, countervailing power:

They [economists] also came to look to competition exclusively and in formal theory still do. The notion that there might be another regulatory mechanism in the economy has been almost completely excluded from economic thought. Thus, with the widespread disappearance of competition in its classical form and its replacement by the small group of firms if not in overt, at least in conventional or tacit collusion, it was easy to suppose that since competition had disappeared, all effective restraint on private power had disappeared. Indeed this conclusion was all but inevitable if no search was made for other restraints and so complete was the preoccupation with competition that none was made.

In fact, new restraints on private power did appear to replace competition. They were nurtured by the same process of concentration which impaired or destroyed competition. But they appeared not on the same side of the market but on the opposite side, not with competitors but with customers or suppliers. It will be convenient to have a name for this counterpart of competition and I shall call it countervailing power. (Italics mine – T.N.V.)

Before continuing with Galbraith’s exposition of the concept of countervailing power, it is worth digressing to examine the dictionary meaning of the term. Countervail, it seems, can be traced back through old French to Latin, from which it is derived literally as “to be strong against.” The idea of compensation or balance is clearly at the heart of the meaning of countervail and the dictionary defines it as “to act against with equal force or power”; or “to act with equivalent effect against anything.” Note the stress on “equal” or “equivalent” power, as this is precisely what Galbraith has in mind.

To begin with a broad and somewhat too dogmatically stated proposition, private economic power is held in check by the countervailing power of those who are subject to it. The first begets the second. The long trend toward concentration of industrial enterprise in the hands of a relatively few firms has brought into existence not only strong sellers, as economists have supposed, but also strong buyers as they have failed to see. The two develop together, not in precise step but in such manner that there can be no doubt that the one is in response to the other.

The fact that a seller enjoys a measure of monopoly power, and is reaping a measure of monopoly return as a result, means that there is an inducement to those firms from whom he buys or those to whom he sells to develop the power with which they can defend themselves against exploitation. It means also that there is a reward to them, in the form of a share of the gains of their opponents’ market power, if they are able to do so. In this way the existence of market power creates an incentive to the organisation of another position of power that neutralizes it.

The contention I am here making is a formidable one. It comes to this: Competition which, at least since the time of Adam Smith, has been viewed as the autonomous regulator of economic activity and as the only available regulatory mechanism apart from the state, has, in fact, been superseded. Not entirely to be sure. There are still important markets where the power of the firm as (say) a seller is checked or circumscribed by those who provide a similar or a substitute product or service. This, in the broadest sense that can be meaningful, is the meaning of competition. The role of the buyer on the other side of such markets is essentially a passive one. It consists in looking for, perhaps asking for, and responding to the best bargain. The active restraint is provided by the competitor who offers, or threatens to offer, a better bargain. By contrast, in the typical modern market of few sellers, the active restraint is provided not by competitors but from the other side of the market by strong buyers. Given the convention against price competition, it is the role of the competitor that becomes passive ... competition was regarded as a self-generating [italics in original] regulatory force. The doubt whether this was in fact so after a market had been pre-empted by a few large sellers, after entry of new firms had become difficult and after existing firms had accepted a convention against price competition, was what destroyed the faith in competition as a regulatory mechanism. Countervailing power is also a self-generating force and this is a matter of great importance ... the regulatory role of the strong buyer, in relation to the market power of the strong seller, is also self-generating. As noted, power on one side of a market creates both the need for, and prospect of reward to, the exercise of countervailing power from the other side. In the market of small numbers, the self-generating power of competition is a chimera. That of countervailing power, by contrast, is readily assimilated to the common sense of the situation and its existence, once we have learned to look for it, is readily subject to empirical verification. (Italics mine – T.N.V.)

The monopolist, according to Galbraith, is held in check (and presumably no great degree of state intervention is required) not by his competing monopolist but by his monopolistic countervailing buyer or supplier. Economic (and political) balance is no longer mainly achieved by parallel competition among a great many (small) sellers or buyers but by relatively few huge supplying and buying organizations confronting each other across the supply-demand equation. Moreover, this exercise of what Galbraith describes as countervailing power is really automatic, i.e., self-generating.

