Innovation, Evolution And Economic Change: New Ideas in the Tradition of Galbraith (New Directions in Modern Economics)

Innovation, Evolution and Economic Change

NEW DIRECTIONS IN MODERN ECONOMICS Series Editor: Malcolm C. Sawyer, Professor of Economics, University of Leeds, UK New Directions in Modern Economics presents a challenge to orthodox economic thinking. It focuses on new ideas emanating from radical traditions including post-Keynesian, Kaleckian, neo-Ricardian and Marxian. The books in the series do not adhere rigidly to any single school of thought but attempt to present a positive alternative to the conventional wisdom. A list of published titles in this series is printed at the end of this volume.

Innovation, Evolution and Economic Change New Ideas in the Tradition of Galbraith

Edited by

Blandine Laperche Research Unit on Industry and Innovation, University of Littoral Côte d’Opale, France

James K. Galbraith Lloyd M. Bentsen Jr. Chair in Government/Business Relations, LBJ School of Public Affairs, University of Texas at Austin, USA

Dimitri Uzunidis Research Unit on Industry and Innovation, University of Littoral Côte d’Opale, France With a Foreword by John Kenneth Galbraith NEW DIRECTIONS IN MODERN ECONOMICS

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© B. Laperche, J.K. Galbraith and D. Uzunidis, 2006 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library

ISBN-13: 978 1 84542 715 3 ISBN-10: 1 84542 715 7 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents List of Figures List of Tables About the editors List of contributors Acknowledgements Foreword: John Kenneth Galbraith

vii viii ix x xii xiii

Introduction

1

PART I CHANGING CAPITALISM: SHAREHOLDERS VERSUS MANAGERS 1

Professionals’ capitalism and democracy Luiz Carlos Bresser-Pereira

17

2

From one managerial capitalism … to another Pascal Petit

38

3

The end of capitalism: J.K. Galbraith versus K. Marx and J.A. Schumpeter Sophie Boutillier

53

4

The power of large companies Marlyse Pouchol

71

5

Is capitalism still Galbraithian? Guy Caire

86

PART II GLOBALIZED TECHNOSTRUCTURES: TOWARDS A THEORY OF THE CORRUPT CORPORATION 6

7

Galbraith’s views on firm and market: between neo-institutionalism and evolutionism Bernadette Madeuf Global R&D networks and ICT: what impacts on firms? Denis Carré, Gilliane Lefebvre, Bernadette Madeuf and Christian Milelli v

107 122

vi

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8

Large corporations and technostructures in competition Blandine Laperche

142

9

The corrupt corporation: a Galbraith-inspired analysis Michael Dietrich and Abhijit Sharma

162

10

The global restructuring of capitalism: new technologies and intellectual property George Liodakis

185

PART III CHARTING THE FUTURE: INNOVATION, STATE POWER AND THE MARKET SYSTEM 11

Galbraith and the political economy of technological innovation: critical perspectives and a heterodox synthesis Jerry Courvisanos

205

12

Knowledge and innovation: power and counterpower Andrée Kartchevsky and Muriel Maillefert

13

Science and governance in the national systems of innovation approach Victor Pelaez

241

Privatization and the management of intellectual property rights: the case of the British defence research establishments Jordi Molas-Gallart and Puay Tang

264

Galbraith and institutionalist analysis: an assessment based on the US military–industrial system transformations in the 1990s Luc Mampaey and Claude Serfati

278

What has happened to the public sector? Marketization and financial logic Blandine Laperche and Dimitri Uzunidis

302

14

15

16

Index

229

319

Figures 2.1 Diffusion of the multidivisional structure in certain European countries and Japan 2.2 Manager salaries in 11 OECD countries over the period 1987–1996: a rise initiated well before the stock market bubble 7.1 The interactions/proximities couple 8.1 Goals of the industrial system 8.2 The motivation system in the modern big firm 9.1 Information, ownership and the corporate sector 9.2 A simple taxonomy of corporate effectiveness 13.1 Technocratic governance model 13.2 Pluralist governance model 15.1 Concentrations in the US armaments industry, 1990–2003 15.2 Comparison of the Dow Jones Industrial, NASDAQ, S&P500, Major Market Index and DFI indexes from 1 January 1999 to 24 October 2004

vii

42 47 126 147 148 165 169 256 258 285

290

Tables 3.1 Major features of the capitalism of big industries: synthetic presentation – Marx–Schumpeter–Galbraith 7.1 Categories of proximity 8.1 Trade union membership as a percentage of wage and salary earners in the US, certain European countries and Japan 8.2 Elements of comparison: the big firm in the 1960s and early twenty-first century 15.1 The 15 US armaments groups that make up the Amex DFI index 15.2 Remuneration of armaments CEOs

67 126 153 155 284 291

BOXES 2.1 Eisner, a not-so-isolated example of deviation 7.1 Genopole®Evry

viii

48 136

About the editors Blandine Laperche is professor (Maître de conférences habilitée à diriger des recherches) of Economics and Vice Director of the Research Unit on Industry and Innovation at the University of Littoral Côte d’Opale, France. She specializes in industrial economics and the economics of innovation. She has recently published Firm and Market: Reading Galbraith (in French) and is joint author with Dimitri Uzunidis of John Kenneth Galbraith and the Future of Economics (in English). James K. Galbraith holds the Lloyd M. Bentsen, Jr. Chair in Government/Business Relations at the LBJ School of Public Affairs, University of Texas at Austin, USA, Senior Scholar of the Levy Economics Institute, and Chair, Economists for Peace and Security. He has published many articles and books, among them Created Unequal: The Crisis in American Pay and Inequality and Industrial Change: A Global View. Dimitri Uzunidis is Director of the Research Unit on Industry and Innovation at the University of Littoral Côte d’Opale, France. He has provided expertise to several international organizations and specializes in the economics of innovation from an international perspective. He has recently published Innovation and Contemporary Economics (in French) and is joint author with Blandine Laperche of John Kenneth Galbraith and the Future of Economics (in English).

ix

Contributors Sophie Boutillier is Professor of Economics, Maître de Conférences habilitée à diriger des recherches, at the Research Unit on Industry and Innovation, University of Littoral Côte d’Opale, France. Luiz Carlos Bresser-Pereira teaches economics and political economy at Getulio Vargas Foundation, Sâo Paulo, Brazil. Guy Caire is Professor Emeritus of Economics at University of Paris X, Nanterre, France. Denis Carré is Chargé de recherches CNRS, and a member of EconomiX, University of Paris X, Nanterre, France. Jerry Courvisanos is Senior Lecturer in Innovation and Entrepreneurship, School of Business, University of Ballarat, Australia. Michael Dietrich is Senior Lecturer in Economics at University of Sheffield, UK. Andrée Kartchevsky is Professor of Economics at University of Reims Champagne Ardennes and a member of EconomiX, University of Paris X, Nanterre, France. Blandine Laperche is Professor of Economics, Maître de Conférences habilitée à diriger des recherches at the Research Unit on Industry and Innovation, University of Littoral Côte d’Opale, France. Gilliane Lefebvre is ingénieur de recherches CNRS and a member of EconomiX, University of Paris X, Nanterre, France. George Liodakis is Professor of Political Economy at the Technical University of Crete, Greece. Bernadette Madeuf is Professor of Economics and a member of EconomiX, University of Paris X, Nanterre, France. x

Contributors

xi

Muriel Maillefert is Professor of Economics, Maître de Conférences at the University of Lille III, France. Luc Mampaey is a Senior Researcher at GRIP (Brussels), a commercial engineer (HEC), and a PhD student at the University of Versailles-SaintQuentin-en-Yvelinnes (lab. C3ED). Christian Milelli is ingénieur de recherche CNRS and a member of EconomiX, University of Paris X, Nanterre, France. Jordi Molas-Gallart is Research Professor at INGENIO, a joint institute of the Spanish Council for Scientific Research (CSIC) and the Polytechnic University of Valencia, Spain. Victor Pelaez, Department of Economics, Universidade do Paraná, Brazil. Pascal Petit is director of Research at CEPREMAP/CNRS, Paris, France. Marlyse Pouchol is Professor of Economics, Maître de Conférences, at the lab.Ceras/Hermes at University of Reims Champagne Ardennes, France. Claude Serfati is Professor of Economics, Maître de Conférence habilité à diriger des recherches. He is a member of the lab.C3ED at the University of Versailles-Saint-Quentin-en-Yvelines, France. Abhijit Sharma is a Postdoctoral Research Economist at Imperial College London, UK. Puay Tang is a Senior Fellow at SPRU, The Freeman Centre, University of Sussex, Brighton, UK. Dimitri Uzunidis is Director of the Research Unit on Industry and Innovation, University of Littoral Côte d’Opale, France.

Acknowledgements There are many people and institutions we would like to thank for their input into making this book possible. The IGS group (Institut de Gestion Sociale) in Paris was the co-organizer with the Research Unit on Industry and Innovation, University of Littoral (Lab.RII) of the first forum, ‘The Spirit of Innovation: John Kenneth Galbraith International Symposium’, in September 2004. The papers included in this volume were all prepared for this conference. We particularly thank Roger Serre, head of the IGS group, and all the staff who took part in the organization of this conference. We are most particularly grateful to Yves Enrègle, Claude Treyer, Christine Lancesseur, Michèle Crost, François Diquero and Claire Jeuffrain. We extend our thanks to Jarlath Dillon, head of the IGS international MBA and his students for the compilation of the debates during the International Symposium John Kenneth Galbraith. Many institutions supported the organization of this event and the publication of this volume. We would like especially to thank the French Ministry of Education and Research, The National Centre for Scientific Research (CNRS), The Embassy of the United States of America in Paris, The French Senate, The French National Institute on Industrial Property (INPI), The French Region Nord/Pas-de-Calais Council and the University of Littoral Côte d’Opale. We also express our thanks to Michel Delebarre, Deputy and Mayor of Dunkerque, for his personal contribution to the achievement of this event. We offer our deep appreciation to all the members of the scientific committee of this symposium, for their help in the selection of papers, in the construction and in the publication of this book. We especially thank Malcolm Sawyer (University of Leeds, UK) for his help with the publication of this book. We also thank our colleagues of the Lab.RII – ULCO, for their precious help. And finally, we warmly thank John Kenneth Galbraith who, all along the preparation of this book, gave us his moral support.

xii

Foreword For many years, aligning myself with perceptive scholars the world around, I have had pleasure in the French response to my work. My pleasure is especially strong in this collection of papers, many of them given at a gathering in Paris in September 2004. The focus of lively discussion at this Galbraith Conference was the economic world and its singular feature: the struggle between truth and personal preference. Such was the mood of the meeting in Paris; such was the source of my sorrow that age and physical instability forbidding, I could not be present. Belief, as here made clear, is sadly subject to personally advantageous belief. The realignment of belief with reality is one of the great tasks of intellectual life. One hesitates to make the comment but I nonetheless risk it: nothing over the centuries has more strongly motivated French thought than appreciation of the truth. In the economic world, no aspect is more important than the separation of belief and prognostication from personal, group, and corporate preference and advantage. It was this aspect, I cannot but think, that brought an array of talent to the Paris meeting and continues, in the publication of this volume, to unite those who pursue truth as distinct from contrived advantage. No one can doubt my gratitude for those who proceeded with the Galbraith Conference and this volume. John Kenneth Galbraith

xiii

Introduction Blandine Laperche, James K. Galbraith and Dimitri Uzunidis 1. GALBRAITH AND THE ANALYSIS OF ECONOMIC CHANGE John Kenneth Galbraith is regarded as an eminent economist of change; his analysis and thesis are, for the contributors of this book, a matter of deep reflection on the evolution of capitalism: taking account of the main changes of the economic context since the publication of J.K Galbraith’s main thesis, they bring new ideas which are fertile ground for new research. Before explaining the main new ideas developed in this book, let us go a bit further in the explanation of Galbraith’s contribution to economics. As already mentioned, change has an important place in all his works. First and foremost, J.K. Galbraith considers that economic theories cannot be understood without reference to the context in which they developed. His book Economics in Perspective: A Critical History (1987) succeeds in this exciting exercise. This is the reason why, in all his own developments, the explanation of the economic context has a very important role to play. In The Great Crash (1955) for example, the abundance of examples and stories demonstrates how financial panics affect real activity. They also show that economics, like history is made at least in part by individuals and, most important, they constitute an approach characterized by the generalization from example, which goes back to the first classical economists. For Galbraith, economics suffers from ‘the conventional wisdoms’ which prevent economists and politicians from having a clear view of economic problems and their needed remedies. Conventional wisdom derives from the neglect – voluntary or not – of economic change. The concept of conventional wisdom was developed in the Affluent Society (1958), a book in which we find a logical and fact-based demolition of the orthodox theory of consumer choice and a demonstration of the dependence effect: the dependence of consumption on production and not the other way round. We also find an analysis of what happens when public action is ignored or 1

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Innovation, evolution and economic change

dominated by the interests of big corporations: ‘private opulence and public squalor’. The New Industrial State (1967) begins with the presentation of the major changes that make the economic system ‘new’ (Chapter 1 is titled: ‘Change and the industrial system’). His theory of the economic organization, highlighting the significance of the specific bureaucratic processes that generate corporate decision-making and the interplay of company and state, is built on this very accurate observation of American capitalism (American Capitalism is also the title of his book (1952) which analysed the existing countervailing powers to the corporation strength). ‘Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary’ (Schumpeter 1942, pp. 81–2). Galbraith, and Schumpeter, understood that very well. As Schumpeter also taught us, innovation, taken in the broad sense of the word, is the driving force of capitalist dynamism, the driving force of economic, social and political change. In a corporation, innovating means developing and diffusing a new combination of production factors. In the sphere of economic ideas, innovating means developing and diffusing a new or a different way of studying economic phenomena, as well as developing and diffusing new ideas or theories. By those two aspects, as shown by the above examples, the work of J.K. Galbraith proves to be ‘innovative’. Moreover, and perhaps more important, J.K. Galbraith’s work may be able to inspire the community of economists with a new spirit of innovation. This is what the authors of this book, ensuing from the first forum on innovation ‘The Spirit of Innovation. J.K. Galbraith International Symposium’, also demonstrate.1 The first part of the book is devoted to the analysis of the main features of today’s capitalism, and especially the conflict between shareholders and managers. The second part focuses on the consequences of globalization in the decision-making process of big corporations and represents an important step in the development of a theory of the corrupt corporation. Finally, in the third part, the discussion deals with the impacts of the domination by the interests of influential groups over major social and political decisions: those relating to technological development in the civil and military sector and those relating to all the collective activities and services. Thus, the latter part and this book clearly ask the question of the meaning and the power of democracy in today’s society.

2. CHANGING CAPITALISM: SHAREHOLDERS VERSUS MANAGERS In the first part of this book, the authors focus on the evolution of capitalim in

Introduction

3

recent years. They particularly raise the following issue: Who is in charge in large corporations – which are today perhaps more than ever at the heart of the economic system? The rise of finance in recent years, along with the importance of knowledge, give managerial capitalism a new face, as described by Galbraith. However, is a new social system emerging from these sweeping changes? In Chapter 1, Luiz Carlos Bresser-Pereira argues that Galbraith’s 1967 prediction that knowledge was replacing capital as the strategic factor of production proved true. According to the author, the strategic role that technical, organizational and communicational knowledge play today, coupled with the rise of organizations as basic units of production, gave rise to a new social class – the professional middle class – characterized by the collective ownership of organizations. Yet, the emergence of the professional class did not imply the rise of a new social system, nor involve the concentration of political power in the hands of the new class. The economy remained controlled by the market and oriented toward profits, and thus capitalist. Instead of classical capitalism, what we have is professional capitalism, a system in which capitalists and professionals share income and power while fighting for them. Yet, as democracy also became the dominant political regime in the twentieth century, both classes surrendered power to citizens and the politicians that represent them. In the long run, in their struggle with capitalists for power, the outcome for the professionals will depend on their ability – that they sometimes already prove to have – to ally with common people. The great evolutions of contemporary capitalism are, according to Pascal Petit, largely endogenous to the technostructure itself. The period of ‘Fordist’ growth which characterizes the expansion of industrial capitalism has been classified as managerial capitalism, because of the role played by middle management and executives in the management and expansion of production processes and the diffusion of consumption standards. At first glance, this description is in considerable contrast with the image of the contemporary growth regime controlled on the one hand by shareholder value and on the other hand by the consumption behaviours of populations receiving unearned income. According to Pascal Petit, this evolution towards patrimonial capitalism is perhaps only a transitional face of reality, which is finally still close to managerial capitalism. Considering the organizational and institutional perspective, in Chapter 2, Pascal Petit underscores the structural development that changed the technostructure, and notably the importance taken by managers in charge of financial issues, the growing role of knowledge and innovation in the internal and external division of labour, the widening and the heterogeneity of management populations and the expansion of the financial sector. According to Pascal Petit, these evolutions are

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Innovation, evolution and economic change

obviously endogenous to the technostructure itself and justify the persistence of managerial capitalism. However, the latter is seriously weakened by the fraudulent behaviour of the category of managers that dominates it. So how can we contemplate the future of capitalism? In Chapter 3, Sophie Boutillier compares John Kenneth Galbraith’s point of view on the evolution of capitalism with those of Marx and Schumpeter. Karl Marx considers that the history of human societies is punctuated by contradictory movements between the social relations of production and the productive forces. Capitalism, like the feudalism that preceded it, must disappear due to its contradictions: the downward trend of the rate of profit, and the increase in the organic composition of capital. In this analysis, the development of limited companies plays an important part. On the one hand, it provides capitalism with new financial resources, and on the other hand, it contributes to its negation by questioning the individual nature of capitalist property. Capitalism cannot survive for Schumpeter either. Marx was right!, he acknowledged. The entrepreneur, the driving force of capitalism in heroic times, disappears when the big firm emerges, managed by a double-headed team, the managers and the shareholders. For Schumpeter as a matter of fact, the occurrence of collective private property destroys initiative and the will to enrich oneself, the cornerstone of capitalism. The spirit of enterprise vanishes, and the firm is no longer a place of economic opportunities, nor a place of professional and personal fulfilment, all that being replaced by a bureaucratic organization, the next step being the birth of a socialist society. However, as shown by J.K. Galbraith, socialism has not replaced capitalism. The latter has become socialized. The entrepreneur is replaced by the technostructure at the head of big firms. The economic power is no longer in the hands of the entrepreneur, but the existence of capitalism is not questioned. Capitalism and socialism have many common points and both are existing. Nowadays, in such a context, a new capitalism is emerging in which the entrepreneur has not disappeared, but he is no longer a hero. Thus, he has become a socialized entrepreneur, i.e. an entrepreneur who is just a player in an economy made up of the planning decisions made by big firms which, even if networked, are powerful bureaucracies nevertheless. In Chapter 4, Marlyse Pouchol explains how J.K. Galbraith conceives the nature of this power wielded by large economic structures in contemporary societies. According to her, J.K. Galbraith undertakes an ‘emancipation of [the] beliefs’ conveyed by ‘neo-classical economics’. This opposition to the ‘official economic science’ is one of the means to resist the ever-tightening grip of large companies. As a matter of fact, in his major works, J.K. Galbraith highlights the domination of large companies over America. If he first puts forward the positive aspect of this domination, he then stresses its harmful effects: the firm imposes its values on the whole society, on individuals and

Introduction

5

on the state as well. Despite superficial similarities, Galbraith’s analysis of the power wielded by large companies is different from the analysis conveyed by the Marxist approach to the economy. According to the author, Marx’s analysis of the origin of those large firms as well as the source and nature of their power does not correspond to the characteristics of the large public limited companies of the second half of the twentieth century. For Galbraith, the remedy is that the state has to ‘break free’ from the grip of those firms which impose their values on the whole of society. This requires relying on the understanding and critical mind of as many people as possible. Such a solution may seem derisory, for any attempted resistance to both the financial and constraining powers of those large firms verges on utopian. This chapter is, however, an attempt to support Galbraith’s position by introducing a rapprochement with the thinking of an American philosopher of German extraction: Hannah Arendt. She is, above all, famous for her analysis of totalitarianism. It is particularly the inability to think, described by H. Arendt, resulting in the installation of a habit of conforming to set rules acknowledged by many and confirmed by society, which very probably explains the extent of the control of industrial and financial groups over human goals that Galbraith so denounces. Finally, in Chapter 5, Guy Caire asks: Is capitalism still Galbraithian? Are J.K. Galbraith’s main arguments – developed in American Capitalism: the Concept of Countervailing Power (1952), The Affluent Society (1958), the New industrial State (1967) and Economics and the Public Purpose (1973) – still intact, despite the new technological wave, the emergence of a knowledge economy and the growing globalization of the economy? Concerning the structural elements of the system, Galbraithian capitalism is a managerial capitalism based on key concepts: organization, planning, technostructure and, of course, the role of managers. According to many observers, a shareholder capitalism is emerging, under the impetus of two forces: new information and communication technologies, and financial globalization. It is based on the neo-liberal doctrine which gives shareholders supremacy over managers and on a large consensus focused on the value maximization objective. Concerning the model of operation, Galbraith’s capitalism is based on the interaction of the planning system with the market system, thus leading, according to the author, to a segmented labour market which generates reformist political propositions. Shareholder capitalism rests on a free market economy and generates a new capitalism which integrates the following three ingredients: stabilization, liberalization and privatization, which change the priorities of macro-economic regulation and labour–management relations. Regarding the system of values, G. Caire uses the language of social protection, and notably the contrasting words of welfare and workfare to show that the notion of power – and notably the notion of countervailing power which characterizes

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Innovation, evolution and economic change

managerial capitalism and is a mechanism aimed at facilitating the emergence of a welfare state – is opposed to the idea according to which inequality is the driving force of history. Thus, according to the author, the new technologies that appeared since the mid-1970s have changed our daily lives and our collective existence, often in the sense of growing risks. However, concerning the places of power, the big corporation is still at the core of the economic system and of our producer/consumer lives. Within the firm, and despite the shareholders’ revolution, the managers have kept their position. The second part of the book follows the discussion of this last chapter, focusing on the impacts of globalization on the running of big corporations. In the global economy, technostructures are divided and located in different parts of the world. This is seen as a way to increase their efficiency (their technological strength). However, isn’t it a way to explain their internal weakness? This issue introduces a major element to the book, which is the question of the corruption of the technostructure from within, also revealing the larger contradictions of today’s managerial capitalism.

3. GLOBALIZED TECHNOSTRUCTURES: TOWARD A THEORY OF THE CORRUPT CORPORATION As a coherent Keynesian, J.K. Galbraith questions the market functioning and regulation conditions as described – and championed – in the ‘conventional wisdom’. This questioning is the basis of Galbraith’s analysis in his most famous works. In Chapter 6, Bernadette Madeuf examines the relationships between market and firm in J.K. Galbraith’s works, not only as an alternative co-ordination mechanism of economic activities (the main issue raised by Coase as far back as 1937) but also in terms of power (market power, consumer sovereignty vs. the power of big firms and the persuasive power of advertising). The author studies J.K. Galbraith’s main concepts and shows how the changing relationship between market and firm, based on the necessary control of technical evolution is eventually leading to an analysis built on assumptions conflicting with mainstream economic assumptions. This chapter also includes a comparison exercise between this construction and the institutionalist and evolutionist approaches. Focusing on the determining factors of the boundaries between firms and market and on the coordination mechanism inside the firm, the author shows how Galbraith’s analysis can be related to some developments of the institutionalist and evolutionist approaches, which nevertheless are basically focused on transaction and exchange conditions and on the interactions between agents, and not on the production and the organization logics. This chapter, mainly focused on the theoretical aspects of the analysis of the firm by Galbraith, introduces the

Introduction

7

discussion on the changes involved by the globalization process. This implies evolving organizational structures in firms faced with new competitive pressure and a faster and faster technological race (Chapter 7) as well as an evolving decision-making process which today reveal the weaknesses of the technostructure (Chapters 8 and 9). Does the use of information and communication technology make the innovation activities of large globalized companies more coherent and operational? This question and this chapter (7) are an extension of J.K. Galbraith’s analysis, notably characterized by the importance of change and technology. In particular, how does information and communication technology (ICT) modify the operation of the technostructure – an association of men of specific skills? According to Denis Carré, Gilliane Lefebvre, Bernadette Madeuf and Christian Milelli, the impact of information and communication technology is generally viewed in terms of compensation between spatial proximity and organizational proximity. The authors put forward a third dimension of proximity: cognitive proximity. Information and communication technology reshapes the internal practices and the working of research, thus having an effect on the parameters which characterize cognitive proximity. As a consequence, the location and management of corporate R&D vary according to the sectors and the characteristics of research activities. Through large surveys and case studies, the authors show that if the potential of information and communication technology seems not enough to mitigate the need for spatial proximity which is largely seen as a requisite for all R&D activity, they nevertheless play an important part in the efficiency of the innovation strategy, through its impact on quality, costs and length of research activity processes, in particular in ‘extended research centres’. Because R&D networks are a central part of the technostructure, these results also apply to the global technostructure as a whole. Even if ICTs may facilitate the organizational as well as cognitive proximity which enhances the functioning of a dispersed global technostructure, they cannot totally replace the spatial proximity necessary to some tasks requiring the exchange and processing of less or non-formalized information. As already mentioned J.K. Galbraith spent most of his intellectual life analysing the big firm. His studies relate both to the structure of power throughout the organization, and its impact on prices, consumer behaviour, and the determination of public policies. The following issues are covered by Blandine Laperche in Chapter 8: in the context of globalization, how strong are the countervailing powers to the big organization? What changes are caused by the intervention of new (institutional) investors in the power structure of the firm? What are the consequences on the objectives of the planning system and those of the members of the technostructure? The author first presents the characteristics of the large corporation which, according to

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Innovation, evolution and economic change

Galbraith, is the keystone of contemporary capitalism. To him, the creation of oligopolistic or monopolistic situations results from an organic process inherent in the functioning of capitalism. The large size is justified by the requirements of modern technology and planning. As the power is in the hands of a group of specialists – the technostructure – their objectives are not as limited and iniquitous as the maximization of profits. Thus the big firm is both justified and rehabilitated all the more as the concentration process that produces the big firm also produces its countervailing powers. Then, the power of the main compensating powers – as identified by J.K. Galbraith – is analysed. According to the author, countervailing powers have been weakened by the changes experienced by modern capitalism, notably by globalization. On the internal plan, the efficiency praised by Galbraith and driven by a complex system of motivation also suffers from the globalized organization of firms which undermines internal cohesion. Finally, the author presents the argument that globalization has contributed to complexify the functioning and structure of industrial technostructures which have relations of competition and cooperation with each other and also with financial technostructures, within which profit making and higher revenue play a major part. In the same vein, Chapter 9, written by Michael Dietrich and Abhijit Sharma presents an analysis of corrupt corporations that builds on theoretical principles developed by Galbraith. In particular his views on the importance of a ‘technostructure’ are reinvented using recent discussions in economic theory. The authors proceed to provide a typology of corrupt practices in the corporate sector. They distinguish non-corrupt corporations, non-corrupt companies with corrupt individuals, and corrupt corporations. Non-corrupt corporations are those emphasized in many of Galbraith’s writings. Such companies can be described in terms of high degrees of organizational effectiveness. Then the authors proceed to the detailed assessment of noncorrupt companies with corrupt individuals and of corrupt corporations, highlighting the role of organizational effectiveness, coherence and objectives combined with the creation and prevalence of incentives (including perverse incentives). Such an analysis enables the authors to present a simple taxonomy of corporate effectiveness based on an examination of a firm’s organizational objectives in relation to its organizational coherence. Use is made of Galbraith’s idea of a technostructure and the forms of motivation that exist within an organization. It is argued that the technostructure in corrupt companies is deformed and hence the forms of motivation are similarly deformed. Following Galbraith, in a well functioning technostructure, ‘identification’ and organizational ‘power seeking’ become more significant than financial motivation and authority. The basic argument is that in a corrupt company financial motivation becomes paramount. Finally, case studies of corrupt companies are presented. They illustrate the importance of deformed

Introduction

9

technostructures with inadequate motivations based on ‘identification’ and ‘power seeking’, and highlight behaviour in agreement with the typology of corrupt behaviour within firms which is developed in this chapter. This analysis helps the understanding of the logic of corrupt behaviour within firms and the impact of phenomena such as the tacit approval of illegal activities in some cases, along with an analysis of individual and corporate motivation and the spin-offs of corrupt behaviour. According to Galbraith, there is a link between an individual’s goals, those of an organization and those of the social body taken as a whole: it is the ‘consistency principle’. The internal weakness of the big corporation and the development of corruption show that today’s common objective is the increase of the bottom line profit. Such an objective shows the growing contradiction of today’s ‘totalitarian capitalism’, according to George Liodakis in Chapter 10. This chapter begins with an analysis of the trend toward a transnationalization of capitalism and a changing role of the state. Within this evolving international context, attention is paid to the role of new technologies (information and communication technologies, biotechnology, new materials) and on the rising tendency in favour of the protection (through patents) of intellectual property rights arising from scientific/technological innovations, particularly in the fields of information technology and biotechnology. The author examines the economic, social and ethical dilemma raised by this expansive protection. According to him, this tendency results in an intensifying contradiction between the increasing socialization of production and the attempt to strengthen the private appropriation of capital, which is partly visible in the expanding privatization, not only of natural resources and means of production, but also of science and technology. According to the author, this contradiction more specifically generates two conflicting social and political perspectives which relate, either to a reorganization and further development of capitalism, associated with stronger private control and appropriation of science and technology, or an alternative transformation of society with an open access development of science and technology and with education and scientific/technological knowledge considered as a common (public) good and the heritage of humanity. The discussion about these conflicting perspectives is carried on in the third part of the book. Without pessimism, but deliberately fighting against the over-optimistic conventional wisdom that prevails in today’s ‘market system’, this benign term which tends to replace the word and the reality of ‘capitalism’ as explained by Galbraith in The Economics of Innocent Fraud (2004), the authors raise important issues: what is the strength of the state, of big enterprises and of the countervailing powers of the people in the various but related fields of technology regulation in the civil or the military sectors, and more globally in the future of the common services to society?

10

Innovation, evolution and economic change

4. CHARTING THE FUTURE: INNOVATION, STATE POWER AND THE MARKET SYSTEM In Chapter 11, Jerry Courvisanos recalls that in The New Industrial State (NIS), Galbraith provides the starting point for the political economy of technological innovation. It is based on a critical evaluation of the decisionmaking processes of economic agents within institutions and how they react to the different levels of political power in society. This political economy approach to technological innovation is the overriding theme of this chapter. According to Jerry Courvisanos, the agency of the technostructure in The New Industrial State has enabled different perspectives to emerge, on the economic and political power of technological innovation. A clear political economy approach is set out as the basis for evaluating various perspectives on technological innovation. Pro-market perspectives are first identified as the mainstream positions on innovation and the agency of entrepreneurship. These are critically evaluated and juxtaposed to the heterodox institutional, strategic and public policy perspectives that have influences from Galbraith’s NIS. A Galbraithian heterodox synthesis of these perspectives is sketched out as a research and policy framework on technological innovation. It should provide a strong generic framework for understanding and appreciating the capitalist forces that underlie technological innovation and its commercialization process. In this perspective, in Chapter 12, Andrée Kartchevsky and Muriel Maillefert study how the organization – the technostructure in the heart of big corporations – exercizes its power on the content, the direction and therefore on change in industrial capitalism. This leads, according to them, to the subordination of markets and the fields of public action to the requirements of influential groups. This context gives scientists specific roles and responsibilities. The authors discuss Galbraith’s argument according to which professors and intellectuals form a safety valve allowing that the needs of the system yield priority to the matters of the mind and to intelligence. With Galbraith, they study the sense of innovation and technical change in the capitalism of big enterprises, in order to highlight the importance of knowledge not only in the achievement of the production process but also for the democratic organization of the whole social system. But given the power of the technostructure, the blurred distinction between private and public sector, and the fact that knowledge is not a perfect public good, isn’t this second objective of favouring the democratic organization of the whole social system endangered? This question is also raised in Chapter 13. Victor Pelaez uses J.K. Galbraith’s institutionalist approach to discuss the process of technology regulation. The institutionalist approach put forward by Galbraith and other

Introduction

11

institutionalist authors has contributed to revealing the exercise of power proceeding within a productive system in which the economic, political and social variables are combined to make the expansion of large corporations viable. The institutionalist approach to the practices of power and clashes of interests contributes to an understanding of the process of technology regulation in which the privileged knowledge of specialists becomes the object of governance from those players directly linked to innovation (companies). Studying then the evolutionary approach that prevails in the contemporary analysis of innovation, he explains that the national innovation system approach aims at studying the causes of economic efficiency in industrialized countries with an emphasis on the phenomena associated with the process of technological innovation. In this standard, the role allocated to institutions corresponds to the incentives or barriers imposed on interaction between organizations whose aim is to generate and diffuse technology. By giving preference to a theoretical analysis based on the satisfactory allocation of resources under limited conditions of rationality, the evolutionist focus of the national innovation system no longer discusses technical progress as resulting from the clashes of interests between the various players involved. After analysing the attempt to regulate biotechnologies in the European Union and Brazil, and in opposition to a technocratic governance model in which society does not take part in the regulating process, the author proposes a new model of governance, a sub-system of innovation, aimed at regulating technologies, that would involve the lay public, mainly through the action of organized society, allowing for the inclusion of the citizen in the process of deciding which technological paths will be adopted and the evaluation of technological risks. However, can we imagine that technical progress could result from other social activities than defence? And aren’t the interests of the defence sector shared by industrial and financial enterprises? More than three decades ago Galbraith argued that in areas like defence procurement the distinction between public and private spheres was at best blurred. In Chapter 14, the authors, Jordi Molas-Gallart and Puay Tang, show that this idea is still very pertinent. As a matter of fact, more recently, close co-operation between defence firms and procurement agencies has either been portrayed as an example of dangerous collusion or efficient, partnershipbased, programme management. These views share a common trait: they argue or assume that a confluence of interests exists between the industrial and customer organizations involved in defence procurement. This chapter examines such a proposition with reference to the management of intellectual property at the interface between government agencies and large defence suppliers, covering the case study of British research establishments. The authors first analyse the difficulties caused by the privatization of DERA (the

12

Innovation, evolution and economic change

main UK defence research establishment) in relation to the ownership of data that it had collected from private firms while operating as a government agency. Far from resulting in a collaborative framework in which the differences between public and private agents are blurred, the result has been heightened conflict and mistrust between private defence firms and government procurement agencies. Indeed, the boundary is blurred (a newly privatized research facility discharging public functions), but on either side of it the distinction between private and public players appears sharper than ever. To conclude, and in the same vein as Galbraith’s recent writings, the authors assess that the tasks that until recently had been assigned to public agencies are now being taken over by private organizations. In Chapter 15, Luc Mampaey and Claude Serfati address the contribution of John Kenneth Galbraith’s analysis to the institutional shaping and economic role of the US military industrial system (MIS, traditionally labelled as the ‘Complex’ since Eisenhower’s 1961 farewell speech). How much the technostructure theory travelled throughout the 1990s when ‘rentiers were back’ is assessed by looking at the sweeping transformations of the ‘Complex’ that took place in the last decade. Galbraithian institutionalism is a precious contribution to the understanding of the growing role of managers in relation to technological development, the close relation between public and private sector, the powerful tendency of the ‘Complex’ to self-enlargement. Other institutionalists (Mills, Melman) at the same time, shed a different light on the Complex. The ascendancy of finance capital institutions (foremost pension, mutual, and hedge funds) in major corporations, including in defence prime contractors, in the 1990s, is a major challenge to Galbraith’s analysis. As he recently claimed that the role of stockholders had become ceremonial in the context of the supremacy of corporate bureaucracy, the thrust of the chapter is that far from a rentier’s euthanasia by top management, a new alliance between the former and latter took shape in the 1990s. Today’s accumulation framework shows the change from the welfare state which was sustaining demand during the 30 years of constant growth after the Second World War to a providential state for capital holders. Far from the ideas developed by Galbraith, notably in the Affluent Society, in which he highlighted the role of states to maintain a ‘social balance’, the activities of states, not only in the military sectors but more largely in all the public services, seem to be dominated by the interest of the big private corporations. According to Blandine Laperche and Dimitri Uzunidis, the supply policies (financing of ‘sunk costs’, creation of a general climate favourable to the valorization of individual fortunes) are closely akin to the aims of the liberal theories (contestable markets) which take up the parts of the Keynesian theory enabling them to circumvent the deadlocks of their own theories (endogenous growth). A new form of state control appears which, under the cover of

Introduction

13

liberalism, unifies the interests of the state and those of fortunate and politically influential groups of people in one movement (same destiny!). In this chapter, the authors show that the ‘marketization’ of the public sector is part of a dual process which brings the failure of the social state in close contact with the crisis of the enterprise system based on the short-sighted growth of production. But as these theories reject or underestimate the contradictory social and political relations existing in the economy and which are inherent in competition, they cannot clearly understand the current evolutions of the public sector: the marketization and financiarization of the public sector lead to the reconstruction of monopolistic and oligopolistic situations and to the domination of large enterprises over privatized and liberalized services. As a result, free competition questions market sustainability, and uncertainty jeopardizes long-term growth.

NOTE 1. The first forum ‘The Spirit of Innovation: John Kenneth Galbraith International Symposium’ organized by the research unit on Industry and Innovation (University of Littoral Côte d’Opale, France), with the IGS Group (Paris) which took place in Paris, 22–25 September 2004, has proved conclusive as to this point. The 68 participants, coming from the five continents, studied the actuality of John Kenneth Galbraith’s writings on the themes of the large corporation, the role of states in economic dynamism, the origins of innovation and growth, the link between money, finance and the real economy, the place of wars in today’s capitalism. They also focused on the particularity of John Kenneth Galbraith’s approach of economics.

REFERENCES Galbraith, John Kenneth (1955), The Great Crash 1929, Boston, MA: Houghton Mifflin Company. Schumpeter, J. (1942), Capitalism, Socialism and Democracy, London: George Allen & Unwin, pp. 81–2.

PART I

Changing Capitalism: Shareholders Versus Managers

1. Professionals’ capitalism and democracy Luiz Carlos Bresser-Pereira 1. INTRODUCTION The twentieth century will be known in the future for many major changes: it was the century of technological progress, the century of organizations rather than of family units of production and the century in which the number of bureaucrats increased so much as to merit being identified as social class – the professional middle class. In connection with these changes, it was the century when knowledge eventually became the decisive factor of production, and the control of technological, organizational, and communicative knowledge turned strategic. Yet it was also the century of democracy, which represents a check to this new power, while at the same time it is conditioned by it. While changes occurred in the social and political spheres, economies experienced enormous growth and became much more complex. In this process, markets assumed a major role in coordinating economies – by allocating factors of production employed by business enterprises – but, obviously, the coordination of the whole system surpassed by far, their possibilities. At the macro political level, the role of the state and of the institutional or legal system which it creates and enforces increased enormously. At the level of civil society (of politically organized society), corporative organizations, and, after that, social accountability organizations increased in number and influence, acting as control mechanisms of governments. Concurrently, at the economic realm, large business corporations, and all other types of large organizations, became dominant everywhere. Firms required entrepreneurs, organizations demanded managers or professionals covering an increasing larger spectrum of specialties. Organizations continue to require entrepreneurial or innovative action, but entrepreneurship became increasingly collective rather than individual (on this point, see Sophie Boutillier’s contribution, Chapter 3). Within all organizations, beginning with the state apparatus and including the social accountability non-profit organizations, the large business enterprises, and the large non-profit service organizations, the demands of technical, administrative and communicative 17

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Changing capitalism: shareholders versus managers

knowledge also increased dramatically – and the power of managers or professionals increased proportionally. In the contemporary world, institutions, organizations and networks are much more complex, in so far as they embody increasingly sophisticated scientific and technological progress, as they deal with large organizations, and as they regulate dense networks. In 1967 Galbraith observed that technical knowledge had become the strategic factor of production. A little later, when I wrote my basic essay on the emergence of technobureaucracy or the professional middle class, I added to technical, organizational or administrative knowledge (Bresser-Pereira, 1972); now I am including a third element, communicative knowledge, to stress the new role played by information technology in shaping what Manuel Castells (1996) called, and analysed so acutely, the ‘network society’. I will call these three forms of knowledge ‘operational knowledge’, in so far as they are required to render operational, the modern and complex societies in which we live. Galbraith’s claim that capital was ceasing to be the strategic factor of production, being gradually replaced by technological knowledge, appeared in his classical book The New Industrial State (1967 [1979]). Today there is little doubt that his prediction was correct. We live in professionals’ capitalism or knowledge capitalism – in a social system which remains capitalist but is increasingly controlled by knowledge rather than by capital. The central characteristics of the capitalist system – market coordination, profit as the basic motive, and capital accumulation with embodied technical progress as the basic means to achieve results – remain valid, but knowledge has become more strategic than the ownership of capital. In the production process, capital goods remain a central factor of production and their ownership a major source of revenue and power, but today they are relatively less scarce than knowledge, than the capacity of dominating technology, of managing modern organizations, and of communicating through the many media. In the political domain, knowledge has always been strategic, but knowledge becoming strategic in the economic realm is a major new historical fact that is necessarily affecting democracy. The major social and more obvious consequence of this change was the rise of the professional middle class, or of a technobureaucratic class, which, today, shares income, wealth, in the private as well as in the public state and non-state organizations, with the capitalist class, while competing for influence or power. The major political consequence is that the emergence of this new class favoured the consolidation of democracy. Democracy is only consolidated when the respective society counts with a large ‘new’ professional middle class, as well as an ‘old’ middle class of owners of small and medium-size businesses. For some time, however, analysts resisted this idea of the emergence of a new social class. First, because the professional

Professionals’ capitalism and democracy

19

middle class, which includes politicians and intellectuals, does not like to be called a new social class, and ‘hides’ itself; second, because to accept the idea of a new emerging social class could entail a loss of power for the capitalist class – something that the left in particular was not prepared to accept, unless such change pointed in the direction of socialism; and, third, because the theory of a new social class, which was rising in the capitalist nations and had become dominant in the Soviet Union, contradicted the standard analysis of social scientists about political power. Yet the increase of the new middle class was so extraordinary that it became impossible not to acknowledge its existence and new relevance. Thus, I will start from the assumption that operational knowledge is the new strategic factor of production, and that the professional middle class shares income and disputes power with the capitalist class. What are the consequences of these new realities? Are we entitled to speak of a professionals’ capitalism, or a knowledge capitalism? Can we have a capitalism in which power and new income may derive principally from knowledge and not from capital? In the affirmative case, does this means that the professional middle class has ‘won’ its fight for power, or that the capitalist class still holds not only wealth but political power? Is the concept of capital still the same, or, given the existence of a new relation of production that I call ‘organization’, should it be revised?1 Can democracy become an effective ‘countervailing force’, in Galbraith’s sense of this expression? How to profit from the advantages deriving from knowledge becoming the strategic factor of production without incurring in its disadvantages? In this chapter, I will suggest some answers to these questions.

2. THE PROFESSIONAL AND THE ORGANIZATION Whenever possible, conventional social science avoids the use of the word ‘capitalism’, preferring more general expressions such as market society or market economy. Nevertheless, capitalism is a strong word and cannot be avoided. Capitalism has been receiving many adjectives as it changes through time. Liberal or classical capitalism, monopolist capitalism, organized capitalism, industrial capitalism, informational capitalism, global capitalism, each one stressing a given aspect. Or, instead of adjectives, some expressions try to suggest that capitalism had been surpassed, given its own success. We would now live in post-capitalist societies, or in post-industrial societies, or in the global society. The fact that operational knowledge is gradually replacing capital as the strategic factor of production seems to corroborate the later approach. Yet, although relevant, the strategic factor variable alone does not define the social and economic natures of the capitalist system.

20

Changing capitalism: shareholders versus managers

Capitalism does not need necessarily to be capitalism of the bourgeoisie, it may well be capitalism of the professional or, more directly, knowledge capitalism. Capitalism was originally defined by Marx as the economic and social system where the means of production are historically separated from workers, giving rise to a capitalist class or bourgeoisie, which holds capital (the private ownership of the means of production), and to a salaried class of workers or proletarians. Capitalists are motivated by profit or the plus value, which is achieved in the market through an exchange of equivalent values. In order to make profits, entrepreneurs accumulate capital and innovate, incorporating technical progress into the process of production, and hire workers who sell their labour in the market as any other merchandise. Defined in these general terms, twenty-first century societies continue to be capitalist, despite the enormous change that they have experienced. The economy continues to be essentially coordinated by market competition. The profit motive remains central, and capital accumulation with incorporation of technical progress remains the means by excellence to achieve profits. Yet as organizations replaced family firms as the basic unit of production, and as operational knowledge became the new strategic factor of production, the control of production changed hands. Classical capitalism was obviously capital’s capitalism; professionals’ capitalism, however, is when capital and organization get associated. As Berle and Means (1932 [1950]) remarked long ago, a major separation of control from the ownership of corporations took place in modern capitalism. Everywhere managers or professionals replaced stockholders or the capitalists in running productive organizations. I have already used ‘technobureaucrat’ instead of professional but it is a long word with negative connotations. ‘Bureaucrat’ would be an alternative, but it is often limited to the public sector. Despite its shortcomings, I would rather use the expression ‘professional’ than ‘manager’ as the modern expression for bureaucrat including private bureaucrats. The expression ‘manager’ would also be adequate in so far as the manager directly controls organizations. But our social actor may be a professional who dominates technical problems, or who operates within communication networks. If he works for business organizations, he will be a private manager or professional; if, directly for the state or for non-profit organizations, he will be a public professional or public officer – public professional includes the ones working for nonprofit organizations, while the public officers work for the state as elected politicians, or non-elected civil servants. Intellectuals and scientists are also within the broad category of professionals. Professionals, as the other social classes, are organized in strata (Bresser-Pereira 1981b): although I speak of a professional middle class, because the great majority of the professionals belong to the middle class, there are also highly paid executives, who are more

Professionals’ capitalism and democracy

21

properly part of the upper strata, as well as low-level bureaucrats who are more properly located in the lower class. The professional takes decisions, defines institutions, organizes production, creates networks, develops new knowledge, propagates or challenges values and beliefs, having as legitimacy not tradition, nor capital, but knowledge. This distinction between capitalists and professionals may always be questioned with the argument that from the modern capitalist entrepreneur is required not only capital and the capacity to assume risks, but also the knowledge from which derives innovation. Yet the ultimate legitimacy of the capitalist derives from capital, not from knowledge. It is also true that Schumpeter’s classical definition of the entrepreneur says that ‘capital’ is not the ownership of the means of production, but credit – the capacity to finance innovation. But in offering this definition of entrepreneur, Schumpeter (1911) was anticipating history, he was suggesting the type of individual entrepreneurship that, together with the collective entrepreneurship in large organizations, would be the typical professionals’ capitalism.2 It is true that, as an end result of his entrepreneurship, the professional, the knowledge person, will also become a capitalist. But this does not change the basic source from which he achieved wealth. In classical capitalism we had just two social classes, if we ignore the aristocracy or the land owners, whose role faded out with the rise of capitalism. In modern societies we have three social classes – the capitalist class, the professional middle class, and the working class. To have two ruling social classes makes no sense if one adopts an orthodox Marxist approach. Not being a Marxist, nevertheless, in my previous writings on this subject I offered a solution to the problem. First, I contrasted ‘pure’ capitalism to a ‘pure’ statist or technobureaucratic mode of production, which would have ‘organization’ as the specific form of property. Second, being probably more faithful to Marx than official Marxists, I defined modern capitalism as a mixed social system, as a social formation which was predominantly capitalist but secondarily technobureaucratic (Bresser-Pereira 1977, 1981a). In the statist mode of production capital ceases to exist, to the extent that private ownership of the means of production disappears, capital being replaced by organization, i.e., by the collective control of bureaucratic organizations by the professional middle class. They do not hold ‘legal’ ownership over the business enterprise and all other forms of organization, but ‘effective’ ownership. While in capitalism, property is private and individual, in statism it is collective. While in capitalism each capitalist either owns directly the means of production, or a proportional part of it in the form of stocks, the manager or professional cannot say that he owns a business enterprise or even a given part of it. He ‘owns’ the bureaucratic organization to the extent that he occupies an executive or staff position in the organizational hierarchy, he participates in

22

Changing capitalism: shareholders versus managers

the management of the organization, and often uses its resources to his own benefit. In professionals’ capitalism, top executives in the state and in the large business enterprises are able to define their own remuneration. In business enterprises, theoretically the board of directors does that, but often these boards are controlled by managers rather than by stockholders. In the state, senior public officers, elected and non-elected, often have a similar power, but their pay is considerably smaller. The fact that managers do not hold legal ownership but, instead, de facto collective ownership of the organization obviously reduces their capacity to fully define their revenue. They constantly have to justify their actions, or to explain their remuneration in market terms. Whereas the capitalist is free to make use of their property for their own benefit and that of their family, even the nomenclature in the predominately state-controlled social formations such as the Soviet Union had definite limitations to their attempts to appropriate economic surplus. Professionals’ property is not inherited, while capitalist and pre-capitalist property is. The new professional middle class has to adopt various strategies to transmit its class positions to its sons and daughters, while this process is relatively automatic in the case of the capitalist and principally of the aristocratic classes. This means that organizational ownership is less defined and less authoritative than capitalist ownership. It means that the organization is a relation of production which offers less stability to its proprietors than capital does. And it explains why social mobility tends to be higher in professional’s capitalism than in liberal capitalism. In professionals’ capitalism, the meritocratic ‘ideal’, which was the dream of a certain kind of naïve American liberalism, turned into a not so ideal reality.3 Pay within the organization is contingent upon the relatively unstable position held by each individual. The position, in turn, derives from the monopoly on technical, organizational, and communicative knowledge that the professional has or purports to have. It originates in the bureaucrat’s real or assumed technical and scientific knowledge, on his or her ability to manage bureaucratic organizations, and on their capacity to create networks and communicate values and ideas. In terms of social justice, there is a meritocratic improvement – but such improvement is far from being ideal given the fact that the pay of top executives has become extremely high, and income does not get even but often concentrates. Merit and organizational power have become so interrelated that it becomes difficult to know which criterion is prevalent. Yet, despite all these changes, the system remains capitalist in so far as it is a market system, where profit is the motivation, the rate of profit or the discounted cash flow return on investment is the criterion of success, and capital accumulation with incorporation of technical progress is the means to

Professionals’ capitalism and democracy

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achieve profits. Peter Drucker (1993, p. 8), who coined the expression ‘knowledge society’, insists that the era of capitalism is over and that the new society is a post-capitalist society. Repeating Galbraith, but using a new expression, he says that ‘the means of production is no longer capital, or natural resources (the economists’ “land”), nor “labor”. It is and will be knowledge. … Value will be created by productivity and innovation.’ He is right in stressing the new role of knowledge, but wrong in not understanding that the essential and surprising characteristic of contemporary capitalism is that it ceased to be capitalists’ capitalism to become professionals’ capitalism. Power and privilege, that in aristocratic societies was assigned according to blood and military force, and in liberal capitalism, allocated according to wealth and entrepreneurship, is today increasingly distributed according to knowledge. Wealth and principally entrepreneurship, continue to have major roles, but today the latter already depends more on knowledge than on the ownership of physical capital. Entrepreneurship always depended on both factors, besides the basic one – the innovative character and need-achievement orientation of the entrepreneur – but today it is increasingly improbable that people not endowed with technical, organizational and communicative knowledge will become major entrepreneurs. The typical capitalist entrepreneur is either the young man or woman who gets out of the university with a bright idea, or the experienced manager of a large business company who starts his own business. Summing up, the social system remains capitalist, but capitalism is professional or knowledge capitalism.

3. THE CONCEPT OF CAPITAL The classical definition of capitalist action, which defined the commercial revolution, was capital accumulation. With the industrial revolution, capital accumulation with incorporation of technical progress became the defining characteristic of the economic system. Today, these two activities remain crucial, and the second one – technical progress – is also the essential part of knowledge capitalism, but a third major element is included: the expansion of the bureaucratic organizations and of the networks through which they operate. If the capitalist accumulates capital, the professional middle class accumulates organizations and networks. The objective is to expand the bureaucratic organization, to create new bureaucratic positions, to accumulate organizational power which depends on the number and character of the subordinated positions in the hierarchical organization, or on the nodes in the personal and organizational networks. The professional, in contrast to the capitalist, is not so much concerned in becoming rich, but in moving up higher in the organizational hierarchy, and in expanding it.

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Changing capitalism: shareholders versus managers

In order to reach his or her goals, the knowledge person must bring about greater efficiency or productivity to their organization. This is the basic criterion which legitimates their position. This is how he or she will be judged by their superiors, their peers and their subordinates. The legitimacy of the professional middle class depends on the real or presumed ability to continually increase productivity as well as the monopoly it holds over technical, organizational and communicative skill. In a world increasingly geared to economic development, where workers’ and professionals’ remuneration depends upon the overall productivity of the economy, those who demonstrate ability to administer bureaucratic organizations and networks will be in power and will control a substantial share of the national income. Thus, organization is now a central factor in capitalist societies, side by side with capital. In modern societies the control of organization is as important as control of capital. Power and income depend on the control of capital and of organization, and operational knowledge is the major tool toward both. I am calling this new form, capitalism assumed, knowledge capitalism or professionals’ capitalism, but I could as well call it organizational capitalism. In this sea of change to which the capitalist system is being subjected, the concept of capital itself has changed, and also the form of measuring capital changed. Capital, obviously, should not be confused with the means of production, or with ‘capital goods’. Capital is the property of the means of production. Within this broad definition, however, the concept of capital has been changing through time. For the first classical economists, capital was circulating capital, it was essentially the capacity to hire workers by paying them before the result of their labour could be sold in the market. For Marx, as well as for neoclassical and Keynesian economists, who lived in a time where fixed capital had become the dominating factor, while workers could increasingly dispense with having their wages pre-paid, capital was principally the ownership of plant and equipment. In recent times, when software prevails over hardware, or when operational knowledge becomes the strategic factor of production displacing capital goods, capital is the capacity to derive profits from the command organizations and the knowledge embodied in them. The curious and significant aspect of this definition of capital is that it includes the concept of organization. Capital is only really capital when its owners are also ‘owners’ or able to control the organization. Or, organization is not only the bureaucratic organization, it is also the collective ownership of the means of production by professionals. Organization is for the professional what capital is for the capitalist. Observe that when Galbraith said that technical knowledge was replacing capital as the strategic factor of production, he was referring to the object of the capital ownership, not to capital itself. He was not defining capital as the

Professionals’ capitalism and democracy

25

ownership of the means of production, but adopting the more usual meaning of the word – the meaning that identifies capital with the means of production, or with physical capital. Concomitantly with the transformation of the concept of capital into the capacity of organizations generating profits or positive cash-flows, the form of measuring capital also changed. I am not referring to the complex and inconclusive discussion of the 1960s between the two Cambridges on the value of capital. Economics, in such debates, gets near metaphysics, an approach that does not fit my more pragmatic concerns. I refer to the financial value of capital; to the value of business enterprises. In the times of industrial capitalism, up to the mid-twentieth century, the capital of a business enterprise was measured by its net worth as it was identified in the balance sheet. Some corrections could be made, the value of intangible assets could be considered, the accounting valuation of given capital goods could be adjusted, but, eventually, the value of the enterprise was the sum of total assets less liabilities. While physical capital was the strategic factor of production, measuring the value of a business enterprise by its accountable net worth or by its cash flow return on investment did not vary much. Both measures were relatively equivalent, in so far as one could assume that in normal conditions, and given the tendency to equalization of profit rates (probably, together with the law of supply and demand, the two foundations of economics, independently of the school of thought), the outcome would be approximately the same. Today, such a view is long forgotten, and the value of an enterprise is given by the discounted value of its cash flow. No serious evaluator will consider the old system. What is behind such change? Is it just an improvement in methods of analysis, as non-historical economics assumes, or is there some historical new fact that prompted such methodological change? The relation of this change in the form of measuring capital to Galbraith’s new strategic factor of production is quite obvious, and twofold. First, knowledge embodied in the organization’s personnel, in software, and in the organization itself is today the more important asset of many corporations, and an important asset for all. Thus, it makes no sense to measure the value of a company by its net worth. Second, after operational knowledge became strategic, financial market analysts verify every day that the value of a corporation varies dramatically according to the quality of its management. A new chief executive officer, a more competent, or an incompetent group of executives running a business enterprise may change its cash flow and profits dramatically in a relatively short period. In this circumstance, the old net worth concept stops making sense, while the cash flow measure of the value of capital becomes the only rational possibility. Thus, in so far as the cash flow of a corporation depends heavily on the quality of its top management, the value of capital depends

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Changing capitalism: shareholders versus managers

on the technical, organizational and communicative knowledge that this management controls. This explains why top management sees its income and power increase every day. It also explains why stockholders’ influence is being systematically reduced. It also perversely explains why abuse and corruption, particularly in the form of fake accounting statements, as happened with Enron, became so common in contemporary professionals’ capitalism, leading Galbraith to speak about ‘the economics of innocent fraud’ – the title of his last book (2004). The extraordinary remuneration of top executives, in the form of bonus and stock options, depends on the performance of the executive. Thus, to forge good results is a temptation which many are unable to resist. This strategic role of top management, coupled with a still limited supply of managers or, more broadly, professionals, despite the enormous increase of graduate courses in business administration and correlated areas, and the striking acceleration of technical progress embodied in the digital information technology, also explain the concentration of income that characterizes contemporary capitalist economies since the mid-1970s. (This issue of the managers’ remuneration is also studied by P. Petit, Chapter 2 and by L. Mampaey and Claude Serfati in the case of armaments CEOs, Chapter 15.) Besides changing the way of evaluating capital, knowledge capitalism suggested the definition of a new type of ‘capital’ – human capital. The two neoclassical economists who formulated this theory (Schultz 1961, 1980; Becker 1962, 1993), assured themselves the Nobel Prize in Economics. And they merited it, because, instead of just using the hypothetical-deductive method, they acknowledged the existence of a new historical fact: that knowledge had become similar to physical capital, and that the investment in education is how individuals ‘accumulate’ such an asset and from it derive earnings or returns. What they did not stress was that the education of many individuals, the generalization of education to a whole society, brings positives externalities, bringing up spillovers and crossovers that open room for innovation and increase in efficiency at a social level, in such a way that the total human capital created is greater than the sum of the capitals accumulated by each individual.

4. DEMOCRACY AS A COUNTERVAILING POWER In the preceding sections we verified that, within organizations, the rise to power and prestige of men and women endowed with strategic operational knowledge had major economic consequences, including a change in the concept and measurement of capital. Yet the political consequences are not so

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clear. Did technobureaucrats lose or gain power in relation to capitalists? Did the people, or the collective of citizens, lose or gain power in relation to capitalists? In relation to capitalists, the professional middle class certainly gained power, but it is far from having achieved more political power than capitalists. This only happened in the statist economic system, but we know that this has been a temporary outcome. In knowledge capitalism, the professional middle class is basically associated to the capitalist one, as the bourgeoisie was, for centuries, associated to the aristocracy. But it is obvious that the capitalist class fears the rise of the professional middle class, particularly when this happens at the level of the state apparatus, of stateowned organizations, and of non-profit organizations. The neo-liberal ideology that rose in the 1970s in the developed capitalist countries as a reaction to the fall in the rate of profit and of the rate of growth of GDP that took place in this decade, was not directed to reducing workers’ direct and indirect wages: it aimed also to reduce the professional middle class’s salaries and political influence. This ideology, which counted with the active cooperation of organic intellectuals – that is, the intellectuals who support the ideas and actions of the representatives of public and private powers (Gramsci 1934 [1971]) – and of other professional middle class representatives (what shows that this class is far from being united), was successful in achieving its objective, but this is just a chapter in a long-term process of conflict and cooperation between the two social classes. Yet, in the twentieth century, with democracy becoming the dominant political regime, the capitalist as well as the professional middle class lost political power, while politicians and, to a certain extent, citizens that they represent, gained it. Politicians, however, are essentially professionals, elected officials receiving salaries from the state. Thus, they mostly belong to the professional middle class. But, in contrast to non-elected civil servants, they depend on citizens, on voters, to achieve political power. In the absolute state, by serving as staff of princes or monarchs, patrimonial bureaucrats had more power than in the nineteenth century, when their successors, the professional civil servants, collaborated with liberal politicians. Democracy in the twentieth century implied an increasing demand for accountability from elected and non-elected public officers, involving a reduction of the political power of bureaucrats, but increase in the power of politicians. Although politicians divided themselves between right and left, the former representing principally the interests of capital, the later, of knowledge, the capitalist class always regards the political class suspiciously, and the charge of populism is always ready.4 The increase in size and complexity of the state organization made their operational knowledge strategic, and increased their political power. The creation of autonomous regulatory and executive agencies, and the rise of

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public management reform after the 1980s reflected this new reality. But, at the same time, as I stress in a recent book (Bresser-Pereira 2004), this augmented autonomy required from senior civil servants an increased accountability and gave rise to a myriad of social accountability organizations which can only flourish in a democratic environment. While it is clear that top executives of private organizations saw their power and prestige skyrocket in the twentieth century with the transformation of knowledge into the strategic factor of production, with the parallel rise of democracy it is difficult to say if, eventually, senior civil servants will see their power and influence increase. It certainly increased within the state apparatus and the public non-state organizations, but it is doubtful that the same happened in political terms – that they became more influential in policymaking – in so far that democratic control over them by internal accountability mechanisms, by the media, and by social accountability organizations does not cease to augment. In comparison, today politicians have more power than they had in the past, but this power does not originate solely in the fact that the knowledge requirements for them are higher than in the past (this is also true for all other professions). It derives principally from their capacity to play the democratic game. Politicians, as with senior civil servants, are also increasingly made accountable through democratic mechanisms, but, unlike regular civil servants, their power’s legitimacy comes from elections and the continuous support of public opinion. Using Galbraith’s concept, democracy acted as a countervailing power to the power of professionals and capitalists – more, however, as a countervailing power to capitalists’ power, because politicians are not typical professionals but are a sort of professional. This is a second instance in this chapter, where we observe a lack of ‘correspondence’ between two historical variables which presumably should be consistent. First we saw that capitalism is turning into a social system which is not primarily controlled by capitalists but by professionals. Now we see that knowledge people may see their power increase within business enterprises and other organizations, but possibly decrease in the political realm. Why? Because the twentieth century, besides been the century of organization, was also the century of democracy. Because it was only in that century that democracy became the preferred regime of philosophers and politicians. Because only in the twentieth century, first, the more advanced societies, and, later, a large number of developing ones, became effectively democratic. The historical new fact that prompted such change was the capitalist revolution which changed the form of economic surplus appropriation from the violent forms of pre-capitalist times to profit achieved in the market. From this moment the new ruling class ceased to impose an absolute veto on democracy. But, after this revolution, a century was necessary – the liberal

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nineteenth century – to persuade capitalists that universal suffrage would not entail the expropriation of the rich by the poor.5 Given the rise of democracy, this second ‘inconsistency’ is not so surprising. The classical correspondence between the economic and the political spheres, which Marx so acutely detected in the nineteenth century, and that is implicit in most non-Marxist contemporary social thought, lost part of its validity. The strategic factor of production is a source of power, but principally of ‘direct’ power – the power originated in the production process. Marxism established an almost direct relation between the control of the strategic factor of production and political power. In pre-capitalist societies it was the land, in capitalist ones, the capital. Yet, this relation was never so straightforward. Land was a source of power, but it was also the command of military power. In classical capitalism, the control of capital was the key to political power, but it is a simplification to believe that government officers were merely their representatives. In knowledge capitalism, all sort of professionals gained power and influence, but the rise of democracy imposed limits to their discretionary power. The democratic revolution involved the autonomy of politics in relation to the economy, and of political power in relation to the control of the strategic factor of production. Economic interests and the ownership of capital and knowledge continue to play a major political role, but the relative autonomy of the political realm is a new and auspicious fact. It suggests that economic and political developments are complementary but increasingly independent phenomena.

