U.S. Intellectual History Blog

Postwar Liberalism and “American Capitalism”

o'connorThe following is a guest post from Mike O’Connor (the sixth of a series–see the fifth in the series here). Mike is one of the original USIH bloggers and a founder of the Society for U.S. Intellectual History. He is the author of A Commercial Republic: America’s Enduring Debate over Democratic Capitalism, which will be published in May by the University Press of Kansas. The book’s Facebook page can be found here, and information from the publisher is available here.

“It is impossible,” wrote English journalist Godfrey Hodgson of the postwar United States, “not to be struck by the degree to which the majority of Americans…accepted the same system of assumptions.” Hodgson and the others who followed him in interpreting the period this way noted that the popular president Dwight Eisenhower had moved his party leftward, defining “modern Republicanism” to include a commitment to maintaining the New Deal. In the fifties and sixties, labor and management generally agreed that the magic of economic growth could advance their mutual interests, rendering obsolete the historical antagonism between these parties. Internationally, both liberals and conservatives championed a foreign policy opposed to Soviet expansion and supported the corresponding U.S. military buildup. Hodgson summarized the decades after World War II as a period of “liberal consensus.”

Historians have complicated this picture since Hodgson’s original diagnosis in 1976. The New Deal, some have pointed out, did not lack for conservative detractors, many of whom later chafed at Eisenhower’s new direction for the Republican Party. Ayn Rand’s The Fountainhead was a bestseller in 1943, suggesting a public receptive to libertarian values. The 1948 Taft-Hartley Act significantly curtailed the power of unions, and Joseph McCarthy made an entire career of questioning the loyalties of various public servants. Perhaps most significantly, segregation and the Civil Rights Movement tore the country apart. Citing some of these points, Kevin Mattson has called the idea of the liberal consensus “little more than a myth.”

Nonetheless, in at least one area of American intellectual life—political economy—it is fair to say that the postwar period admitted of a broad (though hardly unanimous) accord. Two principles formed the basis for this widespread assent: that communism was both politically repressive and economically inefficient, and that the regulatory and welfare state introduced by the New Deal was necessary to tame the excesses of capitalism and to provide for the nation’s less fortunate. These propositions reflected a nationalistic sense that whatever system in place in the U.S. must represent the best possible arrangement. As a result, they did not necessarily cohere together effectively: the principles that justified policies inhibiting business or redistributing wealth were likely to share similarities to socialist ones.

Thus liberal intellectuals during this period struggled to articulate and defend their commitments while simultaneously disavowing any policy that might suggest sympathy with communism. What resulted was often a message that lacked force or clarity. One work that successfully overcame these obstacles, however, was John Kenneth Galbraith’s 1952 American Capitalism: The Theory of Countervailing Power. A noted economist and public intellectual who later served as John Kennedy’s ambassador to India, Galbraith would later write the best-selling The Affluent Society in 1958. The earlier book began with the claim that those who celebrated the success of the American postwar economy could not properly explain it. Galbraith attributed this inability to the fact that the intellectual tools that commentators were using to describe the economy were not the correct ones. In particular, many economists were enamored of the “competitive model” of Adam Smith, David Ricardo and John Stuart Mill, which suggested that market competition would ensure that the economy remained at an ideal point of equilibrium, maximizing satisfaction for all parties. Galbraith argued that his contemporaries were so enamored of this approach that they sought to make the economy conform to it, rather than to adapt their presumptions to observable behavior. His specific concern was that the large size of American business firms meant that a key presumption of classical economics—that any single economic actor is unable to influence the market price of a good—was routinely violated in the postwar United States.

Galbraith argued that industries featuring only a small number of competitors—oligopolies—functioned in the same way as do monopolies. In such a situation, the most powerful firms act as price leaders and set conditions for the rest of the industry; the smaller ones have little choice but to react to the trends set by the established companies. In these oligopolistic situations, it is the industry leaders, not market competition, that set prices. “[W]hen oligopoly or crypto-monopoly are [sic] assumed,” rather than competition among a large number of similarly-sized firms, “it no longer follows that any of the old goals of social efficiency are realized.” Moreover, Galbraith claimed, oligopoly had come to characterize much of the American economy. The executives of the largest companies could raise or lower the price of their products with little concern for market competition. The smaller firms would be unable to successfully compete with the industrial giants, so they would simply follow its lead, adjusting their production and prices in the direction of the larger company. Thus the larger companies’ executives “have latitude on all of these matters; they are not the automatons of market forces.”

Though Galbraith saw oligarchy as common, he did not necessarily view it as a problem. The nation’s economy was growing, unemployment was low, wages were high, and the consumer did not generally appear to be at the mercy of corporate overlords. Oligarchic firms were not constrained by the market, but this did not mean that they were free to do as they please. They were limited, he argued, by their suppliers, workers and customers, who had consolidated in similar fashion as the companies themselves. Galbraith’s “theory of countervailing power” held that, in the absence of market competition, oligarchic firms could still be restrained in their behavior by the consolidation of other economic groups. The rise of labor unions constituted the most prominent and successful example of this principle. The relative interchangeability and plentiful supply of workers meant that the competition for labor would tend to drive wages only in a downward direction. But when laborers bargained collectively through a union, their combined strength and monopolistic position approximated the power of the oligarchic employer, setting in place a rough equilibrium. Galbraith offered other significant examples of countervailing power in American economic life, including large retailers, chain stores and farm co-ops. All such institutions provided a check on the large companies that dominated their respective industries.

Making the distinction between countervailing power and what he called original market power, Galbraith argued that bolstering the former should be, and had been, a central economic function of the state. Government should act to nurture countervailing power, and then, once it has done so, allow the economy to be administered through private transactions. “[T]he support of countervailing power,” he argued, “has become in modern times perhaps the major domestic peacetime function of the federal government.”