According to Galbraith, the importance of countervailing power can be empirically demonstrated in virtually every phase of economic activity where prices are a factor. In fact, he cites the labor market, agriculture and large-scale retailing organizations as the three prime examples of countervailing power. The powerful trade union, the large farmers’ cooperatives and the big chain stores and mail order houses constitute his best illustrations of countervailing power. They have arisen in response to a monopolistic position on the other side of the economic bargaining table. Labor, farmers and consumers (?) need these organizations partly as a matter of self-defense and partly to share the ill- gotten monopolistic gains of their monopolistic antagonists.

The operation of countervailing power is to be seen with the greatest clarity [states Galbraith] in the labor market where it is also most fully developed. [He then cites the case of the steel industry, observing:] As late as the early Twenties, the steel industry worked a twelve-hour day and seventy-two-hour week with an incredible twenty-four-hour stint every fortnight when the shift changed.

No such power is exercised today and for the reason that its earlier exercise stimulated the counteraction that brought it to an end. In the ultimate sense it was the power of the steel industry, not the organizing abilities of John L. Lewis and Philip Murray, that brought the United Steel Workers into being. The economic power that the worker faced in the sale of his labor – the competition of many sellers dealing with few buyers – made it necessary that he organize for his own protection. There were rewards to the power of the steel companies in which, when he had successfully developed countervailing power, he could share.

As a general though not invariable rule there are strong unions in the United States only where markets are served by strong corporations. And it is not an accident that the large automobile, steel, electrical, rubber, farm-machinery and non-ferrous metal-mining and smelting companies all bargain with powerful CIO unions. (Italics mine – T.N.V.)

It is true that capitalism has organized the industrial proletariat in large factories and the class struggle has therefore more readily lead to the development of powerful trade unions. These, however, are terms and forces of which Galbraith is totally ignorant.

He is straining to make the facts of life fit his so-called theory of countervailing power. Yet he must recognize that strong unions exist in areas where powerful oligopolies are conspicuous by their absence. He is thus constrained to state:

I do not advance the theory of countervailing power as a monolithic explanation of trade-union organization; in the case of bituminous-coal mining and the clothing industry, for example, the unions have emerged as a supplement to the weak market position of the operators and manufacturers. They have assumed price- and market-regulating functions that are the normal functions of management. Nevertheless, as an explanation of the incidence of trade-union strength in the American economy, the theory of countervailing power clearly fits the broad contours of experience. (Italics mine – T.N.V.)

Strong unions arise in response to the need of workers to defend themselves from the monopolistic power of large corporations and to obtain a share of the gains of monopoly power for the workers. The function of countervailing power in such instances, it is clear, is a healthy one. It achieves the type of balance of which Galbraith approves. At the same time, in other industries where powerful monopolistic corporations do not exist, strong unions arise “to supplement the weak market position of the operators and manufacturers.” Since the countervailing power of strong unions, however, can only operate against the monopoly power of large corporations, the UMW and the ILGWU must perform the “market functions that normally belong to management”; i.e., they must develop monopolistic powers. It is not precisely clear, however, how a union can share the monopoly power of corporations when such power is non-existent. If Galbraith would study the history of the American labor movement, he might find other reasons for the growth of powerful unions in competitive industries and would thus not try to force his theory of countervailing power to fit facts for which it is patently not designed. It goes without saying that the history of the class struggle provides all the explanations that are necessary for the specific character and strength of the American trade-union movement.

The longest effort to develop countervailing power, according to Galbraith, has been made by the farmer.

In both the markets in which he sells and those in which he buys, the individual farmer’s market power in the typical case is intrinsically nil. In each case he is one among hundreds of thousands. As an individual he can withdraw from the market entirely, and there will be no effect on price – his action will, indeed, have no consequence for anyone but himself and his dependents.