5. ALLIANCE BETWEEN PROFESSIONALS AND CAPITALISTS Despite the advance of democracy, we should not easily dismiss the control of knowledge as a source of power. In some areas, power derives essentially from it. And it becomes particularly dangerous when professionals get associated to capitalists. Take, for instance, macroeconomic policy, which plays a strategic role in all contemporary societies since economic stability and also growth depend heavily on it. Although such policy affects everybody in a modern society, the financial sector has today a privileged role in its determination. In principle, this power is the prerogative of central banks and finance ministries, but, in practical terms, private financial institutions have a decisive say on the matter. Why? Is it because Hilferding’s ‘financial capital’ is all powerful? – clearly not. According to Hilferding (1910 [1963]), ‘financial capital’ was the outcome of the merger of banking with industrial capital under the command of the former. In the beginning of the twentieth century this phenomenon was taking place in Germany, but it was not

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reproduced in the other countries, and even in Germany it came to a halt. Is it because commercial banks have a strategic role in modern societies, where money has lost its classical connection with physical wealth, and became a convention, fully depending on the credit that each national currency disposes? This is a better answer, but not the whole story. Financial institutions also have substantial capacity to influence macroeconomic policy since they have greater knowledge on the subject than other sectors of the economy, as they hire a large number of competent macroeconomists. They do that because macroeconomic policy, the decisions the government takes on the interest rate, exchange rate, money supply, and fiscal policy are the bread and butter of financial institutions. To competently invest their own resources or their clients’ assets they must make predictions every day on such issues. If we compare the number of macroeconomists able to express opinions on macroeconomic policy hired by the financial sector with other sectors of the economy, including government, we will see that conventional macroeconomic knowledge is concentrated in it. It is often a biased knowledge, organized according to the interests of rentiers and the financial sector, but it is effective knowledge. Thus, it is not difficult to understand the disproportional power that the financial sector has on macroeconomic matters – disproportional to the total capital that business enterprises in this sector hold, but proportional to their specialized and often biased knowledge. This example illustrates not only how political power can originate in knowledge, but also shows how this power can be increased when capital and knowledge, capitalists and professionals, are associated. Conservative groups within each nation-state engage in such an association to exert power in terms of control of public policy. Since they cannot exert direct domination based on capital, they use knowledge, that they rapidly label ‘scientific reasoning’, to legitimize their views and interests. Such knowledge is ideological, but it is often viewed as more ‘reasonable’ than the critical views coming from the left or the progressive sectors of society, because it is the outcome of a sophisticated theorizing by economists who are part of the domination system. This knowledge often privileges rentiers and the financial industry at the cost of the real sectors of the economy, but since the critiques coming from the opposing groups are frequently deprived of the necessary technical knowledge, or originate in a competent but very small knowledge group, the probability that the financial sector’s views prevail is great. In Brazil, where macroeconomic policy is particularly strategic in so far as the country has faced chronic macroeconomic instability since 1980, the power of the financial sector is particularly great. And the policy mistakes made with its active support are impressive. Between 1995 and 1998, for instance, it supported an over-valued exchange rate which proved disastrous to the

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Brazilian economy. Presently, it supports the adoption by the central bank of an extremely high basic interest rate, which only benefits rentiers. In principle, a democratic regime should be able to control the central banks and other regulatory agencies whose decisions have powerful consequences over society and the economy. Up to the present, however, a democratic process has not prevailed in these matters because they are both ‘highly technical’ and dangerously strategic. Thus, politicians and the voters they represent abdicate the control over such agencies in the name of the lack of the necessary specialized knowledge. In fact, these matters are often less complex than it is said. Interest and exchange rates policy may have very sophisticated mathematical models behind, but often simple and pragmatic reasoning proves to be more consistent with economic stability and growth. Regulatory agencies, including central banks, are often captured by the respective regulated industry, but their ‘independence’ from politicians will be kept while knowledge remains concentrated in the regulated sector. Politicians themselves feel more secure by granting such independence when the agency is really as strategic as central banks are. The modern corporation, whose central role in contemporary society, Galbraith so acutely discussed, is essentially the epitome of the association of capital with organization, of capitalists with professionals, and probably for that reason it is so strong. In general, private professionals tend to be closely associated to capitalists around the large companies. That is why, in political terms, public professionals are more noteworthy. They also associate themselves with capitalists, but to a lesser extent. They have an autonomy that private professionals lack. Their technocratic ideology based on the claim of a superior efficiency is more consistent than that of private professionals. On the other hand, the fact that they work directly for the state organization allows them a more straightforward public ethos. They work for the public interest, or they are supposed to do so. Thus, when we say that we have three basic social classes in modern capitalism, and that they establish among themselves association and conflict relations, we refer to the capitalist class, the working class and principally the public professional class. The latter acts as a kind of intermediary between the other two classes, while at the same time they have their own interests very clear. While the private professional middle class is always associated with the capitalist one, the public professional middle class associates itself with one or other, or with both, in various ways. After the Second World War, public professionals primarily associated themselves with works in building the welfare state. Thus, in the 1970s, when the profit rate and the rate of economic growth fell, the neo-liberal response aiming at reestablishing both rates was aimed against this association. The objective was to reduce the size of the state, professionals’ salaries and workers’ wages. In the 1930s, Keynes

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realized that there was a less conflicting alternative – to expand the economy through fiscal policy – but such alternative was not effectively available in the 1970s, given that, unlike the 1930s, the nation-states were facing serious fiscal crisis. Keynes’s macroeconomics is a general advance in economic thought, but involved policies to restore the rate of profit and employment which depend on healthy public sector’s finances.

6. IDEOLOGIES While there is a capitalist ideology, based on economic liberalism and the entrepreneurial role of the capitalist, there is a professionals’ ideology based on instrumental rationality and on the claim of superior efficiency of bureaucratic organizations, or of the administrative coordination of the economic system. On certain occasions these ideologies, respectively supported by neoclassical economics and the bureaucratic or statist theory of the planned economy, are at odds. They have never been more in conflict than during the Cold War, when liberal capitalism confronted the Soviet Union’s bureaucratism or statism. When both groups and their respective ideologies are strategically associated, as happened in the developed world during the 1970s, when capital and knowledge come together, we may have, in the ascending phase of the long economic wave, a strong process of economic growth that will interest all. Yet, in the declining one, a process of structural reform aimed at restoring the rate of profit and resuming growth will materialize that will rather serve capitalists than professionals. The neo-liberal ideology, which emerged in the 1970s, together with globalism, was, at national level, the expression of this conflict. While the objective of globalism, at the international level, was to neutralize the newly industrialized countries (NICs) by weakening the respective nation-states, neo-liberalism was a domestic response to the fall of profit and growth rates that happened in the 1970s, and its aim was to reduce real direct and indirect wages by weakening the domestic state organization that supported labour and the welfare state. Globalization is a real historical phenomenon involving technological, economic, cultural and juridical aspects. But it is interesting to observe in the developed countries, and particularly in the United States, how the association between the capitalist and the professional class was instrumental in protecting their national interests in relation to the threat represented by the NICs. Since the implicated economic interests were huge, politics and ideology had a major role. Globalization became apparent in the 1970s, in the same decade that the NICs emerged exporting relatively sophisticated goods produced by cheap labour. How did the rich countries, and particularly Washington and New York respond to such a threat? While domestically they responded to the

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fall of the rate of profit with neo-liberalism, internationally they responded with the ‘globalist’ ideology. Such ideology turned nation-states interdependent in such a measure that they became really irrelevant. Now, in this borderless and competitive world, nation-states would face, in the expression of one of its brightest ideologues, Thomas Friedman (2000), a ‘straightjacket’, so that they have no alternative but to copy the American model of growth. By successfully exporting this ideology, which was the combined outcome of the capitalist and the professional classes’ ingenuity, the developed countries under the leadership of the United States were able to weaken the Latin American NICs. They were less successful in Asia, where governments’ commitment to the national interest proved to be more resistant to the new truth coming from the developed countries. In fact, with globalization the countries became more interdependent, and business organizations compete at world level. However, what globalists forgot to mention was that globalization is the generalized competition at world level of business enterprises supported by their respective nation-states. Thus, the nation-state remains highly strategic and relevant, given its role of supporting national corporations. Yet instead of challenging the highly ideological claim that the nation-state had lost relevance, many progressive intellectuals limited themselves to lamenting this fact, or to attacking globalization. This is, again, an example of how insufficient or incompetent knowledge on the part of the progressive groups held back the necessary critique of the ideological claims issued by conservative groups associated with middle class professionals. Yet neo-liberalism is already fading out in developed countries. It succeeded in curtailing the previous excessive state intervention and in restoring the rates of profit and growth, which was dangerously reduced in the 1970s, but it was unable to offer a sensible alternative to two major achievements in modern democracies: macroeconomic planning and the welfare state. That it is the reason why, not considering privatization but only the state apparatus stricto senso, neo-liberal reforms were unable to reduce this tax burden, and, so, the size of the state organization. On the other hand, globalism is being increasingly criticized in developing countries, particularly in Latin America, where it became dominant in the early 1980s, as it dramatically failed to promote economic growth. It is true that the only way to economic growth is capitalist, but we know that there are many varieties of capitalism besides the one based on foreign savings imposed on the countries that opened their capital account and remain chronically vulnerable in financial terms.6 A demonstration of this fact are the dynamic Asian countries that for decades have continued to grow fast without opening their capital accounts, keeping their exchange rates under control, relatively undervalued, and combining market competition abroad with effective administrative and market coordination of the economy domestically.7 In fact, knowledge

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capitalism is effective in protecting the rate of profit, because without it stability and growth are not possible, but it can also destroy some major institutional achievements such as the welfare state and macroeconomic policy. The welfare state assures social stability and political legitimacy. Economic policies complement the market coordination of the economy, on one hand by defending market competition and correcting resource allocation, and on the other by smoothing the cycle and stimulating investment and growth.

7. CONCLUSION In conclusion, Galbraith’s 1967 prediction that knowledge was replacing capital as the strategic factor of production was corroborated by the facts. This change, together with the substitution of organizations for family firms as the basic units of production, gave rise to a new social class – the professional middle class – characterized by the collective ownership of organizations. Yet, the emergence of the professionals’ class did not imply the rise of a new social system, nor involve the concentration of political power in the hands of the new class. The economy remained controlled by the market, and oriented to profits, thus, capitalist. Yet instead of classical capitalism, what we have is a professionals’ capitalism – a capitalism where the new class simultaneously shares income and power with capitalists while fighting particularly for power. The attempt by the new class of implanting a command economy was successful in achieving forced savings and promoting or consolidating initial industrialization, but the pure statist arrangement failed in the Soviet Union. On the other hand, the rise of democracy in the twentieth century represented a major check to the authoritarian tendencies of the new class, and to the power of both the capitalist and the professional middle class. Today, modern capitalist economies are mixed, not only because capitalists and professionals or knowledge people share power and income, but also because the coordination of the economic system is not based on a strong market and a minimum state, as neo-liberals dreamed, nor on a strong state and a weak market, as statists envisaged. Instead, it is founded on strong markets, because it is competitive and based on a entrepreneurial capitalist class, and on a strong state, in which elected and non-elected representatives of the professional middle class are able to organize collective action democratically and efficiently. This market is never so competitive, and the state is never so efficient and democratic as we would aim, but enough to keep economic and political development going. Knowledge capitalism is part of the development process that modern societies have experienced since the capitalist revolution. Such economic,

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social, and political process is complex, contradictory, sometimes expensive, often unjust, but, anyway, progress. Despite all the drawbacks, professionals’ capitalism represented advancement in relation to classical or liberal capitalism. Not only because this form of capitalism is more efficient than the previous one, but because it is more consistent with democracy and with a more even distribution of income. The essential reason for that probably lies in the fact that knowledge is more accessible to the lower classes than capital. Although knowledge may also be ‘inherited’, and, in moments of extremely fast technological progress, it may imply income concentration as demonstrated, it is more difficult for the rich to transfer knowledge to their children than capital. With professionals’ capitalism, social mobility is higher, and equality of opportunity is a less utopian goal in knowledge than in classical capitalism. I know that this is an optimistic view that has been called into question during the last 30 years in terms of distribution of income, in so far as the supply of knowledge people was smaller than markets demanded, and salaries increased more than wages. But the guarantee of basic education to all, and the enormous increase in students enrolled in universities suggest this long-term optimism is not deprived of realism. This belief in the positive qualities of mixed economies, and the critical view of ‘conventional wisdom’, a term that he coined, is present in most of John Kenneth Galbraith’s work, since American Capitalism: The Concept of Countervailing Power (1957) and The Affluent Society (1958) till The Good Society (1996) and The Economics of Innocent Fraud (2004). He has always been more interested in the corporation than in the state, in the business manager than in the state bureaucrat, but he always made clear that the key for understanding contemporary capitalism is in the interplay of these two entities and their respective agents. And, he always has an innovative view to present. In his last book, for instance, he says: ‘A large and expanding part of what is called the public sector is for all practical effect in the private sector. … Arms expenditure does not occur after detached analysis by the public sector as commonly understood’ (Galbraith, 2004, p. 34). This subject will be dealt with in other chapters of this book, notably Chapter 14 (Jordi Molas-Gallart and Puay Tang) and Chapter 15 (Luc Mampaey and Claude Serfati). In so far as it is a social class, the major weakness of the professional middle class is the lack of a clear political commitment. Their members’ interests are diversified, their associations depend heavily on whom they work for. If we are speaking of professionals working for private organizations, they will easily be associated with the capitalist class. If they work for the state, either as politicians or as civil servants, or for non-profit organizations, they may be more autonomous. In democratic regimes, the members of the professional middle class, instead of just allying themselves with the capitalists, as they often do, or of attempting to become fully autonomous, as happened in the

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Soviet Union, may also ally themselves with the workers and the poor, and display a republican attitude toward the basic citizenship rights and the public interest. If this tendency is confirmed, their political power will probably continue to increase in the future at the expense of the capitalists, but, as a trade-off, they will have to share it with the common people.

NOTES 1. 2. 3. 4. 5. 6.

7.

I developed the concept of organization as the specific relation of production or form of ownership in the statist system in Bresser-Pereira (1977). I first identified collective entrepreneurship as the central form through which innovation and economic development takes place in modern capitalism in Bresser-Pereira, 1962. Lloyd Warner (1953) identifies social mobility, essentially based on capitalist entrepreneurship, as ‘the American dream’. It is interesting to note that orthodox economists, which, for their economic liberalism, are almost always associated with the capitalists, are particularly prone to indict politicians as ‘populists’. This theme is extensively discussed in Bresser-Pereira (2002, 2004). I have been involved in the critique of the growth cum foreign savings (or current account deficits) strategy since 1999. On the subject, see particularly Bresser-Pereira (2001, 2004), Bresser-Pereira and Nakano (2002), Bresser-Pereira and Varela (2004), all available at www.bresserpereira.org.br. Besides some classical works on the Asian economies, as Wade (1990) and Amsden (1989), and even the acknowledgement by the World Bank (1993) of the possibilities of mixed, market and state coordinated economies, see the recent analysis by Dooley et al. (2003) on the new structure of the world economy that is rising, ‘the new Breton Woods’, characterized by three great economic groups: the United States, which grows, involves in consumption, and gets indebted; the ‘trade group’ (the dynamic Asian countries), which keep control of their exchange rate, export, and grow; and the ‘capital group’ (Europe, joined, surprisingly(!), by Latin America), which are concerned with the financial return on investments and grow slowly.

REFERENCES Amsden, Alice H. (1989), Asia’s Next Giant, Oxford: Oxford University Press. Becker, Gary S. (1962), ‘Investment in human capital: a theoretical analysis’, in ‘Investment in Human Beings’, NBER Special Conference 15, supplement to Journal of Political Economy, October. Becker, Gary S. (1964), Human Capital, 3rd edn, reprinted 1993, Chicago: University of Chicago Press. Berle, Adolf and Gardiner Means (1932), The Modern Corporation and Private Property, reprinted 1950, New York: McMillan. Bresser-Pereira, Luiz Carlos (1962), ‘Desenvolvimento e Econômico e o Empresário’, Revista de Administração de Empresas, (4), May, reprinted 1992 na própria RAE, 32 (3) (July), 79–91. Bresser-Pereira, Luiz Carlos (1972), ‘A Emergência da Tecnoburocracia’, in L.-C. Bresser-Pereira, Tecnoburocracia e Contestação, Rio de Janeiro: Editora Vozes, pp. 17–140. (Reprinted in A Sociedade Estatal e a Tecnoburocracia, São Paulo: Editora Brasiliense, 1981, pp. 17–140).

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Bresser-Pereira, Luiz Carlos (1977), ‘Notas introdutórias ao modo tecnoburocrático ou estatal de produção’, Estudos CEBRAP, no. 21, April: 75–110. Bresser-Pereira, Luiz Carlos (1981a), A Sociedade Estatal e a Tecnoburocracia, São Paulo: Editora Brasiliense. Bresser-Pereira, Luiz Carlos (1981b), ‘Classes and social strata in contemporay capitalism’, available at www.bresserpereira.org.br. Bresser-Pereira, Luiz Carlos (2002), ‘Why did democracy become the preferred form of government only in the twentieth century?’, paper presented to the III Conference of the Brazilian Society of Political Science, ABPC, Niteroi, 29–31 July, accessed at www.bresserpereira.org.br. Bresser-Pereira, Luiz Carlos (2004), Democracy and Public Management Reform, Oxford: Oxford University Press. Bresser-Pereira, Luiz Carlos and Yoshiaki Nakano (2002), ‘Economic growth with foreign savings?’, paper presented at the Seventh International Post Keynesian Workshop, Kansas City, MO, 28 June–3 July, accessed at www.bresserpereira.org.br., and in Portuguese in Revista de Economiz Politice, 22 (2) (April), 3–27. Castells, Manuel (1996), The Rise of the Network Society (vol. I of The Information Age), Oxford: Blackwell. Dooley, Michael, David Folkerts-Landau and Peter Garber (2003), ‘An essay on the revived Breton Woods system’, Cambridge, MA: National Bureau of Economic Research, Working Paper 9971, September. Drucker, Peter (1993), Post-capitalist Society, New York: Harper Business. Friedman, Thomas (2000), The Lexus and the Olive Tree, 2nd edn, New York: Random House. Galbraith, John Kenneth (1957), American Capitalism: The Concept of Countervailing Power, 2nd edn, Boston: Houghton Mifflin. Galbraith, John Kenneth (1958), The Affluent Society, Boston: Houghton Mifflin. Galbraith, John Kenneth (1967), The New Industrial State, republished 1979, New York: A Mentor Books. Galbraith, John Kenneth (2004), The Economics of Innocent Fraud: Truth for Our Time, Boston: Houghton Mifflin. Gramsci, Antonio (1934), Selections from the Prison Notebooks of Antonio Gramsci, Q. Hoare and G. Smith (eds), New York: International Publishers, 1971, adapted from material written in Italian around 1934. Hilferding, Rudolf (1910), El Capital Financiero, from the Spanish translation of the first German edition, republished 1963, Madrid: Editorial Tecnos. Schumpeter, Joseph Alois (1911), Theorie der wirtshaftlichen Entwicklung, Leipzig: Duncker & Humblot. Schultz, Theodore W. (1961), ‘Investment in human capital’, American Economic Review, 51 (1), March, 1–17. Schultz, Theodore W. (1980), Investing in People, Berkeley: University of California Press. Wade, Robert (1990), Governing the Market, Princeton, NJ: Princeton University Press. Warner, William Lloyd (1953), American Life: Dream and Reality, Chicago: University of Chicago Press. World Bank (1993), The Asian Miracle, New York: Oxford University Press.

2. From one managerial capitalism … to another Pascal Petit 1. INTRODUCTION * By an irony of fate J.K. Galbraith’s book The New Industrial State was published more or less at the end of the Golden Age of capitalism.1 The accurate description he gives of ‘modern capitalism’, insisting on the role played by the technostructure of major companies, is in considerable contrast to the image of contemporary capitalism dominated by financial logic (see also G. Caire’s contribution, Chapter 5). The distance between the two concepts is formidable! However, if we retrace the history of the developments outlined by Galbraith, we are led, through a sequence of ruptures and continuities, to proceed to a new reading of our contemporary situation. What happened to the power exerted by that technostructure, to that ideology and those political relations on which it rested its primacy? Was the financial deregulation that followed the end of the Bretton Woods system enough to overthrow such power? In what way did their possible reconversion take place? In our stock-exchange euphoria of the 1990s, didn’t we, by mistake, see a takeover by financiers of the sectors in which the evolution was still fairly continuous and strongly centred on the evolution of the managerial world to which Galbraith was trying to draw our attention? Our purpose is to take up Galbraith’s organizational and institutional perspective in order to follow the structural developments that changed that technostructure and conferred on a small group of managers a new role and new powers, going so to speak from one managerial capitalism to another.

2. MANAGERIAL CAPITALISM DURING THE ‘GOLDEN AGE OF CAPITALISM’ ACCORDING TO J.K. GALBRAITH The thesis developed by Galbraith in the New Industrial State is both valid for the strong structuring of his arguments and the examples it contains of the 38

From one managerial capitalism … to another

39

ideas and behaviours of the various players, and especially the entrepreneurs and economists of his time. It gives an edifying account of a dynamic that was due to end after what seemed to have represented a Golden Age. This narrative helps us understand some complexities of the present situation and applies both to the United States and a considerable number of western countries which, after developing their own version of the new industrial capitalism, were, like the USA, faced with financialized capitalism of which they had but a vague understanding. Primarily, the argument postulates that the strong growth of capitalist economies in the decades that followed the Second World War was largely related to the dynamism of the technostructure that led to the massive technical systems to be found in most big companies nowadays. In order to fulfil adequately these huge production and development projects, that technostructure, i.e. the nebulous technological and organizational managerial entity inside the big company, needed both to control its medium/long-term environment and build up a joint entity able to co-operate in the planning of the future. Several conditions made it possible to reach these objectives. First of all, a joint interest around a production project aimed both at increasing market shares and developing high-performing technological systems, these two objectives prevailing over the one of profit maximization. Such an attitude that pushed shareholders’ interests into the background was largely facilitated by the self-financing capacity of these industries. This marginalization of the power of financial capitalism, which is frequently recalled,2 was opposed to the credo of microeconomics that was predominant at the time. Individuals at the head of the technostructure did not make themselves conspicuous, neither in terms of their remuneration nor in terms of their participation in political life. They drew most of their legitimacy first from their education, mainly in the field of sciences, and then from a longlasting cooperation within their business community (little inter-company mobility during their careers). Indeed, for reasons of formal representation – e.g. to shareholders – former top civil servants or high-ranking army officers were authorized to fill some posts, without prejudicing the collegial structure of management. But the foundations of the new system and the driving role of these activities do not stop there. In addition, the competitive relations existing between these companies must not destabilize the overall picture. Therefore, competition is organized between big firms that determine a reference price which makes it possible to achieve the cashflows corresponding to the anticipated medium/long-term investments.3 But this is not enough. In order to validate these prices, an effective demand must exist. The actions taken by such enterprises partly provide for that need by endeavouring to create the conditions of that demand, not only through

40

Changing capitalism: shareholders versus managers

classical advertising but also by using the art of persuasion based on the development of a whole ideology of consuming goods and new technologies (an issue raised by Marlyse Pouchol in Chapter 4). These actions do not exclusively depend on enterprises themselves; they are part of a general evolution of consumers’ perceptions and aspirations supported by public action. One may also consider that all the actions adopted by these technostructures vis-à-vis the demand work toward the same objective. Nevertheless, all this would remain fragile without a much wider macroeconomic support given to demand. As a matter of fact, social transfer policies as well as public investment measures, especially in the military sector, are the last pillar of industrial capitalism. One may say that this is a first version of managerial capitalism insofar as it somewhat represents the destination of a tendency already signalled by Berle and Means in their book The Modern Corporation and Private Property in which they underlined that in 1930, 44 per cent of companies (58 per cent if classified according to their value) had boards of directors that were not appointed by shareholders but by management. And it is a managerial capitalism to the extent that these industries were the driving force of the whole economy through their high productivity gains and the eventual pay rises they could give.4

3. SPECIFIC ‘FORDISM’? Retrospectively, the description given by Galbraith of the period of American economy, qualified as ‘Fordist’ by some authors, seems rather accurate. In particular, he distinguishes some major oppositions and contradictions that will play an important role in the following decades. First of all, there exists a huge sector mainly composed of small and medium-sized privately-owned enterprises that do not at all meet the above-mentioned conditions: they do not master their prices or control their markets, and they remain dependent on immediate profitability, even if the weight of that ‘immediately merchant’ sector is not mentioned with precision. Moreover, even among big companies, some remain dominated by strong individuals who have played a key role in their development and totally refuse to adhere to the organizational principles above. Henry Ford is the first among them, in terms of conditioning the demand, increasing production or pricing goods in agreement with competitors.5 Such a diversity inside the entrepreneurs’ group further complicates the necessary role of public intervention in the ‘model’, both as regards the regulation of revenues and public procurement. Galbraith mentions the climate of hostility towards public intervention that persisted during the whole period, largely fuelled by the community of economists. The key question that enables going beyond that opposition seems to depend

From one managerial capitalism … to another

41

effectively on a certain level of consensus around military expenditures. At that ideological level (as well as at the level of direct participation in political life), technostructures adopted a cautious position. Once again, the legitimacy they obtained vis-à-vis universities due to their technological advances and the jobs they offered in these sectors, enabled them to compensate to a certain degree, a persistent anti-interventionism. However, their relations with universities also included some contradictions. The first and most virulent contradiction at that time was related to the huge number of companies involved in the arms business, which hurt the anti-militarist feelings resulting from the Vietnam war.6 The second contradiction, noted by Galbraith, was longer term: it was the tendency of technostructures to manipulate demand by creating needs, thus distorting the expectations of more and more educated consumers who were rather reticent towards what Galbraith calls ‘bamboozlement’. This being said, The New Industrial State gives rather little room to scientific management, namely the process of scientific organization of work in which the technostructure itself is a component. In fact, that process corresponds to a separation between what is design and methodology, on the one hand, and execution tasks, on the other. This policy nevertheless leaves many alternatives in order to achieve productivity gains, and distribute them. The model described by Galbraith has privileged, to the extent possible, economies of scale achieved by a certain Taylorization of tasks, all the more easily accepted as wages largely benefited from productivity gains. In big enterprises that streamlining was accompanied by a major internal shift from hierarchical functional organizations (U firms) to a division by product centres (M firms). This development made it possible to keep in better touch with demand. It is possible to follow the steps of that diffusion, differently delayed in the various OECD countries (see Figure 2.1), over the whole period 1947–87. On the other hand, one may question the general character of the model described by Galbraith. In terms of the ideological and political debates alluded to by the author, it is strongly American. Mainly, the necessary articulation between actions taken by the state and those adopted by technostructures evokes different constructions of the state and its relations with economic activities. In this respect, the constitution of welfare state systems is fundamentally differentiated. Nevertheless, many aspects are shared by developed countries that characterize the common basis of what has sometimes been called the ‘fordist growth’ system. The organization of the big corporation and mostly the development of socio-professional middle management categories belong to that common stock.7 Nevertheless it remains that the United States played a specific role in the worldwide coordination of the development of these national models, and that the crisis of the 1970s resulted above all from its inability to assume that role for a longer time.

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Changing capitalism: shareholders versus managers

90 80

Britain

Percentage

70

Japan

60

Germany

50

France

40 30 20 0

1932 1947 1948 1951 1953 1955 1957 1932 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987

10

Source: Kogut (2000).

Figure 2.1 Diffusion of the multidivisional structure in certain European countries and Japan.

4. THE RETURN OF FINANCE IN THE 1990s The situation seems totally different 30 years later. An experienced observer following the evolution of practices and rhetorics in the field of corporate governance, would only note that inversion in an environment in which the major players are not very different from those operating 30 years before. Let us give an explanation. The change of course is obvious. The rules of good governance that have seemed to force themselves upon company managers for at least ten years are mainly financial. The obvious objective is to ensure the best profitability of the capital invested in the company. This maximising shareholder value rule even goes beyond any logic since it imposes as a general rule the achieving of a profitability superior to the financial market average.8 Therefore, it implies more risk, with winners and losers, and entails heavy consequences for a real economy in which the new mobility of capital involved favours the creation and destruction of enterprises and institutions on a national scale, but mainly shortens the perspectives of the firm by compelling it to aim at fast profit in order to avoid the sanctions of the market. This short termism is totally opposed to the logic that motivated managerial capitalism (first version) in which everything aimed at extending the horizon of the actions taken in order to develop sophisticated and long-term projects.

From one managerial capitalism … to another

43

At first glance, one might believe that this financial boom is the direct consequence of a deregulation of financial markets, thus triggering competition and prevailing over industrial capital. It is erroneous to believe that the sudden development of the financial sector is the main cause of inversion. We shall see that such an inversion is largely ‘endogenous’, it logically follows the strategies applied in the previous model in an environment that it, maybe unwittingly, created itself. But before coming to facts, to the chain of multiple causes, it is useful to recall, in the context of ideological conflicts, rightly noted by Galbraith (ideological preconceived ideas on the virtues of the market and misdeeds of public interventionism) that the takeover by the financial sector had its propagandists and, in the first place, Milton Friedman, the intense enemy of J.K. Galbraith.9 The attack waged by Friedman aimed essentially at praising the freedom of choice granted by markets, which Galbraith wrongly opposed, according to Friedman. The publication in 1979 of ‘Free to choose’ marked a turning point and serves as a source of inspiration for the liberal populist revolutions of Reagan and Thatcher and the huge movement of deregulation, in the first place in the financial sector. Incidentally, that liberalization also paradoxically alleviated the anti-trust measures that limited the concentration of enterprises, thus strengthening the oligopolistic structure of the economy, but in a totally different context resulting from a greater mobility of capital and a considerably increased international opening. However, and above all, the new aspects of that ideological offensive found their expression in the development of a normative literature concerning property rights and agency theory. A host of eloquent considerations were used to show that economic efficiency and collective well-being require that capital suppliers keep control over company managers. This normative approach, extracted from the contexts in which capital used to be justified, was nevertheless used to introduce change to management criteria as if they represented the victory of shareholders, the end of a deviation that appeared with the birth of the big modern enterprise during the first quarter of the twentieth century.10 This ideological dimension is even more surprising insofar as the period was also characterized by an ample diffusion of stockholding under the joint pressure of a ‘structural’ increase in savings, of which pension funds are a major aspect (with the enrichment and ageing of populations) and of the popularization of that type of investment orchestrated both by privatizations (certainly more important in some European countries compared to others) and the publicity given to the restoration of shareholders to favour, if not to power. Few complaints were made by shareholders concerning the lack of transparency and their weak capacity to have any impact on the situation

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Changing capitalism: shareholders versus managers

(whether we talk of mergers and acquisitions or the distribution of stock options about which very few ‘small’ shareholders ever believed that they would contribute to increase their capital!). These complaints had little weight in the face of the euphoria triggered in the 1990s by the wave of stock exchange speculation. The explosion of the bubble hardly enabled them to assess their situation. It is rather the predatory behaviour of some leaders that enabled them to better understand that there are different types of shareholders.

5. MANAGERS AT THE HELM The return of finance to power has multiple origins widely related to the actions taken by some members of the previous technostructure. More precisely, the black-box represented to a certain extent by that technostructure, with some nuances concerning the internal organization of the companies above, underwent deep internal changes in the context of the decrease of profits, the end of the system of fixed exchange and the greater mobility of capital that followed. We shall note four major developments. The first is the growing importance of managers responsible for financial issues within the technostructure. Obviously, in a period like the 1980s when, for example, in the automotive industry, major profits were coming from the financial departments (capacity to manage cash, foreign exchange transactions), finance managers became more important and their logic predominated in the definition of corporate strategies. That shift of internal influences was accompanied by a general awareness of the profitability of the different production lines directly resulting from the merits of the M division of major companies. This rationalization, together with cost accounting gave the possibility to differentiate management procedures according to product lines. It opened the door to a huge game of acquisitions and transfers, or even mergers, that characterized the 1980s and the 1990s. Based at first on an appreciation of productive capacities, this ‘game’ easily led to movements exclusively based on the financial or even stock exchange capacities of company activities. However, the reasons for that situation are not exclusively to be found in that organizational dynamic. One must also add the characteristics directly belonging to the present cognitive division of labour. If, previously, the internal knowledge cooperation was successful in big industrial projects, we are now faced with the necessity to stick to market movements, more difficult to control and made more demanding by the uncoordinated actions taken by competitors, even though oligopolistic in nature. There is an innovation race in quality, brand and product differentiation. These competitivity requirements

From one managerial capitalism … to another

45

quickly reveal the limitations of strategies based on economies of scale and standardizations, leading to a new step in the division of labour between companies, favouring outsourcing to specialized sub-contractors, sophisticated services and so on, while at the same time mass standardized production is relocated to low-wage countries that may benefit from that cost advantage. The outsourcing of tasks is also linked to the extension of research activities, production and distribution of information and knowledge. Information and communication technologies obviously facilitate such an opening up or networking of design and organizational activities. A third major change in previous technostructures is more directly related to the improvement of educational levels, implying ex ante a considerable widening of the management populations under study, although their borders are still vague (they are included in what L.C. Bresser-Pereira calls ‘the professionals’, in Chapter 1). The division of labour caused by that inflow of educated people will not enable confering on them the impression of being the participants in one industrial development project. Motivations and involvements will be more nuanced, more relative. Obviously, our contemporary period is composed of different categories of managers. Some of them are subject to a relative proletarization of their jobs and, according to enquiries made on working conditions, are more prone to stress than before.11 The rationalization of numerous supervisory tasks contributes to that situation. Mergers and acquisitions, already mentioned, destabilize their career plans previously based on lifelong perspectives. From a totally different angle, educational improvements further complicate the ‘market control’ that the big modern company was so proud of. It is only in fourth place that we put the expansion of the financial sector itself as a source of financialization of company governance. As already underlined, the sector had structural reasons to grow in relation with the ageing of a population that had become wealthier and the development of pension schemes. It is precisely in that context that we observe a clear growth of the share of household savings invested in financial markets. Mergers and acquisitions constituted another source of growth of the sector. Finally, the development of international exchange and the arbitration opportunities provided by the free fluctuation of exchange rates, increased the activities of the sector as well as its leeway.12 The worldwide integration of the financial markets facilitated by these monetary movements on exchange rates, as well as the universal wish to develop national financial markets led to the increase of the international exchange of securities (multiplied by 30 in the USA and Japan, 40 in Germany and 80 in France between the second half of the 1970s and the second half of the 1990s). In turn, all these measures led to the development of the financial sector and its concentration. The leaders of these sectors fully participated in restructuring

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Changing capitalism: shareholders versus managers

operations and the quest for power fostered by their colleagues since the mid 1980s. The four above-mentioned causes are obviously endogenous. They are at the origin of numerous reorganizations often leading to concentrations, possibly representing an advantage to smaller technostructures. In any case, this policy strengthens their power inside our economies. These restructuring concentration movements are implemented with a view to increase their power. Fligstein (2001) clearly shows how the restructuring dynamic is an instrument for a more traditional accumulation of power created by external growth, thus obtaining a valuation of securities that in its turn increases companies’ leeway. That instrumentalization of the shareholder value criteria in order to impose reorganizations is mutatis mutandis similar to the domestication of markets aimed at by Galbraithian technostructures.13 In a certain way, ‘bamboozlement’ would this time be targeted to (small) shareholders. Beyond that similarity which rather strengthens the power of managers, we cannot conclude that the reproduction of managerial capitalism is a mere variation of the previous model.

6. FROM MANAGERIAL CAPITALISM TO WEALTHY MANAGERS Many authors (Fligstein, 2001; Duval, 2003) consider that the financialization of company governance is largely triggered by the managers of the nonfinancial sector who derive an advantage from that situation, in particular through restructuring operations. But their actions do not stop at this point and take a more singular turn, totally opposed to the ethical requirements of their predecessors. We see this on two levels: remuneration and fraud. The evolution of managers’ salaries is extravagant.14 While Galbraith underlined behavioural standards according to which the collective nature of management in control of the technostructure strongly limited any individual or predatory behaviour relatively to remuneration, we observe a continuous and international movement towards an increase of managers’ salaries. Figure 2.2 indicates a certain parallel between these evolutions in OECD countries over 20 years. We may believe that spiralling remuneration is due to a certain degree of stock exchange euphoria or more seriously to the international extension of the sphere in which these leaders exercise their power. The argument in favour of an adjustment of CEO remuneration on that of their foreign counterparts appears here and there in what has recently become a matter of political debate. We might have thought that the explosion of the speculative bubble would have brought some moderation in the determination of their remunerations.

From one managerial capitalism … to another

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1 000 000 Long-term remuneration

USA

900 000

Transfers 800 000

Salary

700 000

Dollars

600 000 France

Belgium 500 000

Germany

UK

Italy

Switzerland

Canada

Netherlands Japan

400 000 Sweden 300 000 200 000 100 000

1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996 1984 1988 1992 1996

0

Source: Abowd and Kaplan (1999).

Figure 2.2 Manager salaries in 11 OECD countries over the period 1987–1996: a rise initiated well before the stock market bubble The disclosure of the extravagance of such emoluments does not seem to have slowed down the long-term trend indicated in Figure 2.2. Not only are these increases not related to corporate profits, but they are not even accompanied by an increase of the dividends received by small shareholders. These conclusions are sometimes difficult to ascertain if we take into account the duration and relative character of performances that vary according to the sector involved. Accurate work concerning the remuneration of the CEOs of S&P500 in the United States and FTSE 100 in the United Kingdom does not reveal any positive correlation between company performance and the outrageous remunerations of their CEOs (ref. works of Ertuk et al. 2004). We have already underlined that far from enabling small shareholders to recover a certain degree of power, the explosion of the speculative bubble has rather confirmed their marginalization. Their demands concerning the strict regulation of stock options, the reduction of top managers’ remunerations, the control of off-balance-sheet operations and mergers and acquisitions are a matter of discussion and even of a certain strengthening of control legislation, questioning the personal responsibility of chief executives without effectively increasing the rights of small shareholders. Legislative developments mainly

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Changing capitalism: shareholders versus managers

aim at restricting the literally fraudulent behaviour of company executives revealed by the explosion of the speculative bubble. However, their predatory capacity is little affected. We shall only give a recent example, rather in the form of a caricature but nevertheless quite eloquent as regards power relations in that context and in the United States during the spring of 2004 with the Eisner case, the uninhibited CEO of Walt Disney (ref. Box 2.1).

BOX 2.1

EISNER, A NOT-SO-ISOLATED EXAMPLE OF DEVIATION

Michael Eisner has been at the head of Walt Disney for 20 years. The company has accumulated setbacks for several years and in 2004 the share was at its 1997 level. That performance is inferior to the other companies of the sector. Nevertheless Eisner’s remuneration has never stopped increasing. He has managed to pass a clause providing that his salary would be maintained at $1 million until 2006, the official date of the end of his mandate, even in case of dismissal. Add to that the payment of an annual $6 million minimum bonus until 2006 plus $12 million severance pay. Business Week estimates that his stock options will yield some $337 million between 2008 and 2011. His personal wealth, thus constituted, had already been estimated at $1 billion in 2004. This being said, we can understand why Eisner was challenged by 46 per cent of his shareholders in the spring of 2004. Criticism is substantial, including from William McDonnough, chairman of the new supervisory authority of auditors implemented by the Sarbanes–Oxley Act. Nevertheless, it remains that the case is not isolated, and the strongly internationalized community of CEOs is extremely reluctant to denounce that deviation. (information excerpted from an article in Les Echos, 12–13 March 2004).

The incidence of fraud is quite interesting and is also accurately analysed by Michael Dietrich and Abhijit Sharma (Chapter 9). In addition to clearly punishable behaviours, it shows a whole continuum of innovative financial practices, long praised by competent academic circles,15 whose main objective was to deceive shareholders and their representatives. Such intermediaries as Arthur Andersen, in a typical example of a type of external strategic services provided by a complex firm, contributed to that disguising of the real situation while striving to keep its ethical profile in conformity with its cooperative

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practices (those links lead Blandine Laperche in Chapter 8 of this volume to characterize today’s capitalism in terms of competition and cooperation between industrial, services and financial technostructures). In fact, there is something systemic in the deviations observed and we understand that they correspond to current practices (off-balance-sheet operations, stock options without restraint, in particular) that may according to the case be sanctioned but to which it is difficult to oppose single and indisputable accounting standards. Thus, in a global market, the value of a company will often depend on its goodwill or the value attributed to its intangible assets (such as the image of the product, the professional expertise of the company or the reputation of its accounts management). The healthy reactions of governments which, in the face of the multiplication of frauds and the risk of decredibilization of financial services this implied, tried to make control and legislation more stringent (financial regulations and laws have been passed by the USA that reacted more quickly and vigorously as it was more seriously exposed) can only have marginal effects due to the complexity and fragility of accounting procedures. Can we perceive the foundations of a new managerial capitalism in the developments that followed the explosion of the financial bubble and the adoption of financial regulations? The answer is obviously negative since we do not find in the above developments the coherence capable of sustaining a whole economy’s growth or even growth on a world scale. First of all, the group of managers we are talking about is extremely small and their predatory behaviour strongly endangers the cohesion of the group of chief executives. The stock option system does not offset that internal contrast, especially as many stockholders find themselves in the position of small shareholders. The insecurity that goes with the restructuring of assets increases centrifugal pressures. The situation of primitive accumulation in which these managers find themselves – they can make a fortune within a few years16 – (like those who managed to monopolize considerable rents in countries in transition) gives us a rough image of that business circle whose apparent illegitimacy is not compensated by any parallel with the remunerations of artists or sportsmen they sometimes refer to. Because they make up a strongly internationalized class, these groups of managers could have played a major part in the development of a new global order, especially in the regulation of financial globalization that remains subjected to repeated crises and is only able to pass on its impact to the periphery without being able to integrate in a long-term perspective the developmental projects needed worldwide. In this respect the movement for another world can only but strengthen its opposition to a whole series of multinational companies led by such selfish managers. The impact of their extravagant salaries may be small compared to the turnover of the big companies, but they nevertheless represent a fundamental element of distrust

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Changing capitalism: shareholders versus managers

since they bring to the extreme the inegalitarian shift of our societies.17 It is true that not all of these company leaders are of this type, but the current that is sometimes called the ‘modern reformers’ of the Soros type remains extremely weak. In any case, that international elite is unable to denounce what is more than a deviation, a long-term trend for what represented the upper fraction of the Galbraithian technostructure. Works such as those of Piketty and Saenz (2003) on the evolution of inequalities over a long period clearly indicate the regression experienced by our societies in the last two decades, a heavy price paid for the internationalization and organization of our industrialized economies. Quite as worrying is the relative silence of all those advocating a rhetoric about new company governance, including profitability criteria confirming the reign of shareholders. These works would gain in distinction if they had denounced practices that are difficult to justify by any economic argument as underlined by Krugman (2002). Maybe a second type of managerial capitalism will preside over a future reorganization of international relations, but such an option must not be definitively perverted by the irresponsible behaviour of an internationalized elite and the incapacity of the social body to put an end to these deviations.

NOTES * 1.

2. 3.

4.

5. 6. 7.

8.

A reduced version of this contribution has been published in Challenge, September–October 2005, 48(5), under the title ‘Managerial capitalism by any name’. The first edition dates back to 1967. The second, largely supplemented to answer criticism, was published in 1972 and coincided with the end of the gold exchange standard. In general, the golden age of capitalism corresponds to the 30 years of constant growth from 1945 to 1975, ref. Marglin and Shor (1990). See for example The New Industrial State, pp. 284–5, second edition, Pelican Books, 1974. Price formation through the application of a mark up was, at that time, submitted to many empirical checks that Galbraith does not remind us of, preferring to insist on the infamy cast by the majority of economists on monopolies and the relative silence kept about abundant oligopolistic structures. Galbraith does not insist too much on that component. However, he rightly notes that such an action is strongly supported by public intervention. He makes recommendations about salary and price increases (although the stability of the latter is one of the objectives of oligopolistic management). Galbraith recalls that Ford leaders participated secretly in such consultations … and that, until the death of Ford, the company had lost market shares to its direct competitors. Galbraith rightly notes that trade unions defend more openly these industries while technostructures are relatively cautious. The phenomenon is extremely clear in France where a specific category of middle managers was created immediately after the Second World War and played an important role in the boom of modern capitalism (French version) in which public intervention was much more marked than in partner countries (Fourquet, 1980; Petit, 1984). In another formulation the criteria of good governance would impose financial yields of about 15 per cent, much over the growth rates of the real economy, and thus imply speculative action on the assets leading to all the mergers and acquisitions that characterize our period.

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9. Explicit hostility is evident in Friedman’s 1977 From Galbraith to Economic Freedom. 10. Ref. Aglietta and Rébérioux (2004) for a review of the literature on that argumentation justifying such financial innovations that triggered off the multiplication of mergers and acquisitions in the 1980s. 11. For recent data, see a survey conducted by the Opinion Way consultancy in 2004 on behalf of the Managers Confederation CFE-CGC according to which 84 per cent of managers state that they must work more quickly than some years ago while only 13 per cent declare that stress is taken into consideration by the company. 12. Statistics are quite surprising: currency exchange operations doubled between 1980 and 2003 and in 2003 exceed US$1200 billion. 13. Share redemption aimed at supporting share quotation follows the same logic. 14. If we only refer to average figures, the remuneration of CEOs in the USA has increased from 45 times the worker’s wage in 1980 to 458 times in 2000 (ref. Skar et al. 2002). The ratio was 96 in 1990 and 236 in 1996, clearly showing the steady increase well before stock exchange rates started to race. 15. See the laudatory presentation in journals such as the Harvard Business Review about the innovative methods of management of, for example, Enron or Worldcom before the explosion of the financial bubble and the discovery of scandals, not to mention the mishaps of Vivendi in France. 16. Constituting a new capitalist class (Froud et al. 2001). 17. The relocation threat is used by the same persons to put pressure on basic wages. This gives the impression of a continuous instrumentalization of the internationalization of economies to their benefit. The pressure they exert in order to obtain a decrease in direct taxation goes in the same direction.

REFERENCES Abowd, J.M. and D.S. Kaplan (1999), ‘Executive compensation: six questions that need answering’, Journal of Economic Perspective, 13, Fall. Aglietta, M.A. Rébérioux (2004), Dérives du capitalisme financier, Paris: Albin Michel. Duval, G. (2003), Le Libéralisme n’a pas d’avenir, free book, Paris: La Découverte. Ertuk I., J. Froud, S. Johal and K. Williams (2004), ‘Pay for corporate performance or pay as social division: re-thinking the problem of top management pay in giant corporations’, working paper, May 2005, Manchester Business School. Fligstein, N. (2001), ‘Le mythe du marché’, Actes de la Recherche en Sciences Sociales, 139 (September). Fourquet, F. (1980), Les comptes de la puissance. Histoire de la comptabilité nationale et du Plan, Paris: Editions Recherches. Friedman, M. (1977), From Galbraith to Economic Freedom, first published London: Institute of Economic Affairs; French version published as Contre Galbraith, Paris: Economica. Froud J., S. Johal, C. Haslam and K. Williams (2001), ‘Accumulation under conditions of inequality’, working paper, Manchester University. Galbraith, J.K. (1967), The New Industrial State, 2nd edn, New York: Pelikan Books. Kogut, B. (2000), ‘The transatlantic exchange of ideas and practices: national institutions and diffusion’, paper no. 26 published by Les Notes de l’IFRI, Paris. Krugman, P. (2002), ‘For Richer’, New York Times Magazine, 20 October, p. 62.

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Marglin, S. and J. Schor (1990), The Golden Age of Capitalism: Reinterpreting the Postwar Experience, Oxford: Clarendon Press. Petit, P. (1984), ‘Origins and originality of French planning’, Contributions to Political Economy, March; and mimeo in French ‘Origine et originalité de la planification française’, CEPREMAP no. 8314, July, 2003. Piketty, T. and E. Saenz (2003), ‘Income inequality in the United States, 1913–1998’, Quarterly Journal of Economics (February), 17 (1), 1–39. Skar, S., L. Mykyta and S. Wefald (2002), Raise the Floor. Wages and Policies That Work for All of Us, Cambridge, MA: South End Press.

3. The end of capitalism: J.K. Galbraith versus K. Marx and J.A. Schumpeter Sophie Boutillier 1. INTRODUCTION Is capitalism mortal? Is capitalism soluble in bureaucracy? Will private property and free enterprise be questioned by the growth of big firms and the increasing weight of the public sector in the economies of the major industrialized countries? What is the nature of the links between state and big firms? How do the decisions made by big firms impact on the economic policies of the industrial nations? According to the patterns of historical materialism, is the socialist mode of production bound to take the place of the capitalist mode, the latter being overcome by its own inconsistencies and contradictions (downward trend of the rate of profit, and increase in the organic composition of capital)? The questions are clearly put, but the answers are not so clear. The problematics of the (probable?) end of capitalism (or the disappearance of investment opportunities), however, is not new. The British classical economists of the early nineteenth century had already questioned themselves about the disappearance of investment opportunities, a situation that eventually led to what in the 1960–70 decade was called the ‘zero growth’. Later, Marx analyses the destabilizing effects of the industrial revolution: rural depopulation, poverty of the working class, harsh competition between entrepreneurs, substitution of work by capital, etc. Is capitalism doomed? At the beginning of the twentieth century, Schumpeter follows in Marx’s footsteps. In his 1942 work Capitalism, Socialism and Democracy, he writes, without any ambiguity: ‘Marx was right! His answer to the question ‘Can capitalism survive?’ is clearly No!’ When J.K. Galbraith writes The New Industrial State in the late 1960s, he positions himself in this problematic by referring to Marx and Schumpeter. The American capitalism of the 1960s is dominated by a handful of big firms, transnational corporations (TNCs), which plan their activities on a global scale. The socialization process has taken its toll, and the heroic entrepreneur has been replaced by a team of specialists. On the other hand, big firms are no longer managed by their owners (the shareholders), but by 53

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employee-managers. The two parties engage in a tug-of-war, and the managers win. That is the cold war era, a period of economic euphoria in which socialism and capitalism are in a political, economic, technological, and scientific struggle (space conquest, colonial wars, arms race, etc.). This special context encourages J.K. Galbraith to relativize the words of Marx and Schumpeter and to highlight the points of convergence between capitalism and socialism. He questions Schumpeter’s problematics on the disappearance of capitalism caused by the disappearance of entrepreneurs. The entrepreneur is replaced by the ‘technostructure’ at the head of big firms. The economic power is no longer in the hands of the entrepreneur, but the existence of capitalism is not questioned. The reason why socialism and capitalism have many common points is not ideological or political, but technological. Big firms, whether capitalist or socialist, are subjected to the same rules of functioning as they have been designed along the same technology. What is the theoretical and historical context of J.K. Galbraith’s concept of the technostructure and the evolution of capitalism? Can capitalism survive? Marx and Schumpeter had expressed serious doubts on the subject. Galbraith does not question himself in such terms, since, according to his analysis, the two systems are convergent. The technostructure replaces the entrepreneur, but without questioning the identity of capitalism, as already mentioned by L.C. Bresser-Pereira, in Chapter 1. Let us repeat that the reason is technological and not ideological. We will develop our argumentation in three phases. We will start with Marx’s analysis. What are his arguments? What is the process of transformation of capitalism? What are the ‘contradictions’ of capitalism? What are the counter-tendencies? A few decades later, while Europe is in chaos, Schumpeter asserts that capitalism cannot survive. He insists: ‘This is what I have established. Is this evolution desirable? I am not asking the question’, he writes, ‘I describe the facts.’ Finally, Galbraith makes fun of J.A. Schumpeter’s concerns: capitalism and socialism have many common points, and both are existing. The curse is broken.

2. MARX: BIG FIRMS, CONCENTRATION/ CENTRALIZATION OF CAPITAL AND PROPERTY Marx, Adam Smith and the Limited Company Before Marx, the British classical theorists (Adam Smith and David Ricardo) had produced very pessimistic assumptions about the future of capitalism. The argument of the stationary state, in connection with the issue of the

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disappearance of investment opportunities, engages all their attention. They both work in the British context of the new-born industrial capitalism. Industry is developing. The size of firms is increasing. Firms are mechanized, but small firms do not disappear. Will this accumulation process be endless? When all consumers’ (solvent) needs are met, will entrepreneurs still have motives for investing? On what markets should the growth of the firms, and consequently the economy, rest? But this is not all the question, for capitalism changes. The substantial investment required by technical progress (the iron and steel industry, railways, industrial robots, etc.) have always triggered major financial innovation. Since the beginning of the nineteenth century, the limited company has taken a key position in the economies of Northern Europe.1 Adam Smith questions himself on the role of the limited company. He professes that its development will lead to the vanishing of the sense of ownership on which capitalism rests. Marx, as a nineteenth century intellectual, sees the major transformations affecting the European economies (and especially in England, France and Germany) as well as the United States. As from the early nineteenth century, the capitalist economy escapes the hold of nature. The power of the steam engine and the mechanical engineering industry dramatically multiplies the productivity of human labour. He also sees rural depopulation pushing thousands of farmers and craftsmen toward labour-consuming towns and cities, thus swelling the new class, the working class. Just like Adam Smith, Marx is in two minds about the development of limited companies, but certainly for different reasons. With the theory of elaborate historical materialism, Marx considers that the history of human societies is punctuated by contradictory movements between the social relations of production and the productive forces. Starting from primitive communism, mankind completes its evolution with the communist mode of production. Each phase sees a change in the economic and social organization. Capitalism results from this evolution. It is a stage in a long historical process. Capitalism, like feudalism which came before, must disappear due to its contradictions: the downward trend of the rate of profit, and the increase in the organic composition of capital. Growth, Crisis, the Dynamics of Capitalism Marx’s analysis on the evolution of capitalism is part of his explanation of the crisis and the expansion of capitalism, two different periods of one dynamic. The recurrent crisis of capitalism does not result from temporary maladjustments regulated by the interplay of supply and demand. The crisis is part of the dynamics of capitalism. It does not result from an exogenous,

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unforeseen or unpredictable event, as nothing is exogenous, whether the increase in the price of such and such raw material, or an invention, or a war. All such events are part of the capitalist accumulation process. The crisis has one function: it is necessary for the extended reproduction of the capitalist economy – restored rates of profit, the counterpart of the devaluation of capital. Successive crises make capitalism weaker, but they also create the conditions for new investment opportunities and, thus, for profit for investors. During each crisis the cards are re-shuffled between effective or potential investors (the weakest go bankrupt, there are new entrants, as well as takeovers and mergers), new markets are generated by the commercialization of new products made possible by technical progress. ‘Crises are only the violent and temporary solutions to existing contradictions, violent fits that restore a disturbed balance’ (Marx 1976, Book III, p. 243). But the expression ‘disturbed balance’ is ambiguous, since after a crisis the initial situation is not restored. The concentration of capital goes on. ‘Capitalist production continuously tends to go beyond the limits which are immanent, but achieves this only through using the means which, again, and on a larger scale, set the same barriers in front of it’(Book III, p. 244). In Book III of The Capital, Marx writes: ‘accumulation accelerates the decrease in the rate of profit as it implies the concentration of work on a large scale, hence a higher composition of capital’ (Book III, p. 236). The recurring depreciation of the existing capital makes it possible to obviate the decrease in the rate of profit as the latter results from the increase in the amount of capital which is used. ‘Therefore with the development of the capitalist mode of production, the rate of profit decreases while its mass increases as the mass of used capital increases’ (Book III, p. 242). In fact, it is a continuous escalation as ‘capitalism which uses more advanced means of production which are not yet general sells under market-price but above its individual production cost; thus the rate of profit increases for it until competition offsets this advantage, and then comes a period of equilibrium in which the second phenomenon occurs, which is the increase in invested capital’ (Book III, pp. 226–7). The Limited Company and the Dynamics of Capitalism Capitalism generates tools to struggle against the decrease in the rate of profit: increases in the degree of the exploitation of labour; wage cuts below labour value; decreases in the price of the elements of constant capital; foreign trade; increases in share capital. The development of managerial capitalism does interest Marx. Industrial and technological development feeds financial innovation and vice versa. ‘The world, for example, would still have to do without railways if it had been compelled to wait until individual capital had swollen by accumulation thus being able to perform the task. The

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centralization of capital through joint-stock companies provided for that in no time. By swelling, thus accelerating the effects of accumulation, centralization extends and precipitates change in the technical composition of capital, such change increasing its constant portion at the expense of its variable portion, or generating a decrease in the relative demand for labour’ (Book I, p. 448–9). Competition, technical progress, creation, and bankruptcies progressively transform capitalism. Capital concentration is accentuated. The scale of production gets larger, thus generating constant capital economies of scale. But the increase in the scale of production is only one of many aspects of the production socialization process. We have shown that the development of the limited company accelerates the capital concentration process. Such changes increase the social nature of production. Private property develops from a collective base, and not only an individual base, thus questioning one of the pillars of capitalism: individual private property. Only the collection of dividends is performed based on individual private appropriation, which, for Marx, is the negation of capitalism itself: ‘This is the cancellation of the capitalist mode of production within the capitalit mode of production itself, and thus a self-destroying contradiction which obviously appears like a simple transitory base toward a new form of production’ (Book III, p. 410). There are two contradictory reasons for the development of limited companies. On the one side, it provides capitalism with new financial resources, and on the other side, it contributes to its negation by questioning the individual nature of capitalist property. In the middle of the nineteenth century, it paved the way for what would become the theory of managerial capitalism in the twentieth century. As a matter of fact, Marx identifies five major consequences of the formation of limited companies on the functioning of the capitalist economy (Book III, p. 408): (1) Technical reasons: huge extension of the production scale; (2) Transformation of private property: joint-stock companies are owned collectively and no longer individually; (3) Transformation of the capitalist function: the capitalist no longer plays a really active part. He is just a manager of somebody else’s capital; (4) Division of tasks between the owners and managers of capital: the power to make economic decisions drifts away from the private ownership of capital. Within capital a division of tasks is established. Production becomes bureaucratic. Individual property becomes collective property; (5) Reinforcement of the division of tasks between design and production: it is necessary that companies should grow in size, partly due to new scientific and technical progress. Applying such progress to the industry leads to reinforcing specialization, to a finer and finer division of tasks between concept and production. Such considerations are included by Marx into an analysis of the dynamics of capitalism, by studying the cycle of capital and the historical dimension of

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economic and social organization. Capitalism has a strong self-renovating capacity. Science, which becomes a branch of business, brings about new investment opportunities. This can be compared with Schumpeter’s concept of ‘creative destruction’. Firms develop and get bigger and bigger, but small producers do not disappear. Marx shows that small merchant production is ahistorical, and that it adjusts to the development of capitalism.