Though “a theoretical case exists for government intervention in private decisions” in those industries in which “countervailing power is not fully operative,” Galbraith scarcely mentioned socialization of private companies, and such actions appeared to be far from the center of his concerns. His theory advanced an organizing principle that simultaneously justified both capitalism and government economic intervention. As such, it provided a compelling rationale for liberalism while clearly distinguishing it from competing schools such as Marxism and laissez faire conservatism. Most important, by pitting ideal capitalist theory against widely lauded capitalist practice, Galbraith opened a space through which to advance a substantive criticism of American economic priorities in an era of relentless boosterism.

7 Thoughts on this Post

  1. This was a fantastic, fantastic post. I’m really looking forward to reading the book, but sticking with this post, I’m really appreciative of your approach to debates about capitalism after World War II.

    Perhaps I’m jumping the gun, but I wonder if this attempt at creating a new language to describe what “American capitalism” was is part of the reason the 1970s and 1980s sees the return of a more laissez-faire capitalism? As in, perhaps this ideal just wasn’t imbued with enough ideological power to stay around and survive the economic crises of the 1970s?

  2. Good piece. It’s important to note to what extent the “liberal” alternatives in the post WWII period partook of the reigning conservative ideals. Cf in other areas the adoration of Niebuhr, Kennan, Schlesinger Jr. and so many others.

  3. Thanks, Robert. I think you’re right about this, and I make a similar point in the book. I do believe that the most influential justifications of the economic order during this period presumed the stability of the more-or-less liberal political environment and consequently did not elucidate or defend their principles as they might have. I wouldn’t want to suggest that clearer arguments could have single-handedly changed the tide of history by themselves, but I do think that liberals were caught somewhat flat-footed by the 1970s. Conservatives had exciting new ideas like tax revolts and supply-side economics, and liberals’ attempts to present a competing narrative were not terribly captivating to the public. (I ended the book in the early eighties because I think that the dynamic put in place then is more-or-less the one in place today.)

    The other thing worth noting, however, is that Keynesian economics, which formed the basis of the liberal outlook in the mid-century period, are much better suited to addressing problems characteristic of depression than those related to inflation. The economic conditions of the seventies really did highlight a limitation of the liberal approach to government economic intervention. The lack of what you call “ideological power” was based partly in rhetorical problems, but also because the particular theoretical formulation in play didn’t effectively address the most relevant issue of the day.

    • Excellent. Again, this is quite fascinating, and you’re right that in the 1970s most liberal ideas just weren’t able to respond to the present crisis.

  4. Mike,

    Thanks again for posting excerpts from your book here. It’s been fun to follow.

    On the post above, I wonder what J.K. Galbraith would have thought of the E.F. Schumacher-inspired *Small is Beautiful* approach as a countervailing force? In my mind I link this to the Catholic principal of subsidiarity, which implies local solutions to political problems and local economics (the latter connected to Wendell Berry). A true Schumacherian approach would address the large business problem (i.e. decentralization of market actors). It would require limits and break-up of “oversized” corporations. Do you address Schumacher in your book?

    Also, what did Galbraith make of government *itself* as a countervailing power? I mean, those powers don’t have to be other private entities that are merely supported by the government, right? Government doesn’t have to own a business to control it. Surely deregulation/regulation must’ve have been a part of Galbraith’s thinking. Hopefully he spoke out about deregulation before his death (esp. against excessive dereg) .

    Finally, I expected a presentist link in your final paragraphs between Galbraithian “oligopoly” and the current research that underscores the oligarchical nature of the present-day United States (and other commentary and studies about our plutocracy!).

    – TL

    • Tim:

      Thank you for your comments. Those are interesting points. With regard to Schumacher and Berry, they represent a strain of American intellectual history with which I am not all that familiar. Unfortunately, they are not in my book, so I’ll leave it to you to make the connections.

      I take the theory of countervailing power as an attempt to get around the traditional “big government versus no government” debate. Of course government can regulate, but the really important question is: to what end? That’s where the important disagreements usually lie. So Galbraith, in my view, successfully provides a systematic, coherent answer to this question that justifies liberal policies but does not invoke the difficult-to-defend and frequently unpopular notion that the better off owe something to the worse off. (He does depend on this idea in the better known Affluent Society, a more popular but, in my opinion, weaker book.) His idea in American Capitalism is that government is justified in acting to bolster countervailing power. So government would not be a countervailing power itself, so much as it would ensure the conditions that would allow countervailing power to combat the original market power of the large corporations.

      And I think the fingerprints of presentism are all over the book. I try to resist those urges as much as possible, but I think they leak through nonetheless. The presentist angle that I am most likely “guiltily” of with regard to postwar liberals is that I find myself continually frustrated that they don’t make more direct appeals to what they value. And that has a lot to do with the DLC/Obama period in which I now live.

      As a side note, you’ve referred to these posts as “excerpts” a couple of times. Most of them are just the opposite: whenever possible, I tried to use material that got left on the cutting room floor, because I can’t imagine it will see the light of day otherwise. In the book, for example, I treated Galbraith’s more influential Affluent Society and had to cut the section on American Capitalism. The first post I did here goes into the 9/11 airline bailout. That was from the book’s original intro before the 2008 bailouts made it seem really dated. When I didn’t have something handy, I’ve tended to publish summaries of the arguments rather than actual excerpts. I’ve seen Rick Perlstein doing that with his upcoming book on his Facebook page. I find that his style of writing lends itself to short vignettes in a way that mine does not.

      • My apologies on calling these excerpts. I don’t know how I got that into my head. But thanks for the clarification. Either way, I’ve enjoyed them. – TL

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