Those from whom the farmer buys and those to whom he sells do, characteristically, have market power. The handful of manufacturers of farm machinery, of accessible fertilizer manufacturers or mixers, of petroleum suppliers, of insurance companies all exercise measurable control over the prices at which they sell. The farmer’s market for his products – the meat-packing industry, the tobacco companies, the canneries, the fluid-milk distributors – is typically, although not universally, divided between a relatively small number of large companies.

Many of the political activities of the farmers, such as the Granger movement, represent attempts to combat the monopolistic buying and selling power to which farmers are opposed in their market activities. The power of the farm bloc in Congress – it is implicit in Galbraith’s analysis flows from these antecedents. “Farmers have turned from the reduction of opposing market power,” according to Galbraith, “to the building of their own.” Here is the explanation of the rise of farm cooperatives.

In seeking to develop countervailing power it was natural that farmers would at some stage seek to imitate the market organization and strategy of those with whom they did business. For purchase or sale as individuals, they would seek to substitute purchase and sale as a group. Livestock or milk producers would combine in the sale of their livestock or milk. The market power of large meat packers and milk distributors would be matched by the market power of a large selling organization of livestock producers and dairymen. Similarly, if purchases of fertilizer, feed and oil were pooled, the prices of these products, hitherto named by the seller to the individual farmer, would become subject to negotiation.

The necessary instrument of organization was also available to the farmer in the form of the cooperative. The membership of the cooperative could include any number of farmers and it could be democratically controlled. All in all, the cooperative seemed an ideal device for exercising countervailing power ...

As a device for getting economies of large-scale operations in the handling of farm products or for providing and capitalizing such facilities as elevators, grain terminals, warehouses and creameries, cooperatives have enjoyed a considerable success. For exercising market power they have fatal structural weaknesses ... It cannot control the production of its members and, in practice, it has less than absolute control over their decision to sell ... A strong bargaining position requires ability to wait – to hold some or all of the product. [The selling cooperative has thus had limited success and required the intervention of the Federal government starting in the Hoover Administration.]

The farmer’s purchasing cooperative is free from the organic weaknesses of the marketing or bargaining cooperative. In the marketing cooperative the noncooperator ... gets a premium for his non-conformance. In the buying cooperative he can be denied the patronage dividends which reflect the economies of effective buying and bargaining. In the purchase of feed, chemicals for fertilizers, petroleum products and other farm supplies and insurance these cooperatives have enjoyed major success.

Galbraith has provided a justification for state intervention in behalf of the farmer that takes the curse off this type of activity and makes it inevitable.

The fact that the modern [farm] legislation is now of two decades’ standing, that behind it is a long history of equivalent aspiration, that there is not a developed country in the world where its counterpart does not exist, that no political party would think of attacking it are all worth pondering by those who regard such legislation as abnormal.

Countervailing power is most effective, it would seem, in the case of large retailing organizations that can exercise unusually strong buying power. States Galbraith:

As a regulatory device one of its [countervailing power] most important manifestations is in the relation of the large retailer to the firms from which it buys.

Again, it is the monopolistic power of the large corporations supplying retailers that provided the need and opportunity for the growth of the A&P, Sears, Roebuck & Co., Woolworth’s, etc. Or, as Galbraith puts it,

in precise parallel with the labor market, we find the retailer with both a protective and profit incentive to develop countervailing power whenever his supplier is in possession of market power. The practical manifestation of this, over the last half-century, has been the spectacular rise of the food chains, the variety chains, the mail-order houses (now graduated into chain stores), the departmentstore chains, and the cooperative buying organizations of the surviving independent department and food stores.

It is clear that Galbraith looks with favor upon the countervailing activities of such large retailing organizations as A&P and Sears, for he feels that it was a mistake even to attempt prosecution of the A&P under the anti-trust statutes, and he clearly lauds Sears for being able to purchase automobile tires at prices from 29 to 40 per cent lower than the market. Consequently, Galbraith is opposed to the Robinson-Patman Act for it fails to distinguish between original power and countervailing power and discriminates against the effective exercise of countervailing power.