3. SCHUMPETER: ‘CAN CAPITALISM SURVIVE? NO! MARX WAS RIGHT!’ The Entrepreneur as the Driving Force of Capitalism The first 50 years of the twentieth century were full of stirring and tragic events: world wars, civil wars, revolutions, and dictatorships. During that period, industrial capitalism still became stronger. Firms became gigantic, with thousands of employees operating powerful machines actuated by electricity or oil. New industrial goods made their appearance: planes, automobiles, light bulbs, telephone, radio, etc. Schumpeter, who lived and wrote during that period, was very much affected by those economic, technological and political changes. This resulted, at the end of his life, in a very pessimistic analysis of the future of capitalism, an evolution which, he thought, was not desirable but inevitable. Such is his assessment of the situation. Is Schumpeter’s fear of the disappearance of capitalism justified? For him, the disappearance of capitalism means the disappearance of investment opportunities. Starting a firm or launching out into business will no longer be for adventure-spirited individuals an opportunity for personal fulfilment and challenge. Economic and political change are such after the First World War that they cause a dialectic revolution among neo-classical economists. During the first half of the twentieth century, economic analysis is marked by the questioning of a basic neo-classical pattern, pure and perfect competition, as well as the resulting conclusions, and especially the achievement of equilibrium. Market imperfection and monopoly make their entrance into the space of the neoclassical political economy. British economist J. Robinson also demonstrates the existence of monopolistic competition (1933), and E. Chamberlin evidences the existence of a discriminating monopoly (1933). C. Pigou’s welfare economy (and his concept of externalities) and A. Marshall’s theory of the partial equilibrium, in particular, substantially reduce the theoretical scope of the pattern of pure and perfect competition. However, before the First World War, Schumpeter is already criticizing the neo-classical analysis as unable to explain the dynamics of capitalism

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satisfactorily (growing dynamics/crisis), in short, the movement of the economy fundamental to Marx’s works. Schumpeter invents the entrepreneur in his well-known work, Theory of Economic Development, published in 1912, a book that made his name. His works are those of an economist, not a historian. For the neo-classical economists, and especially their leader Léon Walras, the basic model is the one of pure and perfect competition. Competition is the only way the market can operate. In this context, big firms and small firms do not exist, but only firms of similar size (assumption of market atomicity). Firms are and will remain firms of similar size, which accounts for the absence of technical progress. The economy duplicates itself indefinitely. For Walras, the industrial entrepreneur ‘buys textiles and raw metals, rents factories, workshops, machinery and tools, hires spinners, blacksmiths and mechanics’ (Walras 1988, p. 287). The Walrasian entrepreneur does not innovate. He buys or rents services or raw materials or other input required by production. He selects according to the price of production factors (interest rate for capital, wage rate for labour). The Schumpeterian entrepreneur is the economic agent that makes new combinations of production factors corresponding to as many investment opportunities. He is the driving force of the capitalist economy. He embodies the dynamics of capitalist change, industrial and technological progress. There are five such combinations: manufacturing of a new product; introduction of a new method of production; opening up of new markets; appropriation of a new source of raw materials or semi-finished products; and implementation of a new organization (creation of a monopolistic situation) (Schumpeter 1935, p. 95). What has become of the entrepreneur in 1942? Schumpeter publishes Capitalism, Socialism and Democracy, a book that instantly becomes a success. Right in the middle of the Second World War, he asks the question: Can capitalism survive? And his answer is ‘No! Marx was right!’ It is easy to imagine the impact of such a statement. Schumpeter uses the same arguments as Marx on two major points: technical progress results in the increase in the production scale; the development of the limited company: the limited company supplies capitalism with the necessary capital for the development of the big industry. The entrepreneur disappears when the big firm emerges (resting on the partition of organizational work and production work, which is basic to automation), managed by a double-headed team, the managers and the shareholders (partition of management and ownership of capital). ‘Technical progress is becoming more and more a matter of teams of specialists working on order and whose methods enable them to foresee the results of their research’ (Schumpeter 1979, p. 181). The entrepreneur, who was the driving force of capitalism in the heroic age, has been replaced by a team of specialists whose essential task is innovation. So, capitalism becomes impersonal, and the

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organization has replaced the individual. Schumpeter thus shares with Marx the concept of self-destruction of capitalism. In Capitalism, Socialism and Democracy, Schumpeter explains that capitalism has made technical progress its raison d’être. ‘Let us repeat that capitalism is by nature a form or method of economic change and not only never is but never can be stationary’ (author’s translation of text on pp. 115–16). Isn’t the entrepreneur the driving force of capitalism just because he innovates, thus continuously creating new investment opportunities? Schumpeter defines the concept of ‘creative destruction’ which precisely highlights the capitalist craving for technology. ‘This creative destruction process constitutes the fundamental concept of capitalism: in the last resort, capitalism consists of that concept and all capitalist firms must adjust to it, like it or not’ (pp. 116–17). Disappearance of the Entrepreneur/End of Capitalism? Marx writes: ‘the actual barrier to capitalist production is capital itself’ (Book III, p. 244). ‘Capitalist production generates its own negation which conditions the transformations of nature. It is the negation of the negation’ (Schumpeter, 1979, p.241). J.A. Schumpeter writes: ‘the assumption that I will endeavour to establish consists in upholding that the performance achieved and achievable by the capitalist system is that it makes it possible to dismiss the possibility of a rupture from the system due to the weight of its economic failure, but that the success of capitalism undermines the institutions that protect it and inevitably creates the conditions in which it will no longer be able to survive and which clearly point out socialism as its heir apparent’ (Marx, Book I, p. 241). Marx and Schumpeter share the idea of self-destruction of capitalism, that self-destruction being paradoxically caused by its success. For the latter, the development of shareholders will have destabilizing effects on the future of capitalism, thus joining A. Smith for whom the development of joint-stock companies is incompatible with the development of business, as the private appropriation feeling is absent. It is dissolved in the multiple ownership of capital. For J.A. Schumpeter, the occurrence of collective private property destroys initiative and the will to enrich oneself which are the cornerstones of capitalism. The spirit of enterprise vanishes, and the firm is no longer a place of economic opportunities, nor a place of professional and personal fulfilment, all that being replaced by a bureaucratic organization. By replacing the walls and equipment of a firm by a block of shares, the capitalist evolution devitalizes the concept of property. It reduces the once so strong owner’s grip on his property, first by reducing his legal rights and then by restraining his effective possibility to make use of it as he wants; and then because the owner of intangible securities loses the will to struggle – economically, politically and

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physically – for ‘his’ company, to ensure direct control over the company and, if necesssary, to die for it. (Schumpeter 1979, pp. 193–4)

In such circumstances, what is, according to Schumpeter, the socialism that is to succeed capitalism? ‘By socialist society’, he writes, ‘we mean an institutional system in which a central authority controls the means of production and production itself, or in which the economic business of society is normally performed by the public sector’ (1979, p. 224). The distinctive feature of socialism is the disappearance of private property, as the state becomes the only economic player and owner of firms.

4. GALBRAITH AND THE TECHNOSTRUCTURE: CONVERGENCE BETWEEN CAPITALISM AND SOCIALISM? Galbraith, or the Criticism of Political Economy When publishing The New Industrial State, in the late 1960s, Galbraith immediately disputes the validity of the neo-classical theory, while continuing the Schumpeterian analysis (on this point, see also J. Courvisanos’s contribution, Chapter 11). For the representatives of the neo-classical school, the economy is the one of pure and perfect competition, and equilibrium. The formation of a monopolistic situation is not left aside, but it is either an aberration or a temporary solution. The restoration of a normal situation (market atomicity) is only a matter of time, except perhaps in natural monopolies. The major interest of the Galbraithian analysis is to combine theoretical reflection and factual analysis. In the aftermath of the Second World War, the world becomes bipolar, with the USSR and the USA sharing the world. The cold war feeds technological and industrial competition between the two blocks, but, while capitalism is still marked by the economic crisis of 1929 and the huge unemployment it generated, socialism presents itself as an economic and political organization not affected by crises and unemployment. Galbraith focuses his analysis on what he can see: American capitalism. It is dominated by a handful of big firms managed by a team of shareholders and managers. Innovation is the fruit of the work of the R&D department of the firm, often closely connected with the state due to the importance of military research. Taking advantage of their big size, such firms endeavour to gain control over the uncertainty which is part of the functioning of the market, thus developing market control tools through, planning, a word to which we will come back as Galbraith is very much interested in it. The consumption of manufactured goods increases at a regular pace. Households

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buy automobiles, domestic appliances (including the toasters Galbraith will refer to on several occasions!). In a few words, consumer society seems to be triumphant forever! To summarize: contrary to the principles defined by the neo-classical economists, Galbraith shows that the economy of capitalist industrialized countries, and especially the United States, is marked by: 1. 2.

3.

4.

5.

6.

The domination of a handful of very powerful big firms which plan the global market. The presence of small firms, in substantial numbers but marginal in terms of generation of wealth, although not for the general equilibrium of the economic system. Such small entrepreneurs are both the owners and managers of the capital they valorize. They do not operate in a pure and perfect competition market, but in markets dominated by big firms. The disappearance of the entrepreneur in big firms, replaced by the partition of property (the shareholders) and capital management (the managers), i.e. the technostructure. The manager (an employee and not the owner of the firm) maximizes the shareholder’s profit (profit distributed in the form of dividends). On the opposite, in the neo-classical theory, the entrepreneur is also the owner of the capital he valorizes. Thus he maximizes his profit. The development of planning tools to minimize the uncertainty arising from the very functioning of the markets. Didn’t the economists who originated the concept of the entrepreneur (R. Cantillon, J.B. Say and Schumpeter) claim that the entrepreneur is the economic agent that stands the risk arising from the uncertainty which is part of the functioning of the markets? The combination of the questioning of the market atomicity assumption and, on the other side, the idea that the (big) firm plans the market automatically leads to question the very existence of capitalism! Except for a very small detail: private property does not disappear, but is collectivized. If the company is led by managers, who makes the decisions? Who determines the strategy of the firm? Do the shareholders and managers share the same objective? Maximum profit? Dividends? Growth of the firm?2 Some organizational and technological similarities with socialism. In the United States as well as in the Soviet Union, the development of the big firm implies the development of a substantial bureaucracy. Managing a big firm requires a lot of skills due to the specialization of technical knowledge, similar in the USSR and the USA alike. The role of the state: Galbraith shows the close relation between the state and big firms especially due to the increase in armament spending. The arms race is immensely profitable to big firms, thus contributing to

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stabilizing their activity in the long run and partly offsetting the endemic uncertainty of the market. The Exclusive Domination of Big Firms – the Weight of the Technostructure As Berle and Means had already evidenced in the 1930s, American capitalism is managerial. Big firms are no longer managed by individuals but by a whole bureaucracy. The technostructure has replaced the entrepreneur. In The New Industrial State, Galbraith writes that flights to the moon have not been made possible by an individual genius, but by bureaucracy. The entrepreneur that had been idealized by Say or Schumpeter (in Theory of Economic Development) does not exist any more. The firm is no longer led by one individual, thus questioning the principle of profit maximization in accordance with the principle of individual economic calculation (the entrepreneur maximizes his profit, and the consumer his utility). Capital is no longer owned by an individual or a family. It is distributed among scores of shareholders who do not participate in the management of the firm and have no effect on its economic decisions.3 So, in The New Industrial State, Galbraith tries to solve the contradictions between the organization of the economies of advanced industrial countries and the economic theory supposed to provide a tool for understanding the economic reality, which, according to him, it does not do. He is thus led into saying that Marx and the marxists have described capitalism better than the liberal economists have done! Galbraith shows that capitalism is dominated by a small number of big firms, thus pointing out the backwardness of the neo-classical economists in that field compared with the marxist economists. The neo-classical economists’ tool for understanding capitalism, focused on the pattern of pure and perfect competition, and on the entrepreneur (or generally speaking, on the individual, as the pattern of pure and perfect competition is incompatible with the existence of the entrepreneur, the latter embodying uncertainty which does not exist in the pattern of pure and perfect competition) makes the representation of an economy planned by the decisions of big firms totally impossible. Convergence between Capitalism and Socialism? J.K. Galbraith observes American capitalism. How has it changed since the end of the Second World War? The economic, political, military and technological power of the United States is evident. The changes which had taken place between the two world wars have become more precise. The competition with the USSR has materialized in an arms race the size of which is multiplied by ten due to technical progress (nuclear technology, computer

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technology, etc.). Galbraith notes that technology becomes more and more complex. The time and spending required by the performance of any task tend to become more and more rigid. Technology requires specialized labour, thus resulting in the specialization of the organization of the firm. So, the firm is rigid and must, in order to amortize its very substantial investment, break into very large markets. And there is no room for improvisation, hence the necessary planning. The word ‘Planning’ nearly makes one’s blood run cold in this cold war era. ‘With the cold war, however, the word “plan” acquired seriously ideological connotations’ (1989, p. 60). Galbraith defines it without any doubts: the objective is to make the state assume most of the risks. The big firm must plan its activity, decide consumer needs and the price they will have to pay to meet them. It must also anticipate its raw material and labour requirements, the way to acquire them, and make them compatible with the price it will charge for the product it commercializes, especially as it has invested very substantially in equipment, machinery and R&D. In short, it must exercise its control over what it sells and what it buys, in other words replace the market by planning. The firm eliminates the market through vertical integration, by taking control of its supply source or its outlet. ‘Thus, transactions which were subject to price and volume negotiations are replaced by a transfer within the planning entity’ (1989, p. 67). This is a way to fight market uncertainty, although the latter is not eliminated, and the firm replaces ‘a big uncertainty which cannot be controlled’ by ‘smaller uncertainties’ (1989, p. 67). The relations between big firms have become contractual ones only for the purpose of fighting uncertainty. The hazards of supply and demand are thus minimized. J.K. Galbraith has a sense of humour. In that period of East–West tensions, he writes that the enemies of the market are not the socialists but ‘the advanced technologies with their inevitable consequences, the specialization of men and production processes, as well as the concurrent increase in investment and industrial gestation time’ (1989, p. 73), hence the conclusion: ‘the big Western firm and the modern tool of socialist planning are two variations expressing one need’ (1989, p. 73). The gap is wide between economic reality and the economic theory supporting the existence of the pure market. However, the entrepreneur has been the economists’ only hero, which Galbraith seems to regret. The power of individuals has been transferred to organizations due to the huge number of decisions to be made. Schumpeter was right: the entrepreneur has disappeared. Yet the market is apparently ‘a little-demanding institution in terms of intellect’ as it rests on the abstract variations of supply and demand. On the opposite, planning requires to master a lot of complex variables over which the firm has full control when planning its activity. This is what Galbraith describes with great care in Chapter 6 of The New Industrial State, calling it the ‘technostructure’.

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To ensure planning efficiency, the firm must be big, thus being able to accept market uncertainty. The legal status of the limited company makes it possible for the firm to be gigantic. The division of capital ownership and management facilitates the firm’s development. The shareholders, i.e. the owners of the firm’s capital, are actually eliminated in favour of its managers. ‘Although the articles of association of the limited company put the power in the hands of its owners, its technological requirements and planning deprive them of the power which is transferred to the technostructure’ (1989, p. 141). The owners lose control over their firm. Capitalism gets out of the hands of the owners, the capitalists. Soviet planning, however, differs from American planning in big firms. The organization of the Soviet firm is much simpler than the organization of the US firm. In the Soviet firm ‘there is no sales department, no marketing, no customer/retailer service, no procurement, etc. Most of the key positions in the firm are held by engineers, which corresponds to the prevalence of technical and administrative matters, totally separated from the planning function’ (1989, p. 148). ‘Capitalism is still capitalism, even if capitalism is also the victim of organization’ (1989, p. 143). It matters little whether ownership is public or private, ‘technology has similar powers and uses similar collective methods to make decisions. It is not surprising that it is very similar in both cases’ (pp. 143–4). Technology makes the economic organization uniform irrespective of ideology! In such conditions, capitalism changes but does not disappear. Bad luck for the entrepreneur! The convergence between capitalism and socialism is of technological nature. Let us repeat: It is not ideological! In both cases similarities are present in terms of industrial organization and planning due to the modern scale of production, the huge amount of capital to invest and technological complexity.

5. ELEMENTS OF CONCLUSION In this early twenty-first century, capitalism has not disappeared. On the contrary! Big multinational firms, TNCs, dominate the world economy while myriads of small firms are born, grow and die on a regular basis, thus composing a kind of stock from which capitalism finds its means of development. Therefore the domination of big firms is not incompatible with the maintenance of large numbers of small firms. Quite the opposite! The strong economic growth that came after the Second World War had provided Western Europe and the United States with safe and stable markets. After the trauma of the 1929 crisis, which had paved the way for war and dictatorship, all-out state intervention had become necessary (support of supply and

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demand). The economic crisis starting in the 1970s questions many certainties. The industries and activities on which economic growth was based have reached maturity. The new information and communication technologies generated by military programmes represent new investment opportunities. Therefore it is necessary to release the capital which has been frozen by nationalizations. This is done by the financial revolution. The limited company has a free hand. It develops through venture capital and pension funds. This is the way ‘new capitalism’ sees the light. The division of labour has become more complex within firms and between firms. Firms communicate in real time and all over the world on the internet. Financial markets have expanded on a global scale. The partition of capital management and property has become wider. It matters little whether the ownership of capital is collective; what is important is the individual possession of the profits capital generates. Economic history since the 1970s confirms this observation: domination by big firms, and survival of myriads of small companies. The theory of corporate governance (even if it reverses the power relation between managers and shareholders) is based on that concept of bureaucracy and collective organization. However, how can we account for the ardour of economists for the entrepreneur? Has the latter become the driving force of capitalism (again)? Is it for the purpose of falsifying Marx’s and Schumpeter’s prediction? There has been no need for that since 1991 and the collapse of the USSR. So, is capitalism the end result of human evolution, as Fukuyama (1994) says? Before him, many others had imagined similar plots, and Hegel and Marx in the first place – but in vain. There are diverse reasons for the entrepreneur’s comeback in the economic theory. Among the main ones: 1.

2.

3.

The slow-down in economic growth and the persistence of massive unemployment. Galbraith elaborated his analysis at a time when American capitalism was experiencing sustained growth. All industrialized or developing countries designed awareness programmes as well as programmes of assistance to company formation. In those terms, the formation of new firms is perceived as a way of creating wealth (and boosting technological innovation), but also of creating employment. The establishment of new firms is perceived by political leaders as a social integration facilitator. The decrease in government social spending, the privatization and deregulation of the economy. Facilitating the formation of companies is less costly to public budgets than granting unemployed people a substitute income. The occurrence of new technologies (NICTs), all being new investment

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Table 3.1 Major features of the capitalism of big industries: synthetic presentation – Marx–Schumpeter–Galbraith Major features

K. Marx 1818–83

J.A. Schumpeter 1883–1950

J.K. Galbraith 1908–

Economic context of each period

Industry is more and more present in the production of wealth; The size of firms increases; Automation with the steam engine; Development of financial markets; Importance of state intervention (supports the supply)

Industrial development continues; Arms race; New technical progress: electricity, oil, chemical industry, etc; Reinforced domination by big firms; The development of financial markets continues; WWI and the Russian Revolution question the optimism of the market; WWII emphasizes this situation

Context of the crisis of 1929 and its devastating effects that reinforce the principle of public intervention (support to supply and demand); Arms race/cold war; Reinforcement of big firms; Unprecedented development of the consumer society

Domination by a handful of big firms

Yes

Yes

Yes

Presence of small small firms

Yes Small merchant production

No

Yes

Disappearance of the entrepreneur

The question is not raised

Yes

Yes, except in small firms

Division of tasks between shareholders and managers

Yes

Yes

Yes

Transformation of capital ownership

Yes The contradictions of capitalism generate socialism, but there are counter-tendencies

Yes The increase in the scale of production and the development of the limited company are signs that socialism is on the way

Yes Convergence between capitalism and socialism; Socialization of private property; Importance of state-owned companies in capitalist countries; Technological convergence

Source: Author.

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4.

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opportunities. Small firms (often affiliated with big firms through financial relations) test those new fields. The development of financial markets (following the privatization and deregulation of the economy) offers new financial instruments which both feed and fragilize the economic growth due to their high instability.

Galbraith was right! Socialism has not replaced capitalism. The latter has become socialized. The big firms which control global markets are led by organizations, and not by one individual who can easily be identified: the entrepreneur and founder. The firm is led by managers on behalf of its shareholders (the owners of the firm). Apparently, the development of financial markets since the early 1980s has restored their lost power to the shareholders, as these now get rid of unsatisfactory managers. However, despite the questioning of the vertical integration of big firms, in favour of a network structure (made possible by the development of NICTs), big firms are still the global market organizing entities. ‘The hold over the firm is in the hands of the management, a bureaucracy that controls their work and remuneration’, writes Galbraith in his last book published in 2004 (p. 49). Since the 1960s, he has not departed by a hair’s breadth from his position. The development of corporate bureaucracy has not resulted in the disappearance of capitalism, or the entrepreneur. The latter even receives assiduous care from the political leaders who have crowned him as a creator of innovation and employment, as well as the champion of social integration! To conclude, we will make the following assumption: the entrepreneur has not disappeared, but he is no longer a hero. Thus, he has become a socialized entrepreneur, an entrepreneur who is a player in the economy made up of the planning decisions made by big firms which, even if networked, nevertheless are powerful bureaucracies. This is the ‘new capitalism’ of the early twentyfirst century!

NOTES 1.

Of course joint-stock companies can be traced back to the voyages of discovery when Europe intensified its trade relations with the rest of the world. Trading with remote countries required capital, and merchant-entrepreneurs then set up complex financial packages and also obtained state support, as states do get something out of that. More generally, it is only at the end of the nineteenth century that the legal status of the limited company was determined. 2. See Chapter 11 in which J.K. Galbraith questions himself on the motivations of shareholders and managers. 3. Indeed, the interest taken by J.K. Galbraith in T. Veblen’s works and ‘absentee ownership’ is public knowledge.

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REFERENCES Bairoch, P. (1997), Victoires et déboires, Paris: Folio Histoire. Berle, A. and G. Means (1932), The Modern Corporation and Private Property, New York: Macmillan. Berstein, S. and P. Milza (sous la direction de) (2000), L’Année 1947, Paris: Presses de Sciences Po. Boutillier, S. (1996), ‘J. Schumpeter, K. Marx: le devenir incertain du capitalisme’, Innovations, Cahiers d’économie de l’innovation, 2 (4), 141–64. Boutillier, S. (1997), ‘La dialectique des crises et les transformations dynamiques de l’économie à partir du Capital’, Innovations, Cahiers d’économie de l’innovation, 2 (6), 67–85. Boutillier, S. and D. Uzunidis (1998), La légende de l’entrepreneur, Paris: Syros. Boutillier, S. and D. Uzunidis (1998), ‘De l’entrepreneur héroïque à l’entrepreneur socialisé, les métamorphoses de la petite entreprise’, Innovations, Cahiers d’économie de l’innovation, 2 (8), 9–28. Boutillier, S. and D. Uzunidis (2002), Comment ont-ils réussi? L’histoire des entrepreneurs: du XVIII° siècle à nos jours, Paris: Studyrama. Braudel, F. (1979), Civilisation matérielle, Economie et capitalisme, vols 1, 2 and 3, Paris: A. Colin. Chamberlin, E. (1933), ‘The theory of monopolistic competition: a re-orientation of the theory of value’, Cambridge, MA: Harvard University Press. Charreaux, G. (coord) (1997), Le Gouvernement des entreprises, corporate governance, théories et faits, Coll. Recherche en Gestion, Paris: Economica. Denis, H. (1980), Histoire de la pensée économique, Coll. Thémis, Paris: PUF. Duménil, G. and D. Lévy (1998), Au-delà du capitalisme?, Paris: PUF. Fukuyama, F. (1994), La fin de l’histoire et le dernier homme, [The End of History and the Last Man], Paris: Flammarion. Galbraith, J.K. (1974), La Science économique et l’intérêt général, [Economics and the Public Purpose], Paris: Gallimard. Galbraith, J.K. (1978), Le Temps des incertitudes, [The Age of Uncertainty], Paris: Gallimard. Galbraith, J.K. (1983), Une vie dans son siècle, [A Life in Our Times], Paris: Gallimard. Galbraith, J.K. (1989), Le Nouvel état industriel, [The New Industrial State], Paris: Gallimard. Galbraith, J.K. (2004), Les Mensonges de l’économie, [The Economics of Innocent Fraud], Paris: Grasset. Hayek, F. (2002), La Route de la servitude, [The Road to Serfdom], Paris: PUF. Hobsbawm, E.J. (1994), L’Age des extrêmes, histoire courte du 20ème siècle, [Age of Extremes: The Short Twentieth Century], Paris: Editions Complexe. Lefebvre, H. (2001), La Fin de l’histoire, 2nd edn, Paris: Anthropos. Mandel, E. (1986), Traité d’économie marxiste, Paris: Christian Bourgois Editeur. Marx, K. (1976), Le Capital, Books I, II and III, Paris: Editions Sociales. Nicolaï, A. (1999), Comportement économique et structures sociales, Paris: Collection Economie et Innovation, L’Harmattan. Plihon, D. (2003), Le Nouveau capitalisme, Paris: La Découverte. Robinson, J. (1933), The Economics of Imperfect Competition, London: Macmillan. Schumpeter, J.A. (1935), Théorie de l’évolution économique, [Theory of Economic Development], Paris: Dalloz.

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Schumpeter, J.A. (1979), Capitalisme, Socialisme et Démocratie, [Capitalism, Socialism and Democracy], Paris: Payot. Schumpeter, J.A. (1983), Histoire de l’analyse économique, vols 1, 2 and 3, [The History of Economic Analysis], Paris: Gallimard. Smith, A. (1976), Recherches sur la nature et les causes de la richesse des nations, [An Inquiry into the Nature and Causes of the Wealth of Nations], Paris: Gallimard. Walras, L. (1988), Eléments d’économie pure, Paris: Economica.

4. The power of large companies Marlyse Pouchol 1. INTRODUCTION * In his major works: The New Industrial State (NIS) (1967) followed by Economics and the Public Purpose (E&PP) (1973), Galbraith undertakes an ‘emancipation of [the] belief[s]’ (E&PP, p. 223) conveyed by ‘neoclassical economics’. He suggests that neoclassical economics might consist of an economic science that serves the views of large industrial and financial groups. These groups he classifies as: ‘the planning sector’, or more often ‘the planning system’, because of the organizational requirements to which they are subjected. He consequently does not hesitate to ask such questions as: ‘Is it not possible that economics also serves the purposes of organisation?’ (E&PP, p. 4). A more recent book: The Culture of Contentment (CC) (1992) underlines this collusion even more clearly: ‘Finally, the great enterprise – the large modern corporation – is extensively under the protection of conventional economic education’ (CC, p. 76). Consequently, it is not surprising that the relations between Galbraith and the most prominent economists have been tense. For Solow, notably, who was very critical of The New Industrial State when it was published, ‘serious’ economists cannot be content with a literary approach that isolates the phenomenon of large companies to exaggerate their power. Such an approach is not scientific and one should consider that ‘Professor Galbraith is essentially a moralist’ (quoted by Frobert 2003, p. 74). The controversy between Galbraith and Solow thus brings into play the status of the economist as much as the object of economics as a discipline. Galbraith, who is at odds with most economists, even those not belonging to the neoclassical school, makes economics a ‘branch of political science’ (Galbraith as quoted by Frobert), which thus includes in its sphere a discussion on the values and purposes of a human community as well as reflections on the common good. This chapter will support this position, not by invoking arguments of an epistemological nature, but rather by having recourse to the political conception associated with the critique of the position of social sciences made by Hannah Arendt (1906–75), a philosopher of German 71

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extraction who is, above all, known for her analysis of totalitarianism. Arendt highlights the crucial importance of preserving a ‘common world’, which cannot be achieved without a reassertion and re-actualization of common values. Arendt thus considers the quest of economics, that consists in seeking to discover objective values that would be truer and less questionable than individuals’ value judgements, to be illusory and dangerous. It is not so much that the content of both authors’ work is closely akin, for they situate themselves in two different disciplines that do not cover the same field of research or analyse the same problems. Nonetheless, there is a certain proximity in the way they both view issues, so much so that it could be said that Galbraith’s economics complements Arendt’s politics, and vice versa. In addition to the fact they both supported J.F. Kennedy’s candidacy and were later critical of US involvement in Vietnam, their closeness lay in the fact that both tried to ensure that the result of their thinking brings answers to questions everybody was asking: ‘The Ultimate Test of a set of economic ideas – a system, if the word be allowed – is whether it illuminates the anxieties of the time’ (E&PP, p. 198). This concern is to be seen as a safeguard protecting the specialist intellectual from the shortcomings inherent to an activity accomplished in solitude. Despite all the problems such an occupational choice raises, the criterion chosen to validate ideas is to be sought more in general assent than in a scientifically defined procedure. Both of them grant themselves a freedom of judgement on events that results in calling their readers to make their own judgement. This position is both their strong point, for it brought them a larger audience than other members of their discipline had, and their weak point, for it deprives them of the support of those very members who do not appreciate what they consider as a debasement of their subject. If Arendt can be presented as a political philosopher at odds with political philosophy, whose influence goes largely beyond this domain, the same goes for Galbraith. His economics is outside the set frame, which means that some, like Solow for example, give him another label than that of economist. For them, the undeniable popular success met by Galbraith’s books in the 1960s and 1970s bears evidence to the lack of seriousness of an economics that can be understood by non-specialists. Friedman, in his From Galbraith to Economic Freedom, ironically argues: ‘One of Galbraith’s talents is his ability to create key-words and to sell them. He is a publicity genius’.1 For the monetarist, Galbraith’s arguments are obviously based on ‘convictions’ not supported by facts. Galbraith, on the other hand, criticizes those economists who – especially on monetarist issues – justify the absence of clarity of their work by the complexity of the reality they have to describe, whereas things are not so mysterious. He even goes as far as to suggest that those theoretical sophistications may be used to mask an absence of substance. ‘The study of

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money, above all other things in economics, is the one in which complexity is used to disguise or to evade the truth, not to reveal it’ (Money (M), p. 5). What needs to be understood is the reason why economists would delight in being so inaccessible to the average person and to what extent such practice could reinforce the grip of large companies. This chapter is an attempt at specifying the kind of relation Galbraith establishes between the deficiencies of ‘official’ economics and industrial and financial groups; in other words, how Galbraith conceives the nature of the power wielded by large economic structures in contemporary societies. On this point, the reflection will be complemented by an analysis of The Anatomy of Power offered by Galbraith in 1983. On this issue, his closeness to Arendt becomes more obvious. The phenomenon of power constitutes, indeed, a major theme that can be found in both authors who, even if their analysis remains largely related to their respective concern, meet on the idea that real power is not derived from strength or the ability to constrain by violence. The defeat of the American superpower in Vietnam is, in fact, not without relation to this idea (Arendt 1969). All in all, that which most brings the two authors closer is that they are both ready to observe what is actually happening, which means, among other things, detecting new developments thanks to a knowledge of the past.

2. THE GRIP OF THE PLANNING SYSTEM In his books written in the 1950s: American Capitalism (1952) and The Affluent Society (1958), Galbraith highlighted the domination of large companies over America. Whilst in his 1952 book the positive aspects of this domination – especially in terms of efficiency – prevail, in that of 1958, the assessment is more contrasted. The wealth of the private sector cannot mask the deprivation of the public one, of schools and housing, neither can it make one forget the lack of proper medical care or of public transport. It cannot any more compensate for the erosion of quality of life and environmental decline. The highlighting of the harmful effects of the domination of the large industrial firm becomes more radical in the first edition of The New Industrial State and even sharper in its third version of 1978: the edition this chapter is referring to. It incorporates changes made after the writing of Economics and the Public Purpose. The firm imposes its values on the whole of society, on individuals as well as on the state. The neoclassical economy does not consider the consequences of the emergence of such firms within a market economy. It persists in seeing them as companies that are run by their owner and whose activity consists in producing goods to meet customers’ demand. According to this logic, which

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Galbraith calls ‘the accepted sequence’, producers, who are at the service of consumers whose tastes and preferences rule the market, do not have the power to impose their prices. This neoclassical vision allows the conclusion that, in the system of economic private ownership, ‘the individual is the ultimate source of power’ (NIS, p. 226). But, if the ‘accepted sequence’ remains the rule for a score of small owner-managed companies, it does not at all apply to public limited companies whose size and activity imply they are managed by a ‘technostructure’, that is to say a group of people with specialized skills and who are compelled to cooperate and work as a team. In the case of those large companies, the ‘sequence is revised’, for it is individuals who are at the service of the economy, not the reverse. To acknowledge the existence of large firms, as is the case for the theories of oligopoly and monopoly, is not enough. One has to consider the consequences by admitting these are entities that generate a new problem: that of the power of the economy over the whole of society. Being a problem that only appeared in the twentieth century, it was not addressed by past theories. The changes have been considerable, especially since the beginning of the Second World War. The large structures, required by complex technology and the massive use of capital this technology demands, were beginning to appear in the production of consumption goods that ‘were once the province of the individual proprietor or the insignificant firm’. The public limited company now sells ‘groceries, mills grain, publishes newspapers and provides public entertainment’ (NIS, p. 1). Individual consumption constitutes the main business of firms that thrive in selling alcohol and processed food, just as it does for the more recent car or pharmaceutical industries, or for telecommunications. Far from existing to meet individuals’ demand, those firms have to generate demand first, by creating a new need. Advertising then becomes a necessary activity to fabricate the need the product will meet. One has to admit that ‘The initiative in deciding what is to be produced comes not from the sovereign consumer, through the market. … Rather it comes from the great producing organization which reaches forward to control the markets that it is presumed to serve and, beyond, to bend the consumer to its needs’ (NIS, p. 7). Contrary to the assumption of conventional economics, it is not profit maximization that constitutes the principal motivation of large companies. If profit maximization has a meaning when it comes to enhancing a capital that belongs to you, it loses it when there is no connection between ownership and control. Profit is only a necessary condition for a growth in production that is, according to Galbraith, the genuine goal of those large organizations for it has the advantage of being the object of a consensus between members of the managing board. It is thus obvious that the shaping of people’s tastes and the applying of technological virtuosity to create new individual needs, so many

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means of achieving ‘growth for the sake of growth’, are an integral part of the activity of those large structures. This activity is not limited to the shaping of people’s consumption. It also entails a subjection of the citizen to the existential needs of those firms. If the technostructure is opposed to state intervention when it undermines their freedom of decision-making, the assistance of the state is required and obtained to finance high-tech development and the training of its employees. Galbraith considers, in fact, that the requirements of those companies better explain a growth in higher education staff than a so-called interest in ‘mass education’. That’s why he also adds that if, on the other hand, ‘the economic system need[ed] only four millions of unlettered proletarians, these, very plausibly, are what would be provided’ (NIS, p. 4). It should be noted that, for Galbraith, it is in the first place technology, not ideology, that ‘defines a growing function of the modern state’ (NIS, p. 5). Also, without implying it might have been introduced for this motive, the regulation of demand by instruments of economic policy set up by the ‘Keynesian Revolution’ has admittedly proved to be a welcomed form of state intervention by those large companies. Indeed, by ensuring a stabilization of consumption, those modern and technologically costly activities, requiring a long period of gestation between the conception and the production of the product, had time to develop. Yet it is not exactly Keynesian interventionist policy that is the cause. Keynes’s ‘macro-economy’ neglects the study of the functioning of companies, and thus gives a free hand to ‘micro-economy’ that, despite a few amendments such as admitting companies can fix prices, continues to teach that companies are subjected to the consumers’ choice. Keynesian reflationary measures were originally aimed at tackling unemployment, but they were diverted to serve a religion of growth that perfectly suited the goals pursued by the technostructure. On the whole, society and the state, more particularly, have ended up granting a ‘high social value’ to all that serves the goals of those organizations. The preservation of the freedom of action of firms, growth and technological change are so many principles whose value seems undeniable, notably thanks to an economic science that presents them as means of ensuring social progress. In Economics and the Public Purpose, Galbraith underlines, to the contrary, that wage inequalities between small businesses dependent on the market and large companies that dominate it, should not be expected to decrease by themselves in the course of time. The economic duality that shows itself in the coexistence, side by side, of a relatively well-off labour force and a relatively poor labour force, is long-lasting for it is inherent in the power large organizations have in the matter of price fixing. It is this power, not superior efficiency or productivity, that affords them the ability to pay relatively higher wages. To face this ‘unequal deployment of power’ (E&PP, p. x), a protection

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for small businesses should be envisaged to prevent them from undergoing excessive pressure to lower their costs, which usually results in the entrepreneur being overworked and the employees underpaid. In opposition to the market-led economy to which owner-managed companies are subjected, Galbraith calls ‘the part of the economy which is characterized by the large corporations’: ‘the planning system’ and he considers its existence as ‘the dominant feature of the New Industrial State’ (NIS, p. 10). Planning, according to Galbraith, is not to be ‘blindly’ assimilated to the socialist ideology. It results, above all, from the organizational requirements inherent to the large industrial structure that is a characteristic feature ‘in the modern economy’ (E&PP, p. xi). He also notes that those organizational requirements lead to a bureaucratization that is noticeable whether in capitalist or socialist countries. The necessity to plan productions that make use of elaborate and changing technologies, the care brought in making forecasts, the need to eliminate uncertainties about the future and to keep clients’ demand under control, all imply a degree of planning whose scope tends to go beyond the internal frame of the firm. To the fixing of both retail and wholesale prices, which shows the economic grip of those firms over their environment, should be added the tendency to direct state action in matters of research and development, education or regulation of demand. These concerns are a part of the planning process of a technostructure that is trapped in the development logic of its organization. In fact, the modern firm depends on the state much more than the owner-managed company. In certain areas, such as the arms industry, it even owes it its existence. The official economic theory that stresses that orders come from the consumer, is naturally inclined to disregard the arms industry whose main clients are states rather than individuals. On the whole, wars, as well as crashes, in fact, are perceived as exceptional events that disrupt the economic routine, which is the object of those trying to formulate permanently valid economic laws. This is not the case for Galbraith. For him, crisis situations are food for thought. It is in the arms industry that the symbiosis between the state and large corporations is most manifest. He does not hesitate to denounce the over-production of arms as a consequence of orders placed by the Department of Defense. However, it is not well received to criticize this over-production and the ensuing excesses in public spending for fear of being accused of being ‘soft on communism’, a problem he underlines in: The Culture of Contentment. The legitimacy of public orders passed to the military-industrial complex should not raise any objection, precisely because national defence is a general concern. But Galbraith ends up questioning the authenticity of this goal. Towards the end of the 1970s, in the introduction of the third edition of The New Industrial State, he judges that the competition between the USA and the USSR has become: ‘a trap – one in which the Soviets do what best

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stimulates the American military response, we do what most stimulates the Soviet reaction. And in both countries, a large military and industrial bureaucracy survives on this interaction’ (NIS, p. xx). Galbraith notes that the fear of communism ‘extending on occasion to clinical paranoia’ (CC, p. 24) has been the mainstay of the American military budget. It allowed an extraordinary increase in military spending in the 1980s, under Ronald Reagan, whilst at the same time, the fashion was for limiting government spending and intervention. A majority of those who vote and form what Galbraith’s translator calls ‘La République des satisfaits’ in ‘The Culture of Contentment’ have adopted an extremely selective vision of the role of the state. Government spending is a ‘burden’ when it comes to financing welfare benefits, social housing, medical care for those without medical coverage or state education. But its necessity is not questioned if it is to provide financial guarantees to the depositors of bank or savings bank accounts or if it is military expenditure, however huge and burdensome for the taxpayer it may be (see also Blandine Laperche and Dimitri Uzunidis’contribution, Chapter 16). Speeches advocating less state interference are held by the very ones that applaud a spending increase in the defence budget. The importance of the arms programme in the 1980s enabled the emergence of an independent military establishment that seems to avoid democratic control. If the fear of communism was the main stimulus behind the arms race, its collapse raised the question of a new justification and need to discover a new enemy. But, for Galbraith, what is obvious is that: ‘the military establishment, public and private, will continue on its own authority to claim a large share of its past financial support’ (CC, p. 25). A consequence of this view is that one should fear that military adventures may be organized to justify the expansionism of the power of the establishment. The arms race has revealed that it is not so much industry that answers an objective of common interest generated by the state, as the state that adopts, in this very field, the concerns of the technostructure. Thus, national security, just like growth, education and scientific and technical progress is one of those goals that ‘reflect adaptation of public goals to the goals of the technostructure’ (NIS, p. 321). The technostructure of large corporations has succeeded in raising its goals to the rank of matters of common interest that has to be supported by the state. This means there is no more genuine democratic control of the people over the values and destiny of society, in the manner of sovereign consumers imposing their preferences on the producers, through the market. In his 1992 book, Galbraith insists on the dangers of leaving too much freedom to large corporations under cover of the dogma of the efficiency of market mechanisms and of the supposedly pernicious nature of government intervention. Those large corporations are not controlled by the market, it is

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therefore not only absurd to rely on this system to limit the power of producers, but also totally unreasonable to allow their expansionist logic to reign supreme over the whole of society. The involvement in conflicts for impenetrable reasons constitutes a risk that Galbraith described during the Gulf War. Another source of worry is the widening of the gap between economic sectors. ‘Capitalism’, he says, ‘needs an underclass’ ready to take up the lower-paid jobs nobody wants to accept. Immigrants held this position for a long time without complaining in so far as their lot remained better than in their country of origin and that they could reasonably hope their children would climb the social ladder. Things are now different, ‘as membership in the underclass becomes stable and enduring, greater resentment and social unrest should be expected’ (CC, p. 40). It is to be hoped that events do not confirm Galbraith’s worries. He indeed warns all those who share the ‘culture of contentment’ of the rage that is simmering amongst all those who have not voted for a long time and who no longer hope for anything coming from politicians. During the second half of the twentieth century, the economy – now under the grip of the planning system – became a lot more invasive than it had been at the time when production essentially met pressing needs. Large corporations had changed its nature. This means in particular, that economics should not be thought of as an immutable subject and that, consequently, it should not be divorced from history. The efficiency of large corporations having met the essential needs of most, the growth of their business now depends on the fabrication of insecurity, frustration and fear of the other, i.e. the fabrication of a climate of permanent need. This permanent state of need could, in turn, inspire an infinite renewal of desires and therefore of economic opportunities. The economy, thus, has exceeded the limits of the functions it used to serve. To characterise the contemporary period (from the second half of the twentieth century on), it is appropriate to speak of an outgrowth of the economy characterized by what Galbraith calls: ‘the bureaucratic power’ incarnated in a ‘technostructure’ Economics in Perspective (EP). It is an impersonal power that has become: ‘the decisive force in economic and political life’ (E&PP, p. xi).

3. RESISTANCE TO THE POWER OF LARGE COMPANIES Marx who, in his days, showed that ‘power was the inescapable fact of economic life’ (EP, 1987, p. 133) opened a path that enables an acknowledgement that large companies are not subordinated to the market. However, Marx’s analysis of the origin of those large firms as well as the source and

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nature of their power does not correspond to the characteristics of the large public limited companies of the second half of the twentieth century. Marx describes ‘the process of capitalist concentration … in which the smaller capitalists are devoured progressively by the large’ (E&PP, p. 106). This does not coincide with ‘the growth of the modern large firm by acquisition’ (E&PP, p. 106) operated by the technostructure. If, for a nineteenth century author, the ‘essential fact’ is that ‘power in capitalism resides with the capitalist’ (EP, p. 134) who is at the same time the manager and owner of their company, for Galbraith, one of the most decisive phenomena today holds in the degree of ‘organization’ required by large companies. In such a case, it is not the ownership or wealth of the capitalist that forms the source of a power that extends to society and the state. Taken by the logic of his own analysis, Marx did not envisage that capitalism may be transformed in any other way than by the abolition of the private property of the means of production. However, he could not imagine that the growth of the large ‘compromise-minded’ public limited companies would considerably tone down pressure in favour of the revolution (EP, p. 138). Equally, he could not think that ‘the ruling power would then be, not the capitalist but the technocrat and the organization man’ (EP, p. 138). From the moment this novelty is acknowledged, one has to ponder over the foundations of the authority of the ‘managing board’. What is particular to Galbraith’s position is more easily revealed by looking at the ‘remedies’ he prescribes. For example, he believes it is quite possible to help the state ‘break free from the power of the planning system’ (E&PP, p. 218). Consequently, he assumes it is not in the nature of the state, even when the means of production are privately owned, to be the subordinate of those corporations. In his Anatomy of Power (AP) (1983), he considers, unlike Marx, that ‘to assign the nineteenth century state exclusively to the service of high industrial capitalism would also be wrong’ (AP, p. 128), although he admits the assertion contains a touch of truth. For the author of Economics and the Public Purpose, it is feasible as well as indispensable to re-establish a distance between the interests of the public, usually safeguarded by the state, and the interests of the planning system.2 And it is to this objective, that he deems a ‘political necessity’, that Galbraith tries to demystify the beliefs of official economic science. ‘The present task is to win freedom from the doctrines that, if accepted, put people in the service not of themselves but of the planning system’ (E&PP, p. 223). To try to get rid of large companies is out of the question. The point is more to prevent them from imposing their preoccupations and points of view on the whole of society. Amongst the means available to control them is nationalization, which is far from being the panacea. On the other hand, antitrust laws are: ‘admirably innocuous’ (E&PP, p. 216). They appear to be: ‘a cul-de-sac in which reform can be safely contained’ (E&PP, p. 217). Galbraith

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does not believe the techniques of experts or recipes concocted by specialists can have the expected result. He wants to arouse ‘Public Cognizance’ (E&PP, p. 229). In fact, he relies on the resistance that could be exercised by all if ‘the instinct which warns of dangers in the association of economics and public power is sound’ (NIS, p. 412) and is orientated in the right direction. For the planning system to be put at the service of public interest, one would have to stop believing that the business world is opposed to state interference in the life of the individual. One would, on the contrary, have to acknowledge that, despite the constantly reiterated official economic dogma, ‘all the while, the successors of the entrepreneur were uniting themselves ever more closely with the state and rejoicing in the result. They were also, and with enthusiasm, accepting abridgement of their freedom’ (NIS, p. 412). If, like Marx, Galbraith admits there is a collusion between the economic and political spheres, he nonetheless hopes a separation between them can be re-established. Since the values of the planning system thrive in the void left by the debasement of human values, resistance to what we have called the overgrowth of the economy supposes an attempt at restoring the political domain. This includes the realization that there is a public interest that is totally different from the version imposed by the planning system. Galbraith defines himself as a ‘liberal’. For him, ‘the problem … is not the freedom of the businessman’ (NIS, p. 412). What is essential is to follow different goals from those that the planning system, which has its own organizational requirements, is imposing on individuals. It is precisely this kind of independence that is being lost and that has to be found again by: ‘help[ing] the individual escape this subordination’ (NIS, p. 382) (this issue is also raised by V. Pelaez in Chapter 13, who stresses the role that the lay public must have in technological choices by the planning system). It implies using one’s own sense and critical mind. The denunciation of ready-made economic theories is joined to a refusal to allow one’s mind to be enclosed within the limits of a conventional discourse that presents all goals not serving the planning system as: ‘precious, unimportant or antisocial’ (NIS, p. 413). To resist depreciation in order to assert strongly the value of other human activities such as artistic ones, whilst ensuring that those who serve them are not subjected to the planning system, are so many positions that will contribute to putting the latter back in its place. Only under such circumstances will: ‘Intellectual preparation … be for its own sake and not for the better service to the … planning system’ (NIS, p. 414). According to this position, recent attempts at reforming the university system in Europe, and in France in particular, targeted at the ‘employability’ of students, reveal that the extent to which the planning system has control over the goals of society is now as great on the Old Continent as it is in America. The remedy prescribed by Galbraith may seem derisory if one considers

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that the power to make others act according to one’s own will is derived from: ‘the threat of physical punishment’ or from: ‘the promise of pecuniary reward’ (AP, p. 3). In this case, the power of constraining the State has at its disposal with the army and the police, and the financial means of large companies, constitute instruments of power against which individuals are totally powerless. But Galbraith believes in a third instrument of power which he calls: ‘conditioned power’ that can be added to the previous two of ‘deterrence’ and ‘pecuniary reward’. In his 1983 book, he maintains that this type of power, based on persuasion – whether it be explicit or implicit (this depending on conditioning) – is ‘central to the functioning of the modern economy and polity, and in capitalist and socialist countries alike’ (AP, p. 6). Persuasion is inseparable from an industrial system that requires a high degree of cooperation. In fact, he estimates that ‘were suppression a practical or legitimate instrument of policy, it would be used not against the planning system but on its behalf’ (E&PP, p. 230). The power of this system ‘rests on its access to belief’ (E&PP, p. 229). That is why, the only remedy that can be envisaged is a: ‘Public Cognizance’ that his book should contribute to arousing. ‘Belief [being] the source of power, the attack must be on belief’ (E&PP, p. 229). However, as long as wrong beliefs persist, nothing can stop the swelling of the designs of the large corporations. To grasp the nature of the power based on social conditioning, a parallel can be drawn with the situation of women who, in modern economy, are converted into: ‘a crypto-servant class’ to ‘accomplish the unpleasant tasks’ (E&PP, p. 33). Conditioning is a way of obtaining their services through ‘the simple acceptance of what community and culture have long thought right and virtuous’ (AP, p. 26). In the 1970s, the movement for the emancipation of women was mostly targeted against social convictions making ‘submission and subservience … normal’ (AP, p. 26). Women had understood that it was the acceptance of those values that formed the essential source of male power in society, as well as in the private sphere. Public displays of discontent and outspoken protestation are, by nature, likely to make things change in so far as this discontent is widely shared. In such a case, general public awareness or ‘public cognizance’ is enough, without there being any need to call on specialists to conceive means of solving the problem. It is, indeed, almost as if the cure was already present in each and every one of us. Conditioning works the opposite way, either by finding the means to mute any discontent, discrediting the protestors or by condemning their arguments. Of course, ‘the supreme expression’ (AP, p. 160) is when the individual does not realize that he/she is being manipulated so that the need to protest does not even appear. Large and complex corporations, whether they be companies, governmental institutions, trade unions or professional associations, favour the

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‘contentment’ of the individual who then forms one body with the rest. This identification raises a problem in that the organization only requires a fragmented function of the human being. ‘Organization is what brings specialists, who as individuals are technically incomplete and largely useless, into a working relationship with other specialists for a complete and useful result’ (E&PP, p. 81). The freedom to follow one’s own way vanishes, not because the individual is subjected to threats or lacks financial resources, but because existence, reduced to its economic function, only takes meaning within the organization. Conditioning by identification to the function plays an important role in companies, especially for management, including the members of the managing board. ‘It is the pride of the senior executive (or the lesser aspirant) that he really believes in what he is doing’ (AP, p. 28). That is why the values fabricated by the technostructure to serve the planning system cannot correspond to those of a ‘complete’ being who is capable of critical judgement and empathy. The ‘culture of organization’ that implies accepting to serve a common goal and ‘to be, in common terminology, a good team player’ (CC, p. 67), is in contradiction with the exercise of freedom of thought. In his 1996 book (The Good Society (GS) dedicated to presenting what a ‘good society’ could be, Galbraith underlines this destructive aspect in a chapter dealing with: ‘the bureaucratic syndrome’. He claims that: ‘The first and most evidently adverse tendency of organization, large organization in particular, is that discipline is substituted for thought’ (GS, p. 105). The use of one’s ability to think is even inappropriate, for the individual who exercises it to find faults will be considered as ‘uncooperative, irresponsible, eccentric’ (GS, p. 105). If the absence of opposition, characteristic of successful conditioning, is the essential means for the thriving of the power of large companies, it is easy to understand how the neoclassical school contributes to it. ‘We have seen that power is served in many ways and that no service is more useful than the cultivation of the belief that it does not exist’ (AP, p. 141). But this help from the economists does not necessarily correspond to a will to deceive the people, by designing theories whose only function would be to justify the established order. Galbraith makes it quite clear that ‘in considering the sources of the instrumental role of economics, nothing should be attributed to conspiracy and not much to design. Economists are not deliberately subservient to economic interest’ (E&PP, p. 7). Even if the criticism of those economists that praise the market undeniably forms an element already present in Marx’s work, Galbraith’s theories are different from those of Marx, or I should say from Marxism.3 In the foreword to his 1973 book, whilst re-asserting that: ‘Economics now brings its communicants to conclusions that are convenient for the great corporation’ (E&PP, p. xii), Galbraith distances himself from the criticisms of ‘extremists’, who go so far as rejecting all the concepts of

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economics and discarding all its theories as: ‘a tedious disguise for wickedness, a way of diverting people from the simple disconcerting truth’ (E&PP, p. xii). Galbraith adds that ‘this does not arouse my sympathy. It would not, the more radical may be reminded, have aroused the sympathy of Marx, for his was a notably demanding intellectual tradition’ (E&PP, p. xii). Galbraith’s criticism of the neoclassical vision of the economy consists, above all, in underlining its obsolescence, so that the attack is not so much targeted at the founding fathers of the approach that praises the virtues of the market, as at those who carry on spreading it in a world that has changed. It is those specialized ‘in the economics profession’ (EP, p. 250) that deny the reality of those changes who are to blame, rather than a lack of scientific value or the wrongness of the ideas that are developed. ‘The neoclassical system owes much to tradition, it is not implausible as a description of a society that once existed’ (E&PP, p. 27). Moreover, it is still relevant to the part of the economy characterized by the small owner-managed companies. Systematic rejection is thus as irrelevant as blind approval. First of all, it is important to denounce the idea that the market system is the economic law that applies to all companies, for it is precisely that generalization which makes it possible to deny the reality of the power of firms. Yet, that generalization is the result of a certain mind set of the economist who: ‘in the academic world, where economics is taught’ (EP, p. 284), has to try to obtain the label of science for his discipline to be given any value. Indeed, in the Modern Era, only that label can confer value to intellectual speculation for ‘the standard of intellectual precision is set by the hard sciences’. Conformity to this criterion does therefore ‘require that the ultimately valid propositions of economics be essentially given, like the structure of neutrons, protons, atoms and molecules’ (EP, p. 284). The aim then becomes to establish ‘fixed and permanent truths’, notably as regards individuals’ motivations. This ultimately results in a moving away from the observation of facts and in a denial of reality. ‘It is the paradox of the discipline that it is the wish so to see itself [as a science] that commits economics to an obsolescence in a changing world’ (EP, p. 284). The problem is therefore not so much the ideas conveyed by the neoclassical school as this search for respectability which economists blindly pursue without reflecting on the consequences of such a practice. The service paid by intellectuals and politicians to the planning system is in no way ‘conspiratorial, wicked or even deliberate’. Galbraith then adds: ‘Much of the articulation will be by men of special function and well-confined imagination to whom the notion of a divergence between the purposes of the planning system and those of the public is safely unrevealed’ (E&PP, p. 228). The subjection of economists to the demands of the planning system is thus a form of involuntary subservience resulting from a conformism that traps minds and cripples imaginations. In his

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latest work: The Economics of Innocent Fraud: Truth for Our Time (2004), Galbraith further develops this analysis invoking the concept of ‘innocent fraud’. More generally, it may be possible to conclude that lack of thinking on the part of those whose very job it is to think, is precisely what enables large corporations to tighten their grip. That is how we come to understand that: ‘The process by which social goals become adapted to the goals of the corporation and ultimately the technostructure is not analytic or cerebral. Rather it reflects a triumph of unexamined but constantly reiterated assumption over exact thought’ (NIS, p. 171). The form and content of the criticism levelled by Galbraith at the theorists of official economics allows, in my opinion, a rapprochement with Arendt’s4 analysis of totalitarianism. The American philosopher of German origin highlights the banality of evil that results from a strange inability to think (see Arendt 1971). This inability particularly affects many intellectuals of the Modern Era, and not only economists. Her analysis shows, among other things, that social sciences confirm the fact the modern person has become a simple function of society,5 seems to perfectly illustrate the nature of Galbraith’s critique and even to reinforce it. The inability to think, which has nothing to do with a deficit in intellectual skills, can easily infest the activity of professional thinkers. ‘The inability to think is not a failing of the many who lack brain power but an ever-present possibility – scientists, scholars, and other specialists in mental enterprises not excluded’ (The Life of the Mind (LM), p. 191). This inability to think, described by Arendt, results in the installation of a habit to conform to set rules that are acknowledged by many and confirmed by society. This very probably explains the extent of the control of industrial and financial groups over human goals that Galbraith so denounces. This contemporary inability accounts for the absence of obstacles to the spreading of the faith on which the power of the planning system depends.

NOTES * 1. 2. 3. 4. 5.

Translated by Raphaële Espiet-Kilty, University of Clermont-Ferrand 2. Translated into English from: Friedman, Milton, Contre Galbraith, Economica, 1977 quoted in L. Frobert, op. cit., p. 81. This issue is also raised, in different terms by A. Kartchevsky and M. Maillefert in Chapter 12 and by V. Pelaez in Chapter 13. For the distinction between Marx and Marxism, see M. Abensour, La démocratie contre l’Etat. Marx et le moment machiavélien, PUF, Collège international de philosophie, 1997. For a presentation of her work, see: Eslin, Jean-Claude, L’obligée du monde, Michalon, Collection Le bien commun, 1996, and Collin, Françoise, L’homme est-il devenu superflu? Hannah Arendt, Odile Jacob, 1999. For further analysis on Arendt’s work see: M. Pouchol, ‘L’explication hayékienne du totalitarisme et l’analyse d’Arendt’ in Les théories économiques et la politique, Economie et Démocratie, vol 1, L’Harmattan, 2003.

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REFERENCES Abensour, Miguel (1997), La Démocratie contre l’Etat. Marx et le moment machiavélien, Paris: PUF, Collège international de philosophie. Arendt, Hannah (1971), Thinking and Moral Considerations: A Lecture, Social Research. Arendt, Hannah (1972), reprinted in French as Du mensonge à la violence, Paris: Calmann-Levy. Crisis of the Republic, originally published in English, 1969. Arendt, Hannah (1977), The Life of the Mind, vol 1: Thinking, New York: Harcourt Brace Jovanovich. Collin, Françoise (1999), L’Homme est-il devenu superflu? Hannah Arendt, Paris: Odile Jacob. Eslin, Jean-Claude (1996), L’Obligée du monde, Paris: Michalon, Collection Le bien commun. Friedman, Milton (1977), From Galbraith to Economic Freedom, first published London: Institute of Economic Affairs, French version published as Contre Galbraith, Paris: Economica. Frobert, Ludovic (2003), Galbraith, La maîtrise sociale de l’économie, Paris: Michalon, collection le Bien commun. Galbraith, John K. (1952), American Capitalism: The Concept of Countervailing Power, Boston: Houghton Mifflin. Galbraith, John K. (1958), The Affluent Society, Boston: Houghton Mifflin. Galbraith, John K. (1973), Economics and The Public Purpose, Boston, MA: Houghton Mifflin. Galbraith, John K. (1975), Money. Whence it Came, Where it Went, Boston: Houghton Mifflin. Galbraith, John K. (1978), The New Industrial State, 3rd edn (1st edn same publisher 1967), Boston: Houghton Mifflin. Galbraith, John K. (1983), The Anatomy of Power, Boston: Houghton Mifflin. Galbraith, John K. (1987), Economics in Perspective, A Critical History, Boston: Houghton Mifflin. Galbraith, John K. (1992), The Culture of Contentment, Boston: Houghton Mifflin. Galbraith, John K. (1996), The Good Society. The Humane Agenda, Boston: Houghton Mifflin. Galbraith, John K. (2004), The Economics of Innocent Fraud. Truth for Our Time, London: Penguin Books. Pouchol, Marlyse (2003), ‘L’explication hayékienne du totalitarisme et l’analyse d’Arendt’, in Les Théories économiques et la politique, Economie et Démocratie, vol 1, Paris: L’Harmattan, pp. 121–39.

5. Is capitalism still Galbraithian? Guy Caire 1. INTRODUCTION Let us take a definition of capitalism which could be regarded as consensual: A capitalist system requires (1) that the means of production are the object of individual appropriation; (2) that the regulation of the economy is decentralized, i.e. the equilibrium between production and consumption is not established once and for all by planned decisions, but progressively, on the market; (3) that employers and employees are segregated so that some have only their ability to work – their labour force – while the others own the means of production, hence the relationship called wage-earning; (4) that the predominant motive is the making of profits; (5) that, since resources are not allocated in accordance with a plan, prices fluctuate on each partial market, and even throughout the economy, which in the language of polemics is called capitalist anarchy. As regulation is not centralized, product prices inevitably fluctuate on the market according to supply and demand. It is understandable that the general level of prices should fluctuate on the market according to excessive or insufficient global demand and that, accordingly, crises should occur from time to time (on a regular or non regular basis). (Aron 1962, pp. 111–12)

However, one of the unquestionable characteristics of the capitalist system is that it is constantly changing. Marx1 had already noted that; he distinguished three successive historical stages in the development of the capitalist production process: ‘(a) simple cooperation, where workers are gathered together in a workshop in which division of labour does not yet exist; (b) manufacture production, based on the division of manual labour in the workshop; (c) machine industry (mass capitalist production), of which factory is the typical form’. One century later, echoing Marx’s position, Schumpeter exposed the creative destruction process typical of the system and fed by the various types of innovation it counts, repeating again and again: Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action … The fundamental impulse that sets and keeps the capitalist engine in 86

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motion comes from the new consumer goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist initiative creates. (Schumpeter 1954, pp. 163–4)

Advocating the long period, Braudel, the historian, observes for his part that ‘every world-economy can be divided in three different areas: a narrow core, i.e. the area around the centre …, then comes a middle zone around the core. Finally, a vast periphery which, in the division of labour typical of the worldeconomy is more subordinated and dependent than participative’ (Braudel 1985, p. 85); the core of the world-economy is progressively shifting, thus generating new relations with its peripheral areas: Venice in the fifteenth century, Amsterdam in the sixteenth, London in the eighteenth, and New York today. Through his study of capitalism and his examination of its most elaborate form, US capitalism, Galbraith is part of that tradition of dynamic structures and systems. In 1967, when he pointed out in the introduction to the first edition of The New Industrial State that this book, which he had started just after The Affluent Society published in 1958, at a time when ‘the market was increasingly adjusting to the requirements and wishes of industrial organizations’, stood in relation to the latter book, ‘as a house to a window’ (Galbraith 1978a, p. 9), Galbraith, in the successive editions, made slight alterations to his original words: in the introduction to the second edition, he described a consumer increasingly subjected to the objectives of the producer organization, and he reviewed his treatment of planning; and, in the third edition, he observed the advent of the modern conglomerate, ‘which has not been produced by a technostructure’, etc. Since the appearance of Galbraith’s major works, a lot of innovation has taken place: the new technological wave with the development of new information and communication technologies (NICTs), the development of a service economy, the striving for more flexibility in more and more frequently networked firms, the emergence of a knowledge economy, and the growing globalization of the economy, etc. Therefore it is legitimate to wonder if twenty-first century capitalism,2 as we can see it, is still Galbraithian. In our attempt to answer this question, we will follow a three-stage approach or, to put it differently, we will study three successive levels: corporate structures or organizations, the machinery or mode of operation of the system, the values or forces driving agents’ behaviours.