When the comprehensive representation of large retailers in the various fields of consumers’ goods distribution is considered, it is reasonable to conclude – the reader is warned [by Galbraith] that this is an important generalization – that most positions of market power in the production of consumers’ goods are covered by positions of countervailing power. (Italics mine – T.N.V.)

The countervailing power of the large retailing organizations, willy nilly, benefits consumers and eliminates the need of consumers organizing large-scale buying cooperatives similar to those in Scandinavia and England. Here is one of the more significant aspects of Galbraith’s concept of countervailing power, and one of the more facile justifications of the status quo.

States Galbraith:

The development of countervailing power requires a certain minimum opportunity and capacity for organization, corporate or otherwise. If the large retail buying organizations had not developed the countervailing power which they have used, by proxy, on behalf of the individual consumer, consumers would have been faced with the need to organize the equivalent of the retailer’s power. This would be a formidable task but it has been accomplished in Scandinavia and, in lesser measure, in England where the consumer’s cooperative, instead of the chain store, is the dominant instrument of countervailing power in consumers’ goods markets ... The fact that there are no consumer cooperatives of any importance in the United States is to be explained, not by any inherent incapacity of the American for such organization, but because the chain stores pre-empted the gains of countervailing power first. The counterpart of the Swedish Kooperative Forbundet or the British Cooperative Wholesale Societies has not appeared in the United States simply because it could not compete with the A&P and the other large food chains. The meaning of this ... is that the chain stores are approximately as efficient in the exercise of countervailing power as a cooperative would be.

Comment on the above would be largely superfluous, particularly since Galbraith recognizes that, “While countervailing power is of decisive importance in regulating the exercise of private economic power, it is not universally effective.” And he cites the case of the residential-building industry. What Galbraith has failed to comprehend, however, is that consumers are not a class but an economic category cutting across all classes. Consumers cannot easily organize unless, as in England and Scandinavia, there is a strong political party of labor able to sustain an economic organization of consumers who are mainly workers. Here, and not in some mysterious countervailing benefits of monopolistic retail chains, lies the basic explanation of why consumers’ cooperatives have not flourished in the United States.

Labor and farmers, however, represent distinct economic classes. The course of the class struggle – not a fraudulent concept of countervailing power – has led to the development of trade unions and farmers’ buying cooperatives. The dialectic of the class struggle also helps to explain why farmers have achieved considerable political power in the United States, whereas the working class, as yet, has failed to achieve political power commensurate with its economic power. Of course, the struggle between a large-scale retail organization, such as Sears, and an oligopolist manufacturer, like the Goodyear Tire & Rubber Company, is a form of the class struggle. Only in this case it represents a struggle between segments of the capitalist class and not between different classes. No profound social consequences are really possible in a struggle within the capitalist class, as frequently occurs when the struggle is between the capitalist class and the working class.

Parenthetically, it is interesting to note that, with few exceptions, American bourgeois economics in the last two generations has been devoid of value theory. The concentration on so-called price theory, as separate and distinct from value theory, led ultimately to the enthronement of Wesley Mitchell and his followers at the National Bureau of Economic Research in the so-called Statistical School. Description – in many cases, interesting and unique descriptions – replaced theory. What exists flows from what was, but why is another question. Galbraith, too, is hardly a theorist. It does not even occur to him to question what is involved in the determination of price besides the superficial supply-demand relationships and the bargaining that occurs in the market place. The “theory” of countervailing power is as much a theory of prices and economic behavior as tides, by themselves, are an explanation of weather formation.

Galbraith, however, does have a sense of reality. He is not only aware of the fact that Keynesianism no longer holds sway and that the theories of monopolistic competition possess many inadequacies, but he is constrained to develop some plausible explanation of existing economic conditions that both justifies the status quo and provides a suitable guide to public policy. Giants on either side of the supply-demand equation play the decisive role in price determination, according to the concept of countervailing power, rather than “competition” amongst monopolies operating on the same side of the market. He provides a rationale for both private control of the means of production and limited state intervention to preserve that control. “The present analysis,” he states, “also legitimatizes government support to countervailing power.”