2. THE STRUCTURES To synthesize the structural changes experienced by contemporary capitalism in its functioning, we will call to mind, with expressions now in everyday use,

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the shift from managerial capitalism, long studied by Galbraith, to shareholder capitalism which certainly has one of its theoretical sources in the works of one of his professed opponents, Milton Friedman.3 Managerial Capitalism Managerial capitalism is the form of capitalism to be found in organizations in which planning plays an essential part, power is transferred to the managers and decisions are made by the technostructure, the key category. Consequently, we need to get a deeper insight into four concepts: organization, planning, manager, and technostructure. Speaking of organization when referring to the big firm is not unimportant: it means speaking of the rationality of its behaviour. As a matter of fact, the purpose of the organization concept is to highlight the levels of agreement and consistency between internal characteristics, modes of operation and types of environment: ‘on the one hand, an organization is a concrete entity which has to manage relations with an environment while trying to maximize either its advantages in a competitive situation or its capacity to survive, or any other objective. On the other hand, it is built along values and standards which are expressed through a mode of authority and a definition of statuses and roles’ (Touraine, 1973, pp. 211–12); in other words, ‘the stress set on the organization as a system of exchange leads us to consider it from two perspectives: as a set of means implemented to negotiate the product with the environment, and as the answer to its situation in that environment’ (Bonis 1971, p. 227). The search for realism therefore leads Galbraith to reject the image made popular by economics textbooks advocating that: ‘the best way to understand capitalism is to study firms without capital, with one manager only, free from all the structural complications of corporations and where there are no trade unions’ (1978a, p. 47) and, on the other hand, to declare that it is necessary to study the fraction of the corporation corresponding to the modern industrial corporation, an essential fraction that he calls the ‘planning system’. To the Walrasian price-taker entrepreneur, Galbraith opposes the price-maker big firm which concurrently shapes individual values, beliefs and behaviours, and thus, ‘ensured of its stability, profits and growth, the big firm, having reached maturity, also enjoys a considerable stability of its situation within the planning system’ (ibid. p. 125). The word ‘planning’ may be confusing; Galbraith is aware of that, and notes that with the cold war ‘the word plan will take highly ideological connotations’ (ibid. p. 60). He nevertheless advocates the use of this word and justifies it in his description of managerial capitalism. As viewed by the industrial firm, planning consists in foreseeing the operations required between the initiation of production and its completion and preparing for

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the accomplishment of these operations. … As regards the economist, the political science theorician, or the augurs, planning consists of replacing prices and the market as the mechanism for determining what will be produced with an authoritative determination of what will be produced and consumed and at what price. It can be objected that the term planning is used in two different senses. In practice, however, these two planning modes, so to speak, are inextricably associated. A firm cannot foresee and schedule its future operations or prepare for contingencies if it does not know what its prices, sales, and costs will be – including labour and capital costs –, and what will be available at these costs. (ibid. p. 63)

So planning exists because the price mechanism alone is not enough to rely on, because it is necessary to anticipate consumer needs, labour requirements, the necessary equipment and raw materials, etc. Thus, planning is one of a series of various strategies aimed at obviating the growing uncertainty of markets: conglomerates, vertical integration, cartels, monopolies, call for state intervention, etc. Galbraith has not invented the character and role of the manager. The analysis was already present in Berle and Means’s works some 30 years earlier (1932), and Galbraith acknowledged his indebtedness to them as well as to J. Burnham (1947). Therefore the shift of power from the owners to the managers was a widely shared concept when Galbraith wrote The New Industrial State. We can, however, concede that our author moved the concept forward, gave reasons for its expansion, and also highlighted sociological mechanisms which have often been confirmed by the most recent developments. In Berle’s views power was diluted: the location of decision-making in the economic world has shifted. Ownership ceases to play much decision-making in from two-thirds to three-fourths (or even more) of the American economic republic. Instead, that power lies in corporations’ managements, in administrators of savings-gathering institutions and pensions funds, in the offices of the larger commercial banks, in government agencies, and in an inchoate emerging group which may be called ‘the scientific community’. (Berle 1965, p. 85)

As for Galbraith, he is a lot more severe and draws a hard picture: ‘the shareholder power is getting weaker and weaker. … Despite a low participation in the ownership of the firm, management has a firm grip on it: it is obvious that the power lies in managers’.4 Galbraith finds three reasons for such an increase in managerial power: technological,5 economic,6 and sociological reasons.7 And finally, a good observer of economic players’ behaviours, and thus a sociologist, Galbraith points out that managers are not appointed by shareholders but by a board of directors shaped by managers themselves. In his analysis of the technostructure, Galbraith assumes that, contrary to conventional positions, ‘the organization is superior to the individual in the performance of important social activities’ (1978a, p. 101). Then, he continues

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his analysis pointing out that ‘in big corporations shareholders have no power; the board of directors is normally the passive instrument of the management, and decisions, whose complexity generally goes together with importance, are actually made by teams; and then they go upwards throughout the organization more than they go down into it’ (ibid. p. 192). Coordination is ensured by committees. So the picture of a pyramidal organization is misleading; the real structure is made up of concentric circles: the external concentric zone with money-motivated shareholders, the middle zone with employees also motivated by money, and the middle-management zone of the technostructure and the management whose identification with the organization is facilitated, according to March and Simon, by four series of factors: prestige of the group, frequent interaction between individuals, individual wishes satisfied by the organization, minimal competition between members, such prospects being reinforced, according to Galbraith, by ‘the almost invariable tendency of everyone of us to limit their own world until it matches their own horizon’ (ibid. p. 200). Shareholder Capitalism Diverse terms have been used to describe the new system: such terms as new age (Brender and Pisani 1999), new economy (Artus 2002), intangible and customized service economy (Reich 1887), access economy (Rifkin 2002), depending on whether the focus is on the performance of the US economy in the 1990s, the characteristics of new products, or consumer behaviour – preference for renting and hiring to ownership –, etc. As far as we are concerned, we will use the term ‘shareholder capitalism’ which both conveys the opposition we want to underline and is focused on the system structure issues valued by Galbraith in his description of managerial capitalism. As a matter of fact, shareholder capitalism is emerging under the action of two forces: new information and communication technologies, and financial globalization which together create a system, as can be seen at the Stock Exchange with electronic quotation replacing traditional floor trading. Few sectors are out of the sphere of influence of NICTs, the latter either creating a ‘cannibalization effect’ by destroying whole sectors of the economy (e.g. the negative impact of the Internet on postal services or some forms of business) or creating a ‘pollinization effect’ (Plihon 2003, p. 8) through the emergence of new organizational methods based on the logic of a cognitive division of labour and characterized by the search for flexibility replacing the standardization logic of the Taylorist and Fordist firm. Regarding financial globalization, it implies a worlwide interconnection of capital markets. The result is a unity of place as financial markets are linked through modern communication networks, and a unity of time as they operate continuously

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24 hours a day. Specific markets – money, finance, exchange, futures, etc. – are now the components of a global financial market. The importance of capital markets is leading to a change in the financing of corporations: the endebtment economy characteristic of bank financing is being replaced by a liberalized financial market economy. Meanwhile we can observe, as Keynes had already done, the prevalence of speculation over the financing of exchange and investment. Shareholder capitalism, based on the neo-liberal doctrine, aims at giving shareholders supremacy over managers who, as they take advantage of the unbalance of information in their favour, are suspected of opportunism, of taking advantage of their position to maximize their income and of pursuing their own objectives. Therefore corporate governance will aim at re-installing ownership legitimacy and establishing a large consensus focused on the value maximization objective. This objective now prevails over the development of activity and employment which was typical of the managerial capitalism of the Fordist era described by Galbraith. So, corporate governance is now financialized. In shareholder capitalism, savings are supposed to be managed efficiently and collectively with three categories of institutional investors of substantial weight8 (pension funds, mutual funds or open-end funds, and insurance companies) whose behaviour is assessed according to standards, benchmarking with the mystique of the 15 per cent per annum return on equity (ROE).

3. THE MACHINERY As we are in possession of the pieces of the jigsaw puzzle, i.e. the constitutive structural elements of the two types of capitalism, it is now possible to study their respective modes of operation. In order to synthesize their approaches, here again we will borrow Galbraith’s terminology to describe the planning system on the one hand and the ‘free-market’ expression which seems to be typical of the neo-liberal views of Friedman’s disciples on the other hand. In a regulating perspective, using these two terms has the advantage of taking us to the heart of the system’s machinery, the heart being, as everyone knows, the organ that circulates blood throughout the body thus ensuring its survival. It is similar for the social body whose operating logic is based, depending on the economic paradigm we advocate, on active players, i.e. price makers who shape the market, or passive ones, i.e. price takers who are under its pressure. The Planning System In his previous works dating back to 1952 (American Capitalism: the Concept of Countervailing Power), 1958 (The Affluent Society), 1967 (The New

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Industrial State), Galbraith described the constituent structures and the functioning of the big firms system, or planning system, but he left aside the competitive market environment. In 1973, with Economics and the Public Purpose9 – even if the fundamental themes could already be found in the 1936 article of the Quarterly Journal of Economics, ‘Monopoly power and prices’ – Galbraith built up what Chapter V of the book calls ‘a general theory of advanced development’ by showing how the two systems were interlocked, and the resulting consequences both in terms of analysis (descriptive side) and in terms of policies (prescriptive side). So, the economic system is composed of two sectors. In the ‘planning system’, which is symbiotic with the state – a symbiosis facilitated by the old boys’ spirit10 – we have seen that the power lies in the technostructure whose objective is the growth of the firm more than the maximization of its profits, and whose action both on consumer choice through advertising and on prices, is dictated by the defensive and offensive strategy it has implemented. As far as the ‘market system’ is concerned, although it is closely related to the neoclassical model (little influence on the consumer, profit maximization, levelling off tendencies), it differs from it on two points: state intervention is present, and the market system interferes with the planning system that dominates it: ‘the existing links between the planning system and the market system, their unequal growth, the exploitation of the latter by the former, and the unequal revenues resulting from those diverse factors, such are the essential features of modern economy’ (Galbraith 1974, p. 168). The market system is relatively stable, and its fluctuations are quite weak and tend to selfadjust. On the contrary, in the absence of state intervention, the planning system is basically unstable due to insufficient effective demand,11 and thus takes advantage of the policies resulting from the Keynesian revolution. In the planning system, as the firm has full control over its prices it has the capacity to satisfy wage claims by transferring the related costs to the consumer, hence an inflationary trend. Finally, the existence of two sectors operated by different mechanisms will – even though Galbraith did not use this expression – lead to a segmentation of the labour market for five reasons, according to Galbraith: the planning sector’s propensity to accept wage claims, as we have seen, in opposition to the market system; the determination of the terms of exchange between the two sectors for the benefit of the former; the acceptance by the market sector entrepreneur of a decrease in his remuneration, if necessary; the possible reduction in prices and incomes in the market sector through anti-inflationary measures, the only possibility to impact on the volume of production and employment in the planning system at most; and finally the use of skilled labour in the latter system and unskilled labour in the market system, thus having an effect on the remuneration gap. For Galbraith, this analysis generates political propositions closely related

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to what could be seen in 1972 in the electoral programme of Democrat candidate George McGovern, a programme Galbraith had participated in. Such propositions are constituent of ‘a general theory of reform’ as ‘rightly or wrongly, he said, I am a reformist and not a revolutionary’ (1974, p. 16). According to him, meeting again with the common interest – beyond the individual interest served by the system – would require action along three lines: ● ●

●

reinforce the power and competence of the market system; set the objectives of the planning system for the benefit of the common interest; govern the economy.

To meet the first objective, Galbraith suggests a series of measures: regulate production, review the practices in relation to the organization of raw materials markets and tariffs, encourage the creation of trade unions, provide assistance to vocational training, create a minimum salary and guaranteed income or substitute income. With regard to the second objective, the planning system in which remunerations are not dependent on the market, the proper measures should consist in checking their levels and gaps for more equality through collective bargaining, fiscal policy and prices and incomes policy.12 For the third objective, Galbraith’s recommendations bear on taxation, which should be highly progressive, the limitation of monetary policies in favour of the most developed sectors and whose impact is dubious and hidden by hermetic vocabulary,13 government expenditure which, in the perspective of ‘a new socialism’,14 ‘does not endeavour to recover the strong areas of the economy but its weaker ones’ (Galbraith 1974, p. 333): housing, education, health, public transportation, art, the environment, all sectors for which it is necessary to ‘accept to spend public money on damage repairs and prevention’ (ibid., p. 341), the promotion of decentralized public services, the social balance being defined as the satisfactory relation between private and public wealth. Galbraith’s above ideas, which progressively took shape in his successive books, have not been confined to silent libraries: ‘Kennedy’s home policies, as well as Johnson’s a bit later, contain some of the essential elements of what could be called Galbraith’s programme. Massive assistance to education, open war on poverty, support to housing and town development programmes, protection of the environment, freshening up of the highway system, consumerism, social justice for all: a set of measures expressing a new frame of mind’ (Silk 1978, p. 147). The ‘Free-market’ System In 1976, Friedman was awarded the Nobel Prize, and in 1977, at the Institute

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of Economic Affairs, he launched an attack against Galbraith, although he said he was his friend. The libel (Friedman 1977) – this is the only suitable word for the booklet that he wrote – is in two parts: the first part to denounce ‘J.K. Galbraith’s conventional ideas’,15 and the second to outline ‘the way to economic liberty, and the stages to go through in order to achieve this goal’. So, as early as 1978, before the coming of Margaret Thatcher and Ronald Reagan16 into office, the intellectual tools of the conservative revolution were in place. When such ideas have widely spread among society, the result is a threefold evolution of the capitalist system: ‘the deregulation of whole sectors of the economy has asserted the priority of market rules. The wave of privatizations has considerably reduced state intervention in the production system and has totally changed the nature of the owners of big firms. Finally, globalization, whose acceleration partly derives from the preceding movements, has offered firms a wider perspective in a purposefully more flexible framework’ (Pastré 2003, p. 89). A new capitalism then saw the light; it has inspired the policies led by the World Bank and the IMF with the following three ingredients: stabilization, liberalization and privatization. Thus the Washington consensus has established fiscal discipline (budget balance and lower taxation), financial liberalization (market-set interest rates), trade liberalization (tariff barriers lifted), the opening of economies to the movement of capital, the privatization of firms, deregulation (elimination of all obstacles to competition), and the protection of patent rights. So, we are getting further away from the Fordist revolution based on a relationship organizing the sharing of productivity gains based on capital/labour compromise, on active economic, budgetary and monetary policies, on a social protection system – the welfare system – based on solidarity between social classes and between generations, on managed financial systems ensuring the financing of capital accumulation through low-interest and controlled rates (Boyer 1987). In the late 1970s, a change of course was operated: wage restraint policies disconnect wage increases from productivity gains, liberalization and privatization policies reduce public regulation, and financial reforms perturb the logic of the financial system: the monitored debt economy makes way for a liberalized market economy. Further to such political and ideological choices, a new growth system is progressively being implemented: ‘shareholder capitalism’ in which market finance plays a major part. … Its main features are: a new distribution of wealth inside corporations, the critical role of stock markets and institutional investors, the prevalence of the shareholder’s logic involving new forms of corporate governance, new corporate and individual behaviours, and finally economic policies losing their autonomy against financial markets. (Plihon 2003, p. 50)

The new macroeconomic regulation makes the fight against inflation its priority task and the monetary policy its essential tool. The new objective of

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managers is to create share value, in other words to generate shareholders value, whereas the Fordist objective was to develop activity and employment. This financialization of corporate governance is visible in managerial policies: mergers and acquisitions generating productivity gains made possible by the synergies created between merged firms and by economies of scale; new focus on their core business, thus making it possible to valorize their know-how, expected to increase their profitability; re-engineering, i.e. the breakdown of the production process consisting in outsourcing the production of a number of products or services to firms with better performance in the related sectors; lower capital intensity, i.e. downsizing, with its most spectacular characteristic, management buyout as part of a takeover bid (ibid. pp. 68–71). Meanwhile, labour–management relations are changing. In the Fordist growth model institutions were centralized, labour–management relations were stable, and collective values were strong and based on solidarity and mutual assistance. A series of practices contributed to disorder such relations. Although collective bargaining ‘picked up’ in the early 1970s, shifting from branch bargaining to interprofessional bargaining, today we can observe the opposite, a shift from branch bargaining to company bargaining, often generating agreements both atypical (i.e. signed by other parties than trade unions, normally the only entities entitled to do so) and derogatory (with employees accepting or forced to accept a revision of a number of hard-won rights). Concurrently, the ‘normal’ contract of employment, the long-term contract, is accompanied by the explosion of the very status of labour (fixedterm contracts of employment, temporary work, part-time work, subcontracting, self-employment) and thus of the collective body of work. Networked companies, the search for flexibility (aimed at adjusting to the demand, responsiveness and optimized production systems), and competence tending to replace skills as a work assessment criterion, are specific characteristics that encourage individualized behaviour and remuneration, and question the concept of common wealth. The conservative revolution which finds expression in an aggressive neoliberalism that goes together with anti-Keynesianism, is aimed at getting rid of the economic and social state interventionist tradition. As regards the financial sector, capital movement and financial flows being totally free now: the consequence of globalization is the destruction of collective action, and the appropriation of the public and social spheres by the market and private entities. It acts as a continuously sorting mechanism under the action of general competition: market against State, private sector against public sector, individual against community, selfishness against solidarity, etc. The new capitalism is the general merchandization of words and things, bodies and minds, nature and culture, thus causing deeper inequalities. (Ramonet 2003/04)

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The functioning of such an economic system does generate a number of deviations, and even scandals (Enron, Vivendi Universal, etc. In Chapter 2, P. Petit gives an interpretation of such scandals, and in Chapter 9, M. Dietrich and A. Scharma focus on the issue of the corrupt corporation). The setting of a 15 per cent ROE has reduced the time scope of firms, a short-term vision which has blinfolded financial analysts and led to higher debt, the extensive development of accounting creativity in order to ‘deflate’ balance sheets, to such modes of remuneration as stock options leading to consider the quotation of shares as the only indicator of success, to ‘Stock Exchange redundancies’ (Danone, Marks and Spencer), and finally to year 2000’s financial bubble (a situation in which the gap between listed shares and the actual value of firms got wider), and the ‘e-crash’ that particularly impacted technological firms. Consequently, an adequate and respected regulatory framework was absolutely necessary, and a series of propositions in favour of an enlightened capitalism were made. Their purpose was to reinforce the weight of regulating authorities by increasing the powers of supervisory authorities and making some regulatory frameworks harder (in terms of fund management, pension fund investment, and correspondent banking), redesign banking information by reviewing the conditions for exercising a number of professions (auditors, financial analysts, rating agencies, fund managers, etc.), clarify accounting standards (clarification of off-balance sheet operations, goodwill amortization, new rules for the allocation and exercise of stock options), re-establish real corporate governance (boards of directors open to independent administrators, penal and financial liability of managers, prohibition of blank powers of attorney) (Pastré 2003, pp. 92–3).

4. THE VALUES ‘Systems of values are necessary, even at the theoretical level of the knowledge of relational facts and channels’ (Myrdal 1972, p. 39). But, similarly to the structures or modes of functioning of the economic system, values evolve: today we hear of individualism as we used to hear of socialization in the sixties. This word means a lot: a value judgement (increasing selfishness and decreasing solidarity), a sociological fact (the disintegration of the old social communities), a historical perspective of the modernity trend (the advent of the individual as foundation of the law), and an anthropological vision (autonomy and narcissism). (Rosanvallon 1988, pp. 45–6)

To describe the changes experienced by capitalism in that field, we will use the language of social protection – the field par excellence of the values

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shared by a society – the opposed and very clear words of ‘welfare’ and ‘workfare’. Welfare If we want to understand the system of values contemporary to the capitalism of Galbraith’s time, as well as the amendments proposed by Galbraith to correct it, a theoretical digression is necessary, which will enable us to better understand the place and role of ideology in the functioning of the economic system. As a matter of fact, values are an integral part of the ideology Galbraith was interested in, devoting long expositions to what he called conventional ideas, ‘ideas which at a given time receive general approval due to their acceptability’ (1961a, p. 16). Such conventional ideas may be of diverse forms as they are shared by the business world, and transmitted by the machinery of education thus becoming ‘a prerogative of the academic, public or economic functions’ (ibid. p. 19). However, just like structures or mechanisms, the constituent values of capitalism evolve, but not without trouble, because as they often have the characteristics of a ‘religious rite’ (ibid. p. 18), they undeniably act as a brake;17 ‘ideas are therefore conservative by nature. They do not give in, in the face of the lack of other ideas, but to the massive aspect of the circumstances against which they are powerless’ (1961a, p. 26). So it is in that way that the economic science, although progressive in its methods (e.g. national income accounting, or input/output techniques) is conservative when it comes to adjusting to deep change (e.g. the consequences involved by the existence of the big firm or the trade unions). Conservatism,18 the imitative scientism typical of social sciences, the specialist’s will to avoid all discussion, and the esoterism of the subject19 all go in that direction. Therefore a counter-offensive is necessary: ‘As beliefs are the source of power, the offensive must be targeted at beliefs’.20 Once this Galbraithian thematic of values and ideology has been established, we can focus on the values we can list in managerial capitalism and which we may possibly want to promote. The main value is the countervailing power, a concept which can be a bit ambiguous as it assumes a certain balance of forces. Galbraith is aware of this fact and, in the book where he analyses it, indicates that his first intention was to use the word countervalence (1956, p. 143) by comparison with the concept of competition, but that word would certainly not have been very well appreciated by his readers, and in addition he says that if there is often, but not always, a symmetry ‘between the way a power is manifested and the way its opponent power is manifested’, his utilization of the word in American Capitalism: the Concept of Countervailing Power was too absolute in terms of the balance to be generated

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by that confrontation’ (1985, p. 77). Similarly, in his autobiography, 30 years later, revisiting his works and their reception, Galbraith wrote ‘my critics accused me of not complying with textbook truth, and, doing so, they overlooked the severe weaknesses of my assumption. I still believe that the elaboration of a countervailing economic power is the normal response to the pre-existing economic power. But, in 1952, in the heat of my demonstration, I made it a mechanism which was a lot more automatic and equalizing than what exists in reality. It is frequent that a countervailing power does not emerge. Many social groups – the young in the ghettos, the poor in the country, textile workers, women employed as clerical workers, many consumers – are still weak and defenceless’ (1983, pp. 271–2). Leaving this semantic issue aside, we are aware that the main point is somewhere else. The concept of power is a blow to the competitive model challenging its existence by the simple adjustment of factors to market requirements as well as by its refusal of all state intervention. With monopolistic competition, the power makes a timid comeback, but the only result for the economic theory is ‘a banal economic power of monopolistic type’ (Galbraith 1956, p. 71). On the contrary, with the managerial capitalism theory elaborated by Galbraith and with the four relevant concepts (organization, planning, management, and technostructure), the power re-establishes all its rights21 concurrently causing the appearance of countervailing forces: ‘the economic power is checked by the countervailing power of those who are subjected to it’ (1956, p. 143), the same countervailing power that can be met with retail distribution networks, cooperatives, consumerism, but mainly with trade unions as ‘the functioning of the countervailing power can be most clearly observed on the labour market where it has its best development’ (ibid. p. 146). But the exertion of this power does not have a universal scope, and it is therefore the government’s responsibility to facilitate its emergence, such as was the case with the New Deal through the Wagner Act, or the assistance programme to farmers and the incentive to get organized. In all, the countervailing power does not achieve the efficiency and equity credited to the market by the neoclassical theory, but at least it is a mechanism whose purpose is to balance powers, make it possible to produce social agreements, facilitate social thrust, and, in a word, as was confirmed by the New Deal, possibly generate the emergence of a welfare state. Workfare Even though Lyndon Johnson’s overwhelming 1964 victory over conservative Barry Goldwater – victory after which he launched a ‘war on poverty’ – may have been considered the triumph of the democrat and Keynesian ideology, we have seen a full turnaround since then. The US right wing’s think tanks (The

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Mont Pelerin Society, Heritage Foundation, Cato Institute), followed by many apostates, former progressives or conservatives of the 1960s, who shaped many top executives of the current Bush administration, were not long in going into action against the ‘pathologies of governmental intervention’ and contributing to ensure the cultural hegemony of Milton Friedman’s and F. von Hayek’s arguments. ‘In 1960, the right wing was Keynesian: British Conservatives, US Republicans and French Gaullists. And 40 years later the left is completely neo-liberal: Blair’s Labour, Clinton’s Democrats and French Socialists’ (Halimi 2003/04, p. 18). For this school of thought, inequality appears to be the actual driving force of history, as it is at the core of biological, economic, or social life. Consequently, income inequalities are justified, as human skills and capabilities are distributed according to a bellshaped curve which coincides with the income distribution curve, thus justifying, according to I. Kristol, the degree of inequality resulting from the functioning of the system. The more or less important capacity ‘to take risks’ which, according to bio-sociologists, is related to I.Q., would go in the same direction to justify the outrageously high remunerations of many heads of major companies’.22 Regarding labour–management relations, the principles of ‘social remodelling’ proposed by MEDEF – the French employers’ federation – are along the same lines: individualized contracts of employment cancelling the sectorial and collective dimensions, prevalence of corporate agreements over branch collective bargaining, individual competence and employability logic instead of the skills logic firmly rooted in blanket agreements, individual management of social protection – the solidarity-based social protection system being replaced by a private insurance system based on financial savings. In all, ‘the ideas governing social remodelling are inspired by the neo-liberal ideology in which the individual prevails over the collective, the economic over the social and the agreement over the law’ (Plihon 2003, p. 98). Is social protection also questioned? The unemployment compensation system is thought to be too often permissive when allowing benefits and too generous in the amounts; minimum income schemes are thought to be deterrents of work; even the names of such benefits and, consequently, their objectives, are reviewed: the RMI (the minimum integration income in France) is completed by the RMA (minimum activity income). Employability is going to replace solidarity as the guiding principle for the allocation of benefits. More generally, ‘today we can see a number of propositions whose purpose is, in terms of social protection, to establish a basic stage that would ensure a minimum protection for the individual, a second stage depending on the firm and the job, and finally a third stage both optional and overcomplementary. When this system is implemented, each one of us will be covered according to their financial means and integration in the business

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world. This is strangely similar to the individualistic philosophy of the late nineteenth century and early twentieth century which originated the first debates on welfare’ (Meda 1995, p. 229).

5. CONCLUSION To conclude this analysis, let us come back to our original question: is capitalism still Galbraithian? The answer can be all but undecided if not evasive. If we focus insistently on the new technologies that made their appearance in the ’70s, and even more if we lend a sympathetic ear to the rhetorics that go with them, the only possible answer is ‘No’. In our daily lives, NICTs – eventually followed by the biological and genetic breakthrough – have brought about dramatic changes, provided that we do not pay attention to the continuing, if not aggravating, digital gap. In our collective existence, financial globalization has generated substantial continuous risks both for workers (redundancies determined by the Stock Exchange) and private investors (e-crash). If we focus on the places of power,23 the answer is different. The big firm, and especially the TNC, is still at the core of the economic system and of our producer/consumer lives: ‘French consumers “eat” TNC (Nestlé, General Foods), “drink” TNC (Coca-Cola), “wash” with TNC (Unilever, Palmolive), and their cars run on TNC (Esso, BP). They are transported by TNCs (Fiat, Ford, Honda), treat their illnesses with TNCs (Dow Chemical, Imperial Chemical Industries), harvest with them (MasseyFerguson, John Deere), “think” with them (IBM, Honeywell), are dressed by them (Ginesco), have their eyes and ears (Nikon, Philips, ITT), and shave with them (Gillette)’ (Maire and Julliard 1975, p. 111). In addition, the ‘shareholders revolution’ did not last long and did not generate the expected results: not only have managers kept their positions, but they have multiplied organizational innovations, designed new human resource management techniques, and taken advantage of the many resources of shareholder capitalism. So, the ‘planning system’ has very good prospects and, on this point, Galbraith’s message is still very topical.

NOTES 1. 2.

Of whom Galbraith said that ‘he was perfectly right on many issues, and especially those of his time’ (1961a, p. 74). The capitalism we are covering here is, according to Braudel’s terminology, capitalism at the core or, in Galbraith’s more common words, US capitalism. Doing which we are not unaware that Galbraith was also interested in the periphery and that he could theoretically synthesize the experience he gained as an ambassador to India in his book The Voice of the Poor. Essays in Economic and Political Persuasion (1983), Harvard University Press, a

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5.

6. 7. 8.

9. 10.

11.

12. 13. 14. 15.

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book in which, anticipating the contributions of a number of modern economists studying African issues, he highlights the concept of accommodation of individuals or of interference between individuals and their environment, which makes it possible to ensure the survival of the poorest ones through family solidarities but also represents a heavy burden for the better-offs, a potential deterrent of individual effort. Contre Galbraith, 1977. The American title is less expressive: From Galbraith to Economic Freedom. The only reservation is in a foot-note which says: ‘this transfer of power is subjected to eclipses and even to shifts in trends when the monetary policy – high interest rates and restricted bank loans – is used to restrain investment and thus stop or try to stop inflation’ (Galbraith 1978a, note 1, p. 98). Technology, which is ‘the systematic application of science and all the other types of knowledge organised for practical tasks’ (Galbraith 1978a, p. 51), implies, according to Galbraith, a job breakdown resulting in six consequences: growing time between the beginning and the completion of a job, constant increase in the invested capital, more and more rigid times and expenses involved in the performance of a job, necessary use of specialized labour, focus of specialist work on a coherent result, necessary planning and scheduling. Low savings imply that ‘the decision to save must obviously be removed from the consumer and exercised by another authority’ (Galbraith 1978a, pp. 77–8); the resulting internal financing weakens the power of shareholders thus reinforcing the power of managers. ‘Power associates with the production factor which is the most difficult to replace or obtain’ (Galbraith 1978a, p. 96), i.e. the land in the eighteenth century, capital in the nineteenth century, and the organizational capacity today. Galbraith does not ignore their existence and action but thinks in 1973, at a time when they did not yet have the weight they acquired later on, that their ‘intervention stops the deterioration of the shareholders’ power, but their effect is much exaggerated’ (1974, p. 115). A book in which, according to L. Silk, ‘Galbraith belatedly undertakes to persuade both his colleagues and the informed public that it is necessary to go beyond Keynes and Samuelson’ (Silk 1978, p. 156). This is especially typical of the United States with the military and industrial system (Galbraith 1978b, p. 67), but this practice is even more widely spread in France with the ‘old boys’ of the Ecole Nationale d’Administration (ENA – National School of Administration). It is well-known that Galbraith studied the 1929 crisis in detail, and that, in the picturesque style of his collaboration to Fortune, ‘during the first week the massacre was the massacre of the innocents. During the second week, it seems that the well-off and rich people were subjected to a levelling process comparable only in size and suddenness with the one led by Lenin a decade before’ (Galbraith 1961b, p. 137). During the war Galbraith headed the price-setting committee: he eventually often mentioned that experience of ‘what was the most discussed and disputed legislation in the whole war’ (Galbraith 1981a, p. 138), and notably by writing A Theory of Price Control (1969). In The Affluent Society Galbraith had already noted that monetary measures are a conservative instrument whereas fiscal policy is a liberal tool. Socialism being defined by Galbraith as ‘the position of the State in the structure of the capital or the organization of a firm, strong enough to ensure or enable the government to exert control or a major influence on it’ (1971, p. 99). Starting from the works of a number of economists (Jewkes, McFazdean, Alen, Demsetz, Solow), Friedman identifies a number of errors presumably made by Galbraith; e.g. and against the assumption developed in Le pouvoir compensateur, ‘trade unions are most concentrated in the industrial sectors in which employers’ power is very little concentrated’ (p. 13), such as the mining industry. Meanwhile, detecting in Galbraith’s works some degree of the philosophical radicalism that could be found in J.S. Mill’s works, thus making him closely related to the radical Tories of the early nineteenth century, he thinks that Galbraith demonstrates both a lack of evidence and dogmatic conviction: ‘the characteristics he

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16.

17.

18. 19. 20.

21.

22.

Changing capitalism: shareholders versus managers ascribes to the world are essential for the maintenance of his own values, and his ideological and political position’ (p. 32). Galbraith, however, did not miss the opportunity to note with mischief that Reagan, when under the necessity of doing so, did not hesitate to brush aside the neo-liberal recommendations he had conformed to in his electoral programme as well as when he came into office (deregulation, strict monetary policy, budget restraint, lower taxation). As a matter of fact, when unemployment figures started to rocket, ‘President Reagan, considering his support to public expenditure, was the most convinced keynesian since the Kennedy years, and since John Maynard Keynes himself’ (Galbraith 1995, p. 206). The first chapters of The Affluent Society relate the long progress of thought that led the economic theory into dropping ‘the despair tradition’ (Chapter III) represented in the form of poverty and inequalities by Ricardo and Malthus, and, more generally, by ‘the sad professors of the sad science’ until the days of ‘precarious optimism’ (Chapter IV) advocated by the marginalists, followed by the more positive vision of American economists, such as Carey or George. It is to be noted that the economic theory has, more generally speaking, two essential features in terms of ideology. On the one side it tends to make the visible reality harder. As a matter of fact, as Galbraith says: ‘the model of the competitive society, as it is described in books, seems to be more hazardous and dangerous than anything generated by true life competition. In the real world, the harshnesses of competition have been softened by usage, monopoly, trade unions, a certain degree of passive resistance, legislation, and even, to a certain extent, compassion’ (Galbraith 1961a, p. 46). On the other side, the economic theory, establishing rigorous mechanisms and economic laws, justifies state abstention, since ‘regarding the economic cycle as a normal rate implied that it was self-correcting. Consequently, it was useless to do anything to correct it’ (idem, p. 49). But this ideological function also goes together with an instrumental function. As a matter of fact, the objective of the economic theory ‘does not consist in making the economic system known or improving it, but in serving the purposes of those who are in power within the system’ (Galbraith 1974 p. 23). Even the differentiation between micro- and macro-economics serves this purpose as it contributes to ‘avert the eyes from the influence of the modern public limited company on the general strategy’ (idem, p. 44). ‘Economics has not been a science, but a system of beliefs useful to the conservatives who intended to present it as a science’ (Galbraith 1971, p. 69). The best students ‘choose economics as it enables them to practise mysterious mathematical skills’ (Galbraith, 1961a, p. 137). Galbraith 1974, p. 279. According to L. Silk, in 1952, considering that his book Theory of Price Command had been unnoticed, Galbraith decided to address the public at large by acting on their beliefs ‘in the form of essays closer to popular works than scientific treatises’ (Silk 1978, p. 133). By doing so, ‘John Galbraith, a mischievous man, brought to the highest degree the art of living one foot inside and one foot outside the economic sanctum’ (ibid., p. 115). Besides, Galbraith tells us of the ‘by-pass strategy’ he had implemented, consisting in ‘touching a wide public and thus force the attention of the specialists’. Revisiting the analysis he had made in The New Industrial State, Galbraith may be optimistic, and, remembering Duesenberry’s works, writes in Annals of an Abiding Liberal, that by scattering the power, the big firm ‘makes a big step forward toward a society which, if not without social classes, is at least one in which social divisions are considerably reduced. And this has a big impact on consumption patterns’ (1981, p. 28). As far as E.A. Seillière is concerned – president of MEDEF, the French employers’ federation, who earned €1.37 million as Chairman of ‘Wendel Investissement’ in 2002 – at his hearing by a parliamentary committee, he said that all legislation aimed at setting an upper limit to such remunerations would be counter-productive as ‘if the heads of major companies received the same compensations as the members of parliament – i.e. €10 500 per month – all big French firms would disappear’. To that idyllic, not to say cynical vision we could oppose the galbraithian analysis: ‘when going up through the hierarchy, an individual realizes that he has more and more power on the determination of his own salary. Remunerations have therefore become very substantial in major companies. It would not be

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serious to say, as some do, that they are a reflection of the scarcity of talent and thus the labour market. In the modern firm, salaries are not only dissociated from the function but can even be inversely proportional to the achieved results’ (1981b, pp. 83–4). At this point, it is not too late to remember that the analysis of power is at the heart of Galbraith’s questioning. Most of the time he analyses its modes of intervention but both in his 1972 inaugural address to the American Economic Association and in his 1983 The Anatomy of Power, power is the subject of a deeper analysis. Galbraith identifies three instruments of power (discussion, remuneration and persuasion, influence) that refer to three sources (personality, property, organization). The Galbraithian analysis then develops along three lines. The first one is historical, with the change in the forms of power over time: ‘just as development caused the shift of power in society from the dissuasive mode to the retributive mode in the form of financial remuneration, so it thrusts it into resorting more and more to persuasion and influence now’ (1985, p. 31); the big firm is very good at resorting to those various methods to establish its power: ‘the organization can exert dissuasive power; in its normal association with property it has retributive power, but above all, and especially in its modern shape, it exerts persuasion’ (ibid., p. 61). The second direction of the analysis is more social and psychological (1956, p. 43), Galbraith notes that, although much sought after, power is often denied and frequently euphemized: ‘power presents many problems to a community that hates its existence, denies possessing it, but enjoys exerting it’ (ibid., p. 33). Finally, the third direction is more political with the already seen symbiosis between state and organization. Galbraith indicates that the state ‘controls the exercise of dissuasive power through strict legislation, but controls the exercise of retributive power with a lot of flexibility. And on the whole, although in a highly controversial context, it protects the exercise of persuasion. It tolerates personality, protects property and, with a few conditions, defends the organization’ (ibid., p. 84).

REFERENCES Aron, R. (1962), Dix-huit leçons sur la société industrielle, Paris: Gallimard. Artus, P. (2002), La nouvelle économie, Paris: La Découverte. Berle, A.A. (1965), La Réorganisation de l’économie américaine [Power Without Property: A New Development in American Political Economy], Paris: PUF. Berle, A.A. and G.C. Means (1932), The Modern Corporation and Private Property, London: Macmillan. Bonis, J. (1971), ‘L’organisation et son environnement’, Sociologie du travail (July–September), pp. 213–27. Boyer, R. (1987), La Théorie de la régulation: une analyse critique, Paris: La Découverte. Braudel, F. (1985), La Dynamique du capitalisme, Paris: Flammarion. Brender, A. and F. Pisani (1999), Le Nouvel age de l’économie américaine, Paris: Economica. Burham, J. (1947), L’ère des organisateurs [The Managerial Revolution], Paris: Gallimard. Meda, D. (1995), Le Travail, une valeur en voie de disparition, Paris: Aubier. Friedman, M. (1977), Contre Galbraith, first published in London by the Institute of Economic Affairs as From Galbraith to Economic Freedom, Paris: Economica. Galbraith, J.K. (1956), Le Capitalisme américain, le concept de pouvoir compensateur [American Capitalism, the Concept of Countervailing Power], Paris: Librairie de Médicis. Galbraith, J.K. (1961a), L’ère de l’opulence [The Affluent Society], Paris: Calmann Levy.

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Galbraith, J.K. (1961b), La Crise économique de 1929, Anatomie d’une catastrophe financiere [The Great Crash 1929], Paris: Payot. Galbraith, J.K. (1969), A Theory of Price Control, Cambridge, MA: Harvard University Press. Galbraith, J.K. (1971), Fraternité, finances, fantaisie. Regards sur le monde [A Contemporary Guide to Economics, Peace and Laughter], Paris: Denöel. Galbraith, J.K. (1974), La Science économique et l’intérêt général [Economics and the Public Purpose], Paris: Gallimard. Galbraith, J.K. (1978a), Le Nouvel état industriel [The New Industrial State], Paris: Gallimard. Galbraith, J.K. (1978b), Tout savoir ou presque sur l’économie, Paris: Le Seuil. Galbraith, J.K. (1981), Chroniques d’un libéral impénitent [Annals of an Abiding Liberal], Paris: Gallimard. Galbraith, J.K. (1983), Une vie dans son siècle [A Life of Our Times], Paris: Gallimard. Galbraith, J.K. (1985), Anatomie du pouvoir [The Anatomy of Power], Paris: Le Seuil. Galbraith, J.K. (1995), Voyage dans le temps. Témoignage de première main [A Journey Through Economic Time], Paris: Le Seuil. Halimi, S. (2003/2004), ‘La droite américaine’, in Le Nouveau capitalisme, Manière de voire n. 72, Le Monde diplomatique, December 2003–January 2004, pp. 7–9. Maire, E. and J. Julliard (1975), La CFDT aujourd’hui, Paris: Le Seuil. Meda, D. (1995), Le Travail, une valeur en voie de disparation, Paris: Aubier. Myrdal, G. (1972), Le Défi du monde pauvre [The Challenge of World Poverty], Paris: Gallimard. Pastré, O. (2003), ‘Le capitalisme, crise ou mutation?’, Les Cahiers français, 319 (November–December) 99–102. Plihon, D. (2003), Le Nouveau capitalisme, Paris: La Découverte. Reich, P. (1887), L’Economie mondialisée, Paris: Dunod. Rifkin, J. (2002), L’âge de l’accès. La Révolution de la nouvelle économie [The Age of Access], Paris: Pocket. Ramonet, I. (2003/2004), ‘Une régression, in Le Nouveau capitalisme’, Manière de voir no. 72 Le Monde diplomatique, December 2003–January 2004, pp. 6–7. Rosanvallon, P. (1988), La Question syndicale, Paris: Calmann Levy. Schumpeter, J. (1954), Capitalisme, socialisme, démocratie [Capitalism, Socialism and Democracy], Paris: Payot. Silk, L. (1978), Apres Keynes, cinq grands économistes, Paris: Editions de l’organisation. Touraine, A. (1973), Production de la société, Paris: Le Seuil.

PART II

Globalized Technostructures: Towards a Theory of the Corrupt Corporation

6. Galbraith’s views on firm and market: between neo-institutionalism and evolutionism Bernadette Madeuf 1. INTRODUCTION The purpose of this chapter is to examine the relationship between market and firm in J.K. Galbraith’s works. Thus, it is concerned with the conditions and institutions which are the foundations of contemporary capitalist economy. As a truly convinced Keynesian economist, J.K. Galbraith questions market functioning and regulation as they are defined – and supported – in mainstream economics. This questioning is the true basis of the development of J.K. Galbraith’s thought in his most famous works. Although the main issue is the relations between market and firm, as they constitute alternative coordination mechanisms of economic activities (the main issue was raised by Coase as far back as 1937), a second issue will also be covered: the balance of power between various market players (market power, consumer sovereignty, as opposed to the power of large firms, and the persuasive power of advertising). Our reflection will mainly focus on The New Industrial State (1967) which deals with the issue of market structures and corporate power in the market as well as within the firm itself. Of course many significant changes have occurred since The New Industrial State was published. Among the most important changes we can mention the globalization of markets and firms, the evolution of managerial power facing the growing weight of shareholders and the evolving relationship between them and the technostructure regarding decision-making in the firm, as shown by the issue of corporate governance, the change in the motivations of managers, increasingly focusing on the pursuit of their own financial rewards. Some of these meaningful issues are dealt with in other chapters of this book (see Chapters 1, 2, 8 and 9) and they are mentioned here only to make the purpose of this chapter clearer. The main purpose of the chapter is not to assess J.K. Galbraith’s arguments 107

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in front of today’s economic reality in order to evaluate their validity. It is rather to try to find out to what extent the issues raised and the answers given by J.K. Galbraith impact on the renewal of corporate economic analysis. In particular, the chapter examines how taking into account the changing relationship between market and firm, based on the necessary control of technical evolution, eventually leads to an analysis built on assumptions conflicting with mainstream economic theory. In some respects, this analysis is close to the new institutionalist approach of the firm, and in some others it shares views with the evolutionist approach. But this does not imply that Galbraith’s analysis generates any chimerical synthesis of the two abovementioned approaches. Thus, the chapter is structured as follows: after a first section presenting the concepts that are regarded as essential, the second is devoted to a short comparison of J.K. Galbraith’s views with the two approaches.

2. J.K. GALBRAITH’S CONSTRUCTION The first and inescapable step of this chapter is a presentation of the leading concepts and the way they are connected in the development of J.K. Galbraith’s analysis. This exercise will be based on one of J.K. Galbraith’s major works, The New Industrial State (NIS1). As the author puts it in his foreword, this book was conceived while he was finishing The Affluent Society, and is thus closely connected to the latter. Even more, the NIS forms the main building, whereas The Affluent Society ‘stands to that book as a house to a window’ and ‘the earlier book allowed the first glimpse inside’ (NIS, p. ix). Furthermore the author says that the NIS had been put aside during the period, termed ‘the diplomatic interlude’ (ibid.), during which he was ambassador to India. Thus the maturing time corresponding to the post held in India, and the close link between these two major works, underscored by the author’s remarks, encourage us to believe that the NIS plays a central part in J.K. Galbraith’s thought. A large number of expressions or concepts coming from the NIS have become very famous and almost commonplace.2 But popular notions may snare inattentive readers. Popularity does not imply that notions have received all the precise attention they deserve. It may even lead to the opposite. In order to elude the familiarity trap, it seems necessary to put the main issue of market–firm relationship, the core issue of the institutions of capitalism, back in the context of the interlocked themes developed by J.K.G., without brushing aside the historical environment. Thus, the first part is devoted to a thorough reading of J.K. Galbraith’s NIS.

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Technological Change and Evolving Economic Structures The starting point of the analytical construction of J.K. Galbraith is to take into account the evolving nature of the economic activity. This does not only imply considering this change as a fact, but also understanding its very nature and explaining its source and consequences; in a way this takes the NIS away from the conventional analysis concerns centred on the equilibrium in allocating resources that are both scarce and fixed. This change in perspective is altogether qualitative, structural and multidimensional. If the origin of the change in economic life is mainly located in the evolution of technology applied to production, other dimensions should not be overlooked. The progress of knowledge and its further application to production is the most visible part of the economic change. This implies two main consequences and three complementary changes. The first major consequence is the replacement of manpower by machines and the upgrade of the skills required in human resources. It is accompanied by an enlarged scale of production thus generating large companies (with the help of the legal status of the limited company). The second consequence concerns the growing participation of the state in economic activity: directly through the expansion of public activities (national defence and space exploration) which are directly controlled by the public administration, and indirectly through the management of global demand in line with the Keynesian revolution. These result in a stabilized economic situation and steady growth. The three complementary changes only will be mentioned: increased advertising, and ‘the massive growth in the apparatus of persuasion and exhortation that is associated with the sale of goods’ (NIS, p. 3), the decline of the trade union, and the expansion in enrolment for higher education. It would be meaningless to consider these changes in isolation, and J.K. Galbraith stresses that they are interconnected and form together a ‘larger matrix of change’ which is ‘much more than the sum of its parts’ (NIS, p. 4). Accordingly we are facing a true systemic change. One example of these interdependent changes is given by the author and concerns the relationship between technology and the large firm: it is the large corporation that can gather the necessary financial funds and the human skills required by the implementation of new techniques, but it is also the large corporation that is able to forecast and anticipate in order to shape its economic environment and thus manage its operations and pursue technological innovation. Nevertheless, the most important part of the systemic change is the weakening of the market law (NIS, p. 6), which is replaced by corporation ‘planning’. This represents a complete reversal of the relations between the fundamental institutions of capitalism, market and firm, that characterizes the

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industrial system of the NIS. Even if some industries (mainly agriculture and services) do not proceed along this new pattern of market–firm relations, most manufacturing industries are included in this new model.3 Technology and Production Technology plays a central part in J.K. Galbraith’s analysis due to the constraints it imposes on productive activities. Technology is defined in a classical way as ‘the systematic application of scientific and other organized knowledge to practical tasks’ (NIS, p. 12), which implies a thorough division of labour into its component parts. Before presenting the six major consequences of the application of technology to production, it is useful to note that the emphasis J.K. Galbraith puts on technology is particularly significant. Actually this implies a change in the core of economic analysis. In ‘conventional economics’ as J.K. Galbraith puts it, the core of analysis is exchange and exchange equilibrium in the market. Here the conditions of production, linking technological knowledge and organization of skills, are the starting point and foundation of the analysis. The six consequences implied by the application of technology to production all converge towards the necessary planning of manufacturing operations: the extension of production processes, the increase in capital goods (irrespective of the higher scale of production), the growing rigidity of production processes due to the use of specialized skills and dedicated equipment, the need for highly skilled labour for both productive activities, and organizational and planning activities, the inescapable task of coordinating the various specific functions inside the firm, and eventually the need to plan production which comes as the result of the combined previous effects. Despite the major part played by technology as the driving force of the evolution of economic structures and their functioning, it must be emphasized that J.K. Galbraith stresses that technology not ‘only causes change’, but that ‘it is a response to change’(NIS, p. 20). Therefore if technology imposes specialization and complex organization, it is also made possible by the specialization and the complex organization of activities. Insisting on the dialectical relationship among the determinants of change should prevent a deterministic overestimate of technology which is implicitly, and sometimes explicitly, assumed in economic analyses of technical change. Market Uncertainty and Planning Planning is central to the functioning of new capitalism, actually more than technology itself. Planning is concerned with the forecast of activities to

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ensure the smooth progress of production. But above all, from a theoretical viewpoint, ‘planning consists in replacing prices and market, as the mechanism for determining what will be produced, with an authoritative determination of what will be produced and consumed and at what price’ (NIS, pp. 25–6). Thus planning, although being closely linked to the technical complexity of production, cannot be restrained to the organization of production: ‘Much of what firm regards as planning consists in minimizing or getting rid of market influences’ (NIS, p. 26). What is at stake is overcoming market uncertainty. Thus, planning is the essential feature of the market–firm relationship. It transforms the link between the two fundamental capitalist institutions, if not for every economic activity,4 at least for the bulk. J.K. Galbraith specifies that large size and product diversification may protect firms from market uncertainty, with no need to replace it with another coordination mechanism; but in this case firms exercise their power over the market. More generally, three strategies make it possible for firms to replace the market with ‘an authoritative determination of price and the amount to be sold or bought at these prices’ (NIS, p. 27). First, the market can be superseded by vertical integration that makes it unnecessary to negotiate on prices and quantities previously exchanged at arm’s length. This reasoning has received large acceptance along with the internalization theme developed in the transaction costs theory, from Coase to Williamson. Second, reducing the decision-making power of other firms, customers or suppliers, of the ‘planning unit’, may also be implemented through contractual agreements specifying quantities and prices of exchanged products over long periods of time (subcontracting, quasi-integration), thus organizing the exchange relationship. Eventually, the large size of firms, and above all the power they can exert in concentrated oligopoly market structures, allow them to regulate the market through a collusive price control. But large size also makes it possible to influence demand through advertising and sophisticated marketing strategies. Even if this control cannot be total, it can reduce outlet uncertainty, which is the objective aimed at. It may be concluded that planning goes along with the increasing application of technology and favours large companies. And it might be quoted, as another concluding remark, that ‘the enemy of market is not ideology, but the engineer’ (NIS, p. 33). This complete inversion of the relation between market and firm, as opposed to the neoclassical view, also concerns capital markets. The savings and self-financing capacity of firms enable them to limit their dependence on capital markets. The important issue of the changes brought about by global

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finance and the power of shareholders is examined in other chapters, and will not be covered here. The Power of the Technostructure The large firm’s need for planning is the most prominent factor of the changing balance of power between market and firm. But in J.K. Galbraith’s analysis this necessary planning is closely linked to the technostructure. The two notions are closely related to the issue of power: the power of the firm on the market with the planning power of the technostructure within the firm. In some respects J.K. Galbraith’s thesis belongs to the managerial approach of the firm: in this approach the decision-making power has been transferred from the capital owners, i.e. the shareholders, to the managers. This shift of power on the productive activities is not the first to occur in economic history. As J.K. Galbraith observed it, land first and then capital have bestowed this decision-making power on their owners. The explanation lies in the elasticity of the supply of the corresponding resource: power gets to those who own the resource with the highest marginal inelasticity. Indeed the constraints emerging from the implementation of technology and planning in the firm have greatly raised the needs for ‘specialized talent and for its organization’ (NIS, p. 57) whilst firms cannot supply these resources. Therefore the decision-making power falls to ‘organized intelligence’. Resorting to organized intelligence aims at satisfying three requirements. First, there is the need to combine scientific and technical capabilities corresponding to the application of modern productive technologies. These require highly-skilled human resources. Thus, it is necessary to combine and coordinate specific knowledge. Second, planning is required, not only for the technical and productive side of the activities of the firm, but also in order to organize what is nowadays known at the supply-chain. This implies managing, before production, the purchase of various inputs, their quality and delivery schedule, and, after production, the selling of products by regulating the markets (contracts with other firms, consumer persuasion, among others). Altogether this implies gathering and organizing various flows of information. Eventually, at a higher level, all the capabilities gathered for the planning of production and logistics, have to be coordinated for a common superior goal. All this involves the capability to extract the necessary information, and to assess its value and relevance, before integrating it into the decision-making process. Coordination of Capabilities and Collective Decision-making The characteristics of the technostructure, as a collective entity dedicated to making decisions, have to be made precise, insofar as it goes against the

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traditional views based on the assumption of individual and rational decisionmaking. Following J.K. Galbraith, the management of the large modern firm relies on collective decisions made by committees (but also in a less formal way through individual discussions). The organization of the large firm is a ‘hierarchy of committees’ (NIS, p. 64) wherein information is exchanged, assessed and condensed. Information is processed in order to produce collective decisions. Another coordination task consists in assigning the various capacities to the different committees so that they make decisions and transfer them, if required, to other committees at a higher level. It is only this committee collective work that makes it possible to identify the ‘intellectual resources’ of the various partners taking part in the decisionmaking process, and the ‘reliability’ or ‘confidence degree’ they deserve. Against those criticizing this collective activity, J.K. Galbraith shows that this is the only efficient way to proceed. The whole paragraph describing the decision-making process should be quoted.5 Suffice it to say that the collective decision-making process can neither be regarded as a mere exchange of information (for other information or for money) nor as the automatic application of simple decision-making rules. It does not consist either, or it does not only consist, in the sharing of information stemming from different sources. The required information is actually processed – screened, assessed, matched – in order to produce a decision. Describing this process as the working out of a decision is not just a formal statement: there is a creative process for every decision, and decisions carry future action on the world (inside or outside the firm). In the field of management literature there are studies tackling this issue of the decision-making process in committees, showing the role of the communication of diverse information and knowledge items among the participants in committees (see among others Bennett and Anthony, 2001; Baumard, 2002). To acknowledge that the technostructure, as a collective entity, produces or generates decisions carrying future action implies the end of the individual entrepreneur seen as the heroic figure embodying risk-taking and the launch of innovative systems and products, as is conveyed in the Schumpeterian approach (on this point, see S. Boutillier’s contribution, Chapter 3). This does not mean that there is no individual firm anymore, as admitted by J.K. Galbraith, but that the modern firm is managed by the technostructure. This involves consequences related to the values conveyed by the technostructure and shared by its members, and produces a change in the goals – incentives and motives – pursued by individuals. Values and Incentives There is a striking contrast between the conditions favouring collective

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decision-making and action, and the values usually associated with the rational behaviour of individuals. Thus, J.K. Galbraith contrasts attentiveness to other people’s reactions, adjustment to organization and cooperative goodwill, and the indifference that goes along with individualism and is increased by competition. Without being openly critical (J.K. Galbraith’s style and humour often soften his critical views) he shows that there is a complete lack of compatibility between individualistic values and organized intelligence, that stresses the limits of purely individual rationality. This questioning of pure individualistic rationality may be connected to the rejection of profit maximization as the goal of the technostructure and money making as the individual stimulus of the people in the technostructure. In both cases, the usual behavioural assumptions of the neo-classical theory are questioned. According to J.K. Galbraith, the challenge is to understand what the objectives of the technostructure are. But this issue cannot be dealt with independently of the issue of individual motivations and incentives inside the technostructure. There is actually a high degree of conformity due to the ‘principle of consistency’(NIS, Chapter xiv) between, on the one hand, what the organization expects of its members, and, on the other hand, what the organization expects of society. If individuals are exclusively driven by the maximization of their income, then it should be evident that the only objective of the technostructure is the maximization of its profits. In investigating the psychological drives that can contribute to linking individuals to the organization, the author shows that, apart from the financial reward, three other main driving forces play a basic part. These are constraint, identification (recognizing that the organization’s goals are more valuable than individual ones) and adaptation (individual employees’ hope that the organization’s goals may be influenced according to their own preferences). Constraint is not consistent with identification and adaptation, and thus will be rejected as a core element of the link between individual and organization. Altogether this will probably result in a combination of the other two components with the financial reward, this not being the most important one (as far as a satisfactory level is reached). Then the technostructure produces a special combination of motivations for the participating individuals. For the objectives of the technostructure itself, they have to be consistent with those of the individuals. Therefore it is not profit maximization that is aimed at, but a satisfying level of profit is nevertheless required in order to guarantee its autonomy and its capability to pursue its objectives. The main target of the technostructure is to ‘maximize its success as an organization’ (NIS, p. 121), meaning that it aims at its survival through its own growth, based on the growth of its output and sales via market control. ‘A secure level

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of earnings and a maximum rate of growth consistent with the provision of revenues for the requisite investment are the prime goals of the technostructure’ (NIS, p.176) when in fact the ability to grow is related to the power of innovation. According to the ‘consistency principle’, stated by J.K. Galbraith as a central assumption of the whole social organization, the objectives of the technostructure are the same as those of the capitalist society taken as a whole. Therefore, the ultimate consequence is that ‘the corporation accommodates social attitudes to its needs. What is deemed to be sound social purpose is a reflection of the goals of the corporation and the members of the technostructure’ (NIS, p. 166). This is the reason why the technological race and economic growth are seen as valuable social ends.

3. ELEMENTS OF COMPARISON: BETWEEN INSTITUTIONALIST AND EVOLUTIONARY APPROACHES Comparison is a delicate exercise. Not only does it involve its own intrinsic difficulties, but also its presentation may be regarded as unsatisfactory and flawed by the specialists of the various analytical streams that have been tentatively brought together. Regarding intrinsic difficulties, which aspects should we select? What concepts are of importance? Apparently it is neither possible to give a full and extensive presentation of the other two approaches we are referring to, nor to make an exhaustive point-by-point comparison. Thus, there are difficult and necessary choices to be made in order to present this tentative comparison, which entails many risks, the least being to appear partial and shallow. Two issues have been selected. The first relates to the determining factors of the boundaries between firm and market, and the second is concerned with the coordination mechanisms inside the firm. For each issue there are similarities with two other approaches: the institutionalist approach of the firm, or transaction cost theory, for the former, and the evolutionary approach for the latter. But paralleling J.K. Galbraith’s thought with either approach cannot be undertaken very far, since it is not possible to take into consideration some current debates on detailed issues taking place both inside and outside these schools of thought. J.K. Galbraith’s analysis and the two approaches nevertheless share some assumptions that differentiate them from the conventional (neo-classical) vision. These assumptions reveal some basic choices that are not always explicitly made, but stand comparison. Such assumptions thus concern the

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rationality of individuals and the uncertainty and incompleteness of the market as a coordination mechanism of economic activities. These imply considering the firm not only as a factor of production, but also as an institution going together with the market to understand the capitalist economy. Furthermore it also involves questioning the internal operation of the firm as an organization composed of individuals. The Boundaries between Firm and Market The factors accounting for the growing size of firms through vertical integration or the multiplication of contractual arrangements between firms, are eventually concerned with the boundaries between the two coordinating mechanisms of economic activities. Apparently there is a parallel between J.K. Galbraith’s analysis and the transaction cost theory dealing with internalization. In both cases, there is a shift of the boundaries between the market, with the price mechanism, and the firm wherein resources are allocated among activities according to hierarchy or authoritative decision. But the accounting factors differ by nature and are eventually related to diverging behavioural assumptions. For the transaction cost approach, the boundaries of a firm’s market are basically determined by the existing transaction costs (or costs of the price system, Coase 1937, Williamson 1975). Such transaction costs are mainly associated with the specificity of the assets involved in the transactions, with the uncertainty due to imperfect and asymmetric information and with the frequency of transactions (Williamson 1985). Actually these factors are interdependent: thus, asymmetric information is linked to asset specificity, and the frequency of transactions is meaningful only if specific assets are implied. As yet firm and market have been considered as two opposed mechanisms in the allocation of resources, whereas the transaction cost approaches, particularly in Williamson’s writings (Williamson 1985, 2002), propose a continuum of organizational arrangements in which the objective is to minimize the costs, according to the efficiency principle, rather than increase the firm’s power over the market (even if this can be an unexpected result). The opposite stands in with J.K. Galbraith’s views: it is the control over market variables, quantities and prices, that accounts for the large size, vertical integration or contractual long-term arrangements governing transactions between firms, and the shifting boundaries between firm and market. Control over the market may naturally result in the power of the firm over the market, which is more striking if the influence on demand through marketing strategies and the pervasive power of advertising are taken in account. However, in the background, the prominent factor corresponds to the need to

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face market uncertainty, whereas rapid technological change requires heavy investment. More fundamentally, stressing the technological constraint, as in J.K. Galbraith’s analysis, leads to emphasizing the production side, whereas transaction cost approaches are basically focused on transaction and exchange conditions. In a parallel way, the origin and definition of uncertainty are contrasted. For J.K. Galbraith, uncertainty mainly results from the constraints on the production side implying the forecasting not only the conditions and organization of supply but also of demand. In the transaction cost approaches, uncertainty is explained by the behavioural assumptions. With imperfect information and asymmetric information, reinforced by asset specificity, agents choose strategies that can result in opportunistic behaviour and moral hazard6 (Williamson 1991). Internal Coordination The foundation and operation of the technostructure may be related to some developments of the evolutionary approaches of the firm. These approaches do not form a completely unified current of analysis, and we will refer to the writings of the main proponents, without discussing their differences (Nelson and Winter 1982; Dosi et al. 1988; Teece 1988, Dosi et al. 1990; Dosi 1991; Dosi and Marengo 1994; Teece and Pisano 1994). In the comparison exercise two points may be presented. On the one hand, the emphasis placed by J.K. Galbraith on the technological change and diversified skills required by the implementation of technology, may be regarded as close to evolutionary views on the importance of knowledge and innovation, concerning products, production processes as well as organizational forms. On the other hand, the analysis of the decisionmaking process inside the technostructure may be linked to organizational routines and learning. Thus, ‘organized intelligence’, another expression used by J.K. Galbraith to describe the firm and the technostructure, refers to the need to gather and coordinate various skills. The firm, as an organization pooling capabilities and skills, echoes the ‘cognitive community’ or ‘a group of cognitive communities’ that can be found in the evolutionary approaches. Actually the evolutionary approaches take account of the characteristic features of knowledge used in productive activities, stressing its limited, fragmented, and tacit nature, which implies the necessity of combining its different pieces. Accordingly the firm is defined as a set of technological knowledge; but it also generates basic skills coming from learning and production routines, more or less formalized or tacit, which consist in specific assets of the firm that cannot be transferred easily (Teece 1988; Dosi et. al. 1990).

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Once accepted, the fact that organizational skills play a prominent part in the making up of the competitive capacity of the firm, it must be explained how collective learning processes occur and are eventually developed and formalized in order to generate organizational routines. These routines result from interactions among agents inside the firm, facing particular difficult events or opportunities offered in the firm’s environment. But the evolutionary literature remains rather in the abstract on this particular point concerning the formation of organizational capabilities, though they are crucial (Coriat and Weinstein 1995). Conversely, in J.K. Galbraith’s approach, there are some elements discussing the issue of the committee collective work that gathers, screens, processes, and assesses information in order to make decisions. But above all, this discussion emphasizes some psychological and socio-psychological conditions required by collective decision-making. These conditions cover personal motivations and incentives implying a behaviour opposed to the usual behaviour of the rational calculating individual, which is the basic model in mainstream economics. The result is that for J.K. Galbraith it is possible to acknowledge the firm as a collective entity, composed of individuals, but possessing a kind of ‘group personality’. It seems that in the evolutionary approaches in favour of a cognitive conception of the firm, the firm itself eventually becomes the mere envelope of organizational routines coming from the learning produced during individual interactions. Is it the result of the resistance of methodological individualism that prevents a group composed of individuals being given the status of a true entity? This is what J.K. Galbraith, on the contrary, claims loudly and strongly. To have, in pursuit of truth, to assert the superiority of the organization over the individual for important task is a taxing prospect. Yet it is a necessary task. It is not to individuals but to organizations that power in the business enterprise and power in the society has passed. And modern economic society can only be understood as an effort, wholly successful, to synthesize by organization a group personality far superior for its purposes to a natural person and with the added advantage of immortality. (NIS, p. 61, italics in original)

But this does not imply that we should not question the way organizations are formed and above all the way they operate. On the contrary, following the view of the firm as a pool of capabilities (Penrose 1959), the main issue is to analyse how organizations build organizational knowledge (Nonaka and Takeuchi 1995) taking into account not only explicit information and knowledge, but also its tacit part (Polanyi 1966) and the various cognitive dimensions involved in the decision-making process (among others, Lant and Shapira 2001; Baumard 2002).

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4. CONCLUDING REMARKS As previously announced this chapter has been mainly focused on the theoretical aspects of the analysis of the firm by J.K. Galbraith as presented in the NIS. This does not imply that new dimensions of the functioning of contemporary capitalism do not deserve discussion for their own sake. Of particularly great importance are the changes involved by the globalization process. This implies evolving organizational structures of firms confronting new competitive pressures in global markets and facing a technological race taking place at an increasing speed. In this perspective, global firms are experiencing new institutional forms of organization at the international level resulting in various contractual arrangements generally referred to as ‘networks’ taking place along the value chain (contracts and alliances of different nature, subcontracting, etc.). The main issue to be raised is how far such changes are affecting the technostructure as described by J.K. Galbraith. Technostructure as a bureaucratic decision-making mechanism is nowadays extending offshore, implying the solving of new coordination problems regarding the activities of the firms. One particular point is to question how the skills and organizing capacity which are at the core of the technostructure are transformed in order to balance the proximity requirement necessary to some activities, such as the production of innovative technologies, with the constraints emerging from globalization. The next chapter tries to cope with this issue, considering the case of R&D activities conducted at the international level.

NOTES 1. References are excerpted from The New Industrial State, Houghton Mifflin Company Boston, 1967 (second printing). 2. They have also brought their author an ambiguous reputation among his colleagues, since J.K. Galbraith has been seen both as a pop star and a twentieth century version of the radical Tory (Friedman). 3. A question can be raised about the impact of new technologies, especially information and communication technologies, on the Galbraithian model. But this point pertains to the larger issue of confronting this model with contemporary economic structures. As already said, this issue is dealt with in other chapters (notably Chapters 1, 5, 7 and 10). Our purpose is mostly limited to the relations between conceptual constructions. 4. Some production activities corresponding to small firms still depend on market mechanism. But as Galbraith repeatedly points out, it should be more important to understand the capitalism of large corporations dominating the market, than to stick to the myths of market and consumer powers. 5. ‘Thus decision in the modern business enterprise is the product not of individuals but of groups. The groups are numerous, as often informal as formal, and subject to constant change in composition. Each contains the men possessed of the information, or with access to the information, that bears on the particular decision together with those whose skill consists in extracting and testing this information and obtaining a conclusion. This is how men act

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Globalized technostructures: towards a theory of the corrupt corporation successfully on matters where no single one, however exalted or intelligent, has more than a fraction of the necessary knowledge. It is what makes modern business possible, and in other contexts it is what makes modern government possible. It is fortunate that men of limited knowledge are so constituted that they can work together in this way. Were it otherwise, business and government, at any given moment, would be at a standstill awaiting the appearance of a man with the requisite breadth of knowledge to resolve the problem presently at hand’ (p. 65). ‘In today’s economics of organization, transacting is fraught with hazards, and the problem of organization is one of creating governance structures to constrain the unproductive rentseeking behaviour that imperfect information permits. Indeed, it is probably not unfair to say that the heuristic driving this literature is to reduce virtually all problems of economic organization to problems of misaligned incentives attendant on imperfect information’(Foss and Langlois 1997, p. 6).

REFERENCES Baumard, Ph. (2002), ‘Connaissances tacites et implicites dans les délibérations de réorientation stratégique’, paper presented to the AIMS Conference, Paris. Bennett, R.H. and W.P. Anthony (2001), ‘Understanding the role of intuition–tacit knowledge and analysis–explicit knowledge in bank deliberations’, in T.H. Lant and Z. Shapira (eds), Organizational Cognition: Computation and Interpretation, London: Lawrence Erlbaum Publishers, pp. 185–209. Coase, R.H. (1937), ‘The nature of the firm’, Economica, 4, 386–405. Coase, R.H. (1991), ‘Nobel Lecture: the institutional structure of production’, in O. Williamson and S. Winter (eds), The Nature of the Firm: Origins, Evolution, and Development, New York and Oxford: Oxford University Press, pp. 227–35. Coriat, B. and O. Weinstein (1995), Les Nouvelles théories de l’entreprise, Paris: Le Livre de Poche, LGF. Dosi, G. (1991), ‘Perspectives on evolutionary theory’, Science and Public Policy, 18, 353–61. Dosi, G. and L. Marengo (1994), ‘Some elements of an evolutionary theory of organizational competences’, in Richard W. Englander (ed.), Evolutionary Concepts in Contemporary Economics, Ann Arbor, MI: University of Michigan Press. Dosi, G., C. Freeman, R. Nelson, G. Silverberg and G. Soete (1988), Technical Change and Economic Theory, London: Pinter Publishers. Dosi, G, D.J. Teece and S.G. Winter (1990), ‘Les frontières de l’entreprise’, Revue d’Economie Industrielle, 51 (1st trimestre), 238–54. Foss, N.J. and R.N. Langlois (1997), ‘Capabilities and governance: the rebirth of production in the theory of economic organisation’, DRUID working paper 97–2. Galbraith, J.K. (1967), The New Industrial State, Boston: Houghton Mifflin. Lant, Y.H. and Z. Shapira (2001), Organizational Cognition: Computation and Interpretation, London: Lawrence Erlbaum Publishers. Nelson, R.R. and S.G. Winter (1982), An Evolutionary Theory of Economic Change, Cambridge, MA: Harvard University Press. Nonaka, I. and H. Takeuchi (1995), The Knowledge-Creating Company, Oxford: Oxford University Press. Penrose, E. (1959), The Theory of the Growth of the Firm, Oxford: Blackwell. Polanyi, M. (1966), The Tacit Dimension, London: Routledge & Kegan Paul.

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Teece, D.J. (1988), ‘Technical change and the nature of the firm’, in G. Dosi, C. Freeman, R. Nelson, G. Silverberg and G. Soete (eds), Technical Change and Economic Theory, London: Pinter Publishers. Teece, D.J. and G. Pisano (1994), ‘The dynamic capabilities of firms: an introduction’, Industrial and Corporate Change, 3 (3), 537–56. Williamson, O. (1975), Markets and Hierarchies: Analysis and Antitrust Implications, New York: Free Press. Williamson, O. (1985), The Economic Institutions of Capitalism, New York: Free Press. Williamson, O. (1993), ‘The logic of economic organization’, in O. Williamson and S. Winter (eds), The Nature of the Firm: Origins, Evolution, and Development, New York and Oxford: Oxford University Press, pp. 90–116. Williamson, O. (2002), ‘The theory of the firm as governance structure: from choice to contract’, Journal of Economic Perspectives, 16 (3), 171–95.

7. Global R&D networks and ICT: what impacts on firms? Denis Carré, Gilliane Lefebvre, Bernadette Madeuf and Christian Milelli 1. INTRODUCTION Economic globalization involves changes in the organization of large firms expanding their activities worldwide. Considering the technostructure as the core of the decision-making process and ‘organized intelligence’, as J.K. Galbraith calls it, global strategies and organization are necessarily changing it. In this perspective one of the main issues is to consider how the technostructure that consists in the pooling of various specialized skills is able to cope with the dispersion of such skills in different economies. The development of new information and communication technologies (ICTs) may be seen as a means to reconcile the proximity required by some tasks, such as the creation of innovative products and processes or the collective decision-making process at the core of the technostructure, with the implementation of global strategies. But insofar as ICTs facilitate the global functioning of a spatially dispersed technostructure, their use may bring about another concern related to the ‘organic solidarity’ among the members of the global and complex technostructure. (This issue will be dealt with in Chapter 8). In order to shed light on this issue of the changing global technostructure, this chapter covers one particular dimension which is the impact of ICTs on the location and organization of the research-and-development (R&D) activities of global firms worldwide. The choice of analysing R&D activities is based on their specificity: first, R&D activities are genuinely associated with information and communication flows; second, firms pursuing worldwide or global strategies routinely make use of ICTs for their management tasks. Accordingly, the case in question is not a mere example among others, as it involves three interrelated forms of ‘proximity’ (called here ‘spatio-temporal, organizational and cognitive’), which are often dealt with either separately, or coupled by considering two out of three. If there is henceforth a consensus among economists to view technical and 122

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organizational decisions inside firms as strongly interrelated (Milgrom and Roberts, 1990), the three dimensions are still rarely gathered in a unified perspective. For all these reasons, analysing the impact of ICTs on global R&D organization is particularly meaningful: not only because it could be seen as an example of the impact of ICTs on the technostructure as a whole; but also, and above all, because the global R&D network is itself one of the central elements of the technostructure. Therefore, any change concerning R&D network activities is significant to the global technostructure. Assessing the impact of new technologies, and especially ICTs (Benghozi 2001) on the organization of firms – to a larger extent, it includes the spatial decentralization and integration of firms into networks, leading to ‘extended firms’ – is quite difficult. But it becomes even more challenging and complex when one deals with the production of scientific and technical knowledge. Indeed, this process is directly affected, since the in-house routines and procedures of research work are modified by the use of ICTs and associated tools. As a result, the impact of ICTs should be apprehended in terms of the models of internal operation of R&D processes, which show a high degree of heterogeneity. Thus, different ‘models’ may be identified: the ‘assembly model’ on the one hand, and the ‘process model’ on the other hand, respectively represented by the automotive industry and the chemical and pharmaceutical industry. In each one, the use of ICTs should be related to different targets, and imply different tools (e.g. communication, definition of projects). For example, the integration process facilitated by ICTs plays a pivotal role in the ‘assembly model’. This is one of the reasons accounting for the difficulty of appraising the impact of ICTs, as far as it can be apprehended only through a breakdown of the daily work of R&D teams. The structure of this chapter is as follows: In section 2, we develop the outward contradiction between the globalization of R&D activities and the major role of proximity and interactions in the said activities. We will show that ICTs do not perfectly answer to this contradiction. ICTs play a relatively minor explanatory role in the location choice of R&D activities but may play a role in the efficiency and the global performance of innovation policy. The analysis of ICT effects on R&D activities has been illustrated by case studies of groups implementing global strategies. Two sets of information have been used: first, the location strategy of R&D activities by global firms (section 3); second, the functioning of R&D centres located in the Ile-de-France Region (section 4). The latter section provides elements of a synthesis based on a multi-level approach. Overall, it has led us to emphasize the complexity of the use of ICTs on the choice of location, organization and modes of operating R&D activities.

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2. INTERACTION AND PROXIMITY: BUILDING BLOCKS FOR THE PROBLEMATIC One issue at stake here is the relationship between two separate, and sometimes opposed, topics: proximity on the one hand, and globalization on the other hand. The attention given to economies of proximity and to localized interactions, over the whole innovation process, is in apparent contrast with the growing trend towards the globalization of technology and innovation. Such opposition appears largely misleading as the globalization of R&D and innovation is still based on local interactions as supported by the analysis of corporate strategies. Global versus Local: the Interplay of Various Interactions Managers’ concerns are steadily focused on the way to combine the global strategic commitment of decentralized R&D – looking for a suitable scientific environment or trying to take part in dynamic markets (see among others Gerybadze and Reger 1999) – with the multiplication and deepening of local relationships with different partners (Cantwell and Janne 2000; Dupuy and Gilly 1999; Lefebvre and Madeuf 2001). Therefore, globalization is not opposed to the strengthening of local deep-rooted interactions, and on the contrary it encompasses the emergence of such dynamics. Although studies on the globalization of R&D stress the possibilities (and the limits) of the spatial division of research work, they often hastily conclude that this decentralization entails easy and quasi-embedding into the local environment in order to trigger interactions. On this particular point it is worth considering whether this common assertion is supported by convincing evidence, suggesting that the rationality of the location choice may require closer scrutiny. And, when one considers how research centres are relocated or even removed, the issue of the rationality of location has to be re-examined. However, it should be acknowledged that R&D processes, in particular the contribution of the environment (a general term corresponding to all the partners taking part in these processes), greatly depends on the type of industries, especially the process or assembly model that characterizes them (Storper 2000; Belis-Bergouignan and Carrincazeaux 2000; Lung 1997). Indeed, this point fundamentally questions the cursory conclusions about the role of local interactions. Furthermore, inter-organizational interactions seem to be crucial as they are part of numerous interactions that characterize the true nature of the research/innovation process inside firms (see among others Dosi 1988). In this perspective, the involvement of different departments (for example, production, marketing, R&D) concurrently with the capture of outside

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scientific information (e.g. academic laboratories, databases, patents) and with supplier and customer relations (Lundvall 1988; Von Hippel 1988), have largely been recognized as being part and parcel of the interactive chain-linked process of innovation (Kline and Rosenberg 1986). To summarize, the interactions taken into account and expanded in the context of globalization may be subdivided into three categories (Lundvall 1988) (see Figure 7.1 and Table 7.1): ● ● ●

Interactions between various stages of the innovation process (a); Interactions between the various departments of a firm (b); And, interactions between different firms (c).

Proximity: Tentative Classification and Grid of Interactions The main issue to be correctly addressed is the assessment of the impact of proximity constraints on interactions, as such constraints are in a way loosened thanks to the opportunities offered by ICTs. This implies: first, to examine the nature and extent of electronic data transmission (see Chapter 8), and second, to evaluate the type of proximity involved. Two types of proximity are generally considered when the location issue is coupled with the organization issue: spatial and temporal proximity on the one hand, and organizational proximity on the other hand. The specific nature of activities involved in the production of knowledge and their related interactions allow us to add ‘cognitive proximity’ (Nooteboom 2002) to the previous ones. Cognitive proximity can be defined as the sharing of experiments, representations, codes, languages and models, more or less formalized and resulting from – and at the same time enhancing – information transfer inside organizations. By its very nature, cognitive proximity is inherently associated with research activities, and more generally it is at the heart of any information flow (Steinmueller 2000). In the case of research interactions, cognitive proximity is not only concerned with the interactions occurring inside research centres, but also with the external interactions of research centres with other departments as well as external partners. Therefore, a tri-dimensional scheme can be set forth, each dimension being connected to ICTs. Table 7.1 pinpoints the main characteristics of the proximities along with their range of action. In Figure 7.1 the different kinds of interactions already put forward have been linked with the three proximities, if the main dimension of interaction only is taken into account.1 Thus, the interactions between different stages of the innovation process (a) are more directly concerned with spatial-temporal proximity (A), whereas functional (b) and inter-organizational interactions

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Table 7.1

Categories of proximity

Dimensions of proximity

Characteristics

Spatial-temporal (A) Distance versus speed

Organizational (B)

Cognitive (C)

Range of action

Transfer: flows

Hierarchy versus market Coordination: decisions, Intra-firm versus inter-firm actions, strategies Vertical versus horizontal Command versus contract Code versus content Communication: concepts, Context vs comprehension ideas, knowledge

(c) are related with organizational proximity (B). The mechanisms characterizing the R&D process, such as procedures, routines, and formalized practices (intrinsically very heterogeneous) make up a fourth category of interactions (d), which is associated with cognitive activities,2 and in which the cognitive proximity (C) represents the principal aspect. It must be emphasized that the various categories of interactions are necessarily multidimensional. This explains why interactions are usually not formally distinguished. Moreover, the impact of ICTs on R&D activities is depicted as an indirect mechanism for two reasons. First, their impact on interactions is carried through the multifaceted dimension. Second, the effect of ICTs upon one Interactions (a, b, c, d) Proximities Spatial-temporal (A) R&D activities

Organizational (B) Cognitive (C)

Figure 7.1

The interactions/proximities couple

ICTs

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dimension of proximity indirectly modifies the other ones: for instance, by reinforcing organizational proximity, ICTs may somehow loosen spatial proximity constraints, or, by codifying and formalizing information (direct effect on cognitive proximity), ICTs can foster organizational proximity either internal or external. As ICTs transform spatial-temporal, organizational and cognitive proximities as well as their relationships, they lead to changes in the dynamics of interactions. Such changes have already been considered, and for some of them discussed, according to rather conventional lines of reasoning (centralization versus decentralization, inter-organizational versus intraorganizational interactions). Besides, they concern internal practices and the working of research activities. Centralization versus Decentralization of R&D Activities According to the conventional assumption, the location of R&D activities is constrained by spatial proximity due to the nature of innovation mechanisms, including not only the production of tacit knowledge but also the use of tests and prototypes. Galbraith himself highlighted the importance of proximity in the functioning of the technostructure: The modern business organization, or that part which has to do with guidance and direction, consists of numerous individuals who are engaged, at any given time, in obtaining, digesting or exchanging and testing information. A very large part of this exchange and testing of information is by word of mouth – a discussion in an office, at lunch or over the telephone. But the most typical procedure is through the committee and the committee meeting. (Galbraith 1967 ed. 1972, p. 78)

In the context of globalization, one can wonder whether ICTs may sever this constraint. The conventional assumption may be split into two sub-assumptions. And each one has to be examined as far as multi-plant enterprises owning R&D centres located in various countries are taken into consideration. The first subassumption deals with the concentration/decentralization degree of the R&D function which is located in different national productive systems. The second one is concerned with the R&D activities conducted at the laboratory level and their links with external partners. Both sub-assumptions correspond to the first two dimensions (spatial and organizational) of proximity. The analysis of R&D management has particularly focused on the centralization versus decentralization issue, by opposing factors in favour of one or the other (e.g. economies of scale, cross-fertilization between projects, communication of tacit information, relationship with production or marketing departments, control over technological assets opposed to access to scarce

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skills, proximity to customers and suppliers, and demand specificities). It should be noted that the location choice of R&D facilities is determined by the relative weight of centralization and decentralization factors. The analyses dealing with these components generally do not take into account the nature of the technological fields explored by the research work conducted in different R&D centres. And yet, the specialized or conversely complementary character of research projects led in different places appears to play an important role in the dilemma of choosing between centralization and decentralization.3 The observation of different practices, which will be addressed later, confirms that the more specialized the centre, the more prevailing the decentralization logic. Local Integration: Intra and Inter-organizational Proximity The innovation process, a non-linear one, involves different kinds of skills. But above all, it implies knowledge flows which differ in their degree of tacitness and formalization according to the stages of the innovation process. The discussion of these knowledge inputs brings into play learning-by-doing effects based on personal interactions, that can be optimized through organizational structures and routines, which are nowadays at the heart of ‘knowledge management’. If organizational proximity supports the efficiency of these structures and routines, spatial proximity is also required when tacit and non-formal knowledge is to be transmitted (Lawson 1999). Furthermore, the innovation process implies interactive links with external sources of information and knowledge, as well as links with firms in upstream and downstream industries. The development of local networks contributes to the set up of organizational structures reconciling two imperatives: the necessary access to external knowledge and the requirement of coherent research mechanisms. The network efficiency is for one part, based on the use of common pre-existing language and, for another part, on the building – more or less explicitly – of common codes and the transfer of tacit information. Here again, learning mechanisms that deliver more or less formalized routines are implied. Therefore, the construction of cognitive proximity can offset a low level of organizational proximity. The same applies to the global complex technostructure, considered as a whole, and characterizing the large global firm. Technostructure efficiency is also related to the managing of information flows of diverse nature, more or less formalized and coming from inside the firm as well as from the environment.4 Therefore, it is based on cognitive proximity and not only on organizational proximity and spatial proximity. And ICTs may facilitate the transfer and processing of these information flows necessary to the organized intelligence at the core of the technostructure.

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Transforming Cognitive Proximity: Working Assumptions ITCs produce effects on R&D activities as a broad range of tools have been developed that truly transform these activities by facilitating operations through automated routines, and greatly enlarging access to valuable information. But they also reveal some limits (EIRMA 2001b). If we summarize the impact of ICT tools on research activities, three interdependent processes can be put forward: ●

●

●

The implementation of codification and formalization necessary to, and compatible with, data computerization, shifts the boundary between coded and non-coded knowledge. Thus, it reduces the part of tacit knowledge and increases the comprehension capacity which becomes less context-dependent. In other words, the break up between context and comprehension, that is possible through formalization, provides data with a higher degree of abstraction; In parallel, computerization facilitates access to information and data processing; this increases the potential connections of originally remote data, which in turn enhance creativity, tests and simulation; Furthermore, some tools specifically designed for R&D activities are geared to develop creativity, project management, and the management of intellectual and industrial property.

As a whole, the implementation of ICTs in R&D activities has increased the abstraction level and the routinization of research processes, and multiplied cognitive interactions. But, if the use of ICTs undoubtedly can boost research processes, and increase the volume of processed data, it also produces closer interpretative schemes – through codification and lower context-dependence – which may result in a loss in the variety of information and knowledge. The evolutionary approach has clearly pointed out that there is a trade-off between the variety degree of the cognitive capacities and the cognitive ‘convergence’, which may be defined as communication capacities coupled with absorption capacities. In this perspective, a lower level of variety may result in significantly reduced creative capacities. Finally, the tri-dimensional scheme permits the re-formulation of the issue of the impact of ICTs on the location of R&D facilities and the emphasis on: ●

●

The relations between inter-organizational co-operation and spatial proximity; The tension and necessary balance between the logic of variety on the one hand, and the logic of integration inside R&D activities at the intraorganizational level on the other hand;

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The interdependent changes in the three proximities which are channelled by ICTs, although ICTs may initially affect only one type of proximity.

By taking these previous remarks into account we put forth the paradoxical assumption that ICTs play a relatively minor explanatory role in the location choice of R&D activities. In some industries, however, they still play a crucial role in the efficiency and global performance of innovation policies through their impact on the quality and length of research processes. More precisely, ICTs do not only affect the relations between spatial and organizational proximities – reducing spatial distances seems to reinforce or facilitate organizational proximity by decreasing the constraint of spatial proximity – but also on the organization of research activities. Actually, by introducing new codifications and formalizations in data processing and knowledge production, ICTs truly transform cognitive proximity.

3. ORGANIZATION AND LOCATION OF R&D IN GLOBAL FIRMS In this section we present a few results from a survey conducted on the global R&D network of 27 French groups in 2000 (Madeuf et al. 2000; Lefebvre and Madeuf 2001). These groups control 148 R&D centres abroad. The results show that global strategies, in the field of innovative and technological management, are not opposed to the deepening of local integration. In other words, proximity plays a meaningful part, as can also be seen from the example of the rationalization of R&D activities after a cross-border acquisition presented below. Motives for the Selection of Location Whether research centres located abroad have been created or acquired by French groups, two main factors are presented as alternative motives. These are the support for production (product and/or process adjustment to the conditions of the local demand) and the search for local scientific or technical advantages. Production support is particularly important for centres in the electronic and computer industry (66 per cent of all centres) and centres located in the United States (52 per cent). Conversely, the location of units in the chemical and pharmaceutical industry is less explained by this motive. The production support includes two kinds of elements mainly related to the demand. One is to respond to local standards, either technical, sanitary or environmental, the other is to satisfy the technical requirements of customers with specific needs, for instance in electronic equipment.

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The possibility of taking advantage of local scientific resources is related to three significant categories of assets: first, highly skilled human resources; second, the possibility of signing collaborative agreements with public or academic laboratories; third, the opportunity to contract co-operative research with enterprises. The first reason is mentioned for more than one third of all centres, the second for less than 10 per cent, and the third for 22 per cent. An active scientific cooperation policy is conducted with local public research centres: one centre abroad out of three is involved. The technological leadership of the United States, on the one hand, and the formation of a supportive technological environment in the European Union – partly based on high quality public research and complementary scientific and technical national systems – on the other hand, account for the weight of local partnerships for the centres located in both areas. Local Interactions and Proximity The more the centres located abroad are part of the global techno-oriented strategy conducted by parent companies the more pronounced their integration into local cooperation agreements. These centres are characterized both as centres aiming at developing and upgrading the technological competence of the groups they belong to, and as entities supporting a ‘global mandate’ in terms of targeted markets. Therefore, the orientation of R&D activities towards research itself (more than development) and towards innovation geared to world markets goes along with the multiplication of cooperative links with firms and public laboratories located in their vicinity. Simply put, globalization is not to be considered as mere territorial ‘deconnection’ as might be suggested by the use of the English word ‘footloose’. But on the contrary, the set up of potent relationships at local level is linked with the ongoing globalization. One must emphasize here that the centres located in Europe differ greatly from those in the USA as far as cooperation is considered as a motive for location: for one centre out of two in the USA, cooperative partnership with local research is mentioned, which is a more important rationale than the sourcing of scientific competences. In Europe, the order of motives is reversed. For centres in both locations the possibility of cooperative agreements with the business sector appears in the second rank and only for centres already interested in close relations with public or academic research. As a result, the motive for possibly cooperating with the local research seems to correspond more to basic or scientific research. However, this assertion has to be supported by evidence regarding the number of effective cooperation agreements the centres are part of. The ratio of centres engaged in collaborative research contracts with

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enterprises is higher (82 per cent) than the ratio of centres cooperating with public or academic research (64 per cent). Eventually, almost half of the centres are involved in both types of co-operation. Thus, the opportunity for cooperation as a motive for locating research abroad is confirmed by data. To sum up, the search for spatial proximity with enterprises or universities plays an essential role, but not exclusively – supporting foreign manufacturing facilities also seems important – in the location choice of R&D centres by large French groups. Those centres target ‘direct contact with local technology’, whether this is made possible or not through collaborative agreements. But, the advantages of polarization stemming from their beneficial integration in local scientific systems, may be counterbalanced by the risk of dispersion of capabilities, unless it is compensated for by organizational proximity. It is precisely here that the use of ICTs might be particularly efficient by strengthening organizational proximity. Rationalization of R&D Activities The current events that occurred after the surge of R&D centre buyouts – in relation with the process of globalization through cross-border ‘merger and acquisition’ deals – have cooled the previous interest in the search for local resources and knowledge diversity both seen as motives for implementing a genuine technology strategy on a global scale.5 The streamlining and specialization of R&D centres are nowadays a top priority on the corporate agenda, and the following two examples are quite representative of the new trend that should be correctly addressed. First, Aventis – ranking eighth by its sales in the global pharmaceutical industry in 2002 – born of the merger of the German enterprise Hoechst and the French Rhône-Poulenc in 1999, is returning to basics by selling off its agro-chemical department CropScience to the German firm Bayer and its animal nutrition activities to the British firm CVC Capital Partners. Besides, the reconfiguration of the overall portfolio around drugs has a substantial impact on the R&D activity, mainly a greater specialization in a few therapeutic domains regarded as particularly crucial: ●

●

● ●

cancer and diabetes for which Aventis has an acknowledged know-how in its French centre (Vitry-Alfortville, close to Paris) which is also the most important research unit for the group; genetic therapy in a new set-up in the Genopole®Evry (Aventis Pharma Evry Genetics Center), coupled with its US centre (Bridgewater); cardiovascular diseases in Germany (Frankfurt); and, emerging domains such as multiple sclerosis, Alzheimer’s disease, asthma, rheumatoid arthritis, in the United States.

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While the various centres are increasing their specialization inside the R&D framework, one of the four French units, located in Romainville – so far specialized in infection treatment – is to be converted into a biotechnological platform.6 Second, the Bayer CropScience (ex-Aventis CropScience sold off in July 2002) case underlines the effects of the substantial reorganization proposed by its management in January 2003 on R&D activities.7 Basically, this involves a substantial downsizing of the research centre staff of La Dargoire (Lyons) which specializes in fungicides. While the research conducted on cereals must be transferred to Germany (Monheim and Frankfurt), the research on vine and fruit trees is maintained in La Dargoire. Additionally, the contemplated reorganization would hit the valuable local interactions of the centre. So far, Aventis CropScience had the sole private research centre in France in the agronomic and phytosanitary domain. Consequently, it was a unique outlet for the students of two prominent regions – Rhône-Alpes and Provence-Alpes-Côtes-d’Azur – with up to 600 training course applications annually. Both examples avowedly show that the rationalization and specialization of R&D facilities are in turn a top priority for corporate officers after the upsurge of merger and acquisition deals. After all, this outcome is not surprising as numerous empirical studies have pointed out the need for enterprises and industries to enter a truly rationalization stage after a ‘deal mania’. Whereupon the potent capacity of ICTs to smoothly manage scattered research centres cannot yet outweigh the previous trend. Summary of the Main Points Three points can be put forth: ●

●

●

First, due to the motives governing location strategies, it can be reasonably assumed that the benefits resulting from the use of ICTs are still not capable of mitigating the need for spatial proximity which is widely seen as a requisite for generating dense and strong ties – transactions and interactions alike – between various actors. Second, one can assert that the use of ICTs makes the management of R&D activities in a decentralized framework easier and more efficient; put it differently, it is the enabling of ‘organizational proximity’. However, we should be cautious and qualify our purpose according to the activities of the centres, particularly their degree of specialization and their complementarities. Third, the forceful requirement for specialization and rationalization of corporate R&D structures, notably in terms of duplication cutbacks,

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leads to sustained overtaking of the advantages provided by cognitive diversity – i.e. the diversification of competencies and knowledge sources resulting from the use of ICTs in networked organizations – by the crude rationale of the cost–benefit approach. The next section dedicated to the presentation of two ‘extended research centres’ makes it possible to confirm these main points and puts particular emphasis on the importance of spatial proximity.

4. SPATIAL PROXIMITY, ICTs AND R&D MANAGEMENT OF ‘EXTENDED RESEARCH CENTRES’ The following empirical studies concerning the observation of specific units, shed light on the issue of the link between ICTs and the management of R&D tasks. The spatial contiguity of numerous different steps and tasks – or to a lesser extent of most of them due to multiple localization – of the innovative process do not exclude but point out the central role of ICTs. These technologies may exert significant effects because they concern both innovation capacities and coordination mechanisms. Indeed, they are interlocked technologies, with both cognitive and organizational dimensions, and one has to grasp both aspects beyond the sole capacity to innovate in ICTs fields (Brousseau and Carré 2001). Whether ICTs are forceful tools for task integration, particularly in the process of innovation activities implying various combinations of knowledge, information, practices and techniques through cognitive links, this integration does not seem to substitute, in our hypothesis, for spatial proximity ascribed to experience. So, there is an apparent paradox between ICTs on one side and proximity on the other side; and to get a deeper understanding we propose to take two meaningful examples (Renault Technocentre and Evry Technopole). The Renault Technocentre: Spatial Proximity and Digital Technology The Renault Technocentre is a markedly illustrative case as it emphasizes a strong need for the spatial proximity of various partners in the innovation process and for the related use of ICTs as well. The centre is largely devoted to the research and development of industrial processes and products for the automobile industry. Since 1998 it has gathered more than 8000 persons of which 2000 are experts from component suppliers that actively participate in the development of new car models.8 Fundamentally, the economic rationale of the ongoing spatial concentration is the will to constantly shorten the delivery lead time for new products – which

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is nowadays a tremendous factor of competitiveness in the global automotive industry. The centre encompasses twofold features: an overall matrix setting-up and a genuine cooperation between numerous enterprises on a ‘shop floor’ basis. Since 1988, Renault has designed and implemented a method based on a technical platform with interrelated resources and skills for the design of new models (Midler 1994). Such a multiple project scheme has been fostered by the setting of an original ‘labour organizational matrix’. Thus, the chief operator of each project (e.g. new car model) is in close contact with people from the main required activities, such as design, product and process engineering, quality, cost control, marketing, and the like. This project team can reach up to 600 persons including external partners. And in each of the four ‘architectural spaces’ of the project (i.e. engine, sub-frame, body and passenger cell), the team is supervised by experts coming from functional domains (electronic devices, materials, painting, and so on). At the end of the day, it can be viewed as a pool of permanent technical endowment. More fundamentally, this kind of matrix organization ensures a better fit between the different stages of the design process and the required production capabilities: obviously, it saves costs and time. In addition, the whole layout plays the role of social landmark or repère collectif (Eymard-Duvernay 1994) which is a useful artefact for the coordination of numerous human players. The integration of external partners, particularly first-rank suppliers of parts, which represents 25 per cent of the centre’s payroll, reveals the expectations of a large car-maker in terms of proximity impact on the coordination process. By doing that Renault ‘is willing to share responsibilities along the whole production process’. It can be put forward that this close relationship or co-conception, at least in specific domains, makes it possible to depart from a standard vertical coordination scheme to a horizontal one seen as more efficient owing to fundamental instability in the field of technological information. The transitional process from the former to the latter is not completely achieved as the proximity ties need time, and has to be enhanced through continuous cooperation practices along with the acquisition of a new frame of mind by individuals. Indeed, individual cognitive interactions are at the core of this achievement. Admittedly, ICTs speed up the numerous routine tasks encompassed by enterprises not only through the extended capacities of data storage and processing but also by the advent of an array of new communication tools (EIRMA 2001a). In the R&D domain, for example, computer engineering software ensures the progressive building, through a continuous oversight and check out of technical performance, of a virtual repère collectif, which is in fact a framework of various functional and architectural spaces (see above). In addition, in the management domain, the extensive use of ICTs boosts the

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acquisition of economic and technical information as well as its selection and retrieval. Thus, evidence is drawn of a simultaneous need for spatial proximity to entail the process of innovation through multi-level interactions along with the crucial role played by ICTs during the entire process. Aventis and Genopole®Evry Aventis Pharma is currently following a strategy focusing on a few product lines and leading to spatial specialization at R&D level. Two years after the merger between Hoeschst and Rhône-Poulenc, the new entity put sizeable capital outlays in its US units thereby lessening its European stronghold.

BOX 7.1

GENOPOLE®EVRY

Genopole®Evry has been designed as a scientific and technological platform for fundamental, applied research and potential outcomes for commercialization in genomic fields. Set up in 1998, it mimics British and US undertakings of ‘genomics valleys’ and seeks to propel France in the first ranks of the global arena. It encompasses: ●

●

●

an industrial park with affiliates from large enterprises conducting research in biotechnology along with specialized SMEs; furthermore, it is linked with nearby scientific centres (i.e. Genethon, sequencing and genotyping centres); a springboard for starts-ups popping from the Genopole®Evry incubator; as a result, overall, 34 enterprises have already been set up, among them 28 being truly ‘greenfield’ investment; and, an academic campus including numerous laboratories established by scientific public bodies (i.e. Centre National de la Recherche Scientifique, Commissariat à l’Energie Atomique, Institut National de la Recherche Agronomique, and Institut National de la Santé et de la Recherche Médicale).

Source:

Author.

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Concurrently the group is re-focusing on the pharmaceutical industry after the sell-off of its agro-chemical and animal nutrition departments. Besides, R&D activities are not immune as there is clearly an ongoing reconfiguration of some key therapeutic sub-domains, along with a specialization of R&D centres. Genetic therapy – which is regarded as a highly promising therapeutic – is a rising priority at corporate level. It would be enhanced both in the United States and in France (Evry Genetics Center located in the Genopole®Evry). Therefore, the specialization and location of disseminated centres give credit to the relevance of spatial proximity in the process of innovation as shown in the French case. Indeed, the set-up of a new unit dedicated to genetic therapy in Genopole®Evry was based on the assumption of capturing two strong advantages: first, to get access to tremendous data processing capabilities (notably InfoBIOGEN), second, the opportunity to join fundamental research conducted in the genomic domain by public and private bodies. If these advantages clearly enlighten the spatial proximity role, one has nevertheless to ponder the choice already made to also carry out research in genetic therapy in the US unit. Here, the prospect of a vibrant and large market has been a point in case. Furthermore, research in that domain is more advanced in the United States, and interestingly less regulated. A search for local relationship overseas and keeping organizational proximity through belonging to a group has quite balanced the loss in spatial proximity. However, the assumption that ICTs facilitate the transfer of information among distant centres by maintaining cognitive proximity and deepening organizational proximity seems so far an acceptable explanation of the location choice made by Aventis for its research facilities. But this view requires additional evidence.

5. ICTs, LOCATION CONSTRAINT AND INNOVATION PROCESS. WHAT CAN BE SAID ABOUT THEIR LINKS? The previous discussion is based on different information (a large survey on global firms and case studies), and does not allow the delivery of quantitative assessment either on the impact of ICTs or on the location of R&D, or on the efficiency of the innovation process. To begin with, two points would require deeper analysis: ●

●

First, the diversity of the proximity/ICT relationship largely results from the plurality of products, and ‘worlds of production’ (Storper 2000); Second, ICTs are not at all a uniform bulk of technologies (e.g. mail, intranet, groupware, and the like) but compounded with differentiated

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components with specific functions. Each one can be used for very different tasks, such as to improve collaborative work, strengthen the whole innovation process, or more simply secure and store relevant information (EIRMA 2001b). Our conclusions should be regarded as preliminary. But as such they provide some elements which can possibly enlighten, and maybe solve paradoxical evidence. The globalization of R&D activities in large French groups generates the development of research centres abroad, particularly in Europe and in the United States. The decision was aimed (and is still aiming) at reinforcing cooperation not only with production facilities but also with local research entities. In addition, spatial decentralization does not seem opposed to the global integration of R&D at group level. And, one may conclude that ICTs make such decentralization possible as well as organizational and cognitive proximities. But the dissemination of R&D activities enhances local cooperation. This in turn allows us to put forward some final remarks that can be landmarks for future research: ●

●

●

●

●

The potentiality of ICTs does not seem enough to offset the contribution of spatial proximity (codified versus tacit information); Local cooperation is facilitated, and therefore more efficient, whenever the spatial proximity between R&D centres and local partners is substantial (see ‘extended research centres’); The effects of spatial contiguity among various partners is tightened up and to some extent framed by digital technologies (above cases); ICTs are significant tools to lessen the contradictory requirements of product differentiation along with the necessary integration of numerous tasks; ICTs speed up the whole innovation process and make it more reliable through the improvement of cognitive proximity.

Because the global R&D network is one of the central parts of the technostructure, these final remarks also apply to the global technostructure considered as a whole. Even if ICTs may facilitate the organizational and cognitive proximity which enhances the functioning of a dispersed global technostruture, ICTs cannot totally replace the spatial proximity necessary for some tasks requiring the exchange and processing of less or non-formalized information. Furthermore, one issue, mentioned in the introduction, is still open: it is related to the ‘organic solidarity’ among the members of the global and complex technostructure (see Chapter 8, by Blandine Laperche).

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NOTES 1.

2. 3. 4.

5. 6. 7. 8.

For instance, interactions among the stages of the innovation process, which are mainly associated with the temporal dimension, may involve different functional departments of the same enterprise or different organizations, and then also represent the organizational dimension of proximity. Cognitive activities and the related dimension of proximity (cognitive proximity) also include the activities of ‘knowledge management’. Specialization and the complementary nature of research activities are one of the main determinants of the cognitive proximity between research work and teams. ‘The need for such a group personality begins with the circumstance that in modern industry a large number of decisions, and all that are important, draw on information possessed by more than one man. Typically they draw on the specialized scientific and technical knowledge, the accumulated information or experience and the artistic or intuitive sense of many persons. And this is guided by further information which is assembled, analyzed and interpreted by professionals using highly technical equipement. The final decision will be informed only as it draws systematically on all those whose information is relevant.’ (Galbraith 1967, pp. 75–6.) According to Cantwell (1989) the enterprise may be considered as an orchestrator and a lever of knowledge. Source: annual report. Source: press releases. Five innovative projects are conducted in parallel: this implies economies of scale as well as economies of scope. Thus, the use of functional resources is optimized through the sharing of indivisible knowledge among projects covering the whole range of products.

REFERENCES Belis-Bergouignan, M.C. and C. Carrincazeaux (2000), ‘Proximité et organisation de la R&D dans les industries automobile et pharmaceutique’, in J.P. Gilly and A. Torre (eds), Dynamiques de proximité, Paris: L’Harmattan, pp. 167–96. Benghozi, P.-J. (2001), ‘Relations interentreprises et nouveaux modèles d’affaires’, special issue, Revue Economique, 52 (hors série, October), 165–90. Brousseau, E. and D. Carré (2001), ‘La région Ile-de-France et la E-économie: atouts et faiblesses’, report for CROCIS–CCIP. Cantwell, J. (1989), Technological Innovation and Multinational Corporations, Oxford: Basil Blackwell. Cantwell, J. and O. Janne (2000), ‘The role of multinational corporations and national states in the globalization of innovatory capacity: the European perspective’, Technology Analysis and Strategic Management, 12 (2), 243–62. Carré, D. (2001), ‘TIC et polarisation intra-métropolitaine en Ile-de-France: coordination économique et enracinement social’, communication to IIIème Congres sur la Proximité, 13–14 December, Paris. Dosi, G. (1988), ‘Sources, procedures and microeconomics effects of innovation’, Journal of Economic Literature, 26 (3), 1120–71. Dupuy, C. and J.P. Gilly (1999), ‘Industrial groups and territories: the case of Matra-Marconi-Space in Toulouse’, Cambridge Journal of Economics, 23 (2), 207–24. European Industrial Research Management (EIRMA) (2001a), ‘Centralised versus decentralised R&D, benefits and drawbacks’, report no. 56. EIRMA (2001b), ‘Technologie de l’Information et R&D’, report no. 57.

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Eymard-Duvernay, F. (1994), ‘Coordination des échanges par l’entreprise et qualité des biens’, in A. Orléan (ed.), Analyse économique des conventions, Paris: PUF. Galbraith, J.K. (1974), The New Industrial State (2nd edn, originally published 1967), Pelican Books. Gerybadze, A. and G. Reger (1999), ‘Globalization of R&D: recent changes in the management of innovation in transnational corporations’, Research Policy, 28 (2–3), 251–74. Horn, F. (2001), ‘La diversité de l’économie du logiciel: pluralité et dynamique de quatre mondes de production’, Revue d’Economie Industrielle, 95, 37–60. Kline, J. and N. Rosenberg (1986), ‘An overview of innovation’, in R. Landau and N. Rosenberg (eds), The Positive Sum Strategy: Harnessing Technology for Economic Growth, Washington, DC: National Academy Press, pp. 275–305. Lawson, C. (1999), ‘Towards a competence theory of the region’, Cambridge Journal of Economics, 23 (2), 151–66. Lefebvre, G. and B. Madeuf (2001), ‘Les liens paradoxaux entre stratégies technoglobales et intégration locale: le cas des groupes français’, Sciences de la Société, 54, 29–50. Lundvall, B.A. (1988), ‘Innovations as an interactive process: from user-producer interaction to the national system of innovation’, in G. Dosi, C. Freeman, R. Nelson, N. Silverberg and L. Soete (eds), Technical Change and Economic Theory, London: Pinter, pp. 349–69. Lung, Y. (1997), ‘Organisation spatiale et coordination des activités d’innovation des entreprises’, IERSO report, October. Madeuf, B., G. Lefebvre and L. Chentouf (2000), ‘Globalisation de la recherche et développement. Le cas des entreprises françaises’, report, Ministère de l’Education Nationale, Paris. Madeuf, B., D. Carré, G. Lefebvre and C. Milelli (2004), ‘Stratégies de localisation de la R-D: technologies de l’information et proximité cognitive’, in D. Uzunidis (ed.), L’Innovation et L’économie contemporaine, Espaces cognitifs et territoriaux’, Brussels: De Boeck, pp. 243–62. Midler, C. (1994), ‘Evolution des règles de gestion et processus d’apprentissage’, in A. Orléan (ed.), Analyse économique des conventions, Paris: PUF. Milgrom, P. and J. Roberts (1990), ‘The economics of modern manufacturing: technology, strategy and organization’, American Economic Review, 80 (3), 511–28. Nohria, N. and S. Ghoshal (1997), The Differentiated Network – Organizing Multinational Corporations for Value Creation, San Francisco: Jossey-Bass. Nooteboom, B. (2002), ‘A cognitive theory of the firm’, paper for ESNIE Workshop Alternative Theories of the Firm, November, Paris. Rallet, A. and A. Torre (2001), ‘Proximité géographique ou proximité organisationnelle? Une analyse spatiale des coopérations technologiques dans les réseaux localisés d’innovation’, Economie Appliquée, LIV (1), 147–71. Salais, R. and M. Storper (1993), Les Mondes de production, Paris: Editions de l’Ecole des Hautes Etudes en Sciences Sociales. Sierra, C. (1997), ‘Proximité(s), interactions technologiques et territoriales’, Revue d’Economie Industrielle, (82), 7–38. Steinmuller, W.E. (2000), ‘Will new information and communication technologies improve the codification of knowledge’, Industrial and Corporate Change, 9 (2), 361–76.

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Storper, M. (2000), ‘L’innovation comme action collective: produits, technologies et territoires’, in J.P. Gilly and A. Torre, Dynamiques de proximité, Paris: L’Harmattan, pp. 99–130. Von Hippel, E. (1988), The Sources of Innovation, Oxford: Oxford University Press.

8. Large corporations and technostructures in competition Blandine Laperche 1. INTRODUCTION In neo-classical economics, the firm is seen as a ‘black box’, i.e. an entity receiving flows of raw materials and turning out flows of processed or finished products. The purpose of such an entity is to maximize its production and profits, being limited only by its resources. It operates on a market which functions in accordance with the rules of pure and perfect competition and thus is similar to its numerous competitors in terms of quality. In this picture, very little space is left for the big firm. Monopoly, which was originally ignored, was later perceived as an exception to the general rule detrimental to the market system: wasted resources, very high prices, and slower technical progress. Such abnormalities have justified the fight, both theoretical and practical, against monopoly (e.g. anti-trust laws in the United States). In the tradition of the economists who decided to start from the monopoly, and not from pure and perfect competition, to study the formation of prices and the realization of profits on the market – i.e. in the tradition of K. Marx, J.A. Schumpeter and J. Robinson – J.K. Galbraith spent most of his intellectual life analysing the big firm. His major writings on the subject are American Capitalism (AC) (1952 [1993]), The New Industrial State (NIS) (1967), Anatomy of Power (1983) and more recently The Economics of Innocent Fraud (EIF) (2004). His study relates both to the structure of power throughout the organization, and its impact on prices, consumer behaviour, and the determination of public policies. Far from seeing the large corporation as harmful, he develops a set of arguments which weaken the idea according to which big firms always waste the resources they have access to. In accordance with an approach privileged by this economist who has attached much importance to economic facts – certainly due to his political responsibilities and his work as a journalist – this chapter is an attempt to compare Galbraith’s analysis with today’s reality by asking the following questions: in the context of globalization, how strong are the countervailing powers to the big organization which, according to Galbraith, are often able to 142

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reduce the excesses which may appear in the big firm or may be generated by the financial, productive or commercial strategy led by its members? Moreover, what changes are caused by the intervention of new (institutional) investors in the power structure of the firm? What are the consequences for the objectives of the planning system and those of the members of the technostructure? In our attempt to answer the above questions, we have structured this chapter in three sections: in the first section, we present the characteristics of the large corporation which, according to Galbraith, is the keystone of contemporary capitalism. To him, the creation of oligopolistic or monopolistic situations results from an organic process inherent in the functioning of capitalism. The large size is justified by the requirements of modern technology and planning. As the power is in the hands of a group of specialists – the technostructure – their objectives are not as limited and iniquitous as the maximization of profits. Thus the big firm is both justified and rehabilitated all the more so as the concentration process that produces the big firm also produces its countervailing powers. Of course, Galbraith also pointed out the harmful effects of the domination of large firms, and notably the fact that the firm imposes its values on the whole society, on individuals as well on the state. This subject is specially studied by M. Pouchol in Chapter 4. In the second section we will study the compensating powers – distribution channels, trade unions – presented by Galbraith in American Capitalism, and will determine to what extent the recent globalization phase still makes them efficient or not. In our third section, we will keep comparing Galbraith’s analysis with today’s reality through focusing mainly on the internal structure of power: we will present the argument that globalization has contributed to complexify the functioning and the structure of industrial technostructures which have relations of competition and cooperation with each other and also with financial technostructures, within which the realization of profits and the increase of revenues play a major part.

2. THE LARGE CORPORATION AS THE KEYSTONE OF CONTEMPORARY CAPITALISM The Large Corporation is Necessary The large corporation is a must in the capitalist system, first because it is generated by this very mode of production, and then because it is made essential by the requirements of modern technology. For John Kenneth Galbraith, just like K. Marx, J.A. Schumpeter or J. Robinson (in her writings of the 1960s and 1970s, see Laperche, 2001), the concentration of capital is an

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organic trend of capitalism. He is critical of the vision prevailing in the United States – a reminiscence of A. Marshall and A.C. Pigou – of a biological process in which the oldest are constantly being replaced by the small ones. Is the future of American capitalism endangered by the ever-increasing role of the state and the domination of big organizations as both conservatives and liberals believed in the aftermath of the Second World War? According to Galbraith, the answer is ‘No’. In his opinion, accusing the big firm is useless, as the causes of capital concentration should not be searched after in the individual will as they are ‘highly organic’ (AC, p. 33). If entering a new industry is easy for all firms, the growth of that industry almost automatically results in a smaller number of participants. First, entering the market becomes more and more difficult as the organizations already in place are getting bigger due to economies of scale and experience. Hence a difficulty to enter the market: ‘As a result, in an established industry, where the scale of production is considerable, there is no such thing as freedom of entry. On the contrary, time and circumstances combine to bar the effective entry of new firms’ (AC, p. 35). Concurrently, there are ‘forces’ leading to a reduction in the number of firms present on a market, both in periods of growth and crisis. As a matter of fact, recession makes the weakest organizations more fragile and growth makes it easier for the strongest organizations to expand. Such forces combine with the difficulty of entering the industry, thus accounting for the smaller number of firms present on the market. ‘The combination of a low or zero birthrate and a continuing death rate must, rather unavoidably, be a declining population’ (AC, p. 35). Galbraith complements his analysis of the organic process of capital concentration by adding a justification of the big size of the firm based on the requirements of modern technology. Thus, the big size of the firm, considering its market shares and its capacity to impact on the associated prices, is a strong incentive to granting technical progress the investment it requires, due, in particular, to the difficulties associated with the appropriation of knowledge ‘there must be some element of monopoly in an industry if it is to be progressive’ (AC, p. 88). This essential role of the large corporation in stimulating the investment required by technological development leads to a paradox between, on the one hand, the judicial fight against big organizations – anti-trust laws – and, on the other hand, the pride instilled by big American organizations. This argument is developed in The New Industrial State. Technology is defined as ‘the systematic application of scientific or other organized knowledge to practical tasks’ (NIS, p. 31). In order to result in concrete achievements, it needs to divide, subdivide and organize tasks, thus involving longer and more rigid production time, a substantial amount of capital, more

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skilled labour, and more and more accurate organization. Thus, modern technology results in the necessary programming or scheduling of tasks. The purpose of planning is to reduce uncertainty, and all the most commonly implemented strategies highlight how a big size is beneficial and necessary. Eliminating companies from the market (through vertical integration), controlling the company’s purchase and selling prices, controlling consumer demand (advertising), freezing the market through purchase or sales agreements, are the most common strategies aimed at reducing uncertainty. They are therefore the ‘familiar features of the industrial system’ (NIS, p. 45). Finally, they are a ‘counterpart of large size and large size in relation to the particular market’ (NIS, p. 46). In short, modern technology imperatives, and their corollary, the fight against uncertainty, are a justification of the big size of the firm. ‘Vertical integration, the control of prices and consumer demand and reciprocal absorption of market uncertainty by contracts between firms all favour the large enterprise’ (NIS, p. 49). This necessity for the big firm, aimed at meeting the requirements of modern technology, also makes the objectives more complex but also less open to criticism, compared with the ones advanced by the traditional theory. ‘Size is the general servant of technology, not the special servant of profits’ (NIS, p. 50). In addition, assuming that the big firm maximizes its profits comes to conferring on it a rationality of its own. In contrast, in Galbraith’s approach, the big firm does not have a rationality of its own; the objectives are those of the ‘class’ in possession of the power, the members of the technostructure (James Galbraith 1984). The weakening of the profit maximization assumption, as outlined here, is maximal in the study of the decision-making power in the firm, i.e. through the technostructure, that we will deal with in the next section. Internal Efficiency The big firm is not only connected with the functioning of the capitalist system, but its structure of power creates an internal efficiency. To us, internal efficiency means the internal capacity to make complex decisions and also to fight against the potential misuse of power by any member of the firm (selfregulation). For Galbraith, this efficiency originates in the technostructure. The power exercised over the firm and society shifted from capital to organized competence in the twentieth century, as it had shifted from land property to capital in the nineteenth century. Until the eighteenth century, land property was the source of wealth. Anyone owning land could be sure of having considerable influence in economic activities (which, at the time, were essentially agicultural) as well as in political decision-making. The discovery of new lands, the capital investment opportunities offered by technical

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progress, and the huge need for capital of modern industrial activities accelerated the transfer of power from land to capital in the nineteenth century. Money-capital then became both the means and the end of all economic activity, which forged the social prestige of the entrepreneur, his political weight and the justification of the profit-maximizing objective of all economic activity. However, according to Galbraith, a new transfer of power took place in the twentieth century from the capitalist to the organized competence personified by the ‘technostructure’, a new production factor consisting of ‘the association of men of diverse technical knowledge, experience or other talent which modern industrial technology and planning require’ (NIS, p. 74). This transfer, which also goes together with the large size of the firm, derives, as we have already pointed out, from the requirements of modern technology which demands specific skills that will eventually have to be coordinated to create any new type of merchandise. There is no need of geniuses to produce rockets, military aircraft, or automobiles; only ordinary men carefully trained and coordinated within the organization. The more complex and costly the technology, the more necessary it is to forecast and master the possible variations in consumer tastes or supplier costs. Planning therefore imposes collective decision-making: customer-conditioning goes through the elaboration and circulation of targeted and attractive advertisements. Cost reductions result from more control over suppliers and from self-financed investment. Easily accessible corporate capital has reduced its own power. In the modern big firm, stockholders, who own a small share of the capital, are ‘goldfish’ with a passive walk-on part at general meetings. Besides, such meetings are only an ‘elaborate exercise in popular illusion’ (NIS, p. 99) simulating the might of capital, thus preserving market law in the sight of all. However, power has been taken over by the managers composing the technostructure. Organized competence has become the rare, costly and essential production factor for any modern production: ‘Power goes to the factor which is the hardest to obtain or hardest to replace’ (NIS, p. 71). The transfer of power from capital to the technostructure goes together with the revelation of the new goals of the planning system given impetus by the technostructure members’ new individual motivations, other than profitmaximizing or remuneration. In addition, according to Galbraith there is a link between an individual’s goals, those of the organization, and those of the social body taken as a whole: it is the consistency principle. The profitmaximizing assumption was applicable when capital was the prevailing production factor, as the capitalist, who had full decision-making power in the firm, would maximize his contribution, i.e. money. The situation has changed with the technostructure, as it contributes specific skills and organization

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capacity. According to this logic, what the technostructure maximizes is no longer money, but its skills and organizing capacity. ‘There is, a priori, no reason to believe that it will maximize the return to capital. More plausibly it will maximise its success as an organization’ (NIS, p. 132). The technostructure members and the planning system therefore have other objectives. Profit-making is essential to ensure the technostructure’s selfsufficiency and survival, but it is no longer the only objective. Other objectives in line with the aspirations of the members of the technostructure and with the objectives of the social body are more and more important. The growing size of the firm and its technical virtuosity strengthen the technostructure’s decision-making power (growth and protection from downsizing, remuneration, and responsibility) as well as its social prestige. The making of sufficient profits and increased sales are priority objectives, whereas technical virtuosity and the payment of dividends are secondary objectives which should not interfere with the priority objectives. For instance, technical virtuosity requires heavy investment in research and development, which may be detrimental to the firm’s self-sufficiency. The effect would be similar if the objective of the technostructure’s members was to serve the highest possible dividends to its stockholders (see Figure 8.1). Goals of the industrial system Autonomy/minimum of earnings

Growth (sales)

Technical virtuosity

Organization’s own survival, decisionmaking power

Technostructure growth (high responsibility jobs, promotion, protection against contraction)

Jobs, promotion for technologists, prestige

Dividends Reinvestment

Principle of consistency Non-intervention of state

Principle of consistency Annual increase in GNP

Principle of consistency Technological advance synonymous with social achievement

Prime goals: permit to make the requisite investment Secondary objectives: they must not interfere with the prime objectives Source: Based on Chapter 15, The New Industrial State (pp. 174–85).

Figure 8.1 Goals of the industrial system

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Likewise, the individual motivation system also broadens out to integrate identification with the technostructure and the wish to adapt in addition to financial reward. Identification means ‘the voluntary exchange of one’s goals for the preferable ones of organization’. Adaptation is ‘the association with organization in the hope of influencing its goals to accord more closely with one’s own’ (NIS, p. 166). The three motivations (financial reward, identification, wish to adapt) are distributed and often combined in the modern big firm according to the types of parties present in the modern big firm, as shown in Figure 8.2. Ordinary stockholders Production workers Foremen and supervisory personnel and the clerical, sales, and other white-collar personnel Technicians, engineers, sales executives, scientists, designers and other specialists Executives

‘This for all practical purpose is a purely pecuniary association’ (NIS, p. 159). ‘In fact, the motivation of the production worker is a mixture of pecuniary compensation and identification’ (NIS, p. 161). ‘Thus, as one moves to the centre of the technostructure, identification and adaptation become increasingly plausible motivations’ (NIS, p. 162).

Source: Based on Chapter 13, The New Industrial State, pp. 158–67.

Figure 8.2

The motivation system in the modern big firm

If the nature of the link between the big modern firm and its stokholders is mainly financial, the various categories of personnel on the other hand have a more complex motivation system in which, as they come closer to the managing nucleus, financial motivation gives place to identification and the wish to adapt. As the power is controlled by the technostructure, the objectives of the planning system and the members of the technostructure will generate internal efficiency made even stronger by the discipline imposed by collective decision-making. As a matter of fact, the power of the managers quickly alarmed economic observers: those managers can take advantage of the information they have on daily business to make decisions that are opposed to

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the interests of the shareholders and all the stakeholders of the the firm: employees, customers and suppliers. Already in the 1930s their personal enrichment was a cause for concern. The purpose of some specific legislation and the founding of a commission in charge of supervising Stock Exchange transactions (the Security Exchange Commission was created in 1934 in the United States) was to punish such practices. However, according to Galbraith, in the technostructure ‘each member is his brother’s auditor and watchdog’ (NIS, p. 132). As decision-making is collective, the pursuit of individual interest becomes highly improbable. Such discipline also counteracts the profit maximization assumption which is the only one accepted by the traditional theory to explain the motivations of the firm. As a matter of fact, the managers who have the power in the firm do not receive the benefits themselves. According to Galbraith, if this assumption was maintained, all the members of the technostructure would be regarded as maximizing the profits of the firm not for themselves but for remote stockholders. In Galbraith’s writings, the large corporation is the keystone of modern capitalism: it results from a concentration process generated by the operation of the system itself. It is also fundamentally necessary for technological development, the driving force of economic evolution. The structure of power within the big firm generates internal efficiency coming from the discipline imposed by collective decision-making. Finally, the big firm does not have infinite power, and this argument can obliterate all the evils which are traditionally imputed to the big company. In the next section we will examine such countervailing powers and the mutations generated by globalization over the last few years.