While state intervention has already been sanctioned by Keynesian theory in the need to create demand in a period of depression, Galbraith’s concept of countervailing power justifies state intervention in a somewhat negative way. The thought is rather fully developed in the following paragraph:

No case for an ideal distribution and employment of resources – for maximized social efficiency – can be made when countervailing power rather than competition is accepted as the basic regulator of the economy. Countervailing power does operate in the right direction. When a powerful retail buyer forces down the prices of an industry which had previously been enjoying monopoly returns, the result is larger sales of the product, a larger and broadly speaking a more desirable use of labor, materials and plant in production. But no one can suppose that this happens with precision. Thus a theoretical case exists for government intervention in private decision. It becomes strong where it can be shown that countervailing power is not fully operative.

The major argument against state intervention, in fact, becomes the old chestnut concerning the alleged impracticality and bureaucratic nature of state planning transformed into a wondrous argument about the administrative advantages of decentralized authority. Thus,

Although little cited, even by conservatives, administrative considerations now provide capitalism with by far its strongest defense against detailed interference with private business decision. To put the matter bluntly, in a parliamentary democracy with a high standard of living there is no administratively acceptable alternative to the decision-making mechanism of capitalism. No method of comparable effectiveness is available to decentralize authority over final decisions.

Countervailing power on Galbraith’s own testimony, however, cannot work in a period of inflation and inflation is the basic characteristic of our times. After developing his theory, he states:

I come now to the major limitation on the operation of countervailing power – a matter of much importance in our time. Countervailing power is not exercised uniformly under all conditions of demand. It does not function at all as a restraint on market power when there is inflationary pressure on markets ... Countervailing power, as a restraint on market power, only (Galbraith’s emphasis) operates when there is a relative scarcity of demand. Only then is the buyer important to the seller and this is an obvious prerequisite for his bringing his power to bear on the market power of the seller. If buyers are plentiful, that is, if supply is small in relation to current demand, the seller is under no compulsion to surrender to the bargaining power of any customer. The countervailing power of the buyer, however great, disappears with an excess of demand. With it goes the regulatory or restraining role of countervailing power in general. Indeed, the best hope of the buyer, under conditions of excess demand, may be to form a coalition with the seller to bring about an agreed division of returns ...

When demand is limited, we have ... an essentially healthy manifestation of countervailing power. The union opposes its power as a seller of labor to that of management as a buyer: At stake is the division of the returns. An occasional strike is an indication that countervailing power is being employed in a sound context where the costs of any wage increase cannot readily be passed along to someone else. It should be an occasion for mild rejoicing in the conservative press. The Daily Worker, eagerly contemplating the downfall of capitalism, should regret this manifestation of the continued health of the system.

Under conditions of strong demand, however, collective bargaining takes on a radically different form ... Thus when demand is sufficiently strong to press upon the capacity of industry generally to supply it, there is no real conflict of interest between union and employer. It is to their mutual advantage to effect a coalition and to pass the costs of their agreement along in higher prices. Other buyers along the line, who under other circumstances might have exercised their countervailing power against the price increases, are similarly inhibited. Thus under inflationary pressure of demand, the whole structure of countervailing power in the economy dissolves. (Italics mine – T.N.V.)

Inflation, of course, has certain beneficiaries: “In the inflation years of the Forties, farmers and recipients of business profits did gain greatly in real income. It is not possible for any reputable American to be overtly in favor of inflation; it is a symbol of evil, like adultery, against which a stand must be taken in public however much it is enjoyed in private.” Inflation eliminates the slack in the economy and makes countervailing power virtually inoperative.

Inflation, moreover, is a characteristic of the Permanent War Economy and makes controls inevitable. This will have a permanent impact on the nature of capitalism, and it is on this rather lugubrious note that Galbraith concludes his book:

Given war or preparation for war – coupled with the effect of these on the public’s expectations as to prices – there is every likelihood that the scope for decentralized decision will be substantially narrowed. It is inflation, not deflation or depression, that will cause capitalism to be modified by extensive centralized decision. The position of capitalism in face of this threat is exceedingly vulnerable. This is not a matter of theory but of experience ... A few months of inflation [in 1950] accomplished what ten years of depression had not required.

The concept of countervailing power, consequently, is counterfeit on two grounds. Firstly, and mainly, it takes what are simple phenomena of the class struggle and erects them into a fraudulent theory that is supposed to explain and justify the status quo. Secondly, it admittedly cannot operate in a period of inflation, which means that its functions are necessarily extremely limited, being restricted to ever-narrowing periods of deflation (at least, according to Galbraith). Countervailing power exists, yes, in so far as it is a manifestation of the class struggle; but that is the only extent to which the concept is valid. The rest is a triumph of public relations and a fraud, although an interesting one, upon an unsuspecting intelligentsia.

The struggle across opposite sides of the marketplace is only one – and a minor phase at that – of the forms of the modern class struggle. As already mentioned, it is essentially a conflict within the capitalist class and, therefore, normally less intense and historically less significant than the class struggle in the factories between capital and labor. Preoccupation with mitigating all forms of the class struggle has become one of the hallmarks of American twentieth century liberalism; and, as a rule, no distinction is made among various types of class struggles. The important thing in the modern liberal lexicon is to have social peace – usually at any price.

Galbraith is no exception to this characteristic liberal approach. If he did not make his position entirely clear to everyone in American Capitalism, he is unambiguous in a paper on Countervailing Power, delivered before the December 1953 annual meeting of the American Economic Association. He states:

I fear I did not make as explicit as I should the welfare criteria I was employing. In partial equilibrium situations, economics has long made the maximization of consumer welfare a nearly absolute goal. Any type of economic behavior which lowered the prices of products to the consumer, quality of course being given, is good ...

In our own time, ... we regularly reject the particular equilibrium test of maximized consumer well-being. We regularly accept measures which raise product prices to ameliorate the grievances or alleviate the tensions of some social group. And it is well that we do. An opulent society can afford to sacrifice material well-being for social contentment. Higher prices of coal or clothing we regard as a small price for freedom from disorder in the coal fields or destitution in the sweatshops.

I doubt whether, in entering a defense of the social utility of countervailing power, I made sufficiently clear whether my standard was the welfare of the consumer or the minimization of social tension. It was natural that perceptive critics would take up the attack on the test of consumer welfare. Had I been less under the influence of this norm myself I would have invited the battle in the area of social harmonies. This, I submit, is also the critical test. American society has not recently been threatened in peacetime (or even in wartime) by a shortage of food. There have been times when the tensions of the farming community were a threat to orderly democratic process. The evolution of countervailing power in the labor market has similarly been a major solvent of tensions in the last half-century. Most would now agree, I think, that this has been worth a considerable price. (Italics mine – T.N.V.)

The concept of countervailing power – objectively in the view of its creator – has the dual purpose of softening the class struggle (reducing social tensions) and of creating the proper socio-economic climate for progressive economic development (dissipating the psychosis of depression and justifying state monopoly capitalism). In the course of developing his essay in social criticism, Galbraith, as we have pointed out, has had to do violence to many basic social phenomena, such as the nature of and reasons for the growth of the trade-union movement. He has also felt constrained to exhibit his ignorance of Marxism. He obviously believes he is making a telling point when he states: “In the Marxian lexicon, capitalism and competition are mutually exclusive concepts; the Marxian attack has not been on capitalism but on monopoly capitalism.” How one person can be so wrong in such a brief sentence is difficult to comprehend. Suffice it to say, that Marx always held competition to be a basic characteristic of capitalism, and the Marxian analysis of state monopoly capitalism constitutes a fundamental attack on capitalism as a social system that has outlived its historical usefulness.