3. POWER, COUNTERVAILING POWERS AND GLOBALIZATION The ‘Dialectics of Power’ According to Galbraith, in the traditional theory competition is the main market-regulating mechanism, and thus the main countervailing power to any anti-competitive strategy implemented by a firm. The limits imposed on the power of a firm are always due, according to the model of pure and perfect competition, to the presence of other firms on the same side of the market (producers opposing other producers’ ambitions, purchasers reducing the market share of another seller, etc.). But in Galbraith’s words – Anatomy of Power (1983b) – there is a dialectics of power: the capital concentration process produces big firms which dominate the market as well as it

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produces big purchasers or suppliers able to reduce the power exercised by the big firm. Countervailing powers thus develop on the other side of the market, originating from the same organic process that generates economic power.1 Counter-powers may be exercised both on the demand side (big buyers against weaker sellers) and on the supply side (big sellers against weaker buyers). The most significant examples are mass distribution chain stores in the first case and trade unions in the second case. Such counter-powers develop in the most concentrated markets, thus evidencing the link between the development of a market power and, almost simultaneously, its counterpower. ‘The power on one side of a market creates both the need for, and the prospect of reward to, the exercise of countervailing power from the other side’ (AC, p. 113). In his introduction to the Transaction Publishers edition (1993) of American Capitalism, John Kenneth Galbraith revisits the main argument he had developed in the book to discuss its topicality.2 In his opinion, even though this argument is still valid nowadays, the weight of monopolistic or oligopolistic big American firms has been reduced due to globalization and the bureaucratization of the big firm. International competition has indeed weakened big American firms: ‘One need only give thought to what has happened in the automobile industry in the last forty years. Thanks especially to Japan, General Motors, Ford and Chrysler look far less formidable than they did then’ (AC, p. x). This situation then generates a parallel decline of the countervailing power exercised by trade unions. As a matter of fact, counterpower may appear only in the presence of effective power, and the decrease in power of the big firm has come with the decrease in power of the countervailing powers, such as trade unions. ‘To put the matter bluntly, strong trade unions require strong employers. Nothing so weakens a union as an employer who cannot afford to pay and is closing plants or going entirely out of business. This is what, in these last decades, has driven the unions into the shadows. Countervailing power, the raison d’être of the trade union, requires that there be a power to countervail’ (AC, p. x). However, within a decade, international competition has become stronger. The wave of mergers and takeovers which occurred in the 1990–2000 decade was facilitated by the accelerated globalization of economies, financial deregulation, and the spread of information technologies. This wave of mergers and takeovers has coupled firms of different nationalities more widely than in the previous periods, thus giving birth to big transnational companies. According to the United Nations Conference on Trade and Development (2001), the annual growth of international transactions reached 50 per cent over the 1996–99 period, with a peak of 74.4 per cent in 1998. Thus, oligopolies are getting stronger all over the world. What is the impact of this

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new global power of big oligopolistic firms on the counter-powers identified by Galbraith? Weaker Countervailing Powers In this section we will cover two of the main counter-powers studied by Galbraith: mass distribution companies and trade unions. In the first case, big distribution companies have gone international by themselves and they still continue to exercise pressure on the decrease of consumer good prices. The most revelatory example is Wal-Mart,3 the American company, which is currently the biggest firm in the world with revenues of $245 billion for 2002 – three times as much as Carrefour, the second biggest mass distributor in the world – and the world’s biggest private employer with 1.5 million employees. This firm controls the major part of all sales made by US producers of consumer goods: 28 per cent of Dial’s total sales, 24 per cent of Del Monte Foods, 23 per cent of Clorox’s, 23 per cent of Revlon’s, etc. In 2002, 82 per cent of US households shopped at least once from a Wal-Mart store. In the United States, the firm controls 32 per cent of diaper sales, 30 per cent of hair care product sales, 26 per cent of toothpaste sales, 20 per cent of pet food sales, etc. The firm has widely spread into international markets since the 1990s. Its slogan ‘Always low prices – Always Wal-Mart’ highlights its core activity consisting in offering products at the lowest possible prices. According to a British consulting firm quoted by Business Week, Wal-Mart has enabled US consumers to save $20 billion in 2002. The firm would thus play a major macro-economic part in the fight against inflation and in favour of increased American productivity. Finally the power detained by this distributor has led to the death of smaller stores. Despite this monopolistic trend, the firm is spared prosecution under anti-trust laws due to its weight on markets and its action on the drop in prices of consumer goods. On the other hand, in order to meet this objective, the firm is accused of negligence regarding the working conditions of its employees. Wages and salaries are regarded as very low. Apparently, basic employees received $8.23 per hour, i.e. $13 861 per year in 2001. At that time the poverty line for a family of three was of $14 630 per year. In addition, more than 40 lawsuits have been filed against Wal-Mart in 25 US states on the grounds that the company has refused to pay overtime, and legal cases for health problems and sexual discrimination are more and more frequent. The power of distribution companies on the markets as well as its impact on working conditions would then require the existence of other countervailing powers, and especially the counter-power of the trade unions, to prevent large corporations from misusing their power regarding employees. However, the globalization of multinational firms’ strategies, which is made

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possible by the market deregulation and liberalization policies implemented for goods, services, capital and labour, results in flexible and international asset management (financial, human, scientific and technical) for such firms organized in networks. Holding companies are located in areas with low or even non-existing taxation. Research and development laboratories are set up in areas where financial, scientific and technical resources are abundant. Production plants select attractive countries in terms of specialization and labour costs as well as transport infrastructures. Goods are marketed in all financially solvent areas worldwide (Andreff 2003; Milward 2003; Michalet 2004). Such flexibility in the organization of companies’ chains of values goes together with the capacity to manage the labour force required for producing and marketing the goods and services of the multinational firms with as much flexibility. Private employment systems take precedence over national employment systems in which the state (at least in Europe) plays an important part by passing legislation on the utilization of work in a given national economy (regulations for the utilization of work, its cost and content) (Laperche and Uzunidis 1999). As a matter of fact, if the launching, extension and worldwide imbrication of production systems given impetus by liberal economic policies and global corporate strategies are established facts, the national logic of the national employment systems contradicts the world logic of accumulation. The ever-increasing insertion of electronics in production, the multiplication of the forms of work, the diversification of the modes of management, and the deregulation of economies have shattered national systems of employment, thus offering firms great flexibility in the management of their employees. The firm focuses on a stable core of managers in the R&D, financial and administrative departments. They use more and more diverse forms of work and contracts of employment to manage their other employees worldwide in accordance with the demand, political and social risk, production costs, available infrastructures, etc. Such flexibility goes together with contracts which are more and more individualized (working times, salaries, place of work, job content). The big firm thus becomes a source of law (negotiation of corporate agreements, out of the scope of traditional legal procedures). This trend towards self-regulating firms evidences the current strength of capital in comparison with labour, which is shown in the reduction of unionized employees (see Table 8.1). According to the International Labour Organization, the number of strikes has also dramatically decreased, e.g. 187 recorded strikes in the USA in 1980 against 31 in 1995 and 14 in 2003. In France, the number of strikes had initially decreased – 2118 strikes in France in 1980 and 1671 in 1994 – but then it increased and reached 2131 strikes in 2001, while 1133 strikes had been

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Table 8.1 Trade union membership as a percentage of wage and salary earners in the US, certain European countries and Japan

United States Japan Germany UK France

1985

1995

18 28.8 35.31 45.5 14.5

14.2 24 28.9 32.9 9.1

Note: 1. Former Federal Republic of Germany. Source: ILO (1997–98).

recorded in Japan in 1980, 230 in 1994 and 74 in 2002. The task of trade unions, whose mission is to represent all employees, is further complicated by the introduction of individualized contracts of employment and the multiple forms of labour existing in a firm. Today, we can claim that the compensation power of the unions is weakened and endangered not by the weakness of the big firm but by its strength acquired through the deregulating liberal policies which have been implemented. In the first place, the industrial system ‘has largely encompassed the labour movement’ (NIS, p. 282), and then it managed, over the last few years, to cut the human chain linking employees together. The big firm is therefore very powerful on international markets. Far from making the big firm weaker, global competition, with the assistance of market liberalization and deregulation policies, has made it possible for the big firm to extend its power worlwide. This is what Galbraith exposes in his last book, The Economics of Innocent Fraud (2004), in which he explains again that now the power of the big firm is denied by the orthodox theory, politicians and the media, and perhaps even more than at any other time.4 Facing this power of big multinational firms (including the major chains of distribution) and the weakening of the countervailing power of the unions, are the states able to oppose the power of big multinational firms? In practice, the ‘global legal framework’ made up by the states themselves organized on a world scale is very much in favour of the interests of big private firms (Uzunidis 2004). The liberalization of trade, which had been debated since the Second World War as part of the GATT and then WTO negotiations, as well as global finance have paved the way for the globalization of corporate strategies thus offering new profit-making opportunities to the former national monopolies. The liberalization and deregulation of public services have the same purpose (see Laperche and Uzunidis, Chapter 16 of this volume)

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regardless of the social consequences of such policies (increases in prices, end of the concept of universal public service, deteriorating services), as had already been revealed by Galbraith in The Affluent Society, published in 1958. In addition, the interests of the states’ members and the private firms’ members are more and more similar, as is shown by the American defence industry. According to Galbraith, the intrusion of the private sector into the public sector has become commonplace over the last few years, and particularly in the defence sector. ‘Arms expenditures does not occur after detached analysis by the public sector as commonly understood. Much is at the initiative and with the authority of the arms industry and its political voice – the private sector’ (EIF, p. 34). But the defence industry is not the only field of public intervention in which the private sector has substantial influence: it is also the case for foreign policy, the Treasury and also the environment. Consequently, ‘The blurring of the difference between the private and corporate sector and the diminishing public sector proceeds’ (EIF, p. 36) ‘So the reality. In war command as in peace, the private becomes the public sector’ (EIF, p. 37). But can today’s big firm, which looks so powerful, compare with the one of the 1960s? We will try to answer this question in the next section.

4. COMPETITION AND COOPERATION AMONG GLOBAL TECHNOSTRUCTURES Today’s Big Firm: Similarities with and Differences from Galbraith’s Analysis Table 8.2 highlights the common points and the differences between the big firm as it had been analysed by Galbraith in the late 1960s, and the firm we can analyse today. The organizational structure of firms, at the time of New Industrial State, may be described as multidivisional. Galbraith does point out that it is necessary to abandon ‘the conventional image of the corporate structure’ (NIS, p. 158) which is the one conveyed by hierarchical firms in which stockholders are ‘the repository of ultimate power’. The multidivisional firm, a term which Galbraith does not use, reflects the independence with which teams or divisions can make decisions: ‘decisions, since complexity is usually associated with importance, are effectively the work of groups. The decisions move up through the organization’ (NIS, p. 158). The shift of organizational structures from the multidivisional firm to the network firm was made necessary as well as possible by the changes that occurred in the competitive

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Table 8.2 Elements of comparison: the big firm in the 1960s and early twenty-first century The big firm in the 1960s according to J.K. Galbraith

The big firm today

Organizational structure

Multidivisional firms

Network firms

Structure of power

Technostructure

Complex, global technostructures

Individual motivations of the members of the technostructure

Identification\adaptation Financial reward Financial reward

Objectives of the planning system

Autonomy Growth Technical progress

Profit Other objectives: autonomy, growth, technical progress are all subjected to it

environment of the firms. The spread of new information and communication technologies came with the network organization of firms worldwide. Design, production and marketing units are located in the most attractive territories (see Carre et al. Chapter 7 of this volume). The network firm associates asset ownership for its key activities with flexible contracts for all its activities relating to the implementation of its corporate strategy (subcontracting agreements, cooperation agreements, licences, franchises, etc.). Associating these two types of relationship (property, contracts) makes its physical and geographical contour lines more and more blurred: the firm progressively looks like an evolutive network. The decision-making power in the big firm seems to remain in the hands of the technostructure and its members, i.e. the managers (this point, however, is debated, and we will deal with it below). As a matter of fact, only a team of specialists can make decisions in an uncertain competitive climate where technological performance plays a key part. However, today’s technostructure is very different from the one of the 1960s. In his introduction to the French edition of The New Industrial State, 1989, J.K. Galbraith pointed out that he had been wrong to praise the ability and the efficiency of the technostructure. He argued that he had neglected its harmful tendencies, notably its irresistible propensity to increase its staff and its bureaucratic behaviour (NEI, 1989, p. vi). Galbraith also came back to the subject of the bureaucratization of the

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big firm in his 1993 introduction to American Capitalism, considering that it is one of the main causes of the weakening of the power of the big firm: ‘Once the great firm was respected and feared for its external power; now, very often it is the victim of its own internal weakness’ (AC, p. x). As a matter of fact, the 1980s were marked by many management failures. However, the financial globalization of the 1980s led to the emergence of a more concentrated type of shareholding composed of institutional investors in a position to demand the implementation of a number of rules in favour of more transparency in the management of firms and thus make the technostructure less bureaucratic in its functioning. In contrast, technostructures are made more complex in their composition and functioning. Technostructure organization is carried out on a global scale. Such changes made to the shape and organization of the technostructure have big consequences on the motivation system of the members of the technostructure as seen by Galbraith. The worldwide dispersion of the members of the technostructure makes it more difficult for them to identify with the specific objectives of the organization such as the ones underlined by Galbraith (virtuosity, growth in size and the wish to adapt). The organic solidarity (in Durkheim’s words) that ties the members of working teams is closely related to physical vicinity, which information technologies reproduce only very imperfectly. Financial motivation would thus be the main motivation in the big global firm. If adaptation and the wish to adapt are present, this however represents the universal objective of the members of global technostructures, all the more as the evolutive character of networks makes employees more and more vulnerable to the possible strategic changes decided by big multinational firms (naturally, the employees who are far from the decision-making centres are hit first, but executives are also more and more frequently hit by reorganizations) under the pressure of institutional stockholders. Under such circumstances, we may think that, above all, management as well as basic employees want to increase their income. The Institutional Investor and the Power of the Global Technostructure Financial market deregulation has made it possible for new types of investors – non-banking institutional investors (pension funds, insurance companies, investment funds) – to have access to financial markets and acquire shares of listed companies. Due to their main activity (e.g. managing employees’ pension funds), they feel less concerned by the development of such companies than by the amount of the dividends to be received. In order to select the most profitable firms in terms of ‘value for the shareholder’ they have striven to improve the quality of information and limit the powers of the technostructure.

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The measures recommended for more transparent firms, known as ‘corporate governance’, become codes of ethics which are imposed worldwide through international institutions (see Laperche, 1999) and seem to ring the death knell of the technostructure while announcing the shareholder’s return at the controls of the firm. This is all the more so as the deregulation and global opening of markets for goods, services and capital have provided new opportunities for investment. In 2002, according to S. Lavigne (2004), pension funds and other mutual funds owned 42 per cent of the stock exchange capitalization in the USA. According to a recent report by the Commissariat Général du Plan (national economic planning authority), in the thick of the speculation wave of the late 1990s, 48 per cent of Vivendi’s capital, 56 per cent of Usinor’s and 45 per cent of Michelin’s, were owned by pension funds and other financial institutions. According to the report, corporate capital internationalization is closely linked with transborder mergers and acquisitions (mainly financed through exchange of shares) representing as much as 85 per cent of all foreign direct investment in 2000 ($1300 billion) (Dietsch 2003). Institutional investors thus increased their power within big firms. For all that, we must take the specificity of those new investors into account before concluding that the stockholders have possibly come to power again in the firm. The stockholder in question is not a private individual but a firm (a technostructure) that manages other people’s property. The structure of the capital of big firms then clearly shows how pertinent and topical Galbraith’s thinking is. According to such logic, managers are still in power in the firm. However, there is a big difference: in an open economy, industrial organization is subject to the competition and also to the cooperation between the technostructures of different firms supervised by the managerial structures of financial institutions.5 Recent bankruptcies or downfalls, such as those of Worldcom, Enron or Vivendi Universal, have revealed the subtlety of the changing patterns of alliances and competition between big technostructures. So, the stock option plans offered by the remuneration boards of big firms to their managers have proved to be a huge ‘rip-off organised by managers’ as J.E. Stiglitz said (2003, p. 165). As a matter of fact, stock options gave managers unprecedented remunerations (in the 1990s, the US top executive’s average remuneration increased by 442 per cent in eight years) not identified as operating expenses in the accounts of their companies, and thus having no impact on their profits (see Petit, Chapter 2 of this volume). But giving stock options means increasing the total number of shares and reducing the value of the already existing ones. As long as share prices were going up, which was the case in the context of the financial bubble of the ‘new economy’, this misappropriation of the shareholders’ money by the technostructures and the ensuing

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risk for the firm went unnoticed. Fund managers, whose interest was only on the short term, were also encouraged to close their eyes. In The Economics of Innocent Fraud, Galbraith uses the phrase ‘legal selfenrichment’ insofar as managers determine and approve for themselves the phenomenal salaries and other financial benefits they enjoy. Such managerial power is therefore a fraud, and an ‘innocent’ one indeed, since, when informed of such situations, the internal and external observers never interfered to denounce such unfair practices. The members of the Worldcom or Enron technostructures, with the blessing of the members of the technostructures in the banks, accounting firms, analysts and consultancy firms have thus used the information they had to act in their own interest before acting in their small shareholders’ interest (including employee stockholders).6 Undoubtedly, the most exposed managers were in power for a determined period of time: once the manipulation and fraud revealed, or where management decisions had been questioned, such managers were removed from their posts or sank with their firms. However, as Galbraith would say, the function of examples and myths is to conceal realities. Behind the myths, such as the myth of the king consumer, the decision-making stockholder or the optimal size of the firm, today more than ever there is the power of the big firm and its organization, whose sphere of influence expands not only to embrace the private domain but also to subdue public initiative for the purpose of production and profit. The recent episode of financial euphoria revealed the fierce competition that opposes the technostructures of industrial, service and financial firms worldwide. It also showed that many of the above organizations succumbed to the multiform temptation to make easy money (especially through the overflexibility of accounting rules, etc.) (on the subject of corruption, also see Dietrich and Sharma, Chapter 9). Two points, then, which in our opinion are important, proceed from our analysis: on the one hand, the technostructures, which are composed of managers, still have the power to manage the firm. On the other hand, such technostructures are more complex in their composition and operation due to their global organization and the pressure put on them by the rules imposed by institutional investors. The latter also form one or more organizations/technostructures able to counteract the ambitions of the industrial technostructure members or to cooperate with them in meeting a common objective: the increase of the bottom-line profit.

5. CONCLUSION In his analysis of the big firm, John Kenneth Galbraith directly opposes the liberal analysis. The big firm is generated by the system itself, and it is

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required by the system (it is the only drive to innovation, thus making change possible), and in addition it is an efficient organization due to the internal distribution of power and the compensatory powers generated by the integration process. Comparing J.K. Galbraith’s analysis with today’s reality reveals how pertinent his analysis on the distribution of power in the firm is. In spite of the irruption of new stockholders, and the implementation of favourable rules for them (corporate governance), managers are still in power in the big firm as shown by the many examples of managerial frauds in the last few years. The big firm then has perhaps lost part of its efficiency. For what reasons? On the one hand, countervailing powers have been weakened by the changes experienced by modern capitalism. Mass distribution chain stores have taken advantage of globalization to increase their size. Although they still play an important part in price decreases, their behaviour is similar to the one usually adopted by monopolies: maltreatment of employees, high margins, etc. The numbers of unionized employees are constantly decreasing, and trade union representativity is more complicated due to the globalization of technostructures. The state is more and more frequently the mainstay of the planning system with objectives combining economic and political concerns. New compensatory powers have emerged though, such as the pressure exerted by financial technostructures, which are able to curb the big industrial firms’ requirements or even to cooperate with them where they have a common (financial) interest. On the internal plan, the efficiency praised by Galbraith and driven by other objectives than profit also suffers from the globalized organization of firms which reduces the ‘organic solidarity’ and undermines internal cohesion. This certainly justifies the fact that Galbraith, in his last book published in 2004, does not even refer to the ‘technostructure’ and prefers the more non-committal term of ‘management’. In today’s global managerial capitalism, industrial and financial technostructures are in competition and thus cooperate, while trying to take advantage, on the short term, of any new profit opportunity (this idea is also developed in other terms by Luc Mampaey and Claude Serfati, Chapter 15). The objectives of the planning system, Galbraith said, are consistent with those of the members of the technostructure and the whole of society. Those of the current period show that capitalism is not stationary (and thus that motivations also evolve), but also that they are met in contempt of the interests of employees, unemployed people, or the numerous populations suffering from starvation and the ones that are under the poverty line. Here again, we could say that the causes are ‘mainly organic’.

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NOTES 1.

2.

3. 4.

5. 6.

‘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’ (AC, p. 111). Of course, Galbraith also recognizes in his autobiography that the elaboration of a countervailing power is not such an automatic mechanism in the reality and that it is frequent that a countervailing power does not form, as explained by Guy Caire in Chapter 5, this volume. See A. Bianco, W. Zellner, ‘Is Wal-Mart too powerful?’ (Galbraith, 1981) and also Business Week, October 6, 2003; J.E. Garten, ‘Wal-Mart gives globalism a bad name’, Business Week, 8 March, 2004. ‘None can doubt that the modern corporation is a dominant force in the present-day economy, and certainly so in the United States. Nonetheless, allusions to it are used with caution or not at all. Sensitive friends and beneficiaries of the system do not wish to assign definitive authority to the corporation. Better the benign reference to the market’ (EIF, pp. 8–9). See Innovations, Cahiers d’économie de l’innovation, Systèmes d’innovations. Chroniques d’intégration ordinaire, 2004–1. New legislation has been passed in the USA, and in France as well (founding of the financial market authority merging the financial market council and COB – securities and exchange commission) to reinforce the control of managers, but it is to be feared that, as Galbraith said about the legislation passed in the 1930s, that it prevents ‘only some of the enrichment opportunities’. See Managers 1, actionnaires 0 (Managers 1, Shareholders 0), Alternatives économiques, No 213, April 2003 and http://www-amf-france.org.

REFERENCES Andreff, W. (2003), Les multinationales globales, reference collection, Paris: La Découverte. Dietsch, M. (2003), Mondialisation et recomposition du capital des entreprises européennes, December 2003 (and for statistical update February 2004), report to the Commissariat Général du Plan, Paris. Durkheim, E. (1996), De la division du travail social, Quadrige series, originally published 1930, Paris: PUF. Galbraith, J.K. (1993), American Capitalism, The Concept of Countervailing Power, originally published 1952 by Houghton Mifflin, New Brunswick, NJ, and London: Transaction Publishers. Galbraith, J.K. (1961), L’Ere de l’opulence [The Affluent Society], French edition, originally published in English in 1958, Paris: Calmann-Levy. Galbraith, J.K. (1974), The New Industrial State, 2nd edn, originally published 1967, Harmondsworth: Pelican Books. Galbraith, J.K. (1983), Une vie dans son siècle [A Life in Our Times], originally published 1981, Paris: Gallimard. Galbraith, J.K. (1985), Anatomie du pouvoir [Anatomy of Power], originally published 1983, Paris: Seuil. Galbraith, J.K. (1989), Le Nouvel état industriel [The New Industrial State], originally published in English in 1967, Paris: Gallimard. Galbraith, J.K. (2004), The Economics of Innocent Fraud, Truth for our Time, Boston and New York: Houghton Mifflin.

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Galbraith, James K. (1984), ‘Galbraith and the theory of the corporation’, Journal of Post Keynesian Economics, VII (1) 43–60. Innovations, Cahiers d’économie de l’innovation (journal) (2004), theme of issue: ‘Systèmes d’innovations. Chroniques d’intégration ordinaire’, 19, all pages. International Labour Organization (ILO) (1997–98), World Labour Report. Industrial Relations, Democracy and Social Stability, accessed 10 June, 2004 at www.ilo.org/public/english/dialogue/ifpdial/publ/wlr97/annex/tab12.htm Laperche, B. (1999), ‘Gouvernement d’entreprise et mondialisation’, in J.P. Michiels and D. Uzunidis (eds), Mondialisation et citoyenneté, Economie et Innovation series, Paris: L’Harmattan, pp. 97–109. Laperche, B. and D. Uzunidis (1999), ‘Systèmes nationaux d’emploi et stratégies mondiales des firmes, la flexibilité comme norme’, Innovations, Cahiers d’economie de l’innovation, 9, 75–99. Laperche, B. (2001), ‘Les ressorts du monopole, essai sur l’hérésie de Joan Robinson’, Innovations, Cahiers d’economie de l’innovation, 141, 33–54. Lavigne, S. (2004), L’industrie des fonds de pension. Les investisseurs institutionnels américains, l’Esprit economique collection, Paris: L’Harmattan. Michalet, C.A. (2004), Qu’est-ce que la mondialisation? Petit traité à l’usage de ceux et celles qui ne savent pas encore s’il faut être pour ou contre, Paris: La Découverte. Milward, B. (2003), Globalization? Internationalization and Monopoly Capitalism, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Robinson, J. (1984), Contributions à l’économie contemporaine, Paris: Economica. Schumpeter, J.A. (1990), Capitalisme, socialisme et démocratie [Capitalism, Socialism and Democracy], originally published 1942, Paris: Payot. Stiglitz, J.E. (2003), Quand le capitalisme perd la tête [The Roaring Nineties], Paris: Fayard. United Nations Conference on Trade and Development (UNCTAD) (2001), World Investment Report, Geneva: UNCTAD. Uzunidis, D. (ed.) (2004), L’Innovation et l’économie contemporaine, Espaces cognitifs et territoriaux, Brussels: De Boeck.

9. The corrupt corporation: a Galbraith-inspired analysis Michael Dietrich and Abhijit Sharma 1. INTRODUCTION This chapter presents an analysis of corrupt corporations that builds on theoretical principles developed by J.K. Galbraith. The inspiration for the chapter is threefold. First, is the obvious presence of corrupt companies in modern economies, particularly since the 1980s. Second, are limitations and inadequacies of the usual explanation of such corruption based on regulatory failure; an argument propounded by, for example, Stiglitz (2003). A simple indicator of the inadequacy of the regulatory failure account of corruption is that millions of firms exist in the same regulatory environment, but a relatively small proportion appear corrupt. Hence, at a basic level, a complete analysis of corruption requires regulatory failure plus an analysis of the motivation of corrupt firms. This analysis of motivation leads to the third inspiration for the chapter: use and development of the framework presented by Galbraith to analyse the modern corporation. Corruption is a subject that can be studied from several different perspectives. We choose a Galbraith inspired framework to make the discussion meaningful within the context of firms (especially corporate entities). This framework can be used to provide the necessary analysis of corrupt motivation in a corporate setting, involving in particular the importance of a company’s ‘technostructure’. But the Galbraith framework requires reinterpretation to incorporate corruption. This development and reinterpretation is arguably necessary as witnessed by the opinion expressed by Galbraith, in a recent interview conducted by one of the authors (Dietrich 2003), that modern firms are fundamentally well run. Corrupt corporations can be viewed either as an exception to this opinion, or what is meant by ‘well run’ requires examination. Either possibility would seem to be an important part of a Galbraith inspired analysis. The rest of the discussion is organized as follows. In the next section basic definitions are presented. In section 3 the discussion turns to Galbraith’s (1967) idea of a corporate technostructure and its significance for corrupt 162

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activity. The final substantive section presents a number of case studies that are used to provide empirical content to the essentially conceptual discussion. Finally brief conclusions are drawn.

2. CORRUPT CORPORATIONS: BASIC DEFINITIONS This first main section of the chapter presents basic definitions and terminology that are necessary for the discussion to be undertaken. An overwhelmingly large number of studies on corruption involve an examination of the government sector, state bureaucracies and public sector procurement policies; see Rose-Ackerman (1975) for a seminal analysis of this type of study. Others relate corruption to growth, poverty or governance aspects, especially for the case of developing countries; see, for instance, Bhagwati (1982) and Krueger (1974). In this chapter a different approach is adopted that concentrates on corrupt practices within the private firm sector. Following Galbraith (1967), a distinction is drawn between the sphere of the economy inhabited by competitive (neoclassical-type) firms and the sphere of the economy inhabited by large corporations. This distinction between competitive and corporate spheres is important for the analysis of corruption. As will be argued below, corruption in the two spheres is understood in terms of two different frameworks. Competitive sector corruption is explicable using traditional economic categories whereas corporate corruption requires recognition of organizational complexities; and in particular those suggested by Galbraith. The difference of framework illustrates a fundamental difference between competitive and corporate sectors. Hence it is important to highlight the general differences involved. Using causal empiricism we can suggest the competitive sector is inhabited by small and medium sized firms and the corporate sphere by large and giant firms. This is useful as an introductory statement but is inadequate for current purposes, for which a more analytical approach is required. We can understand the differences involved as being based on two factors: institutional and informational. The institutional difference between market and corporate sectors involves the definition of ownership. We must recognize that economic conceptions of ownership as used in, for example Hart’s (1995) analysis of the firm and more general traditional principal–agent approaches, are not necessarily consistent with legal conceptions. The latter define the institutional basis of the firm in reality and so are important for current discussion. The legal conception of ownership reveals a difference between market and corporate firms. Kay (1997) points out that, according to legal principles, ownership is defined in terms of 11 characteristics: a right of possession; a right of use; a

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right to manage; a right to income from ownership; a right to the capital value; a right to security from expropriation; a power of sale or disposal; no time limit on ownership rights; a right of residual control; property can be used to obtain satisfaction of legal judgment against the owner; a duty to refrain from harmful use. Two important implications follow from this legal definition. First, it is clear that individual shareholders do not own companies, instead they own shares. So, for example, shareholders have a right to use, manage, derive income from and dispose of shares. But no individual shareholder has the right to use, manage, derive income from and dispose of the assets of a company. The second implication is that we cannot even argue that companies are collectively owned by shareholders. This follows because shareholders, collectively or individually, have no duty to refrain from harmful use of company assets. In our context harmful use covers corrupt practices. Managers have a duty to refrain from harmful use of a company’s assets, but equally this does not imply that managers own companies. In short, we can follow Kay (1997) and suggest that the ownership of publicly quoted companies is inevitably ambiguous. In terms of the distinction between markets and corporate spheres, one criterion is therefore the ambiguity of ownership. With unambiguous ownership, corrupt practices are either the result of strategic intent or the result of inefficiently managed ownership rights. With ambiguous ownership the analysis is less straightforward. In narrow economic terms, with unambiguous ownership it is possible to define the principal(s) and agents in any relationship. With ambiguous ownership the definition of principal(s) and agents is not a priori clear. This lack of clarity implies that the actual functioning of principal–agent relationships is ex-post institutionalised in actual economic processes rather than being an ex-ante determinant or guide to the structure of these processes. This complexity is recognized in formal economic theory by Douglas and Whinston (1986) when they suggest that ‘common agency’ may be significant. Examples of common agency fall into one of two categories: delegated or intrinsic. Delegated common agency arises when several parties voluntarily bestow the right to make certain decisions upon a single (common) agent. Intrinsic common agency arises when an individual is ‘naturally’ endowed with the right to make a particular decision affecting other parties, who may in turn attempt to influence that decision. Both possibilities involve a number of principals who simultaneously announce incentive schemes for a common agent. In the presence of collusion, institutional remedies for the resulting inefficiency are needed. In addition the distribution of net rewards among the principals is, in general, indeterminate when we have common agency. The second criterion referred to above is an informational difference between the market and corporate sectors. Assuming unambiguous ownership, with perfect information we can use standard principal–agent theory to specify

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optimal contracts. It follows that any corruption is the result of principal objectives rather than inefficiently managed ownership rights. But the possibility of such optimal contracting requires two key information inputs.1 The principal must have ex-ante full knowledge of (1) the production/ transformation processes being managed and (2) agents’ preferences. If we follow a Galbraith (1967) logic, ex-ante knowledge of production/transformation processes is not possible because such knowledge is embodied in the functioning of an organization’s technostructure, a matter discussed in more detail in the next section. Knowledge of agent preferences would seem to be impossible in all circumstances except where regular day-to-day contact allows inferences to be drawn based on observed behaviour. In short, in large companies optimal contracting seems infeasible because of principal ignorance. This latter point, about shareholder ignorance, is not of course fundamentally original. Instead it invokes a traditional argument based on a divorce of ownership from control in large joint stock companies (Berle and Means 1932). More recently, however, the rise of institutional firm ownership has somewhat undermined a traditional shareholder ignorance argument (Nyman and Silberson 1978; Baldwin 1964). In terms of corporate corruption we will see below that financial institutions seem to have been party to the corrupt practices of business firms. It follows that for current purposes, i.e. an analysis of corporate corruption, their existence must be recognized. The complexities this introduces are presented, schematically, in Figure 9.1. The competitive sector is characterized by unambiguous ownership and owner information that is (effectively) complete. Traditional divorce of ownership from control is based on owner ignorance, but the ownership is considered unproblematic. If financial institutions have (effectively) perfect ex-ante knowledge of firm affairs the modern joint-stock company would not be part of the corporate sector. Instead it would be subject to effective financial control. But if we recognize the centrality of a firm’s technostructure such knowledge is ex-ante Owner information Informed

Ignorant

Unambiguous

Competitive sector

Divorce of ownership from control

Ambiguous

Financial control

Corporate sector

Ownership characteristic

Figure 9.1

Information, ownership and the corporate sector

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not available. Hence, the corporate sector is defined here as involving (inevitably) uninformed ownership that is ambiguously defined. The emphasis on ownership ambiguity is not an explicit part of a Galbraith framework. But for an analysis of corruption it would seem to be necessary, because in its absence corruption can be viewed as ineffective corporate control i.e. a regulatory failure. With ambiguous ownership perfect corporate control of corrupt practices is not even, in principle, possible. Hence analysis can be focused on the firm rather than on the regulating system. Competitive market firms are largely ignored in the later discussion of corporate corruption. This is not to suggest that corruption does not exist in the competitive market sector. Such market sector corruption does, of course, exist and a brief discussion is warranted here as an introduction to the main topic of corporate corruption. The nature of market sector corruption is somewhat easier to analyse than for the corporate sector because of unambiguous ownership and that the firms involved are controlled by individuals rather than technocracies. Competitive sector corruption is based on information asymmetries between buyers and sellers, to a seller’s advantage, with resulting hidden information and hidden action problems. These problems are a reflection of the personal and in particular profit-maximising objectives of those who control market sector firms. Arguably the standard analysis of hidden information and hidden action can be used to analyse such corruption. It follows that contracting failures are an adequate framework for such an analysis, i.e. a standard analysis of corruption based on regulatory failure is relevant. In this context the minority of firms in the market sector that are corrupt can be analysed in terms of high degrees of risk-loving behaviour given the probability of less than perfect legal sanction. From a neoclassical economic perspective, risk-loving behaviour is a common attribute of entrepreneurial activity. From an Austrian economic perspective (for example Hayek 1945; Kirzner 1973) corrupt exploitation of information advantages is simply an example of the commercial use of subjective knowledge that underlies all entrepreneurial activity. It follows that firm corruption in the market sector can be seen as a form of entrepreneurial activity that takes on anti-social significance. Two implications follow from this brief discussion of corruption in the competitive sector. First, the distinction between social and anti-social entrepreneurship and behaviour is of critical importance. As seen above, ownership is defined in terms of a duty not to do harm. Hence, corrupt practices by entrepreneurially owned firms imply abuse of ownership rights. But it is clear that the definition of anti-social behaviour is not geographically or historically neutral. For example, the making and taking of bribes may be acceptable in one economy but evidence of corrupt activity in another. Perhaps

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more importantly the conception of anti-social activity can change over time. Such a change clearly occurred in Anglo-Saxon and some other Western economies from the 1970s onwards, and perhaps more dramatically in the old Soviet dominated economies. Based on earlier discussion we might suggest that such change will stimulate anti-social entrepreneurial behaviour as it affects not only the profit opportunities involved but also the probability of legal sanction for any particular anti-social act. Hence the apparent rise in corrupt corporate activity from the 1980s onwards is perhaps not surprising, given the rise of market liberalism and attendant socio-political changes. The second implication that follows from the brief discussion of corruption in the market sector involves recognizing that because of the transaction costs involved in the policing of legal sanctions (Williamson 1985) strict optimal contracting is not possible because of the costs of search, negotiation and policing of agreements; i.e. less than complete contracting is rational. From a policy perspective, an appropriate response might therefore rely on ‘market’, non-state or ex-post private litigation solutions. Market and non-state solutions involve greater provision of information that undermines the basis of corrupt activity. For instance, the media can play an important role in information provision as can market testing and state agencies. Any such policies will not, of course, eliminate corruption but will remove its long-run rationale. Given the relatively small size of any one corrupt market sector firm the social costs involved might appear small and a necessary cost of market functioning. But the social significance of corporate corruption cannot be viewed as a necessary, but undesirable cost of market functioning. As Galbraith (1967) has emphasized, the corporate sector is based not only on standard monopoly power of the firms involved but also on the management and commercial use of scientific information. Given these bases to large firm corporate activity, it is by no means obvious how simple information provision can remove the information asymmetry upon which corruption relies. In addition, given the legal and other resources that the corporate sector can exploit, but are not available to many private individuals, it is by no means obvious how ex-post private litigation can be expected to work anything other than highly imperfectly. In short, corporate corruption can be expected to have a profound impact on economic activity rather than being an undesirable but necessary adjunct of market functioning. Hence an understanding of the topic in its own right would seem to be important. Given this brief consideration of competitive sector corruption the discussion can now turn to the more involved topic of corporate corruption. For current purposes a distinction is drawn between three ‘types’ of corporations: (a) non-corrupt corporations; (b) non-corrupt companies with corrupt individuals; and (c) corrupt corporations. Type (a) companies are those emphasized in much of Galbraith’s writing. In general terms such companies

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can be described in terms of high degrees of organizational effectiveness. A precise definition of ‘organizational effectiveness’ is presented in the next section using an explicitly Galbraith inspired framework. For the moment it is sufficient to define effectiveness in terms of two general characteristics: organizational coherence and organizational objectives. The links between effectiveness, coherence and objectives are well illustrated using traditional strategic management theory (for example, Johnson and Scholes 1997). Here, organizational objectives are derived from the position and power of various organizational stakeholders. It is the responsibility of senior organizational strategists to reconcile these stakeholder aspirations and to map this organizationally viable set of objectives into concrete organizational activity, i.e. coherent strategies and operations acceptable to all organizational actors. In short, therefore, organizational effectiveness requires this senior organizational arbitration role.2 If type (a) corporations are conceptualized in terms of this effective organizational arbitration, type (b) and type (c) companies are conceptualized in terms of a breaking down of this effective arbitration. An example of a type (b) non-corrupt company that has corrupt individual(s) is Barings Bank in which a Far East trader was allowed to extract significant personal financial advantage from unrecorded trades that eventually precipitated the collapse of the company. In Barings, the key problem was that organizational coherence was limited because control systems were totally inadequate and then clearly undermined by individual aspirations, that is, there was not an effective mapping from objectives into coherent operations. Examples of type (c) corrupt companies are given below. Their general characteristic is that while organizational coherence is high, i.e. the company can run itself effectively, there is a corruption of organizational objectives. This corruption can be viewed as a failure of the traditional strategic management framework outlined above. In this framework senior strategists are viewed as essentially arbiters of organizational stakeholders. What is not considered is that the senior strategists can be stakeholders themselves, and in particular powerful and significant stakeholders because of the organizational position involved. When senior strategists shift from being arbitrators to being dominant stakeholders organizational objectives become skewed. Corruption results when this skewing takes on anti-social significance. It may, of course, be argued that overriding socially accepted stakeholders is itself anti-social, in which case all skewing of objectives involves corruption. In practice it would appear that a skewing of objectives requires a formal or informal alliance between senior management and other powerful stakeholders, e.g. financial institutions and auditors. Two comments would seem to be pertinent in this regard. First, such alliances take on greater significance when financial and auditing services are provided by organizations that are

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themselves in the corporate sector. In these circumstances financial and accounting companies may skew objectives. That this has indeed been the case is indicated in the case studies reported later. The second comment concerns the earlier discussion of stakeholder, and in particular shareholder, ignorance. In Anglo-Saxon type economies auditing is a core way in which ex-post information provision is institutionalized. It follows that corruption of the auditing process is a necessary basis for wider corporate corruption; hence the significance of accounting companies being in the corporate sector. In Japanese and European-based economies the auditing function is complemented by a greater direct but private managerial, rather than arm’s-length, role for the banking system. In principle this would seem to increase the possibility of corrupt practices emerging, if the objectives of the banking system are skewed, because of the tighter and longer-term alliances between companies and financial institutions. Organizational objectives

Organizational coherence

Figure 9.2

Effective

Skewed

High

Type (a) Galbraith corporations

Type (c) corrupt coporations

Low

Type (b) corrupt individuals

non-viable corporation

A simple taxonomy of corporate effectiveness

The simple taxonomy of organizational types suggested here is presented in Figure 9.2. The only addition to earlier discussion in this figure is the ‘nonviable’ category. This can be thought of as either a transitional category during periods of radical organizational and technological change or alternatively as the space inhabited by market sector firms that are small scale and dominated by individuals. It might be argued that the definition of corruption offered here is rather extreme, in which case it is appropriate to identify two types of corrupt corporations. First are those companies in which corruption is endemic or core to organizational activity and second, are those companies in which corruption is marginal or non-core to organizational activity. These sub-types can be called fundamentally corrupt and anti-social corporations respectively. With fundamentally corrupt companies, removal of the corrupt activity, by reorienting objectives to reflect non-senior strategist stakeholders, implies that the organization would become effectively non-viable. This would seem to be the case with companies such as Enron and Parmalat. With anti-social

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corporations, reorientation of the objectives results in reduced profitability but organizational viability is not fundamentally undermined. This would be the case with successful anti-monopoly or cartel activity. Perhaps more topically we can also cite the recent case of Shell that overestimated oil stocks because of the financial advantages that were derived. This chapter is primarily interested in fundamentally corrupt corporations, although other organizational types may be introduced for illustrative purposes.

3. CORRUPTION AND THE CORPORATE TECHNOSTRUCTURE Central to Galbraith’s (1967) analysis of the business corporation is his idea of a technostructure that controls corporate activity. In this section the functioning of the technostructure will be linked to corrupt business practices. In his New Industrial State he argues that: In the past, leadership in business organization was identified with the entrepreneur. … With the rise of the modern corporation, the emergence of the organization required by modern technology and planning, … the entrepreneur no longer exists as an individual person … [Instead, there] is a collective and imperfectly defined entity … [that] embraces all who bring specialized knowledge, talent or experience to group decision-making. This, not the narrow management group, is the guiding intelligence – the brain – of the enterprise. I propose we call this organization the Technostructure. (Galbraith 1967, p. 85)

The importance of this technostructure has not been undermined by the ‘new economy’. For example, Galbraith (2001, p. 55) claims that although the argument presented above was developed ‘before the computer revolution … the essence of [the argument], the bearing of technology on modern industrial structure, is still stoutly valid’. In more detail he made the same point in a recent interview (Dietrich 2003, p. 392): Now the modern corporation has taken over the basic industrial structure and on the whole it is economically competent. It does the economic task well. … On the whole the old fashioned capitalist power had a wide range of damaging features. And the most serious was its inability when it came to technical innovation and productive competence. The modern corporation owes much of its power, much of its authority, and much of its acceptance to the fact that it does its job very well. There is no complaint. On the other hand that gives it a licence to reward its management very wonderfully. In fact it has moved power to the managerial complex and has left the owners in a more or less celebratory role. … But power doesn’t rest usually with any identifiable individual, although it may. It really rests with the corporate structure … the competence may not be greater but the consolidation of power in the management structure is greater than I then [in the 1950s and 1960s] told or foresaw. (Dietrich 2003)

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For current purposes, a key implication of the dominance of the technostructure is that within it the nature of individual motivation changes. As argued in his New Industrial State, the importance of compulsion and pecuniary motivation are downplayed, instead identification and power seeking become more significant (see a visual representation in Figure 8.2 this volume). In terms of an analysis of corporate corruption the basic argument can be presented as follows. An effectively functioning corporate bureaucracy requires that compulsion and pecuniary motivation become subordinate to identification and power seeking. Effectively functioning here means effectively exploiting specialist technical and human knowledge. But the skewing of corporate objectives that underpins corrupt practices implies that financial objectives and compulsion become dominant compared to identification and power seeking. It follows that corruption implies an undermining of technostructure functioning. For this reason fundamentally corrupt practices are likely to have no long-run viability except in circumstances in which the corruption involves state protection. In this regard, we can recognize the importance of Galbraith’s (2004) statement that: The accepted distinction between the public and private sectors has no meaning when seriously viewed. Rhetoric, not reality. A large, vital and expanding part of what is called the public sector is for all practical effect in the private sector. (p.48)

Furthermore: In recent times the intrusion into what is called the public sector by the ostensibly private sector has become a commonplace. Management having full authority in the modern great corporation, it was natural that it would extend its role to politics and to government. (p.50)

To develop this argument in more detail we use non-Galbraith writing to understand the importance of power seeking and identification. We can recast Galbraith’s analysis and suggest that non-financial motivation is necessary to generate organizational coherence in a context of non-centralized decisionmaking, with such decision-making being necessary because of the complexity of organizational tasks. The alternative is that centralized decision making, based on financial motivation, can be used to generate coherence with resulting corrupt business practices that may be ‘merely’ anti-social or fundamentally corrupt. Dealing initially with power seeking, the issue here involves Sen’s (1970, 1983) paradox, similar to Arrow’s (1963) possibility theorem, that no social choice rule can guarantee efficient and coherent decision-making for all preferences given three characteristics: (a) unrestricted preferences, (b) Pareto optimality, (c) minimal delegation. Technostructure functioning allows coherent decision-making by controlling at least one of (a), (b) or (c).

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To facilitate discussion we present a firm-based example of Sen’s paradox, inspired by Miller (1992). A company has three groups of experts: financial specialists, marketing specialists and production managers. Each group has a characteristic time horizon for decisions based on the nature of their specialist task. Financial specialists have a short-term orientation. Marketing managers can be assumed to have an overwhelming objective based on market share development that requires a medium-term horizon. Production managers emphasize technical issues and research and development that require a characteristic longer-term horizon. Three mutually exclusive strategies are assumed to exist: Strategy M Strategy P Strategy N

Exploitation of existing monopoly power using skimming pricing; Further market share development using penetration pricing; New product development based on application of research and development.

The priority rankings of the three groups of specialists are as follows: Finance: M > P > N Marketing: P > N > M Production: N > M > P A simple voting rule produces the following results: M > P (2 votes to 1) P > N (2 votes to 1) N > M (2 votes to 1) We can now derive Sen’s well-known paradox. In any organization with minimal delegation and unrestricted preferences there is always some combination of individual preferences that lead to either intransitivity or inefficiency in group choice. The intransitivity is clear from the circularity in the above company rankings i.e. consistent and logical organizational decision-making is not possible. Inefficiency is given a Pareto interpretation. Decisions can be rendered consistent by assuming some sort of dominance in the decision process. With financial dominance N > M is overridden in which case M is chosen. Marketing dominance involves M > P being overridden, in which case P is adopted. Production dominance involves P > N being vetoed resulting in N as the strategy. But any of these vetoes implies company decision-making is not Pareto efficient. We can now see the way in which technostructure functioning facilitates the

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management of the potential conflict between decentralized decision-making and firm activity and why it is necessary for organizational coherence in a context of non-centralized decision-making. The technostructure allows manageable decision-making by controlling at least one of the factors that generate the Sen paradox i.e. there must be (a) constrained delegation; and/or (b) preference restriction; and/or (c) Pareto inefficient practices. In terms of technostructure activity we can see two general ways in which such coherence can be developed. First, specialists within an organization can act politically, i.e. undertake power-seeking behaviour, with the objective of controlling the ‘corporate agenda’ hence their objectives come to dominate corporate activity, i.e. this controlling group become the central strategists. In the above example N > M, M > P or P > N is overridden depending on who controls the agenda. Second, central strategists can impose an external coherence not based on the specific tasks of organizational actors, with corrupt consequences. In terms of the above example, and with corruption involving a skewing of objectives towards financial gain, external coherence involves imposing N > M. The conclusion that organizational coherence can be developed in these two general, but mutually exclusive, ways is consistent with the more formal analysis presented by Itoh (1991). Technostructure functioning can be viewed in terms of team activity because the shared knowledge of specialists produces an interdependent knowledge base unique to each organization (Dietrich 1993). In this team situation Itoh examines possible incentive schemes; either interdependent schemes or individual based schemes. The key result, for current purposes is the nonconvexity of the optimal task structure where the principal either wants a specialized structure or substantial teamwork in which agents have full information about each other’s actions. A specialized structure is equivalent to an external imposition of team coherence whereas the development of teamwork is equivalent to a more decentralized development of coherence. The discussion can now move on from power seeking to the importance of identification for motivation within a technostructure. In this regard, the work of Dietrich and Roberts (1996, 1999) on the economics of professional behaviour is relevant. In these works it is argued that professional organization gains a comparative advantage when a principal is ignorant about the transformation processes undertaken by an agent. The relevance of this ignorance for the corporate sector and technostructure functioning is clear from earlier discussion. As discussed above, the result of this ignorance is that arm’s-length contracting is an ineffective means of controlling economic activity. This comparative effectiveness of professional organization requires the development of a professional ethic that provides a signal that a principal can trust. But equally professional organization involves an inevitable institutionalization of monopoly power to the advantage of the professional.

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Using this perspective it is clear why professional identification is necessary for effective technostructure functioning and also why a degrading of such identification can facilitate a skewing of technostructure objectives with corrupt consequences. This identification is important within an organization, as a means of controlling power seeking and financial motivations. Equally it is important externally as a means of controlling relationships between senior organizational managers and key external stakeholders e.g. auditors and financial institutions. But as discussed above, this internal and external role for identification is basically the same when external stakeholders are themselves part of the corporate sector. The importance of this professional identification is emphasized by Galbraith: The least expected contribution to the adverse and even criminal [corporate] activity was … corrupt accounting. … This provided cover for devious actions and extended to outright theft. Individuals of inquiring mind had long regarded accounting as both competent and honest. Over a professional lifetime in economics, … I have read through dozens, perhaps hundreds of corporate financial statements. That some were a disguise for quiet larceny did not cross my mind. (2004, p. 66)

4. CORRUPT CORPORATIONS: ENRON, PARMALAT AND ROYAL DUTCH SHELL In this section the intention is to provide some empirical meat for the conceptual skeleton developed in the previous two sections. This application involves case studies of three famous examples of corporate corruption: Enron, Parmalat and Royal Dutch Shell (other examples are given in other chapters of this volume, notably by P. Petit, Chapter 2). The intention here is not to provide detailed corporate histories of these companies but rather to use them as illustrations of the framework developed above. There are several analytical strands which are similar for all three firms. Inadequate adherence to accounting norms, incomplete disclosure of information, serious conflicts of interests, a dilution of accounting rigour due to conflicts generated by lucrative consulting fees and finally, the limited role of independent nonexecutive directors existed in all these firms. To get an idea of the scale of the problem consider the fact that 250 US public companies restated their profits in 2002, compared with only 92 in 1997 and three in 1981 (The Economist 2002). In 2002, the venerable Xerox Corporation was fined US$10 million to settle a case brought by the US Securities and Exchange Commission (SEC), the largest such fine ever paid till then. Xerox admitted that it had overstated its profits by US$1.4 billion between 1997 and 2001 (The Economist 2002).

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Enron Enron was a Houston-based energy firm founded by Kenneth Lay. It transformed itself over its 16-year lifespan from an obscure gas-pipeline firm to the world’s largest energy trading company (for both offline and online businesses). As a consequence of deregulation, Enron moved to the electricity business to supplement its natural gas business. It also tried to buy into the water business. For a while Enron was viewed as a trailblazer and it became the darling of Wall Street and investors alike. In 2001, Enron’s several deceptions began unravelling due to a combination of off balance sheet accounting and unsustainable profit and share price growth. In spite of its best efforts at manipulation, Enron failed to enter the California retail electricity market. As a consequence of a lack of transparency and concealing fraudulent numbers on its balance sheets, by October 2001 Enron’s credibility, its share prices and credit rating plunged. A rival firm, Dynegy, shied away from a proposed lifeline merger fearing lawsuits over Enron’s shoddy and fraudulent accounting. By December 2001, Enron filed for bankruptcy, but by then many of its employees lost their savings and their jobs. Some employees also lost their retirement funds, because their pensions were invested in Enron stock through their company scheme. US Federal prosecutors took senior management to task with ex-CEO Kenneth Lay charged with fraud in July 2004. Michael Kopper, an assistant to Andrew Fastow pleaded guilty to money laundering. The ex-CFO, Andrew Fastow, plea-bargained a ten-year prison sentence in January 2004 (The Economist 2004e). As of now, criminal charges have been brought against a total of 30 people involved in Enron’s collapse, not counting the charges against Arthur Andersen, and ten guilty pleas have been entered (The Economist 2004f). Enron removed big liabilities from its balance sheet and put them into so called ‘special-purpose entities’ (SPEs) (with names like Raptor and Chewco), which were financial structures apparently designed to remove unpleasant information from the sight of investors. When this deception could not be continued any longer, Enron had to restate its profits for the years from 1997 to 2000, knocking off more than US$1.2 billion from its book value (The Economist 2002). Enron (much like another discredited firm, WorldCom) set out to revolutionize its industry on the back of deregulation which let it enter new markets, and the Internet which changed the economics of entry. In the ensuing fallout accompanying its collapse, investor confidence has diminished significantly and chief executives of firms and accountants have come to be perceived as particularly untrustworthy. Most of these issues fall under the rubric of corporate governance. In all three cases discussed here, the role of auditors as guardians of managers’ accounting probity has been increasingly questioned. The auditors of Enron, Arthur Andersen, faced an unresolved

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conflict between its auditing and its faster growing, higher margin, consulting business. In 2000, it earned US$25 million from auditing Enron’s books and another US$27 million from providing consulting services which had been aggressively promoted. Andersen ultimately went out of business on 31 August, 2002. It was revealed that its executives had shredded incriminating documents about Enron, even after US Federal investigators started looking into the auditor’s activities. The US Department of Justice decided to bring criminal indictments against Andersen, hastening its demise. Another factor that fuelled these excesses was the practice of awarding extravagant rewards to top corporate executives with the company boards condoning such rewards. This was largely possible through share options. Share options were given generously in the 1990s in the hope that they would align managers’ interests with those of shareholders, but in many cases share options motivated the unscrupulous to massage their company’s figures and to persuade their auditors to go along with them. In the case of Enron, Andersen did not need much persuading. Partners who objected were moved to other clients. Finally, insiders exercised their share options before accounting deceits were revealed and before share prices collapsed, often netting large windfall gains in the process. Deficiencies in financial statement disclosure and corporate corruption were serious problems long before the Enron debacle. In most countries surveyed, the lack of disclosure of information by companies was a bigger issue than either corrupt business practices or a lack of effective accounting guidelines. Only for the case of the UK, more CFOs (chief financial officers) considered the lack of effective accounting guidelines to be an issue of more concern than lack of disclosure. In developing countries, as could be expected, CFOs regarded corruption to be the more important problem, as compared to disclosure issues and issues relating to accounting guidelines. Barth et al. (2003) also contend that the lines between law and accounting are becoming very blurred. In their view, inadequate training in accounting theory and practices on the part of lawyers resulted in a diminishing competence on the part of lawyers to understand and effectively monitor the firms whose operations were being analysed. In the United States, the Enron case led to the enactment of the Sarbanes–Oxley Act of 2002, which attempts to increase the transparency of corporate financial statements, reform the oversight of accounting and aims at helping to restore investor confidence. Barth et al. (2003) cite a remarkable quote from the US Senate’s Permanent Subcommitte on Investigations (2002): Citigroup and [JP Morgan] Chase each deliberately misused structured finance techniques to help Enron engage in deceptive accounting or tax strategies, and were rewarded with millions of dollars and favorable consideration in other business dealings.

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Parmalat Parmalat is a well-known Italian food and milk products company, especially well-known for its innovative brand advertising. Parmalat was viewed as an apparently healthy firm, the product of decades of entrepreneurial endeavour that had turned a tiny ham merchant in Parma into a global giant. Fifty-one per cent of its shares were owned by the family of the founder, Calisto Tanzi. In December 2003, Parmalat caused panic among investors by almost defaulting on a small bond issue. Parmalat was a regular heavy user of the bond markets, and it had often been criticized for its habit of carrying large debts that were supposedly offset by big cash holdings. Suddenly in December 2003, Parmalat struggled to redeem a €150 million (US$180 million) Eurobond, despite having already bought back much of the issue. Financial markets wondered why the redemption was a problem for a group with more than €4 billion of reported cash and short-term assets. Investors panicked when Parmalat admitted that it had been unable to secure the release of almost €500 million trapped in a mutual fund in the Cayman Islands. Within days, Parmalat’s banks forced out Calisto Tanzi who was the group’s chairman and chief executive, and appointed Enrico Bondi in his place, effectively as a troubleshooter. Enrico Bondi quickly discovered a huge and long-running deception, which became the subject of a full-scale judicial inquiry. There were two main allegations: first, that the family-owned group falsified its accounts to conceal its losses and second, that up to €800 million were embezzled, chiefly by Calisto Tanzi. Faced with implosion at Parmalat, the Italian government passed an emergency law introducing American Chapter 11 style bankruptcy protection in order to salvage parts of the Parmalat group’s business which were still viable going concerns. This case did not prove to be a uniquely Italian affair. The investigation has spread to the Netherlands, America and Brazil, and it encompasses questionable behaviour on the part of international investors, credit-rating agencies, banks and auditors, prompting the media to dub the Parmalat case, Europe’s Enron. Quite like Enron, Parmalat had a corrupt management and a complacent board of directors, as well as complicated financial deals in offshore tax havens via big banks, which seem to have been only too willing to underwrite deals that kept a massive fraud alive for years. As at Enron, accounting and auditing deceptions enabled the fraud to continue. At the heart of the Parmalat scandal lies a letter, purportedly from the Bank of America, in which the bank confirmed that Bonlat, a Parmalat subsidiary based in the Cayman islands, had deposits close to €4 billion (US$5.5 billion) with the bank. Parmalat’s auditor, Grant Thornton claimed that the forged Bank of America letter was good enough to fool them into approving accounts that were fraudulent. Grant Thornton used Parmalat’s internal mail to request

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financial information, rather than dealing with the banks concerned or other parties directly. Many observers contend that either Grant Thornton was too close to Parmalat’s affairs to maintain objective, professional standards or that they were incompetent. Grant Thornton expelled its Italian member from the network for deviant and unethical behaviour, no doubt mindful of the fate of Arthur Andersen. The size of the hole in Parmalat’s accounts is estimated to be between €12 billion to €14 billion (The Economist 2003b). According to Giulio Tremonti, Italy’s finance minister, this may well end up being underwritten by taxpayers’ money (The Economist 2004b). Fausto Tonna, Parlamat’s former CFO was one of ten people (including his wife) who were arrested over the affair, and he has confessed to prosecutors that he benefited personally from funds held by Parmalat subsidiaries (The Economist 2004a). Like Enron, Parmalat was overly fond of using elaborate bond and derivates deals, often using complex offshore structures that involved some of its many subsidiaries.3 For example, Parmalat employed the so-called ‘self-references credit linked notes (CLNs)’ which were effectively an insurance policy written on itself. Investors and bankers alike struggled to understand its balance sheet or to gauge the true extent of its liabilities. Parmalat became well known for a lack of transparency. In 2002, Merrill Lynch advised investors to sell Parmalat shares on the grounds that they could not understand the need for such opaque financing (The Economist 2003a). Further, respected global banks such as Citigroup, JP Morgan and Deutsche Bank were only too willing to construct the derivative deals by which Parmalat transferred funds offshore and speculated with them. These banks are, of course, not answerable to shareholders, but they do earn lucrative fees. Credit rating agencies like Standard & Poor’s also kept issuing investment grade ratings to Parmalat bonds, without adequate monitoring. The US SEC widened its probe to include the $1.5 billion worth of bonds sold by Parmalat in the USA. The SEC is investigating whether American banks, which helped to place the bonds with investors, were wilfully ignorant of the firm’s problems. The Parmalat case demonstrates the jurisdictional risks associated with solving problems in a highly complex and uncertain regulatory and legal environment. This problem is exacerbated by the fact that there has been an increasing globalization of the world’s capital markets, as foreign firms increasingly raise money in the USA. More significantly, the Parmalat case and similar cases of fraud such as Cirio and Finmatica in Italy have increased calls for an Italy risk premium, to cover opaque financial reporting, poor governance, weak regulation and toleration of corruption, with potential adverse consequences for foreign investments. But on the whole, it is clear that Parmalat is not simply an Italian affair – it reflects a general malaise and deficiencies in corporate governance.

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Royal Dutch Shell Royal Dutch Shell is one of the world’s largest oil companies. Till recently it was one of the world’s most admired companies and it used to like to boast about its technocratic and managerial excellence. The company is a 60:40 amalgam of Royal Dutch petroleum and Shell Transport and Trading, which together own the many Shell operating companies around the world. Admirers say that this structure generates a need for consensus decision-making, which is well suited to a firm with a 50-year planning horizon, and that while decisions may take longer to reach, broad agreement usually results in quicker and better execution. But many critics argue that the firm’s governance structure is antiquated and badly designed. It has two separate boards of directors, and at group level, the group head is a chairman of a managing committee of six managing directors and he is not a command and control boss. The firm also does not have a consistent global process for measuring and categorizing reserves with each business using its own approach. At rivals like British Petroleum, global processes have been the norm for the last 15 years. In January 2004, Shell was forced to reclassify a fifth of its ‘proven’ reserves. Such a large reclassification is unprecedented in the history of the oil industry. Some Shell managers attribute this denouement to ‘technocratic hubris’, while other analysts put it down simply to fraudulent accounting. It is argued that the former chairman of Shell, Philip Watts, deliberately inflated the reserves figures, ignoring the increasingly strict rules of the US SEC about booking reserves, taking full advantage of Shell’s own, loose guideline to conceal disappointing exploration results so as to obtain the top job himself (The Economist 2004d). Shell’s internal report into this fiasco paints a picture of deception and backbiting at the top, which could end up encouraging shareholder lawsuits and possibly criminal prosecutions. In the mid-1990s, Shell was finding it very hard to replace the oil and gas reserves that it was pumping out of the ground. During 1997–2001, when Phillip Watts was the head of Shell’s Exploration and Production (E&P) division, the firm inflated the reserves that it reported to the SEC as ‘proven’. The SEC defines proven reserves as reserves that the company has firm plans to get to the market quickly. Shell now has only 14.5 billion barrels of proved oil and gas, which represents about ten years’ worth of production. In contrast, British Petroleum has 18.3 billion barrels (enough for 14 years of production), while Exxon Mobil has over 21 billion barrels which could keep it going for a bit longer than BP. For years, Shell has been falling behind its peers in reserve replacement and reporting fraudulent numbers to hide this fact. The awkward bi-national structure, with two weak boards and a committee of managing directors leads to an inward looking bureaucracy that breeds arrogance and

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creates conditions where few questions are asked, making deception easier. Walter van de Vijver (recent head of Shell’s E&P) wrote an extraordinary e-mail to Phillip Watts (ex-chairman) in November 2003 saying: ‘I am becoming sick and tired about lying’, fuming that he was tired of covering up for shortfalls in the group’s reserves, that resulted from ‘far too aggressive/ optimistic bookings’, mostly made by Phillip Watts who preceded him as head of E&P (The Economist 2004d).4 These oversights have led to lawsuits in the USA against Shell on the grounds that this massive deception harmed shareholders and severely overstated the firm’s market value. Other class action suits are being prepared for purported malfeasance and the US SEC is also likely to investigate the matter. Phillip Watts, long seen as arrogant and aloof, brushed of allegations of wrongdoing or incompetence, but he was sacked and replaced by Jeroen van der Veer in 2004. Shell memos (dated 2002) leaked to the SEC, contend that Watts knew about the deception, but more seriously for Shell they also suggest that van der Veer may also have known about the miscategorization (The Economist 2004c). In the Shell case, there are two important differences as compared to Enron. Shell’s shifting of reserves from ‘proven’ to ‘probable’ cannot compare with the phantom profits and bogus assets declared by Enron. The oil and gas actually still exists and Shell still owns them as real usable assets. Probable reserves are simply not as close to commercialization for Shell to consider them as ‘proven’ under SEC rules, but they are likely to get to market with a time delay. Probable reserves are still assets but not as valuable because of the lower certainty. In fact, in Canada and Australia, oil firms routinely book both proven and probable reserves. Share prices in Shell have recovered after an initial sharp drop. Second, Shell takes great pains to emphasize that none of its financial statements have been restated, even though it is undeniable that the firm has restated data of great importance to investors. There is no accounting black hole, or misappropriation of funds. The real damage is to Shell’s once stellar reputation.

5. CONCLUSIONS This chapter provides an analysis of the functioning of the corrupt corporation within a Galbraithian framework. The Galbraithian notion of a corporate technostructure and the forces and processes that can lead to corruption within the technostructure, and eventually the firm itself, are examined in some detail. The Galbraithian framework also provides us bounds within which to consider the larger issue of corruption, and it distinguishes our chapter from previous work which is largely confined to corruption in the government

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sector, state bureaucracies and in public sector procurement. We distinguish between competitive neoclassical-type firms (small and medium enterprises – SMEs) on the one hand and large and giant corporate entities on the other, and analyse the incidence and motivation for corruption within both these groups. This chapter deals mainly with corruption in the corporate sector which is revealed to be greatly more complex than the case of SMEs. These differences are based on institutional and informational factors. We also employ insights from legal theory to assess ownership and the consequent implications for the well-known principal–agent framework. Ownership status, the presence of multiple principals and common agency problems are examined in detail. This allows us to set out the conditions and cases where corruption can be seen to be facilitated in the presence of different types of ownership and informational patterns. The specific cases relating to informational asymmetries and the role of transaction costs are examined in detail. We then proceed to provide a typology of corrupt practices in the corporate sector. We distinguish between three ‘types’ of corporations: (a) non-corrupt corporations; (b) non-corrupt companies with corrupt individuals; and (c) corrupt corporations. Type (a) companies are those emphasized in much of Galbraith’s writing. In general terms such companies can be described in terms of high degrees of organizational effectiveness. We proceed to assess type (b) and type (c) corporations in detail, setting out the role of organizational effectiveness, coherence and objectives combined with the creation and prevalence of incentives (including perverse incentives). Such an analysis enables us to present a simple taxonomy of corporate effectiveness based on an examination of a firm’s organizational objectives in relation to its organizational coherence. We examine links between corporate structure and the corporate technostructure explicitly. A key implication of the dominance of the technostructure is that within it the nature of individual motivation changes as a result of which compulsion and pecuniary motivation are downplayed, instead identification and power seeking become more significant. An effectively functioning corporate bureaucracy requires that compulsion and pecuniary motivation become subordinate to identification and power seeking. Effectively functioning here means effectively exploiting specialist technical and human knowledge. Dysfunctional corporate objectives that underpin corrupt practices mean that financial objectives and compulsion become dominant compared to identification and power seeking. As a result corruption implies an undermining of technostructure functioning. The conclusion is that corrupt practices are likely to have no long-run viability except in circumstances in which the corruption involves state protection. We look at these issues more formally within the framework of Sen’s paradox. It is shown that in any organization with minimal delegation and

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unrestricted preferences there are always some combination of individual preferences that can either lead to intransitivity or inefficiency in group choice. These aspects are considered within a more formal setting involving teams and the effectiveness of incentive schemes. We examine the case of Enron, Parmalat and Royal Dutch Shell corporations as recent examples which have involved a consideration of the many issues that have been developed in the first half of this chapter. These well-known cases of corporate corruption have been associated with lack of transparency, inadequate disclosure of accounts, withholding of information from shareholders and regulators, collusion between banks, firm management and auditors, and spectacular financial disasters. The role of perverse incentives and the operation of cartels and informal collusive networks have undermined the operation of firm technostructure for each of these three firms, and many of the factors and processes which led to undermining these firms are of global import and international significance. An examination of these cases reveals to us the complexity of the legal and regulatory reform required to reduce such instances in the future, as well as the crucial role of informational, institutional and strategic factors in engendering corrupt practices and the scale of the task confronting those who are attempting systemic reform. In our future research, we intend to carry out a more formal analysis in a well defined mathematical framework, in order to analyse the role of incentives, teams and problems relating to multiple principals and multiple agents within a framework consistent with that developed here.

NOTES 1.

The theory of optimal contracting is discussed in any reasonable advanced microeconomics text, for example Gravelle and Rees (2004) and Kreps (1990). 2. This senior arbitration role is similar to that suggested by behavioural theorists, for example Cyert and March (1963) and March and Simon (1958), a tradition that Galbraith (1967) uses. But for reasons briefly set out in Dietrich (1994) this behavioural basis to the firm is not used here to analyse corrupt corporations because it lacks a strategic dimension. 3. One particular financial structure has prompted outrage from institutional investors and small shareholders alike. A Citigroup entity registered in Delaware (USA) was called Buconero, which is Italian for ‘black hole’, which was allegedly used by Parmalat to conceal borrowings and to conduct a massive fraud (The Economist 2004h). Citigroup has issued an apology for the choice of this name and it has denied any wrongdoing. 4. Phillip Watts was the head of Shell’s operations in Nigeria in the 1990s, when Shell was under fire for its environmental record. At that time it also faced allegations of causing severe pollution there. To make matters worse for Shell, the Nigerian government executed Ken Saro-Wiwa, a political activist who had consistently criticized Shell’s Nigerian policies (The Economist 2004g).

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REFERENCES Arrow, K. (1963), Social Choice and Individual Values, 2nd edn, New Haven, CT: Cowles Foundation. Baldwin, W.L. (1964), ‘The motives of managers, environmental restraints and the theory of the managerial enterprise’, Quarterly Journal of Economics, 78 (2), 238–56. Barth, J.R., S. Trimbath and G. Yago (2003), ‘Before the Enron collapse: What corporate CFOs around the world said about the status of accounting and disclosure practices’, Review of Pacific Basin Financial Markets and Policies, 4, 433–40. Berle, A.A. and G.C. Means (1932), The Modern Corporation and Private Property, New York, Macmillan. Bhagwati, J. (1982), ‘Directly unproductive profit seeking (DUP) activities’, Journal of Political Economy, 90 (5), 988–1002. Cyert, R.M. and J.G. March (1963), A Behavioural Theory of the Firm, Englewood Cliffs, NJ, Prentice Hall. Dietrich, M. (1993), ‘Total quality control, just-in-time management, and the economics of the firm’, Journal of Economic Studies, 20 (6), 17–31. Dietrich, M. (1994), Transaction Cost Economics and Beyond: Towards a New Economics of the Firm, London: Routledge. Dietrich, M. (2003), ‘JK Galbraith: liberal politics and the economics of the modern business firm’, New Political Economy, 8 (2), 385–400. Dietrich, M. and J. Roberts (1996), ‘The economics of professionalism’, in M. Dietrich, J. Broadbent and J. Roberts (eds), The End of the Professions? The Restructuring of Professional Work, London: Routledge, pp. 14–33. Dietrich, M. and J. Roberts (1999), ‘Conceptualising professionalism: why economics needs sociology’, American Journal of Economics and Sociology, 58 (4), 977–98. Douglas, B. and M.D. Whinston (1986), ‘Common agency’, Econometrica, 54, 923-42. The Economist (2002), ‘Corporate America’s woes, continued’, The Economist, 28 November 2002, accessed at www.economist.com. The Economist (2003a), ‘Déjà vu all over again?’, The Economist, 18 December 2003, accessed at www.economist.com. The Economist (2003b), ‘Milking lessons’, The Economist, 30 December 2003, accessed at www.economist.com. The Economist (2004a), ‘Parma splat’, The Economist, 15 January 2004, accessed at www.economist.com. The Economist (2004b), ‘Spilt milk’, The Economist, 5 February 2004, accessed at www.economist.com. The Economist (2004c), ‘Another Enron?’, The Economist, 11 March 2004, accessed at www.economist.com. The Economist (2004d), ‘Sick and tired about lying’, The Economist, 22 April 2004, accessed at www.economist.com. The Economist (2004e), ‘Enron – a backgrounder’, The Economist, 8 July 2004, accessed at www.economist.com. The Economist (2004f), ‘The big one’, The Economist, 9 July 2004, accessed at www.economist.com. The Economist (2004g), ‘This time, sorry may not be enough’, The Economist, 29 January 2004, accessed at www.economist.com. The Economist (2004h), ‘Skimming off the cream’, The Economist, 22 January 2004, accessed at www.economist.com.

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Galbraith, J.K. (1967), The New Industrial State, 2nd edn, published 1974, Harmondsworth: Pelican. Galbraith, J.K. (2001), The Essential Galbraith, Boston: Houghton Mifflin. Galbraith, J.K. (2004), The Economics of Innocent Fraud: Truth for Our Time, London: Penguin. Gravelle, H. and R. Rees (2004), Microeconomics, 3rd edn, London: Prentice Hall. Hart, O. (1995), Firms, Contracts and Financial Structure, Oxford: Clarendon Press. Hayek, F.A. (1945), ‘The use of knowledge in society’, American Economic Review, 35, 519–30. Itoh, H. (1991), ‘Incentives to help in multi-agent situations’, Econometrica, 59, 611–36. Johnson, G. and K. Scholes (1997), Exploring Corporate Strategy, London: Prentice Hall. Kay, J. (1997), ‘The stakeholder corporation’, in G. Kelly, D. Kelly and A. Gamble (eds), Stakeholder Capitalism, Basingstoke: Macmillan. Kirzner, I.M. (1973), Competition and Entrepreneurship, Chicago: University of Chicago Press. Kreps, D.M. (1990), A Course in Microeconomic Theory, London: Harvester Wheatsheaf. Krueger, A.O. (1974), ‘The political economy of the rent-seeking society’, American Economic Review, 64 (3), 291–303. March, J.G. and H.A. Simon (1958), Organizations, London: John Wiley & Sons. Miller, G.J. (1992), Managerial Dilemmas: the Political Economy of Hierarchy, Cambridge: Cambridge University Press. Nyman, S. and A. Silberson (1978), ‘The ownership and control of industry’, Oxford Economic Papers, 30, 82–9. Rose-Ackerman, S. (1975), ‘The economics of corruption’, Journal of Public Economics, 4, 187–203. Scherer, F.M. (1980), Industrial Market Structure and Economic Performance, Boston, MA: Houghton Mifflin. Sen, A.K. (1970), Collective Choice and Social Welfare, San Francisco: Holden-Day. Sen, A.K. (1983), ‘Liberty and social choice’, Journal of Philosophy, 80, 5–28. Stiglitz, J.E. (2003), The Roaring Nineties: A New History of the World’s Most Prosperous Decade, New York: W.W. Norton & Co. US Senate Permanent Subcommittee on Investigations (2002), Fishtail, Bacchus, Sundance and Slapshot [Four Enron Transactions], Washington, DC: US Senate, accessed at www.senate.gov/~gov_affairs/010203psireport.pdf. Williamson, O.E. (1985), The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, London: Macmillan.

10. The global restructuring of capitalism: new technologies and intellectual property George Liodakis 1. J.K. GALBRAITH’S CONTRIBUTION AND THE APPROPRIATE THEORETICAL FRAMEWORK The theoretical investigation of the current global restructuring of capitalism and of the relevant role of technology is an urgent task for contemporary political economy. In developing an adequate theoretical framework for such an investigation, it is appropriate to refer to, and draw from, J.K. Galbraith’s work because the issues regarding the role of technology and the industrial restructuring of modern capitalism run through, as a connecting thread, his whole work. There are, certainly, common premises in the work of JKG, but also a significant critical divergence from mainstream economics. Regarding Keynesian economics, more specifically, it should be noted that both Keynes and Galbraith agree that free market capitalism, without state intervention and regulation, tends to instability, and that Galbraith was an important figure in the promotion of Keynesian economics in the USA (see Dietrich 2003). However, Galbraith’s critical work was also pointing to the inadequacies and shortcomings of the Keynesian analysis, particularly in relation to the shifting balance of power from consumers to producers, the growing divergence between producers’ interests and public purpose, the unequal development and distribution of income, the impact on the environment, the antiinflationary impotence of fiscal policy in case of oligopolistic structure, and the lack of economic co-ordination on a national and global scale (JKG 1973: ch. 31, section III). Although Galbraith himself declares that, for better or worse, he is ‘a reformer rather than a revolutionary’ (JKG 1973: Preface, III), he seems to have a great esteem for Marx and his work. As he points out, ‘The world celebrates Karl Marx as a revolutionary. … [But] he was also a social scientist, many would say the most original and imaginative economist, one of the most 185

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erudite political philosophers of this age’ (JKG 1977, p. 107). Apart from very substantial differences, and contrary to the mainstream perception that economic theory should facilitate the reshaping of economic and social relations to serve the interests of the ruling classes (or elites), I would point out that in both the work of Galbraith and Marx the focus is on the development of a scientifically adequate theory capable of serving a better understanding of reality and the development of a policy or political praxis purporting to change this social reality. Moreover, it might be argued that the work of both Galbraith and Marx has largely a non-formalist and anti-conformist character, stressing mostly the historical evolution of concrete social reality. However, the methodological and political differences between Galbraith and Marx are of an even greater importance, as notably mentioned by S. Boutillier, in Chapter 3. Marx’s work, in the first place, offers a historical materialist methodology and a safer guidance for working class struggles aiming at a transformation of society. Moreover, Galbraith focuses on oligopolistic power and its economic and socio-political implications, and the Marxian class analysis allows a historically specific analysis of the prevailing capitalist relations of production, as well as of the consequent class power, exploitation, and social control. Galbraith’s reformism derives specifically from his understanding that market failures and unequal development between sectors need a remedy through state intervention, while the competitive relation between a market and a planning sector requires a specific coordination by the state (JKG 1973: ch. 27, V; 31, I). Regarding the power and influence of the modern corporation, one of Galbraith’s main concerns accurately studied by M. Pouchol in Chapter 4, his reformism, can hardly offer any optimistic perspectives in a period of growing globalization and an overriding dominance of neo-liberal policy worldwide. Insofar as institutions based on countervailing power apparently fail to effectively counter the power of multinational corporations and reverse the rapid expansion of the private sector at the expense of a shrinking public sector, Galbraith would not possibly have any other option but resorting, in an elitist way, and rather in vain, to ‘the intellectual community, the perceptive community’ (as cited in Dietrich 2003). According to Galbraith: With the rise of the modern corporation, the emergence of the organization required by modern technology and planning, … the entrepreneur no longer exists as an individual person … . [Instead, there] is a collective and imperfectly defined entity … [that] embraces all who bring specialized knowledge, talent or experience to group decision-making. This, not the narrow management group, is the guiding intelligence – the brain – of the enterprise. I propose we call this organization the Technostructure. (1974, p. 85)

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Evidently, by overstressing the role of technology in a deterministic fashion (see also Dietrich 2003) and the power of corporate ‘technostructure’, Galbraith underestimates the significance of private property in configuring the class structure of society and characterizing the prevailing capitalist relations of production (JKG 1973, Chapter 9). Despite the growing power of corporate managerial bureaucracy, which brings them largely within the lines of the capitalist class, private property in the means of production and subsistence maintains its crucial importance in determining social relations of production, exploitation and distribution. Otherwise, the considerable current stress on ‘intellectual property rights’ associated with new technologies would be pointless. But, as emphasized below, the expanding protection of intellectual property plays a crucial role in the expansion and deepening of the process of primitive accumulation, and private property in general (including intellectual property) continues to play a decisive role in the exploitation of wage labour and the distribution of production. What are the socio-political basis of today’s evolution of capitalism? How could J.K. Galbraith’s thought be revisited, including these deep changes in the analysis?

2. GLOBAL RESTRUCTURING OF CAPITALISM AND THE CHANGING ROLE OF THE STATE In this section, I will briefly deal with the current restructuring of capitalism, the dominant trend of capitalist globalization, and the evolving relationship between capital and the state (national or supra-national). Based on the relevant literature (see Bryan 1995; Perraton et al. 1997; Dicken 1998; Burbach and Robinson 1999; Castells 2000; Went 2002) and on some of my previous work (Liodakis 2000, 2005), I will argue that we are currently facing an emerging new stage of capitalism, which might be termed ‘transnational’ or ‘totalitarian capitalism’. The latter polyvalent term is meant to imply both economic integration and a totalitarian political and social practice. Apart from the increasingly transnational accumulation of capital and the reinforcing corporate control, this restructuring, during the last two or three decades, crucially implies a trend towards a universal (nearly total) subsumption, not only of labour, but also of science and nature under capital. Although this global restructuring is not caused by the technological revolution which has been underway since the 1970s, this revolution has largely enabled global restructuring, and this in turn has partly shaped the evolution of further technological innovations (see Castells 2000, pp. 12–13, 60–1; Went 2002, pp. 4, 78; Liodakis 2005). This conception of a new stage of totalitarian capitalism derives from a specific historical periodization of capitalism, based on four criteria. The first

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concerns the fundamental (revolutionary) transformations of technology, since the 1980s, which allow a radical restructuring of capitalist production. This technological revolution (new information and communication technologies, biotechnology, etc.) is being largely induced and developed by the ongoing over-accumulation crisis that started in the early 1970s. Insofar as it is crystallized into specific innovations, it has a fundamental impact on the potential subsumption under capital, on the conditions regarding the reproduction of capitalist relations, as well as on the potential and the new forms of extraction of surplus value. A characteristic case is presented, for instance, by the impact stemming from the development of biotechnology and the expansive protection of relevant intellectual property rights (Liodakis 2003). By dispossessing a great number of independent producers, expanding the primitive accumulation of capital, and reinforcing the diffusion of capitalist relations of production, these processes imply, not only an increasing subsumption under capital, but also an increasing labour productivity and, hence, an increasing potential for relative surplus value extraction. The second criterion is related to the organizational subsumption of labour and the other fundamental resources of production under capital, the particular mode of appropriation and distribution of surplus value, and the reproduction of class relations in society. The radical restructuring of capitalism, combined with the collapse of the socialist countries and the abatement of the working class movement, have allowed capital, despite all resistance, to promote a radical restructuring of the labour process and employment relations, improving thus its valorization conditions at the expense of wage labour. Flexible forms of organization and ‘human-centric’ systems have enabled capital to exhaustively exploit labour power, as well as the imagination and creativity of working people. What constitutes the landmark for the new stage of capitalism is the universal (tending to a total) subsumption not only of labour but also of science and nature under capital. This implies, not only a greater class differentiation deriving from an expansive protection of property rights, but also a drastic expansion of the accumulation terrain for capital. The third criterion concerns the concentration of capital and its competitive or monopolistic characteristics. What needs to be stressed here is that the increasing internationalization of capital and the dominant trend of economic integration, particularly on a regional level, imply an unprecedented socialization (interdependence) of production on a world level. This process of integration is taking place under an increasing monopolistic control and, after the collapse of the Eastern block, it tends to acquire a truly global coverage. Despite this integration, the inherently competitive character of capital and the forceful process of restructuring imply an increasing tension between capitals, states, and large trading blocs.

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Finally, the fourth criterion is intimately interrelated with the other three criteria. It concerns, more specifically, the socioeconomic or state regulation and authority, as well as the particular forms of a rising socialization of production, at both a national and international level. Two points should be stressed here. On the one hand, the rising concentration of economic and political power, the exacerbating crisis, and the deadlocks facing contemporary capitalism increasingly imply authoritarian (indeed totalitarian, in some respects) political and social practices. On the other hand, the requirements of transnational capital in terms of socioeconomic regulation and political authority have led to a radical differentiation and, indeed, internationalization of nation states. This trend is increasingly giving rise to what some authors have called a ‘transnational capitalist state’ (see Robinson and Harris 2000; Cammack 2003). It should be pointed out here that the emerging new stage of capitalism maintains some of the basic characteristics of the previous imperialist stage, while some new structural characteristics are also added on. It signals that stage at which quantitative changes in some factors turn into qualitative ones. In what concerns competition, exploitation and the accumulation potential, the impressive increase in concentration and monopolization of capital leads to a complex and extensive development of large conglomerates, while the exhaustion of extensive limits shifts focus on the sphere of production and on intensive methods of development. Thus, while the conflict over market control still rages, a rising tension concerns the vertical reorganization of capital, the competitive struggle over energy resources or communication and transportation networks, and the subsumption of the fundamental resources (labour and nature) under capital. In this respect, it is of particularly crucial significance that the formal or real subsumption of labour, science, and nature is dialectically upgraded toward a universal (or total) subsumption. Within this context, and insofar as this process of transnational globalization develops in an extremely uneven and contradictory fashion, there is a growing need for a supra-national (transnational) regulation of the most essential conditions for the valorization and accumulation of capital. Hence, a crucial reorganization of nation-states comes forth, as well as a transnational state nexus constituted mainly through international organisations and various capitalist groupings (see Yaghmaian 1998; Robinson and Harris 2000; Brand and Görg 2001; Sklair 2001, pp. 14–16; Cammack 2003). It should be noted here that the familiar dialectic between capital and nationstate now extends to a transnational level, and should be properly understood, not so much as a state regulation and protection of capitalist interests, leading also to a specific class formation, but rather as a determination and crystallization of state policies and institutions, on a national and supranational level, on the ground of relevant class alliances and a transnational

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class formation, and along the requirements of transnational capital (see also Drahos 1995; Liodakis 2005). The multifaceted character of the ongoing global restructuring (including economic, environmental, ideological, political, cultural and institutional aspects) and the contradictory features of capitalist development imply, of course, a variety of interpretations, policies and strategies, depending on ideological standpoint and class position (see Brand and Görg 2001). But surely the economic and institutional restructuring outlined above has a great impact, not only on the conditions of accumulation and the potential overcoming of economic crisis, but also on the environment, the exploitation of labour, and the class struggle balances, while it simultaneously creates new conditions and prospects for social emancipation.

3. NEW TECHNOLOGIES, INTELLECTUAL PROPERTY, AND SOCIAL RESTRUCTURING Within this evolving international context, it is now useful to more specifically examine the role of new technologies, or what has been considered as a major technological revolution, comparable only to the deep technological transformation that took place during the classic industrial revolution (see Noble 1995, pp. xi, 3, Castells 2000, p. 29). As is well known, this technological revolution encompasses new information and communication technologies, biotechnology, new materials, etc., and it is crucially important that a synergistic interaction seems to develop between some of these forms of technology, especially between information technology and biotechnology. Focusing on the revolutionary developments in microelectronics and information technologies, some authors speak of a new information revolution or a new information technology paradigm, and referring to the new technoeconomic system they speak of an ‘informational capitalism’ (Castells 2000, p. 18). According to Castells (2000, p. 31), ‘[w]hat characterizes the current technological revolution is not the centrality of knowledge and information, but the application of such knowledge and information to knowledge generation and information processing/communication devices, in a cumulative feedback loop. … The feedback loop between introducing new technology, using it, and developing it into new realms becomes much faster under the new technological paradigm.’ But genetic revolution and the relevant biotechnology is equally important (see King 1997; Castells 2000, pp. 57–9; Brand and Görg 2001; Cullet 2001; Liodakis 2003). The tendency of capitalism to develop scientific knowledge and utilize new technological information is, of course, not entirely new. In some often cited passages from the Grundrisse, Marx (1973, pp. 700–06) points out the

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increasing tendency of direct (living) labour to be substituted by scientific, universal labour, which, combined with the positive effects of the social association of production, leads to a dynamically rising productivity of labour. This increasing predominance of universal labour, however, tends to undermine the law of value, the regulating law of capitalist development. For advanced industrial capitalism, Marx anticipates that ‘[i]nvention then becomes a business, and the application of science to direct production itself becomes a prospect which determines and solicits it’ (1973, p. 704). Moreover, Marx points out a tendency for undervaluation of the product of mental (scientific) labour, ‘because the labour-time needed to reproduce it has no relation at all to the labour-time required for its original production. For example, a school boy can learn the binomial theorem in an hour’ (Marx 1963–71, Book I, p. 353, see also Marx 1967, Book III, p. 104). Moving afar from a technological determinism, we should perceive the recent technological revolution (since the 1970s) in a dialectical interaction with social development in general, and the globalization process in particular (see Noble 1995, pp. 34–5; Castells 2000, pp. 35, 37, 60–1). Within this context, the most crucial technological developments and innovations, along with further developments in education and training, and the generalization of universal labour, tend to rapidly increase labour productivity, and hence the capacity of relative surplus value extraction. Thus, the tendency of the rate of profit to fall, which lies behind the over-accumulation crisis since the early 1970s, can be at least partly counteracted, not only by the rising intensification and exploitation of labour, or the positive impact of the transnationalization (globalization) process, but also by the revolutionary development and application of new technologies. Within the context of a protracted and aggravating crisis of capitalism, with a detrimental shift in the balance of power against the working classes, and the rapid increase in the role of scientific and technological developments, there has been a rising tendency, since the 1980s, for the protection (through patents) of intellectual property rights (IPRs) arising from scientific/ technological innovations, particularly in the fields of information technology and biotechnology. Apart from patents, protection of intellectual property also includes copyrights and information databases (see Royal Society 2003), but I will here concentrate on patents as the, by far, most important form of protection. This tendency is not an entirely new phenomenon. A similar trend appeared during the second half of the nineteenth century and then, even liberal economists reacted to it, but their resistance relented as the crisis seemed to increasingly get hold of capitalism around the end of that century. Now, as the crisis exacerbates again, and with the abating resistance of the working class movement, the trend towards an expansive protection of IPRs acquires an impressive momentum. As this expansive protection concerns not

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only the effectiveness and duration of protection, but also extends to cases of inventions (not strictly patentable), as well as to life forms and to basic knowledge for scientific development, it raises important economic, social and ethical dilemmas. This trend brings about fundamental institutional changes and calls for significant state reforms (re-regulations), as well as an increasing role of transnational corporations (TNCs), which control new technologies, international organizations, conventions and agreements (see Drahos 1995; Correa 2000; Liodakis 2003). But most important, we should stress that patenting IPRs implies essentially a monopolization, that is, an exclusive utilization for a certain period of time, of the knowledge and information associated to a particular scientific/technological innovation. Patenting IPRs, according to the prevailing neo-liberal orthodoxy, is presumably intended to induce further technological innovation and a diffusion of technological information.1 Apart from other effects, however, it crucially implies the expropriation and valorization of relevant knowledge independently developed by other social agents, the transfer of surplus value from other sectors, and their conversion into capitalist profits. This creates an additional important mechanism for counteracting, under contemporary conditions, of the tendency of the rate of profit to fall, and thus facing the crisis. It seems, therefore, that universal (scientific) labour, rather than directly threatening capitalist production, has become a major prop for the capitalist system, in the form of an expanding intellectual property. But, as a considerable amount of recent research has shown, neither is science and technology socially and politically neutral (see Mackenzie and Wajcman 1985; Noble 1995, pp. 33–5, 108–09; Perelman 1998, p. 68, 2001; Liodakis 2003), nor could an institutional restructuring associated with an expansive protection of IPRs arising from a specific development of science and technology be neutral. Neo-classical economics, of course, and neo-liberal social science in general have systematically obscured the nature and implications of technical change, by creating an often metaphysical and class-neutral image of technology.2 A great number of ideologues of the ‘information society’, in particular, have tended to obscure rather than clarify the new socio-technical conditions, among other things, by obscuring property relations and depoliticizing work relations in the so-called information age (for a critique see Wood 1997; May 2002). A critical approach to the role of technology, on the other hand, concerns both its implications for the labour process, in a narrow sense, and the more general impact on economic and social development. It goes back, at least, to Marx who, referring to the monopolization by capital of strategic information in the labour process, stresses that, ‘[t]he possibility of intelligent direction of production expands in one direction because it vanishes in many others. What the specialised workers lose is concentrated in the capital that

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confronts them’ (as cited in Perelman 1998, p. 42). Thus, he clearly anticipates Braverman’s classic work, which analyses how monopoly capital, utilizing ‘scientific’ management and the technologies associated with Taylorism– Fordism, tends to de-skill labour and reduce its autonomy at work (Braverman 1974, p. 425). More recent work has stressed that the monopolistic control of information and knowledge in the labour process, and through the institutionalization of intellectual property, tends to reproduce class relations and expand a capitalist social division of labour (see May 2002). It can be argued more generally that, apart from any positive effects, the specific development and application of technology in capitalism may serve the interests of capital, but may be detrimental for the workers, as well as for the ecosystem (see Marx 1967, Book I, pp. 506–07; Noble 1995; Liodakis 2003). Generalizing one of Marx’s familiar insights, we could argue that, through technological developments, capital tends to undermine the two basic sources of all wealth, namely labour and nature. The increasing displacement of labour and the rising unemployment, caused by the extensive introduction of new technologies and automation in production, is just one of these potentially detrimental effects of technological modernization. The capitalist state has also played a crucial role in the development of technology, and this role is now extended to the transnational state under formation. Contrary to a common and ideologically propagated belief, it was not the private market forces, but rather the state which has played the most decisive role in the revolutionary development of technology (see Noble 1995, pp. 96–8; Castells 2000, p. 69). The state (and the transnational state likewise), again, by exerting its legislative and coercive power, plays a crucial role in the expansion of intellectual property relations, and thus in reshaping and expanding the capitalist relations of production (see Perelman 2001, 2003; Liodakis 2003; Cammack 2003). In the latter case, the misappropriation of resources brought about through state enforcement is far more pervasive than in the case of property in the form of physical assets. The expansion of IPRs concerns, in fact, an evolving interface between new technology and social relations of production, mediated by state power. But in order to explicate the significance of the expansion in intellectual property, a broader and more specific analysis of the implications of privatization (in general) is certainly required.

4. IMPLICATIONS OF PRIVATIZING NATURE, SCIENCE, AND TECHNOLOGY Contrary to the approach of a number of institutionalist economists or sociologists (see Perelman 1998, pp. 44–7), property matters, and indeed it

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matters a great deal in both the case of physical means of production and subsistence, and in the case of property in information and knowledge. The significance of property relations is manifested, not only in the case of the nowadays dominant trend towards privatization of natural resources and means of production in general, but also in the recently rapid move towards an expansive protection of IPRs. As is familiar, according to the prevailing neo-classical orthodoxy, the establishment of well-defined private property rights on natural resources, through privatization, and the expansion of market relations are expected to increase economic efficiency and ensure sustainability of development. However, the adverse effects in most cases of privatization of natural resources and the long-run sustainability of traditional or alternative property regimes, such as common property or open access regimes, casts serious doubt on the validity of the neo-classical (and neo-liberal) argument. In most cases, the expropriation and privatization of common property has increased class tensions, economic inequality, and environmental degradation (see Goldman 1998; Cullet 2001; Vatn 2001). In some cases, maldistribution and inequality undermine economic efficiency (see Runge 1986). On the other hand, a considerable amount of research has recently questioned the assumed efficiency of private property and stressed that the measure of efficiency depends on the prevailing social structure and the associated economic and social criteria (see Runge 1986; Castells 2000, p. 16; Vatn 2001; O’Neill 2001; Tsakalotos 2004). A remarkable efficiency has been pointed out in the allocation and utilization of resources in other, traditional or alternative property rights regimes, which partly explains their sustainability. A further attempt is also made to explain this sustainability more adequately (see Agrawal 2001; Vatn 2001). The points raised above are also largely valid in the case of an expansive protection of intellectual property, which implies a privatization and exclusive use of mental production, science and technology, or of information and knowledge in general. But here we need to proceed to a more specific, even if brief, analysis of the implications of this expansion in IPRs. ●

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This expansion of intellectual property implies an expropriation of basic means of production and subsistence, and hence a pervasive broadening and deepening of the process of primitive accumulation (class differentiation and polarization) and a corresponding expansion of the capitalist relations of production and market exchange. Today, this is a worldwide process (see Liodakis 2003; Cammack 2003). In relation to information and the information technology revolution in particular, it can be argued that we are witnessing today an expanding ‘information enclosure’. Much like the ‘enclosure movement’ in the

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eighteenth century, the most important consequence of the contemporary ‘information enclosure’, through expanding IPRs and monopolizing information, is the redistribution of the means of producing wealth, and not the production of additional wealth by increasing efficiency (see also Allen 1982; Runge 1986). This, again, reinforces the above-mentioned process of primitive accumulation. By expanding the capitalist relations of production and exchange, the expansion of IPRs contributes to a universal commodification of production and a privatization of education, with immensely detrimental effects, while at the same time the increasing commodification of scientific knowledge and technology, and the tight interlocking between universities and corporate capital imply a huge transfer of value and an indirect social subsidization of research appropriated by private capital (see Perelman 2001, 2003). The move from public to privatized education and from education and information as a public good to a proprietary science and technology imply that labour becomes more attached to capital and less free (see Perelman 1998, p. 63). This may lead to wage reductions in favour of capital, but also reduces the cost-reducing tendency of inter-capitalist competition, which decreases efficiency and makes the sustainability of capitalist firms more vulnerable. By restricting the access, exchange and use of scientific knowledge and technological information, the expansive protection of intellectual property retards a free and unrestricted development of science and technology (see Perelman 2001; Gallini 2002; Liodakis 2003; Royal Society 2003). By restricting the development of science and technology, the education and training of labour, and the productive utilization of the available scientific and technological capacity, it also restricts the overall development of the social forces of production, and hence social welfare. The implementation of relevant institutions, the costly processing of accumulating applications for patents, and the numerous litigation procedures imply an immensely heavy cost for the whole process of intellectual property protection (see Gallini 2002; Liodakis 2003), which reduces the overall efficiency of the private property regime constituting the material basis of the prevailing capitalist mode of production. The expansive protection of IPRs associated with biotechnology, in particular, does not only imply an increased corporate control of crucial means of production (biological knowledge and genetic material) for fields like agriculture, medicine, etc., but also leads to a reduction of

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biodiversity and threatens a potential disruption of the ecological basis of all production and human life (see Liodakis 2003). The overall undervaluation of both scientific and informal knowledge by capital, which is strengthened further through the expanding protection of IPRs, ‘not only inhibits the general development of science but also biases scientific work toward the production of monopolizable forms of knowledge capable of yielding rents’ (Burkett 1999, p. 162, italics in original). This biased orientation of scientific work also leads to an over-expansion of commodity production at the expense of the sphere of public goods production. The prevailing strategy of market expansion, which is partly implemented through the expansive protection of IPRs, goes well beyond efficiency concerns and aims further at the restriction of labour’s autonomy and the creation of ‘a culture’ consonant with capital’s logic and subservient to the overall strategy towards a total subsumption under capital. The restriction of the scope of public goods production is an important factor in this process. Overall, it can be argued that capital’s strategy for an expansive institutionalization and protection of intellectual property contributes significantly to a rising contradiction between the increasingly social character of production (universal labour) and capital’s aim at private appropriation, which is specifically manifested through an expanding, but rather inefficient and historically outmoded property rights regime (see Barbrook 2000; Liodakis 2003; Wheeler 2003).

In an attempt to theoretically evaluate the recent strategy toward an expansive protection of intellectual property, we should point out that the social rationality of patenting scientific knowledge and technological information can be questioned even within the neo-classical economic context, and there are of course several attempts to reform the economic and legal regime of patent protection (see Cullet 2001; Gallini 2002; Royal Society 2003). But the privatization strategy and the system of protecting IPRs through patents fall completely apart if the homo-economicus assumptions of neoclassical economics are rejected, or if we consider an alternative setting of the social relations of production (see Patel 1996, p. 319; King 1997, p. 153; O’Neill 2001; Liodakis 2003; Tsakalotos 2004).

5. SOCIAL CONFLICT AND DIVERGING POLITICAL PERSPECTIVES WITHIN A GLOBAL CONTEXT Before we turn to more specifically examine the relevant conflict evolving

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within an increasingly global context, it is useful to make a couple of methodological remarks. First, it should be pointed out that methodological individualism could not possibly offer an adequate explanation of social change. For the contemporary, increasingly exploitative and repressive society, such an explanation may rather be offered by a satisfactory analysis of class relations and contradictions. As argued elsewhere (Liodakis 2003), the relevant struggles, on an international level, will be fought in the immediate future mainly by those class forces unleashed through the process of development and productive utilization of new technologies, as well as from the process of private property expansion (including IPRs). It should be noted, secondly, that institutions and cultural values, though largely neglected by neoclassical economics and a certain limited version of political economy (see Tsakalotos 2004), are important, among else, for economic development performance. But, contrary to a common institutionalist conception, they are not exogenous variables, but rather endogenous factors instigated by the already existing and prevailing social relations of production and property (see also O’Neill 2001). Hence, they should not lead us to an institutional particularism, with a determinant role in the last instance, but should rather appropriately inform a political economy approach, which considers them as materially grounded and determined, within the overall social and environmental context, in the last instance, by the prevailing social relations of production and the associated structure of property rights. It is on this ground that the class relations of material–social reproduction are formed. Now, these two points may be of help in better understanding the role of new technologies and an expansive protection of intellectual property in the current (economic and institutional) global restructuring of capitalism. There is now a growing ideological and social conflict evolving worldwide as a result of the above-mentioned intensifying contradiction between an immensely increasing socialization of production and capital’s strengthening attempt at private appropriation, which is partly manifested in the expanding privatization, not only of natural resources and produced means of production, but also of science and technology. This contradiction gives rise, more specifically, to two conflicting social and political perspectives which relate, either to a restructuring and further development of capitalism, associated with a strengthening private control and appropriation of science and technology, or to an alternative transformation of society, with an open access development of science and technology, and with education and scientific/ technological knowledge considered as a common (public) good and a heritage of humanity. Regarding the former perspective, and according to our analysis, it should be noted that contemporary capitalism still has powerful means to counteract the tendency of the rate of profit to fall and, by facing the current crisis, to

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ensure its reproduction and survival. This can be done through an increasing exploitation of labour, an extensive externalization of production costs and a corresponding degradation of the environment, an expansive transnationalization of the accumulation and development process, a revolutionization of labour productivity by means of the new technological revolution and by intensifying the process of knowledge and training, or by deepening the primitive accumulation and expanding market relations through privatization and an expansive protection of IPRs. However, the more capitalism counteracts to its inherent crisis tendency, the more flawed and undermined its reproduction and development becomes. The more it subsumes labour, nature, and science to itself, the more gravediggers it seems to produce for itself, and the more it tends to exhaust its historical limits. Among other things, as already noted, the rising significance of universal labour tends to a supersession of the law of value and of the capitalist mode of production itself. Despite the recent ebb of the working class movement worldwide, the objective conditions are quite mature, there are sufficient reasons (overexploitation and alienation of labour, increasing inequalities and social oppression, ecological degradation, a meaningless life, ethical corruption, war conflicts, and a rising barbarism), and extensive social forces (more or less conscious) who have a strong stake in struggling against the above social and political perspective. It is in the interest of these social forces to struggle, against the embeddedment of the emerging new stage of totalitarian capitalism, and for opening new perspectives for an equitable, ecologically compatible, and meaningful human life. Regarding this latter perspective, it should be noted the will to place human, social, and ecological needs in command of production, is an outgrowth of the inherent contradictions of capitalism, and of the contradiction in particular between production for profit on the one hand and human development on the other. In his writings, J.K. Galbraith was very worried about life conditions. He did not hesitate to make contrary suggestions. However, are the reforms sufficient? In the course of a transformation of society, there is of course an extensive need for further research regarding, among other things, alternative property rights regimes, and concerning especially the differences and implications of common property and open access arrangements (see Vatn 2001). But certainly I would argue, along these lines, that education should be rendered a public good and, besides basic natural resources, scientific and technological knowledge should clearly be treated as a common good and inalienable heritage of all humanity (see also Brush 1996; Patel 1996; Cullet 2001). There is, of course, an even greater need for transformative social struggle, in order to win particular fronts and crystallize the specific structures and institutions of the new society. Despite all difficulties, however, there are

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deep reasons to believe that, by utilizing past experience, past failures can be surpassed and a worth-living society, which does not yet exist, can be realized.

NOTES 1. 2.

They are also considered, as J. Molas-Gallart and P. Tang explain it in Chapter 14, as a new coordination means between diverse institutions, notably public and private ones. On this point, see J. Courvisanos’ contribution, Chapter 11.

REFERENCES Agrawal, A. (2001), ‘Common property institutions and sustainable governance of resources’, World Development, 29 (10), 1649–72. Allen, R.C. (1982), ‘The efficiency and distributional implications of 18th century enclosures’, Economic Journal, 92, 937–53. Barbrook, R. (2000), ‘Cyber-communism: how the Americans are superseding capitalism in cyberspace’, Science as Culture, 9 (1), 5–40. Brand, U. and C. Görg (2001), ‘The regulation of the market and the transformation of the societal relationships with nature’, Capitalism, Nature, Socialism, 12 (4), 67–94. Braverman, H. (1974), Labor and Monopoly Capital, New York: Monthly Review Press. Brush, S. (1996), ‘Is common heritage outmoded?’, in S. Brush and D. Stabinsky (eds), Valuing Local Knowledge: Indigenous People and Intellectual Property Rights, Washington, DC: Island Press, pp. 143–65. Bryan, D. (1995), The Chase Across the Globe: International Accumulation and the Contradictions for Nation States, Boulder, CO: Westview Press. Burbach, R. and W. Robinson (1999), ‘The fin de siecle debate: globalization as epochal shift’, Science and Society, 63 (1), 10–39. Burkett, P. (1999), Marx and Nature: A Red and Green Perspective, London: Macmillan. Cammack, P. (2003), ‘The governance of global capitalism: a new materialist perspective’, Historical Materialism, 11 (2), 37–59. Castells, M. (2000), The Rise of the Network Society, 2nd edn, Oxford: Blackwell Publishing. Correa, C. (2000), Intellectual Property Rights, the WTO and Developing Countries: The TRIPS Agreement and Policy Options, London: Zed Books. Cullet, Ph. (2001), ‘Property-rights regimes over biological resources’, Environment and Planning C: Government and Policy, 19, 651–64. Dicken, P. (1998), Global Shift: Transforming the World Economy, 3rd edn, London: Paul Chapman Publishing. Dietrich, M. (2003), ‘J.K. Galbraith: liberal politics and the economics of the modern business firm’, New Political Economy, 8 (3), 385–400. Drahos, P. (1995), ‘Global property rights in information: the story of TRIPS at the GATT’, Prometheus, 13 (1), 6–19. Galbraith, J.K. (1973), Economics and the Public Purpose, Boston, MA: Houghton Mifflin. Galbraith, J.K. (1974), The New Industrial State, 2nd edn, Harmondsworth: Pelican.

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Galbraith, J.K. (1977), The Age of Uncertainty, Boston, MA: Houghton Mifflin. Gallini, N. (2002), ‘The economics of patents: lessons from recent U.S. patent reform’, Journal of Economic Perspectives, 16 (2), 131–54. Goldman, M. (1998), Privatizing Nature: Political Struggles for the Global Commons, London: Pluto Press. King, J. (1997), ‘The biotechnology revolution: self-replicating factories and the ownership of life forms’, in J. Davis, T. Hirschl and M. Stack (eds), Cutting Edge: Technology, Information Capitalism and Social Revolution, London: Verso, pp. 145–56. Liodakis, G. (2000), ‘The new stage of totalitarian capitalism and the European economic integration’, in Greek, UTOPIA, 39, 117–27. Liodakis, G. (2003), ‘The role of biotechnology in the agro-food system and the socialist horizon’, Historical Materialism, 11 (1), 37–74. Liodakis, G. (2005), ‘The new stage of capitalist development and the prospects of globalization’, Science and Society, 69 (3), 341–66. MacKennzie, D. and J. Wajcman (1985), The Social Shaping of Technology, Philadelphia, PA: Open University Press. Marx, K. (1963–71), Theories of Surplus Value, Moscow: Progress Publishers. Marx, K. (1967), Capital, New York: International Publishers. Marx, K. (1973), Grundrisse, New York: Vintage. May, C. (2002), ‘The political economy of proximity: intellectual property and the global division of information labour’, New Political Economy, 7 (3), 317–42. Noble, D. (1995), Progress Without People: New Technology, Unemployment, and the Message of Resistance, Toronto: Between the Lines. O’Neill, J. (2001), ‘Property, care, and environment’, Environment and Planning C: Government and Policy, 19, 695–711. Patel, S. (1996), ‘Can the intellectual property rights system serve the interests of indigenous knowledge?’, in S. Brush and D. Stabinsky (eds), Valuing Local Knowledge: Indigenous People and Intellectual Property Rights, Washington, DC: Island Press, pp. 305–22. Perelman, M. (1998), Class Warfare in the Information Age, London: Macmillan. Perelman, M. (2001), Steal this Idea: Intellectual Property and the Corporate Confiscation of Creativity, New York: Palgrave. Perelman, M. (2003), ‘The political economy of intellectual property’, Monthly Review, 54 (8), 29–37. Perraton, J., D. Goldblatt, D. Held and A. McGrew (1997), ‘The globalisation of economic activity’, New Political Economy, 2 (2), 257–77. Robinson, W. and J. Harris (2000), ‘Towards a global ruling class? Globalization and the transnational capitalist class’, Science and Society, 64 (1), 11–54. Royal Society (2003), ‘Keeping science open: the effects of intellectual property policy on the conduct of science’, London, accessed 22 March, 2004 at www.royalsoc.ac.uk. Runge, C.F. (1986), ‘Common property and collective action in economic development’, World Development, 14 (5), 623–35. Sklair, L. (2001), Transnational Capitalist Class, Oxford: Blackwell. Tsakalotos, E. (2004), ‘Homo economicus, political economy and socialism’, Science and Society, 68 (2), 137–60. Vatn, A. (2001), ‘Environmental resources, property regimes, and efficiency’, Environment and Planning C: Government and Policy, 19, 665–80.

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Went, R. (2002), The Enigma of Globalization: A Journey to a New Stage of Capitalism, London: Routledge. Wheeler, D. (2003), ‘Why open source software/free software (OSS/FS)? Look at the numbers!’ accessed 13 February 2004 at www.dwheeler.com/oss_fs_why.html). Wood, M.E. (1997), ‘Modernity, postmodernity or capitalism?’, Review of International Political Economy, 4 (3), 539–60. Yaghmaian, B. (1998), ‘Globalization and the state: the political economy of global accumulation and its emerging mode of regulation’, Science and Society, 62 (2), 241–65.

PART III

Charting the Future: Innovation, State Power and the Market System

11.

Galbraith and the political economy of technological innovation: critical perspectives and a heterodox synthesis Jerry Courvisanos

1. INTRODUCTION In The New Industrial State (NIS), Galbraith (1967) develops a unique approach to understanding the management of technological innovation. It is based on a critical evaluation of the decision-making processes of economic agents within institutions and how they react to the different levels of political power in society. This political economy (PE) approach to technological innovation is the overriding theme of this chapter and is in direct contrast to the plethora of books and articles that provide a technocratic approach to managing technological innovation.1 There has been an appalling lack of any PE analysis of technological innovation in the spirit of Galbraith since NIS. Kingston (1984) is one notable excellent exception. The extremely poor level of citation of the Kingston book in the 20 years after its publication is a reflection not of the quality of the work, but with the obsession with technocratic issues within the business management discipline. In the meantime, mainstream neoclassical economics refuses to look inside what Rosenberg calls ‘the black box’ of technological innovation despite all economists recognizing the crucial role that it plays in economic development.2 Technological innovation has many definitions in the innovation literature. For the purposes of this chapter, the following is most appropriate: The creation, development and implementation of an idea from problem-solving or opportunity identification that alters (innovation) the current state of theoretical and practical knowledge, skills and artefacts in the production and delivery of economic activity (technology). Technology here refers to any production and delivery processes that require a significant input of fixed capital investment.3 In the context of innovation, technology matters because it is the engine that drives change and economic growth. This is in response to society’s needs or in the conceiving of new economic opportunities that 205

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induce demand. Without effective demand generating the commercialization of new technology, the idea remains merely an invention without exploitation. Underlying the incessant drive in capitalism to technological change, are the agency processes of technological innovation that bring about this change. These agency processes need to be clearly understood and appreciated for policy relevance to the public, private and third (non-profit) sectors. The scholarly works related to technological innovation have many ideological and functional intentions, leading to diverse perspectives on agency that have little in the way of overlap and even less dialogue between them. The PE approach in this chapter will provide a set of common evaluating criteria to assess critically all the perspectives. A political economy approach that initiates this investigation is set out first, along with the evaluating criteria. Then the role of technological innovation in capitalism from the pro-market perspectives (neoclassical and neo-Austrian) establishes the historical basis of the individual capitalist–entrepreneur agent effecting change. Galbraith provides a critical response from which to appreciate the development of large corporate agency in technological innovation. This critical response comes from three perspectives that have adopted some aspects of Galbraith’s NIS – institutionalists, resource-based strategists and post-Keynesians. The various perspectives are briefly outlined and critically assessed on the basis of the evaluating criteria. The final section identifies key common themes that exist across the perspectives outlined and proposes a heterodox synthesis that unifies these common themes around a Galbraithian framework of analysis.

2. POLITICAL ECONOMY APPROACH The parameter that sets up this PE approach is the dynamic model of technological change based on Marx’s laws of motion. Essentially, the circulation process under capitalism must overcome the limits of production by expanding over the barriers of declining additions to surplus value time (Lallier 1989). This determines the drive to technological innovation in three forms: (1) opening up new markets, (2) creating new needs and demands, (3) investment in increasingly technologically efficient means of production. These forms are endogenously linked to instability, unemployment, inequality and unsustainable development that create an economy with fundamental uncertainty. In fact, it is the attempt to ‘control’ this uncertainty that drives all the perspectives. This control comes from the agents that are given power in their respective perspectives (be it capitalists, entrepreneurs, technostructure, firm, creative elite or politicians).

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Crucially, the economic agents of institutions are the central decisionmaking actors in the process of technological innovation. These agents have the power to affect the way society adapts to such innovations in three ways: (1) ability to determine the nature of the technology employed; (2) monopoly power that resides with the entrepreneurs who install the innovation that can stifle other innovations as well as promote their own, (3) force society through organizational (politics), property (rights) and individual (charisma) elements to adopt the innovations they promote. This power view of innovation has two dimensions. One is the power to manipulate production in a way that technological innovation alters the physical aspect of the economy. Adam Smith, followed by Ricardo and Marx, developed this dimension around specialization (Smith), employment (Ricardo) and exploitation (Marx) on the basis of what happens to the economic surplus (Dasgupta 1985, p. 15). The other is the power to manipulate demand in a way that promotes one innovation while stifling another. Sraffa (1926) first recognized the power of marketing, which was subsequently developed by many economists, but notably Robinson (1933), Sylos-Labini (1962) and Galbraith (1958).4 The perspectives will be examined with two objectives in mind. The first is to appreciate the limits to innovation. These limits are specified by each particular perspective with each identifying the role of business planning and public policy in overcoming these limitations. The second is to identify common themes that could form the basis of a general framework of technological innovation. This framework has a Galbraithian base as it encompasses the uncertainty principle by institutions that handle the tension between planning strategies and unconstrained environments. The innovation process is the generation of ideas and their implementation (often called ‘commercialization’ when it occurs in a private sector business environment). Jolly (1997) calls this the process of getting ideas from the ‘mind to the market’, and he identifies in his research five interconnected stages in the process: ●

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Imagining – which generates technological solutions with problemsolving skills. Incubating – which develops concrete applications of the technological solutions. Demonstrating – which tests designs and validates outcomes of technological applications. Promoting – which positions the demonstrated technology into appropriate market(s). Sustaining – which improves functionality through incremental improvements.

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The various perspectives examined below emphasize different aspects of this five-stage innovation process, and the articulation of these perspectives will be in the context of the aspects of this process which each perspective concentrates its analysis. Seven factors make up the criteria that are applied to appreciating the role of technological innovation and its influence on the society. Each perspective is examined to see which of these factors are specified and the role that they play in the innovation process as identified by Jolly (1997). The seven factors are: 1. 2. 3. 4. 5. 6. 7.

Source of creativity in the imagining and incubating stages; Bridging the invention–innovation gap to fund and technically support the demonstrating stage; Promoting the technological applications for the diffusion of innovation; Role of investment and effective demand in sustaining the innovation; Contextual analysis related to firm size, regional location and industrial sector; Trend and cycle patterns in the laws of motion for innovation; Role of government in relation to the whole technological innovation process.

3. PRO-MARKET PERSPECTIVES The agency that is central to the determination of technological innovation in neoclassical economics is ‘The Market’. The firm is seen as reflecting the will of the market determined through contracts of exchange, with economic agents carrying out the dictates of the market. This agency perspective is consistent with market dominance developed by economics writers in the marginalist revolution post-1870. The Walrasian general equilibrium system describes a pure exchange economy without any consideration of production. The Marshallian partial equilibrium system attempts to integrate the theory of exchange with a production system anchored in industries that are made up of a set of heterogeneous firms (Best 1992, p. 4). Industries, not firms, are central to the determination of price and quantity through the interplay of supply and demand forces in each industry setting. Any advantage gained by one firm quickly spills over to other firms in the same industry evening out the industry’s firms. Bloch and Finch argue that: Despite irreducible heterogeneity among firms in often localised and clustered industries, the tendencies that prevent one firm from getting a lead and benefiting from faster accumulation or internal economies mean that the famous representative firm of Marshall’s principles has some (logical) credence or tractability. (2004, p. 5)

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The source of creativity is in the market itself, or in Marshall’s terms it is ‘in the air’. The knowledge inherent in innovation ‘leaks out’ quickly and easily through communication of customers, suppliers, rivals, educational institutions, etc.. This spillover occurs around localized districts (or clusters) in Marshall’s world, but this can extend to electronic networks and globalized strategic alliances (including franchising and licensing). Innovation gradually builds upon previous knowledge and its diffusion is very quick and effective. Incentives through early technical knowledge are brief, with first-mover advantage the longer-term objective. Source of innovation is, thus, exogenous to operation of the market. That is why Nelson and Winter (1982) use random draws for innovation knowledge in their simulation model of enterprise development. Bridging the invention–innovation gap is problematic from the neoclassical perspective, because the market works on the basis of information spreading quickly (if not instantaneously) to enable the innovation knowledge to diffuse. The process of bridging the gap is not of significance per se; only when market forces are prevented from diffusing the information is there a legitimate reason for passive public policies to dissuade such prevention. Promotion through advertising and other marketing techniques is important in differentiated markets, but only as a temporary competitive advantage to be whittled away by competitors marketing strategies. The criterion of investment in sustaining innovation is essential but not a driver of innovation, only a response to the market situation. The market is the power. The contextual criterion in neoclassical economics is crucial in the Marshallian strand that has influenced generations of industrial organization researchers. This is the biological analogy of firms as trees, where they ‘… gradually lose vitality; and one after another they give place to others, which … have on their side the vigour of youth’ (Marshall, 1920, p. 316). This implies that firms do grow, but then decay, so that no firm becomes too large over a long time so as to dominate the industry. The role of regional clustering and industrial location is linked to this biological need to group together in order to be sustainable. This sustainability is only in a quasi-equilibrium state such that there is ‘…dynamic balance between progressive and declining firms, with today’s progressives inevitably becoming tomorrow’s decliners’ (Bloch and Finch 2004, p. 5). This analogy also provides a trend around an equilibrium stationary state position for the ‘forest of firms’ as a whole, with the representative firm providing some medium firm in this industry, with only exogenous shocks like radical disruptive technologies disturbing the ‘biological’ balance. Trend is the statical balance with heterogeneity being competed away quickly. Any major disturbances causing cycles are exogenous shocks to the system. The role that government plays in the innovation process in neoclassical

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economics is passive and reactive. Any exogenous shocks and distortions that threaten the biological balance need to be addressed by policies that ensure the stability of private investment decisions. This stability derives from the state’s attention in establishing the ‘benchmark’ competitive conditions that lead to a stable market-based economy (for example legislation on: anti-trust, consumer protection, anti-discrimination, intellectual property rights). These benchmark conditions allow the price signals to arise, and for them to be the basis upon which private entrepreneurs respond. This benchmarking begins from the premise that human agency responds to flexible market signals by tending towards a known (or at least knowable) equilibrium stable condition. The dynamic aspect of this neoclassical position is the exogenous element of technological innovation. It is such technology that is assumed will come forward under correct market signals. This innovation is seen as being appropriated via investment, but with no specific theory on how it happens. Empirical evidence on technical change comes forth as only a ‘residual’ to all the basic internal static economic factors that are explicitly price responsive (see Denison 1962). Critical response to this neoclassical view of innovation centres on the dilemma of limits to innovation. On the one hand there are no limits because price signals will always respond to shortages in the market, stimulating technological innovations that will overcome such problems. On the other hand, the fact that technological innovation is merely a residual in the economic model makes any efforts to understand, model and act on any specific conditions impossible. This limits innovation to purely the outcome of the ‘invisible hand’. The uncertainty principle inherent in this perspective cannot be addressed except in some fundamental commitment to the market faith, the signals it creates and the quick responses elicited. The underlying critical response to this market faith is that technology itself, within the context of volatile market signals creates conditions for uncertainty in expectations about the future that lead to cumulative shortrun instability and cumulative long-run systemic change. The work by Minsky (1982) on financial instability and by Crotty (1992) on growth–safety trade off in capital goods investment, show the cumulative volatility arising from market signals to investment (both financial and physical). Recent work on technology embodied in investment has shown the rise of severe cyclical activity whenever new technological systems predominate.5 When technology becomes embedded, then past technology decisions shape future investment decisions and myopic selection pressures operate. Such pressures work against the automatic price response mechanism that would in theory induce new appropriate technology; for example, replacement technology for the petrol-driven automobile (Rip and Kemp, 1998, pp. 372–9).

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A pro-market variation to the neoclassical view comes from the neo-Austrians who see the agency that is central to the determination of technological innovation as ‘The Entrepreneur’. The entrepreneur is seen as alert to opportunities for taking advantage of discrepancies and gaps in the market system.6 In this sense, the neo-Austrian version of the entrepreneur is an arbitrager; a persona embodying foresight, knowledge and willingness to act in situations of widespread ignorance of the disequilibria that exist in the market that comes out of the criticism that the neoclassical position lacks any subjective human element to agency (Canterbery 1995, p. 262). Exploiting opportunities in a rational planning manner adds to the value of the final product by the techniques that are ‘put to use’. The more capital-intensive the process of production, the more capital goods are put to use through increasingly complex techniques and the higher market price that the product can command. Value is thus added by the ‘degree of roundaboutness’, leading to capital deepening in the economy (Kirzner 1973). The appropriation of monopoly power in the market is evidence of creative and successful entrepreneurship. Such monopoly power is not seen as permanent by neoAustrians unless such power is underwritten, subsidized and otherwise supported by governments and their regulatory agencies. Promoting the innovation provides the competitive advantage, similar to neoclassical economics. As an arbitrager, the neo-Austrian entrepreneur identifies and reveals the ends latently demanded in the economy. Marketing is merely the process of informing market participants of the opportunities created by entrepreneurs. Any monopoly power that is established from marketing will be slowly undermined in the marketplace rather than the quick response assumed by the neoclassical version of this promotion story. The neo-Austrians have a strong accumulation link from innovation to investment, and it is driven by the entrepreneur’s need to produce the final marketable product. Effective demand is latent and always waiting for the entrepreneur to exploit. The investment process continually alters the structure of capital, where this capital is the only factor of production and embodies anything that the entrepreneur invests in (human, physical, natural or social) to produce the final product (Kirzner 1976). Contextual relevance to this entrepreneurial process centres on Schumpeter (1934) and the role of small innovative firms developing the creative niche in capitalism that is the bulwark of technological innovation, which reflects the capitalism of the nineteenth century. The laws of motion are governed by the actions of the entrepreneur, with cycles being the subjective reflections as well as signals of these actions. Surveillance of market-created rules under the principles of private property is the one role of government in the process of innovation and economic development. Laissez-faire is rationally necessary for

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entrepreneurship to flourish, with judicial outcomes protecting private property rights being the centrepiece of public policy. For the neo-Austrians, innovation is only limited endogenously by the imagination and creativity of entrepreneurs and exogenously by the heavy hand of government restraining opportunities through regulation. Both limitations are subjectively bounded by the operation of individual creativity and by the negative reaction of entrepreneurs to regulation. There is much research on the most effective ways of unlocking the creative potential for business (e.g. Amabile 1997) but this does not provide a model of creativity that can be used to understand economic development of the innovation process, nor an appropriate comparator of different innovation systems. There is also no guidance for public policy for innovation, since subjective individualism drives innovation.7 Uncertainty underlies finding opportunities and delivering outcomes. This is the crucial dynamic element that drives the entrepreneur, but it is not analysed in a way that would facilitate the better handling of uncertainty for potential entrepreneurs. Thus, it is not clear whether entrepreneurial actions will deliver the desired outcomes. Examples of actions by entrepreneurs in the corporate collapses of the early 2000s (‘tech wreak’, Enron, WorldCom, Martha Stewart) indicate that optimum social outcomes may not always result (see Clarke et al. 2003). The pro-market perspectives outlined above view market signals as the dynamic of capitalism. Whereas the neoclassical mainstream adopts an objective commitment to market processes; the neo-Austrians base their market faith on a subjective nature of human action. Both have an approach to innovation that harks back to the individual entrepreneurial economy of the nineteenth century. Power of the entrepreneur is dominant in these perspectives, either implicitly (neoclassical) or explicitly (neo-Austrian), while the effects this power has on civil society in monopoly capitalism is ignored, especially in terms of the lack of both transparency and ethical responsibility. At the beginning of the twenty-first century, this approach can be a rationalization for capitalist excesses in a globalized economy where the rule of national law is becoming much more tenuous. Although the classic entrepreneur still exists, empirical evidence suggests ‘…that only a minority of new companies survive, and that these are often not particularly innovative’ (Sundbo 1998, p. 157).8 The innovation process has become institutionalized since Thomas Edison introduced the research and development department into his innovation of a longer-lasting light globe. Technological innovation has to a large extent become organized, ‘managed’ and taught in MBA programmes (see note 1). This opens the door for Galbraith to provide an institutional approach to technological innovation.