In the same paper before the American Economic Association, Galbraith is forced to admit that one of his major points – the reduction of consumer prices by large retail chain operations – is not really due to countervailing power, but to competition. He states:

The gains from opposing mass retail buying to large-scale or oligopolistic production have, I think, been fairly generally conceded. The question has been asked, however, as to what eleemosynary instinct causes the gains that are won by the mass buyer to be passed along to the consumer. In my book I argued that it was the result of the shape of the production function in retailing. My critics have suggested that it is because retailing, the mass buyers notwithstanding, is still a competitive industry. (It is likely to remain one, for entry is almost inherently easy.) I suspect they are right. I am sure that I was more than a little reluctant, at this particular stage in my argument, to confess a reliance on competition. (Italics mine – T.N.V.)

The self-generating character of countervailing power and its beneficent effects become just a series of unproved statements on the part of Galbraith – so much so, that the self-generating character of countervailing power may be labeled a self-generating fraud. This is pretty much the view of Galbraith’s professional critics. States Professor George J. Stigler (in a paper entitled, The Economist Plays With Blocs, delivered at the same session of the American Economic Association):

We must regret that at the very threshold of the doctrine of countervailing power, Galbraith eschews rational explanation. It is not as if one were asking, in the tones of a stuffy formalist, for explicit development of details of a theory whose general outline is familiar or which is a plausible extension of well-explored theories. The theory of bilateral oligopoly can hardly be said to exist, and the theory of bilateral monopoly – which Galbraith disposes of in a singularly high-handed manner – offers only contradictions to his theory ... Galbraith’s notion of countervailing power is a dogma, not a theory. It lacks a rational development and must be accepted or rejected without reference to its unstated logical antecedents ... Nor is there any explanation, in Galbraith’s book or elsewhere, why bilateral oligopoly should in general eliminate, and not merely redistribute, monopoly gains.

Stigler concludes his critique of Galbraith by stating:

I want to close with an apology for the consistently negative attitude I have felt compelled to take with respect to Galbraith’s theory. One would like to speak well of so urbane and witty a presentation. Especially at this season one would like to avoid expressing doubts that a mysterious, benevolent being will crawl down each and every chimney and leave a large income as well as directions to the nearest cut-rate outlet. Yet even at this season, Galbraith cannot persuade us that we should turn our economic problems over to Santa.

Another academic critic, John Perry Miller, in a paper at the same meeting, entitled Competition and Countervailing Power: Their Rôles in the American Economy, summarizes Galbraith’s theoretical approach by stating:

Here indeed is an optimistic doctrine of the dialectic suggesting that it is the search for power and countervailing power rather than self-interest in the search for gain which promotes economic progress. [Miller does not have much faith in countervailing power and expresses his basic attitude by declaring:] The further one burrows into the concept of countervailing power the clearer it becomes that a catchy phrase is being used to cover a variety of situations. It is doubtful whether so used it is a very useful tool of analysis. I doubt, also, that it is good history. And as an instrument of policy it is at best one in a crowded kit of tools along with the traditional tools of the policy of competition.

Nor were the discussants of the main papers at this session on Countervailing Power any kinder toward Galbraith than the official critics. David McCord Wright concludes his discussion with this trenchant blow: “I should judge Dr. Galbraith one of the most effective enemies of both capitalism and democracy.”

While Galbraith is to be commended for writing in non-technical language, and for attempting to relate economic theory to social reality (i.e., for returning to the precepts of political economy), his humor smacks of smart-aleckism and is misplaced in a serious work. The popularity that Galbraith’s book has achieved, however, is not due to its style. And it is only partly due to excellent public relations in its promotion. Countervailing power appeals to a certain segment of intellectuals who are groping for doctrines that will reassure them that their world is not crumbling. This the theory of countervailing power attempts to do. Amidst the general bankruptcy of American bourgeois political economy, Galbraith is refreshing in his candor and style, but destined to a short life as the theorist of the day, for the simple reason that his theory is a fraud and will not even be accepted by the liberal bourgeoisie for whose benefit it was concocted.

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1. Published by Houghton Mifflin Co., Boston 1952, 217 pp.

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