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4. GALBRAITH AND THE INSTITUTIONAL PERSPECTIVE The rise of big business in the twentieth century moved the dynamic of agency away from the individual entrepreneur. NIS provides a way of understanding this dynamic on technological innovation by recognizing the laws of motion within the large corporations, but incorporating into this trajectory a strong agency story. The agency that is central to the determination of technological innovation in NIS is ‘The Technostructure’. The technostructure is seen as the decision-making basis of the large corporations that forms ‘the planning system’ of advanced capitalist economies and which guides economic development. This agency group embraces specialized knowledge, talent and experience in specific technology-based areas where the market system (and its small enterprises) is symbiotically subservient to the decisions of large corporations, while governments need to acquiesce to the planning system’s power and influence. NIS developed this large firm dominance approach from Schumpeter (1942), where the small firm entrepreneur of Schumpeter (1934) gives way to a managerial class who are concerned to protect and support increasingly sophisticated technology in a planned approach. Power lies with the technostructure inside large corporations who serve partly the capitalistowners through share price and dividend sustainability, with increasingly generous serving to themselves via remuneration packages and perquisites of office (Stilwell 2002, p. 232). NIS forms the basis of a critical institutional school response to the power of big business. Galbraith in NIS reaches back to the seminal early works of Thorstein Veblen and linking with contemporaries like Clarence Ayres.9 Although clearly having an institutional focus, NIS has a sophisticated methodological enquiry that is evolutionary, emphasizing the role of major institutions in shaping economic and social development. In the context of technological innovation, it is the technostructure that is the major agent of change that results in corporate dominance, environmental stress, deep military–industrial complex, financial instability, as well as globalized market and cultural penetration. All this can be described as an interlocking complex set of innovation systems operating at global, national and sub-national (or regional) levels.10 Sources of creativity in technological innovation are a two-edged sword from this perspective. The technology imperative demands from the technostructure two actions. First, the technostructure needs to stifle competing radical innovations from individual entrepreneurs of the classic neo-Austrian variety (see Lessig 2004). Second, the technostructure needs to commit funds for internal research and development (R&D) in the incremental innovations of existing corporate technologies (see Chiesa 2001). These two

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actions tend to limit innovation to what a bureaucracy can produce in a planned system, underlying a certain hard-core level of technological determinism. Schumpeter (1942) expressed concern that the dynamism of innovative entrepreneurship will be eroded by the technostructure sheltering their large corporations from ‘the gales of creative destruction’. The large corporation bridges internally the investment–innovation gap by first funding R&D and then commercializing the projects that are deemed by the technostructure as having the potential for success (see Jolly 1997). This leads to circular and cumulative causation,11 where the dynamic forces of innovation support certain forms of innovation to the detriment of other innovations. Self-perpetuation through monopoly control in the physical dimensions of innovation leads to a virtuous cycle of incremental innovation by large corporations. This is perpetuated in MBA courses that develop models for managing technological innovation (e.g. Ettlie 2000). On the other hand, there is also the vicious cycle of disadvantage, prejudice and legal constraints that prevent the investment–innovation gap from being met by funds and other support. Support to traverse this gap does not easily trickle down to small innovative entrepreneurs (see Kingston 1984; Lessig 2004). Galbraith (1958) develops the concept of producer sovereignty to replace consumer sovereignty, the neoclassical term to express consumer choice in the market. Under a planning system, the large corporation needs to reduce fundamental uncertainty of new innovations by channelling huge resources into market research (or ‘wants-creation’ process) and developing a marketing plan that creates product acceptance and brand loyalty. This is the promotion aspect of innovation from the institutional perspective. The acceptance of a strong consumerist ethos is a necessary pre-condition for producer sovereignty to work in the aggregate. There will always be specific examples of failures in marketing, but its overall success is evident from the continual development of consumerism both in advanced economies and now spreading through to strongly developing economies like China.12 Galbraith often quips: ‘It is the exception that proves the rule.’ Another cumulative causation aspect emerges with the role of investment and effective demand in innovation. Heilbroner (1961, p. 265) identifies that capitalism’s investment rests on the shoulders of technological progress alone, which carries with it an inherent instability: The great inventive contributions of mankind had always come in sudden bursts: an era of industrial revolution; an era of railroadization; an era of electrification; another of automotive building [and yet another era of information technology building – JC]. Each cluster of inventions had resulted in a spurt of investment, but when each had run its course, the hectic activity of building was succeeded by a period of quiescence.

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This instability of innovation has been dubbed the ‘clust-bun’ effect; clustering of inventions leads to bunching of investment to intensify existing business cycle activity. The virtuous ‘clust-bun’ effect requires effective demand stimulus through widespread diffusion of the clustering phenomenon that can only be achieved through the availability of profits for investment determined by the technostructure, often politically and financially supported by public sector funding.13 Impediments to the ‘clust-bun’ effect reside in the institutional frameworks of nations (national innovation systems), particularly the ones with stilldominant mature industries utilizing older technologies (Freeman and Perez, 1988, pp. 58–65). Increased uncertainty arising from large investment in the new technology systems also adds an impediment through increased macroeconomic volatility, which Toivanen et al. (1999) empirically identify as slowing down the diffusion process. R&D (and technology transfer thereof) provides large corporations with the potential means to overcome these impediments and set up their own national innovation systems, with profits determining the volume of R&D that firms can undertake. Thus, the size of firms will reflect how successful the technostructure is in overcoming impediments in their own terms. The greater this success, the larger and stronger monopoly control will be exerted by large corporations. Then, there would be less space for small enterprises to prosper, unless they are symbiotically linked to the large corporations (e.g. component makers for automobiles and computers). This provides a clear and consistent adaptation and modification to Galbraith’s technostructure concept in the light of capitalist developments in technological innovation since publication of NIS. The cumulative causation process has a regional inequality dimension to it. So, firms that cluster in one industrial location, strongly supported by one or a few large corporations, create strong regional innovation systems. Meanwhile, peripheral industrial regions without large and expanding corporations will tend to lose their entrepreneurial people to strong cluster regions. This is what Myrdal (1957, p. 27) calls the ‘backwash effects’ in regional economies, from an economic development perspective. In the classic evolutionary proposition by Schumpeter (1939) the investment function responds to waves of optimism and pessimism to create clusters of inventions, which then are diffused through the bunching of investment: the ‘clust-bun’ effect. This leads to investment cycle patterns and the development of a trigger mechanism to significantly increase the rate of investment in endogenous (incremental) innovation on the basis of a specific exogenous basic (or radical) innovation already created by the established large corporation. At the bottom of the investment cycle a trigger to initiate a ‘virtuous cycle’ effect occurs with investment rising to diffuse basic innovation. This increases the amplitude of the expansion phase of the

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investment cycle, raising innovation intensity and shifting the trend path of economic growth upward.14 An opposing ‘vicious cycle’ effect works to reduce innovation intensity, thus sending the investment cycle into a significant contractionary phase. From NIS, the role of government in technological innovation is to support the technostructure through the educational and scientific estate made up of teachers and researchers in schools, universities and non-profit research centres. Their intellectual work and social organization ‘are woven into the work of big corporations, which provide research funds, endowed chairs, and lucrative consultancies in exchange for these valuable new technologies and techniques’ (Parker 2005, pp. 440–1). This estate generally does not challenge the order of the corporate planning system and is bound to it by mutual love of what Galbraith called ‘technological virtuosity’ and the social prestige it engenders. Galbraith’s institutional perspective is strongly based on a public sector interventionist position. The political power imbalance clearly needs to be addressed by reformist public policies that aim to provide more balanced development by supporting regions, industries, unions, communities and independent innovators that do not have the support of the technostructure. The innovation policies need to be active and positive in the direction of encouraging variety, fostering experimental behaviour, supporting new developments, focusing on system building, enhancing diffusion, promoting learning organizations and their skills training, as well as assisting to influence expectations (through broad-based grants, tax concessions, mentoring, and supporting small business services).15 The major contribution from this perspective is the holistic approach to analysis and policy, recognizing interdependencies with dynamic evolutionary forces. This requires complex economic dynamics that can identify systemic (rather than market) failure and interventionist policies to overcome such failures. Many examples of success in this innovation approach can be noted: war-based economy, reconstruction from major devastation (e.g. the Marshall Plan), national sports-based academies, regional clustering around universities and technology parks. Four major criticisms of the institutional perspective can be identified: (1) Given the large monopoly planning power of the technostructure it is unclear how a government can escape from their acquiescent policy framework into the more balanced approach advocated by these economists. In fact, this planning power will ensure that any ‘balanced’ attempts will be skewed to favour the large corporations through special interest lobbying and pleas by neoclassical economists of the erroneousness of profligate state spending on picking ‘so-called’ winners. (2) The vast majority of job creating companies are fast-growing start-ups (or gazelles), independent of the

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technostructure (Birch et al. 1999), especially with the downsizing of large corporations through the 1990s. (3) Affluent electoral majorities in advanced capitalist economies are enjoying the fruits of a consumerist society and no longer look to government for social betterment of society in a balanced way, but instead demand security to protect their materialist gains from what Galbraith calls ‘the underclasses’ that exist both inside and outside national borders (see Lasch 1995). (4) Technological and historical determinism that underlies the advance of innovation is being undermined by the higher-order strategic planning process of professional managers, leaving the middle level technicians to work at a purely operational level (see Sundbo 1998, p. 116).

5. GALBRAITH AND THE RESOURCE-BASED PERSPECTIVE The four criticisms of the Institutional perspective above can be directly addressed by the resource-based view (RBV) that centres on the strategic organization of the innovation process. The agency that is central to the RBV is ‘The Firm’. The firm from this perspective is an administrative unit that develops a ‘life’ of its own and is not distinguished from the actors who operate inside this organization. Penrose (1959) is the major inspiration for this perspective that has now become the mainstream perspective in the business management discipline.16 The focus is on the firm’s internal development through a dynamic capabilities framework, without explicitly establishing an innovation theory. Competitive advantage is seen not from the firm’s interaction with the external market, but instead based on coordinating and combining the following core competences: distinctive assets, specific processes and critical know-how.17 All three are developed from learning-bydoing in a path-dependent way that produces increasing returns. This destroys the fiction on constant returns that neoclassical economics depends on to deliver an equilibrium position. Galbraith is seen from this RBV perspective as supporting the technocratic role of the professional manager, separating ownership from management and developing a internal organizational structure based around strategic planning (Sundbo 1998, p. 141). Galbraith uses this internal corporate structure to focus on the politico-economic role of large corporations on the external society, while Penrose focuses on how corporations organize their internal resources. In the process, the RBV is consistent with an acquiescent political system, a consumerist society and strategic (rather determinist) core. Penrose also provides a clear growth process for independent start-ups to becoming large corporations, something Galbraith does not entertain.

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The source of creativity in the RBV perspective comes from the ability of the firm to gather together distinctive core competences. This starts with management of the imagining stage to generate ideas (see Amabile 1997), right through to the sustaining stage of the idea over the long term (see Jolly 1997). What ultimately limits innovation is the capacity of the firm’s management to implement and learn from the five-stage innovation process. Organizations need to develop behavioural patterns and habits called ‘routines’, in order to make decisions on future actions. These routines are based on a repertoire of skills that evolve over the life-cycle of the organization as learning and selection occur. Bridging the invention–innovation gap is an integral part of the management’s ability to work through the first three stages of the innovation process. Growth of the firm comes from the ability to free up internal resources so as to create managerial services for new diversified opportunities. This is more important than engaging in zero-sum games with competitors like price discounting, cost-cutting, downsizing and developing barriers to entry; since competing firms will retaliate with similar actions that will rebound on the initial instigator. The promotion of innovation through marketing is seen as just another of the core competences that needs to be effectively managed. In fact, it is argued that market position in the context of rapid innovation is extremely fragile and difficult even to identify. ‘Moreover, the link between market share and innovation has long been broken, if it ever existed’ (Teece et al. 2004, p. 319). Considering the role of investment in the innovation process, it is surprising that this aspect is not discussed in any great detail by this perspective. Consistent with RBV, investment is seen as a capital budgeting process that shapes both the introduction of new capital stock into the firm and also the decommissioning of old capital stock. The management process for capital budgeting involves traditional net present value calculations, together with developing a portfolio of investment opportunities and calculating the option value of participating in new technology – contingent on competitor behaviour (Ettlie 2000, p. 192). Whereas the previous perspectives clearly specified the firm size of innovation champions, RBV follows Penrose in identifying the precise circumstances and actions of the firms that determines innovation champions. Scherer warned in 1980 (p. 418) that ‘[t]he search for a firm size uniquely and unambiguously optimal for invention and innovation is misguided’. There is strong theory and evidence to support both small and large firm innovation propensity. In fact, medium-sized firms tend to be the most disadvantaged, since they lack the dynamism of small entrepreneurship and the wherewithal of large firms to conduct R&D. However, ‘unequivocal evidence is found that [market] concentration exerts a negative influence on the number of

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innovations being made in an industry’ (Acs and Audretsch 1991, p. 14). This means that innovations can emerge as much from small firms as from large firms, thus industrial and regulatory policies cannot be based on simple rules about firm size but more related to market power through high concentration in particular industries. In general, the role of government is active supportive (e.g. removing monopoly rents), but not in the positive reformist approach of the institutional perspective. Collaborations between firms are a crucial element of the learning process in RBV and studies have identified the technological and marketing innovative benefits that emerge (see Coombs et al. 1996). Networking from collaborations by (and with) small and large firms has significant implications for regional clusters (or industrial milieux) both in geographic and cyberspace. In this way, innovation diffuses over space through the process of knowledge spillovers that operate at different rates of diffusion across technology gaps. The laws of motion that this perspective concentrates on relates to the evolution of technological innovation. The initial approach was the life cycle (or S-curve) from birth to decay (or transition). Since then more sophisticated approaches have emerged for large firms, particularly punctuated equilibrium and jolt theory; whereas small firms still tend to resemble the neoclassical ‘forest of firms’ (Ettlie 2000, pp. 76–82). The constructive elements of this perspective come from the hard-nosed empirical research underpinning the concepts outlined, using specific measures of innovation and coming up with practical strategies for the management of innovation. Planning, thus, is seen as a cooperative process in tune with market reality – linking markets with the planning system. On the negative side, RBV ‘is still too undeveloped to function as a unified basic theory’. (Sundbo 1998, pp. 157–8), and despite its empirical disposition, many measures used are acknowledged as unsatisfactory, especially in trying to identify innovations themselves and the core competences that create them (Acs and Audretsch 1991). Core competences can also be limiting when they become core rigidities and then firms underestimate or neglect emerging core competences arising in the economy. This leads to ignoring market demand, leading to the problem of effective demand and its limitation on innovation. From this emerges the most critical factor, essential in Galbraithian institutionalism, that there is the lack of power as a crucial element in the innovation process, despite the occasional reference to market concentration strength as a negative influence on innovation. One aspect that could reflect a fresh angle on power is the neglected notion of an ‘innovation mechanism’ by Downie (1958), ‘whereby laggard firms have a greater incentive (the need to survive) to undertake risky R&D work that might provide them with ways to re-establish their competitive position’ (Bloch and Finch 2004, p. 12).

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6. GALBRAITH AND THE POST-KEYNESIAN PERSPECTIVE A macroeconomic perspective on the technological innovation process is lacking in all the previous perspectives. Their emphasis is on the industrial organization of innovation. Galbraith’s own Keynesian predilections gave him a strong effective demand macroeconomic view, but this has never been wedded to his technostructure and the political economy of technological innovation. A small group of economists working in the Kalecki–Steindl tradition have made a significant contribution to the macroeconomic demandoriented aspects of technological innovation that helps to appreciate the economic development and volatility of modern neo-liberal capitalism. On the scale of technological determinism, this contribution is further to the soft end than the institutional or RBV perspectives because of its emphasis on the power of capitalists’ own behavioural decision-making. The agency that is central to the determination of technological innovation is ‘The Capitalist’. The capitalist links innovation to investment decisionmaking so that the elements of effective demand and cyclical volatility at the broad base are related to the cumulative processes in all forms of innovation at the firm/industry level. This perspective derives from Keynes (1936) and his clear view that investment (in capital stock) is the essential, but ‘undependable’ drive wheel for the economy. Co-progenitor of the postKeynesian perspective, Michal Kalecki, identifies the historically determined profit levels as generating the ability to invest in capital goods and in innovation knowledge enhancement. Profits (or surpluses in non-profit organizations and public authorities) not only provide the wherewithal to invest, but also through their extension of the capital funds owned by the organization (‘entrepreneurial capital’), it also allows for access to loans and share issues (‘rentier capital’), which can further extend capital and knowledge-based investment (Kalecki 1991, p. 279). Capital accumulation is embedded in the endogenous (or induced) innovation generated from within the organizations (via R&D expenditure, and knowledge spillovers). Such innovation is of secondary importance from the scientific standpoint, coming as it does from: (1) slight adaptations on previous capital equipment; (2) cosmetic improvement in old products; and (3) extension of previous raw material sources. Kalecki calls the ‘innovation effect’ a ‘development factor’ which creates the following dynamic process: innovations prevent the system from settling to a static position and engender a long-run upward trend. The accumulation of capital, which results from the fact that long-run investment is above the depreciation level, in turn increases the scope of the influence of the development factors and thus contributes to the maintenance of the long-run trend. (1991, p. 327)

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Kalecki, then, sees ‘exogenous’ innovation as representing the intensity of innovation with given capital investment levels. This means that any change in the intensity of the innovation effect originates in the scientific invention or basic business opportunity identified as the source of the innovation. So that a: reduction in the intensity of innovations … will also initially cause a disturbance in the cyclical fluctuation and, by means of a slump more pronounced than the boom, will make for a lower long-run level of investment. (Kalecki 1991, p. 328)

This would lower the long-run trend, where an increase in innovation intensity would raise the long-run trend in economic growth. R&D amounts in aggregate to a large body of investigation going on continuously (at different rates of intensity). This large R&D spending and related innovation effects are bound to lead to some major new ‘discovery’ or ‘invention’ which is related to the total aggregate R&D, rather than any one particular R&D project. This discovery is linked to possible small developments in various laboratories and informal networks between firms and industries, eventually coming to fruition in some way divorced of any specific competitive behaviour. New technological paradigms come out of such aggregate developments and are the basis of structural change to a new long wave of boom and prosperity (Freeman and Perez 1988, pp. 47–58). Changes in technological systems and paradigms arise only after all the minor improvements (endogenous innovation) are squeezed out of the old systems and paradigms by ‘monopoly capital’ entrepreneurs who want to protect existing capital stock and delay the new paradigm taking over. There is also ‘log jam’ in endogenous innovations based on the new paradigm which compounds the latter’s slow initial adoption. This occurs when established powerful capitalists, with much old capital stock, cannot justify the entire shake-up of industries, since not enough interrelated clusters have been formed. As the Galbraithian institutional framework slowly adapts to the new technological system, capitalists’ reactions against uncertainty of profits come from competitive pressures and growing inefficiencies of old capital stock. This induces adaptation (by industries) and imitation (within industries) to technological trajectories that are totally new, establishing the new investment upturn. It is creating a new investment boom and at the same time reestablishing the conditions for a new phase of steady development. A paradigm shift occurs when the new adapted technological systems pervade the whole economy. This analysis links together the two types of innovations described by Baran and Sweezy (1966), namely ‘normal’ (or endogenous) and ‘epoch-making’ (or exogenous). A period of secular decline in economic development can now be associated with the limitations of scale production in oligopolistic

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competition, as the old technology systems are running out of possible new adaptations. Diffusion of the old systems through endogenous innovation slows down and imitators become considerably fewer. The large powerful corporations attempt to protect existing capital values and ignore the new technological systems being developed on the fringe of the corporate world. This tends to exacerbate the mismatch between new technologies and powerful institutional framework based around monopoly capital. It was Steindl, back in 1952, who recognized this secular decline as the incentive to reduce surplus capacity and invest in established monopoly capital sectors. In his 1976 introduction to the 1952 book reprint, Steindl stated that he was ‘ready to admit a possibility which I denied in my book: that it might be the result of exhaustion of a long technological wave’ (1976, p. xv). Courvisanos (1996, pp. 225–30) outlines in detail three public policies: (1) demand management to regularize investment cycles at the macroeconomic level; (2) encouraging innovation into new technological systems at the microeconomic level; (3) ‘socialisation of investment’ through perspective planning at the mesoeconomic level as countervailing power to the planning system of monopoly capital. The post-Keynesian perspective provides a more short-term demand-oriented response to innovation policies, but it is the lack of a broader institutional aspect to innovation that limits the post-Keynesian position. Ignorance of the roles of competition (neo-Austrian) and collaboration (resource-based) in the innovation process opens up the criticism that despite the appropriate demand conditions and public support, without these two dynamic elements of firm innovation, the innovation process could be heavily compromised as it was during the command economy period of Eastern European economies (see Marangos, 2004).

7. A GALBRAITHIAN HETERODOX SYNTHESIS Galbraith and NIS provide the impetus for a heterodox analytical framework for technological innovation.18 Galbraith’s institutional base provides an effective PE critical response to the pro-market perspectives on technological innovation, but at the same time giving a level of technological determinism to the innovation process that raises concerns for its viability as a complete framework. The work of resource-based strategists at the internal organization level and post-Keynesian economists at the macro policy level has the potential to develop a more comprehensive and less determinist framework. The intellectual support of Galbraith and his NIS thesis in the RBV and postKeynesian perspectives as they relate to innovation can be incorporated into the Galbraithian institutional framework. The following themes form the basis of this heterodox synthesis:

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Endogeneity: Innovation arises from within the system with recursive effects and increasing returns, and is not some exogenous or independent force. Galbraith recognizes that through the technostructure innovation is generated and then efforts are applied to manage the process. Uncertainty: Need to ‘manage’ uncertainty is crucial for the innovation process. The pro-market perspectives have mechanisms that assume the change agents can handle uncertainty automatically. The Galbraithian element in all the three other perspectives develop more open-ended approaches to uncertainty, identifying various political, social and corporate elements that ‘manage’ uncertainty through strategy, power and influence. Evolutionary: Innovation is a process of change that evolves from some embryonic revolutionary idea to different types of innovation: infant (radical), growth (incremental), maturity (stagnant) and then either declines or transforms (diversifies). Dynamic mechanisms are developed by all the three critical market perspectives to address implications of evolution. Individualism: A person (or team) drives the innovation process through entrepreneurship. The process can be based on competitive and/or collaborative arrangements in the commercialization of the innovation. Galbraith identifies the technostructure and the collective organized teams (e.g. R&D departments) within large organizations that drive innovation, but the RBV also recognises employees as champions (or intrapreneurs) who are catalysts. Strategic planning: Managing and strategizing innovation in a planned approach is a strong antidote to the idea that it just happens by the power of individualism. This shifts the innovation process from psychological (individual) and technocratic (scientific) to organizational and marketing; a process begun by Galbraith. Investment: Where the pro-market perspectives see investment only as some automatic response to market signals. Empirical evidence on the basis of sound Keynesian principles shows that investment decisionmaking is needed to deliver technological innovation in a mass capitalist economy. This requires basic post-Keynesian foundations related to profits, debt and productive capacity (see Courvisanos 1996). Supportive state policy: The need for public policy to support the innovation process is recognized explicitly (institutional and postKeynesian) and implicitly (RBV and neo-Austrian). The differences relate to questions of passive versus active intervention and the underlying reasons that the state is ‘induced’ to provide this support. Neoclassical, neo-Austrian, and RBV (to a less extent) see public policy

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as needing to be passive while ignoring the PE reasons for its support. The institutional response is strong in terms of PE and the need for reformist active intervention, despite the fundamental contradiction identified earlier. Post-Keynesians have strong active support but without the political–institutional depth of Galbraith. Some studies have combined institutional and post-Keynesian elements into a public policy framework to address these political economy concerns (see Freeman and Perz 1988; Lima 2000; Courvisanos and Verspagen 2004).

8. CONCLUSION A Galbraithian heterodox synthesis should provide a strong generic framework to understand and appreciate the capitalist forces that underlie technological innovation and its commercialization process. A thumbnail sketch of such a framework has been provided in this chapter. A deeper policy analysis that emerges from this synthesis could form the basis of a substantial development in strategic planning and public policy analysis. This could provide improved ability to cope with the uncertainty that arises from the dynamics of technological innovation and accompanying capital investment. At the same time this generic framework can be used to take advantage of the susceptibility of other firms in a dynamic competitive environment in order to innovate and develop competitive strengths. Finally, such a synthesis enables some rigorous guidelines to be established for further empirical research on the political economy of technological innovation.

ACKNOWLEDGEMENT I acknowledge my appreciation of the advice and suggestions made by Stefan Kesting and Geoff Harcourt.

NOTES 1.

See books like Jolly (1997), Ettlie (2000), and Betz (2003). For selected significant articles in this genre, see Tushman and Anderson (2004). 2. Rosenberg (1982) is an example of a strong historical approach to researching innovation that has important implicit PE implications. See also Landes (1969), von Hippel (1988). 3. For example, opening up of new sources of raw materials requires enormous input of new capital stock. Even the creation of a new organizational structure is technology-based if it requires significant new capital equipment to make the reorganized structure work effectively. This ‘new investment’ condition qualifies all the five innovation forms defined by Schumpeter (1934, p. 66) into this definition of ‘technological innovation’.

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5.

6. 7. 8.

9.

10. 11. 12. 13. 14. 15. 16. 17. 18.

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Kingston (1984) provides (to my knowledge) the first attempt to synthesize these two political economy dimensions to innovation. Sundbo (1998, p. 156) argues that at the end of the twentieth century it is the marketing dimension that has become the greater challenge and the driving force behind innovation. Courvisanos (1996) has combined the Minsky and Crotty analyses to develop a ‘susceptibility cycle’ of investment at the agency behavioural level involving technological innovation. Case study patterns provide support to this concept of cumulative instability. See also Freeman and Perez (1988). Neoclassical economists call such discrepancies and gaps ‘disequilibria in the market’. See Kirzner (1973) for a modern-day exposition of Neo-Austrian entrepreneurship. Hayek (1948) explains how little we know from an objective basis of human activity. Sundbo (1998, p. 160) goes on to argue that ‘the number and significance of the entrepreneurs compared with the large, complex companies have been weakened.’ The global entrepreneurship monitor (GEM) of ‘entrepreneurial activity’ only shows new business ventures out of necessity or opportunity identification (see Reynolds et al. 2002). Although job creating in the short term, generally such ventures do not survive and do not involve technological innovation, as identified in empirical studies quoted by Sundbo (1998, p. 157). Ayres (1952) has been described as a strong case of technological determinism. However, Lawson (2004, p. 5) notes ‘on closer reading, as with Marx, the point that emerges is that some technological development may be a necessary condition for some other technological development (or indeed social development).’ Thus, technological determinism should not be seen as some mechanistic operation. All technological change is contingent on how technology is ‘shaped’ by human agency processes as social groups manage technological, social and economic conflicts (MacKenzie and Wajcman 1985). The dynamic forces of this complexity system approach to innovation are outlined in Bryant and Wells (1998). On complex economic dynamics, see Rosser (1999). This concept was originally outlined by Thorstein Veblen and developed across a broad range of issues by Gunnar Myrdal (see Argyrous 1996). For a recent evaluation of Galbraith’s work as it applies to fundamental uncertainty, see Dunn (2001). For new psychology-based research that supports producer sovereignty and the consumerist context, see Kahneman (1999). See Courvisanos and Verspagen (2004) for empirical support on the ‘clust-bun’ effect. See Toivanen et al. (1999) for empirical support on this virtuous cycle effect. Modern neo-Schumpeterian economists spell out such policies in detail (see Bryant and Wells 1998). For a neo-Schumpeterian overview from one of its leading lights, see Nelson (1987). A significant contribution to this perspective by economists working in this field is Dosi et al. (2000). This sidesteps entirely the planning versus market dichotomy that characterizes the previous perspectives. Heterodox interface has become an important part of communication amongst many nonneoclassical schools of economics; in an effort to develop dialogue, learn from alternative approaches and find common threads of analysis. For example, the inaugural conference of the International Confederation of Associations for Pluralism in Economics (ICAPE), University of Missouri, Kansas City, June 2003.

REFERENCES Acs, Z.J. and D.B. Audretsch (1991), ‘Innovation and technical change: an overview’, in Z.J. Acs and D.B. Audretsch (eds), Innovation and Technological Change: An International Comparison, New York: Harvester Wheatsheaf, pp. 1–23. Amabile, T.M. (1997), ‘Motivating creativity in organizations: on doing what you love and loving what you do’, California Management Review, 40 (1) (Fall), 39–57.

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Argyrous, G. (1996), ‘Economic evolution and cumulative causation’, in G. Argyrous and F. Stilwell (eds), Economics as a Social Science: Readings in Political Economy, Sydney: Pluto Press, pp. 112–19. Ayres, C.W. (1952), The Industrial Economy: Its Technological Basis and Institutional Destiny, Boston, MA: Houghton Mifflin. Baran, P. and P. Sweezy (1966), Monopoly Capital, New York: Monthly Review Press. Best, M.H. (1992), ‘The firm and market: the dynamic perspectives of Schumpeter and Penrose’, Social Concept, 6 (2), 3–23. Betz, F. (2003), Managing Technological Innovation: Competitive Advantage from Change, 2nd edn, Hoboken, NJ: John Wiley & Sons. Birch, D., J. Gundersen, A. Haggerty and W. Parsons (1999), Corporate Demographics, Cambridge, MA: Cognetics. Bloch, H. and J. Finch (2004), ‘Penrose and Steindl: foundations for a general theory of the firm and competition’, paper presented at the History of Economics Thought Society of Australia (HETSA) Annual Conference, University of Western Australia, Perth, July. Bryant, K. and A. Wells (eds) (1998), A New Economic Paradigm? Innovation-based Evolutionary Systems, Discussions in Science and Innovation 4, Department of Industry, Science and Resources, Canberra: Commonwealth of Australia. Canterbery, E.R. (1995), The Literate Economist, New York: HarperCollins. Chiesa, V. (2001), R&D Strategy and Organisation: Managing Technical Change in Dynamic Contexts, London: Imperial College Press. Clarke, F., G. Dean and K. Oliver (2003), Corporate Collapse: Accounting, Regulatory and Ethical Failure, revised edn, Cambridge: Cambridge University Press. Coombs, R., A. Richards, P. Saviotti and V. Walsh (1996), Technological Collaboration: the Dynamics of Cooperation in Industrial Innovation, Cheltenham, UK and Brookfield, USA: Edward Elgar. Courvisanos, J. (1996), Investment Cycles in Capitalist Economies: A Kaleckian Behavioural Contribution, Cheltenham, UK and Brookfield, USA: Edward Elgar. Courvisanos, J. and B. Verspagen (2004), ‘Innovation and investment in capitalist economies 1870–2000: Kaleckian dynamics and evolutionary life cycles’, in L.R. Wray and M. Forstater (eds), Contemporary Post Keynesian Analysis, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 205–26. Crotty, J.R. (1992), ‘Neoclassical and Keynesian approaches to the theory of investment’, Journal of Post Keynesian Economics, 14 (4) (Summer), 519–42. Dasgupta, A.K. (1985), Epochs of Economic Theory, Oxford: Basil Blackwell. Denison, E. (1962), The Sources of Economic Growth in the U.S., New York: Committee for Economic Development. Dosi, G., R.R. Nelson and S.G. Winter (eds) (2000), The Nature and Dynamics of Organizational Capabilities, Oxford: Oxford University Press. Downie, J. (1958), The Competitive Process, London: Duckworth. Dunn, S.P. (2001), ‘Galbraith, uncertainty and the modern corporation’, in M. Keaney (ed.), Economist With a Public Purpose: Essays in Honour of John Kenneth Galbraith, London: Routledge, pp. 157–82. Ettlie, J.E. (2000), Managing Technological Innovation, New York: John Wiley & Sons. Freeman, C. and C. Perez (1988), ‘Structural crises of adjustment, business cycles and investment behaviour’, in G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete (eds), Technical Change and Economic Theory, London: Pinter, pp. 38–66. Galbraith, J.K. (1958), The Affluent Society, Boston, MA: Houghton Mifflin.

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Galbraith, J.K. (1967), The New Industrial State, Boston, MA: Houghton Mifflin. Hayek, F.A. (1948), Individualism and Economic Order, Chicago: University of Chicago Press. Heilbroner, R.L. (1961), The Wordly Philosophers, revised edn, New York: Simon & Schuster. Jolly, V.K. (1997), Commercializing New Technologies: Getting from Mind to Market, Boston: Harvard Business School Press. Kahneman, D. (1999), ‘Objective happiness’, in D. Kahneman, E. Diener and N. Schwarz (eds), Well-Being: Foundations of Hedonic Psychology, New York: Russell Sage Foundation Press, pp. 3–27. Kalecki, M. (1991), Theory of Economic Dynamics, in J. Osiatyn´ski (ed.), Collected Works of Michal Kalecki, Volume II: Capitalism – Economic Dynamics, originally published 1954, London, Oxford: Clarendon Press, pp. 203–348. Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan. Kingston, W. (1984), Political Economy of Innovation, The Hague: Martinus Nijhoff. Kirzner, I.M. (1973), Competition and Entrepreneurship, Chicago: University of Chicago Press. Kirzner, I.M. (1976), ‘The theory of capital’, in E.G. Dolan (ed.), The Foundations of Modern Austrian Economics, Kansas City: Sheed & Ward. Lallier, A.G. (1989), The Economics of Marx’s Grundrisse: An Annotated Summary, London: Macmillan. Landes, D. (1969), The Unbounded Prometheus, Cambridge: Cambridge University Press. Lasch, C. (1995), The Revolt of the Elites and the Betrayal of Democracy, New York: W.W. Norton. Lawson, C. (2004), ‘Technology, technological determinism and the transformational model of technical activity’, paper presented at Theorising Ontology, Annual Conference of the International Association for Critical Realism, Girton College, Cambridge, 17–19 August. Lessig, L. (2004), Free Culture: How Big Media Uses Technology and the Law to Lock Down Culture and Control Creativity, New York: Penguin. Lima, G.T. (2000), ‘Market concentration and technological innovation in a dynamic model of growth and distribution’, Banca Nazionale del Lavoro Quarterly Review (215) (December), pp. 447–75. MacKenzie, D. and J. Wajcman (eds) (1985), ‘Introduction’, The Social Shaping of Technology, Milton Keynes: Open University Press. Marangos, J. (2004), Alternative Economic Models of Transition, Aldershot: Ashgate. Marshall, A. (1920), Principles of Economics, 8th edn, London: Macmillan. Minsky, H.P. (1982) Can ‘It’ Happen Again?, Armonk, NY: M.E. Sharpe. Myrdal, G. (1957), Economic Theory and Underdeveloped Regions, London: Methuen. Nelson, R.R. (1987), Understanding Technical Change as an Evolutionary Process, Amsterdam: North-Holland. Nelson, R.R. and S.G. Winter (1982), An Evolutionary Theory of Economic Change, Cambridge, MA: Harvard University Press. Parker, R. (2005), John Kenneth Galbraith: His Life, His Politics, His Economics, Toronto: HarperCollins. Penrose, E. (1959), The Theory of the Growth of the Firm, Oxford: Basil Blackwell. Reynolds, P.D., W.D. Bygrave, E. Autio and M. Hay (2002), Global Entrepreneurship Monitor – Summary Report, Kansas City: Ewing Kauffman Foundation.

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Rip, A. and R. Kemp (1998), ‘Technological change’, in S. Rayner and E.L. Malone (eds), Human Choice and Climate Change, Volume 2: Resources and Technology, Columbus, OH: Battelle Press, pp. 327–99. Robinson, J. (1933), The Economics of Imperfect Competition, London: Macmillan. Rosenberg, N. (1982), Inside the Black Box, Cambridge: Cambridge University Press. Rosser, J.B. Jr. (1999), ‘On the complexities of complex economic dynamics’, Journal of Economic Perspectives, 13 (4), 288–302. Schumpeter, J.A. (1934), The Theory of Economic Development, original German version published 1911, Cambridge, MA: Harvard University Press. Schumpeter, J. (1939), Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, 2 volumes, New York: McGraw-Hill. Schumpeter, J.A. (1942), Capitalism, Socialism and Democracy, New York: Harper & Row. Sraffa, P. (1926), ‘The laws of returns under competitive conditions’, Economic Journal, 36, 535–50. Steindl, J. (1976), Maturity and Stagnation in American Capitalism, reprint with new introduction by author, New York, Monthly Review Press. Stilwell, F. (2002), Political Economy: The Contest of Economic Ideas, Oxford: Oxford University Press. Sundbo, J. (1998), The Theory of Innovation: Entrepreneurs, Technology and Strategy, Cheltenham, UK and Lyme, USA: Edward Elgar. Sylos-Labini, Paolo (1962), Oligopoly and Technical Progress, Cambridge, MA: Harvard University Press. Teece, D.J., G. Pisano and A. Shuen (2004), ‘Dynamic capabilities and strategic management’, in M.L. Tushman and P. Anderson (eds), Managing Strategic Innovation and Change: A Collection of Readings, 2nd edn, Oxford: Oxford University Press, pp. 308–32. Toivanen, O., P. Stoneman and P. Diederen (1999), ‘Uncertainty, macroeconomic volatility and investment in new technology’, in C. Driver and P. Temple (eds), Investment, Growth and Employment: Perspectives for Policy, London and New York: Routledge, pp. 136–59. Tushman, M.L. and P. Anderson (2004), Managing Strategic Innovation and Change: A Collection of Readings, 2nd edn, New York: Oxford University Press. Von Hippel, E. (1988), Sources of Innovation, Oxford: Oxford University Press.

12. Knowledge and innovation: power and counterpower Andrée Kartchevsky and Muriel Maillefert The idea that people could one day consume less, work less and live more might seem puzzling. And nevertheless … J.K. Galbraith, 1971

1. INTRODUCTION The economic tradition radically opposes the state and the market, the market and organizations, the former regulating and mitigating possible market failures and the latter representing an alternative in the coordination of economic activities. This view, widely accepted by economic theory during the growth years, is not exactly the one held by Galbraith. This author, without denying the virtues or the shortcomings of the market, does not concede Keynesian economic policies the advantages they are traditionally granted. Thus Galbraith’s heterodoxy is opposed to the liberal discourse as well as to the interventionist solutions applied during the 1970s. Likewise, Galbraith, in contrast to Schumpeter, presents organizations as an endogenous element to the economy. According to Galbraith, organizations are the market and make the market, even if alongside an organized world exists a quasi-competitive universe in which small enterprises operate. In this chapter, we will first study how the organization – the technostructure in the heart of big corporations – exercizes its power on the content, the direction and therefore on change in industrial capitalism. This leads to the subordination of markets and the fields of public action to the requirements of influential groups. This context gives scientists specific roles and responsibilities. With Galbraith, in the second part, we will study the sense of innovation and technical change in the capitalism of big enterprises, in order to highlight the importance of knowledge not only in the achievement of the production process but also for the democratic organization of the whole social system. 229

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2. THE POWER OF THE TECHNOSTRUCTURE The Technostructure and the Control of Social Production In 1971, during a European conference, John Kenneth Galbraith described the technostructure in the following terms. Modern technology imposes a very complex organization on firms in the industrial subsystem. An individual on his/her own is no longer capable of controlling all the information needed to make important decisions. Therefore, firms are managed by complex bodies that distribute and use the information provided by numerous people. This body includes engineers, scientists, plant managers, sales directors, marketing specialists, accountants, lawyers … What is Galbraith’s industrial system? What are its characteristics? The initiative in deciding what is to be produced comes not from the sovereign consumer who, through the market, issues the instructions that bend the productive mechanism to his ultimate will. Rather it comes from the great producing organization which reaches forward to control the markets that it is presumed to serve and, beyond, to bend the customer to its needs. (Galbraith 1967, p. 6)

These characteristics can be grouped under three types of action: first, the sociological action of great organizations. Here decisions are made following an in-depth study of buyers’ behaviour and needs (which induces the temptation of acting on them). These decisions imply that the public authority will regulate global demand, control wages and prices, and assume an important share of the risks associated with research. This sociological action takes the form of: ● ●

●

Corporate action on consumers (advertising and publicity). Action on the working class. The needs generated are generally higher than average incomes. This leads to the making of a new kind of worker whose future is tied to the general prosperity which, in turn, is determined by well-defined interests. Furthermore, technological evolution tends to weaken trade unions because these new categories of workers are less concerned. Action on the state. Great organizations ask the state, on behalf of their own interest, to maintain a certain equilibrium through budget policies, wages, prices, research and development. States generally prefer to compromise with private interests when they oppose public interest. In fact, the tie between governmental decisions and the aims of industrial groups is established and constantly reinforced. The border between public and private is blurred.

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Galbraith concludes that the individual as well as ideologies and politics tend to be integrated within the industrial system. Individualism develops an allegory, a refutation of the organization, in particular of the state organization. This makes it possible to mask reality; it hides the fact that in modern society the individual is ‘under the control’ of private organizations. Then comes managerial action: since 1932 Berle and Means have identified what, in their opinion, seems to be the organizational form of the future: the so-called management firm. It has two main characteristics: a professional management which does not control shares and a large number of individual shareholders. In this perspective, this form of organization is supposed to be better in terms of economic efficiency because it involves a better allocation of resources. In this system, the powerful one is no longer the owner of capital. Power is in the hands of managers whose aim is growth rather than profit maximizing, the aim of the nineteenth century capitalist. However, Galbraith does not go into detail about the conditions and the shift from the classical firm managed by its owner to the technostructure. Galbraith focuses his attention on the latter. The technostructure as such, does not involve the highest levels even if they come from the technostructure itself. According to Galbraith, it is essential for the technostructure to install a dichotomy between the expert function and the decision-making function. What are the motivations of the technostructure? Maximizing profits becomes even more important due to the partition between property and control. This maximization even viewed as a long-term goal by those directly concerned (the shareholders) is not free from risk. Even if it has been toned down, this goal is not logically linked to the managers’ interests if no further precisions are made regarding the agency relationship. Paradoxically, the technostructure is seriously exposed to risk because of its needs for skilled or educated labour. This, according to Mendès-France (1968a, p. 14) when commenting on Galbraith: Necessarily leads to the multiplication of individuals holding other values and eager for emancipation. The industrial system risks being contested precisely by those who are its necessary instruments. Because of this, these disputants are able to question the mystic associated with pure material growth and to debate over the distribution the industrial system produces between labour and the promotion of man and his liberty.

The technostructure is ‘an apparatus for group decision-making – for pooling and testing the information provided by numerous individuals to reach decisions that are beyond the knowledge of any one’ (Galbraith 1967, p. 88).

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It is composed of ‘technicians, engineers, sales executives, scientists, designers and other specialists’ (ibid. p. 163). As for the scientists’ role it will be discussed later (cf. below). It is now possible to synthesize the main characteristics of the technostructure: ●

●

●

Technology plays a central role. As a corollary, there is growing specialization and training in a global organizational context and no longer in a fragmented way. Planning becomes unavoidable in order to undercut the market, be it through its elimination, its control or putting it on hold. However, the market makes its come back through another door, namely that of small firms. Power characterizes the industrial society even if it is absent from economic analysis. Nevertheless, in the technostructure, that which it needs the most may prove to be particularly rare: intelligence, competence, experience, which have a very low elasticity. However, as the organization becomes more complex and flows of information increase, permanent planning and coordination become crucial.

The Subordination of Markets and Public Action In 1958, The Affluent Society is published (it is interesting to note that the previous title was Why Are People Poor?). It is a first global and critical description of consumer society intended for the public at large. The author emphasizes the contrast between private opulence and public squalor; in other words, between the opulence of goods produced by private firms and the poorness of public goods. He defends public spending, making clear that, in his book, he has put forward market revival as well as the Keynesian argument according to which all social distress could be overcome with a decisive increase in production. However, Galbraith marks his distance from Keynes adding that continuous growth does not prove a society is successful nor does it solve all social trouble. In fact, the modern economy in its most advanced forms provides commodities that are increasingly superfluous and even harmful. This leads to a feeling of irrationality intensified by the fact that needs have first to be created so they can afterwards be satisfied. Moreover, when the technostructure reaches its highest degree of development, that is when more and more decisions are made in a collegial manner by those who possess the relevant information, it becomes increasingly difficult for an un-informed outsider to the technostructure to participate in the decision-making process (when extrapolating, we may say that these statements more or less anticipate

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the contract theory because they emphasize the existence of information asymmetries). The technostructure no longer guarantees its own safety, growth, increased profits, as the neoclassical conception asserts, by responding to the needs of the market (or of the political context). It does so by actively influencing prices, consumer habits and public and governmental attitudes. We can even say that Galbraith goes further than Keynes because he insists on and is interested in the role of institutions, which is not the case with Keynes who deals mostly with macroeconomic issues. Hence, for J.K. Galbraith a rational economic system is a system reasonably adapted to needs. It is not farfetched to see here proximity with Amartya Sen (1991, 1992, 1999) when he develops his approach in terms of capabilities as opposed to the welfare theories of public choice; Amartya Sen names it ‘the possibility of reasonable choice’. In The Affluent Society Galbraith also says: On the importance of production as a test of performance, there is no difference between Republicans and Democrats, right and left, white or black, Catholic or Protestant. It is a common ground for the general secretary of the Communist Party, the Chairman of Americans for Democratic Action, the President of the United States Chamber of Commerce and the President of the National Association of Manufacturers. (Galbraith, 1969, p. 122)

Galbraith adds that the bureaucracy of public services should be dissolved so that the state would really serve citizens. Does this mean he is in favour of workers overthrowing the ruling class? Certainly not. In his opinion, there should be a gathering of all the citizens in order to fight against the domination and the persuasive force of the technostructure. Neither does Galbraith present an anti-market discourse. He explores the concept and the role of the market advanced by the neoclassical theory in order to update them and, no doubt, to give them a significant place within democracy. Nevertheless, we could argue that the concept of technostructure only disguises the very nature of capitalism. And its underscoring of the role of the market leads to the same result. When Galbraith says that production subordinates the markets to its own demands, for truly post-marxist authors, this does not eliminate the essential fact that market needs have never been natural or eternal, homo economicus is a myth. Therefore, the law of the market is distorted, it is not abolished and competition survives at least at a submarket level. But what about the market concept? As regards continuity, the starting point of the argument is still the question about consumer sovereignty as is the case in the founding works (Galbraith 1967, 1969).

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This permanence of the topic of consumer sovereignty enables us to understand what Galbraith is talking about and where he places the question on power and its control. In this sense, one must clearly establish the analytical level the thesis belongs to. It does not really correspond to a theory of organizations or corporate governance. Such a theory would find several points of refutation, theoretical (agency theory, difference between stake-holder and share-holder or financial insiders and outsiders, etc., see Aglietta 1999) and empirical points (for example, the multiplication of the forms of firms and governance, see Caby 2003).1 It is rather a macroeconomic theory about how the American economic system works. This theory is grounded on a microeconomic analysis of the behaviour of firms.2 According to Galbraith, the criticism aimed at the consumer sovereignty assumption, to be found in ‘industrial capitalism’ as well as in the ‘market economy’ (the two names given to the main historical forms of capitalism in the United States) masks the fundamental process of domination contained in the system. Actually the producer cannot take the risk of leaving market forces without control, and thus he will try to model and control demand. This is where we find the central issue of control.

3. TECHNOSTRUCTURE, INNOVATION AND THE SCIENTISTS’ ROLE The Sense of Innovation in Industrial Capitalism We know that demand corresponds to products and these products must be continuously reinvented. This accounts for the notion of innovation and therefrom of its control: ‘Product innovation and modification is a major economic function and no significant manufacturer introduces a new product without cultivating the consumer demand for it’ (Galbraith 2004, p. 7). Innovation here is analysed considering its impact on sales (hence on the results obtained by the firm). Such an approach makes it possible to produce a simple definition of the innovation process through its consequences. This is the definition proposed by the OECD (2003, p. 93): the innovation process leads to the introduction of ‘new products and services, new business processes, and new applications’. Therefore, new technologies appear as vectors that ‘facilitate’ the process of innovation. Innovation appears once again as a fundamental process in capitalism. Nevertheless, this is not enough to characterize the different forms of capitalism, which seem to change in time.

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According to experts in the history of techniques, what characterizes modern societies, even if the content is difficult to establish, is the introduction of a new ingredient in the production function. Information3 becomes allpervading, even overabundant: ‘The shift from an agricultural economy to an industrial economy is at present relatively easy to recognize and understand. What is not as clear to most, is the impact of the shift from the industrial to the knowledge focused on economy … . The knowledge economy is typified by an oversupply of information’ (Van Deventer 2002, chap. 2). As Galbraith underlines, the matrix of information flows becomes a major issue. The capacity economies have for appropriating information flows seems to be a discriminating factor as regards growth. From a macroeconomic perspective, a significant part of the differences in growth could be the result not only of exogenous political and economic shocks (such as the Asian crisis or the reunification of Germany), but more generally of differences in productivity. However, in this field, the incidence of new technologies as well as the micro and macroeconomic supervising of their assimilation in the economies seem to be very important factors (OECD, 2001). We have then the three essential ingredients. Besides the material and cognitive techniques already described, we have the private actors (basically firms but an important part of the literature on innovation insists on the organizational aspect of innovation including the employees, for example the so-called management innovation) and the public players in charge of supervising these innovations. According to Galbraith, the point is to liberate the individual from the control of the technostructure. However, his intentions seem somewhat weak. In The New Industrial State (NIS) he emphasizes the role of education as a support of democracy. It is thus convenient to plead in favour of scientists, researchers and teachers who would activate civil society and its explicit and implicit ambitions (cf. NIS). Therefore, the advisability of implementing devices leading to the activation of civil society through negotiation and/or participation seems obvious. In other words, as Ayres (and other dissidents) underlines, the bureaucratic power of corporations, assisted by the state itself, must be checked by counterpowers so as to define the aim of social imagination. The role of scientists is presented not only in its technical but also in its ‘political’ dimensions. In this sense, almost immediately the question of the tendency of the technostructure to take over control from civil society arises. J.K. Galbraith is rather pessimistic on this account emphasizing the capacity large firms have to control, without constraint, prices and quantities. He also stresses the corporate ability to use, on the one hand, the State as its armed force and on the other hand, the individual and intermediary groups according to its own interest.

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Actually, the individual and the state are profiled, adapted to the needs, to the demands of the industrial system. This inevitably leads to the ‘absorption’ of clashes of interests. However, would the industrial system agree without reaction to the growth of market production no longer being recognized as the only priority need, or to the public authority using part of its resources to finance the beautiful, the humane? Scientists, Knowledge and Democracy Professors and intellectuals form, according to J.K. Galbraith, a safety valve allowing that the needs of the system yield priority to the matters of the mind and to intelligence. But isn’t Galbraith’s view too optimistic? For this to happen, he states that intellectuals and the population must learn how to define and create the kind of society they want. Taking the argument a step further, one could say that in between the lines, Galbraith presents a significant reflection on the need for controlled information and ‘elaboration of public opinion as a manifestation of civil society’. Democracy is not a luxury; in fact it is a building block of social dignity, because participating in the civil society is pivotal to all progress. ‘There can be no effective advance if the masses do not participate … As literacy is economically efficient so is social justice’ (Galbraith 1964, p. 46). In fact, one must say Galbraith agrees with Keynes (as other institutionalists do) regarding the idea that the ‘people’ (rather than the civil society) is perfectly capable of expressing itself and participating in the democratic game. As regards the role of teachers and intellectuals in general, as suggestive as Galbraith’s statements might seem, on second thought they are bound to perplexity. Indeed, nothing hinders these scientists, who are supposed to smooth the productivist values of the technostructure, from reclaiming these same values for themselves. The tacit dimension of knowledge allows its possessor to exert a certain control, because only voluntary demonstration and on-the-job training lead to its acquisition. Besides, past and present history shows their power is not enough to change the world, or at least to cause a transformation in the social vision. In contrast, Galbraith would say that civil disobedience is essential as a check to the technostructure and its discriminating interests. Civil disobedience is called to guarantee the existence of the common good. This dissidence comes from intellectuals, teachers and trade unions. It is therefore a massive dissidence. Galbraith’s aim is to implement social knowledge of all the subjects of public policies. The point for Galbraith is to advance a critical analysis and to deliberately adapt the institutions that form social life.

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Within the field of scientific knowledge, not only is the individual satisfaction of some consumers slowed down because of the constraining use of knowledge. It is mostly accumulation and collective progress, the thousands of opportunities open through new combinations of diverse knowledge. If we accept the premise that the private sector’s goal is to maximize the rent resulting from an innovation, then it is necessary to find an adequate way of protecting intellectual property. On the contrary, the hypothesis is somewhat reversed for the public sector. The public sector will strive to increase the stock of knowledge and will promote its rapid and complete diffusion. Nevertheless, this apparent antagonism between the two goals will be lessened because of the idea that the state and its several branches serve the interests of corporations. Moreover, it must be noted that although the costs of usage are low due to the public sector, acquisition, access and transmission are expensive. Acquisition is particularly costly due to the high investment needed to educate and intellectually train individuals who will be in charge of the exploitation of knowledge. Callon emphasizes the fact that it is of crucial importance to have a group of people capable of understanding and using this knowledge. The larger this group, the higher the social returns of knowledge (Callon 1994). This certainly raises a problem of fairness between generations on the one hand, and between populations, on the other. One must accept that the State is not almighty and that knowledge is not a perfect public good with a universal access since its production. Its situation of relative power has to do with an informational asymmetry in the sense that it is hard for those who benefit from public intervention to control the execution of the contract. It is as difficult to measure the social return of publicly-funded research beyond those who directly participate in it. Direct state intervention in a project does not make things clearer. Coming back to Galbraith’s arguments (or of other authors’), as has already been said, the state is not necessarily the representative of the common interest, i.e. on the one hand, (and our author thoroughly explains the point) there is an evident cooperation – even collusion – with corporate interests, and on the other hand, the state (mythical form?) is an extraordinary imbroglio of directions, departments, all kinds of offices that frequently work in an isolated manner, without great transparency, as if they were trying to preserve their ‘portion’ of decision-making power.

4. CONCLUSION Finally, Galbraith’s work can be read considering his project of exposing the forms of domination through corporations and technostructure (e.g.

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domination is analysed using elements from economic analysis and not sociological analysis). One could think that the evolution of developed societies is accompanied by the deployment of individual liberties (and the reduction of domination forms, particularly economical ones), as the liberals suggest. On the contrary, Galbraith presents us with a reading in terms of the extension of opportunities for the technostructure to increase its power and control. He links this extension with the technological evolutions that, in his opinion, lead to the control of information. This is where the main source of power of the technostructure lies. If, under industrial capitalism, domination is based upon a market domination of consumers (monopolistic power of firms and of the technostructure), and a physical domination of employees (coercive power of employers over employees), the typical domination of the market economy is based upon symbolic forms. These forms highly rely on the control of flows of knowledge and information and of the legitimating discourse of the ways of the dominant groups. Here lays the difference between the dominant approach to governance and Galbraith’s view. ‘Conventional wisdom’ adopts a position that goes along with the dogma of the market and its self-regulating assumptions. According to the tenets of this view, public regulation must favour the emergence and diffusion of innovation (obviously including human capital through the acquisition and update of knowledge) within a competitive market context. Alongside an adequate direction of macroeconomic fundamentals is required. This is a condition for the deployment of the knowledge economy (OECD, 2003). Therefore, even if it is not easy (as we have tried to show it in this chapter) it is of vital importance to preserve the individual and collective potentialities of a discussion about the desired social objectives. Where there is no discussion, Galbraith says, there can be no freedom, no democracy. Refusing to question ourselves is ‘to fail to allow such choice – to be guided by the belief that everyone should work a standard week and year – to make the needs of the industrial system, not the opportunity for the individual to shape his own existence, the social concern.’ (Galbraith, 1964, p. 3). This becomes even more important if we consider that the control of corporate organizations over the economic activity is selective and that besides they leave aside the sectors that do not interest them, namely education, health and housing. Therefore, education should be given the importance it deserves by empowering teachers and scientists; ‘yet it is safe to say that the future of what is called modern society depends on how willingly and effectively the intellectual community in general, and the educational and scientific estate in particular, assume responsibilities for political action and leadership’ (J.K. Galbraith, ibid. p. 2).

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Nevertheless, it is obvious for our author, the efficiency standard must be questioned. Hence, a serious investigation of values should be proposed instead of the objectivist search for efficiency, a search that completely ignores the consequences of productivism on the social and natural environment. Finally, according to Clarence Ayres we will say that ‘economics must be a science of values or else it is nothing (The Theory of Economic Progress, 1944); then political economy, the field of knowledge and exercise of economists, should be rebuilt’. John Kenneth Galbraith, Gunnar Myrdal and François Perroux in France devoted themselves to this dissident analysis.

NOTES 1. 2. 3.

In this field Roe (2000) explicitly introduces the political element, even if it is not in the same sense as JKG. We find here the initial goal of Galbraith’s radical project (founding an alternative economics). Reisman’s work (1980) presents this goal in a particularly interesting way. In a nutshell the difference between information and knowledge would actually correspond to a difference of the stock/flow kind. Information is a flow, knowledge an associated stock. The definition of the economics of knowledge would then be the following (Peters and Humes 2003, p. 5): ‘The term “knowledge capitalism” emerged only recently to describe the transition to the so-called “knowledge economy”, which can be characterized in terms of the economics of abundance (as opposed to scarcity), the annihilation of distance, the deterritorialization of the state, and investment in human capital’.

REFERENCES Aglietta, M. (1999), ‘Shareholder value and corporate governance: some tricky questions’, Economy and Society, 29 (1) (February). Ayres, C. (1944), The Theory of Economic Progress, Chapel Hill, NC: University of North Carolina Press. Berle, A.A. and G.C. Means (1932), The Modern Corporation and Private Property, New York: Macmillan. Caby, J. (2003), ‘La convergence internationale des systèmes de gouvernance des entreprises: faits et débats’, working paper 07, IAE de Paris. Callon, M. (1994), ‘Is science a public good? Filter Mullins Lecture’, Science, Technology and Human Value, 19 (4), 395–424. Castells, M. (2000), The Rise of the Network Society, 2nd edn, Blackwell Publishers. Galbraith, J.K. (1965), Economic Development, Cambridge, MA: Harvard University Press. Galbraith, J.K. (1967), The New Industrial State, Boston, MA: Houghton Mifflin. Galbraith, J.K. (1969), The Affluent Society, 2nd edn, Boston, MA: Houghton Mifflin. Galbraith, J.K. (1971), presentation to conférénce Club du Nouvel Observateur, Paris, 21 February. Galbraith, J.K. (1996), The Good Society. The Humane Agenda, Boston: MA: Houghton Mifflin.

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Galbraith, J.K. (2004), The Economics of Innocent Fraud: Truth for Our Time, Boston, MA: Houghton Mifflin. Mendès-France, P. (1968a), ‘Société industrielle, politique économique et socialisme moderne’, Le Monde, 29 October, pp. 1 and 14. Mendès-France, P. (1968b), ‘La planification et la liberté selon Claude Gruson’, Le Monde, 30 October, p. 23. Organisation for Economic Co-operation and Development (OECD) (2001), The New Economy, Beyond the Hype, Paris: OECD, accessed at www.oecd.org. OECD (2003), ICT and Economic Growth. Evidence from OECD Countries, Industries and Firms, Paris: OECD. Peters, Michael A. and Walter Humes (2003), ‘Education in the knowledge economy’, Policy Features in Education, 1 (1), 5. Reisman, D. (1980), Galbraith and Market Capitalism, London: Macmillan. Roe, M.J. (2000), ‘Political foundations for separating ownership from corporate control’, Stanford Law Review, 53, 1–65. Sen, A. (1991), On Ethics and Economics, Oxford: Blackwell Publishers. Sen, A. (1992), Inequality Reexamined, Oxford: Clarendon Press. Sen, A. (1999), Development as Freedom, New York: Alfred A. Knopf. Van Deventer, M.J. (2002), ‘Introducing intellectual capital management in an information support services environment’, PhD thesis, University of Pretoria, accessed 10 October, 2004 at www.upetd.up.ac.za/thesis/available/etd-08012003162454/.

13. Science and governance in the national systems of innovation approach Victor Pelaez 1. INTRODUCTION * Since the 1970s, the concern of industrialized societies over the environmental impacts of technical progress has played a steadily increasing role in political agendas both at national and international levels. The risks associated with nuclear energy, toxic residues, carbon emissions and, more recently, genetic engineering, have contributed towards building a social critical vision of the positivist approach to technical progress. In his book (The New Industrial State – NIS) Galbraith (1967) makes a critical analysis of an economic system which prioritizes and spreads the values of economic growth as an ideology. Through an institutionalist approach, Galbraith highlights the power exerted by a planning system controlled by big industrial corporations and supported by the organized use of capital and technology (NIS, Chapter 6). The exertion of power would consist of an increasingly intense symbiosis between the interests of corporations and the state, thereby allowing the socialization of the risks of capital reproduction (NIS, Chapter 11). By providing the material basis for capital reproduction, scientific and technological knowledge becomes a fundamental instrument in the strategies of expansion of the technostructure (NIS, Chapter 2). The (re)production of this knowledge in turn depends on education and research institutions which, according to Galbraith’s critical approach, tend to assimilate the preponderant values of the production of goods. The systemic approach of technical progress has gained strength since the late 1980s with the evolutionary theory that analyses technical progress as a phenomenon based on endogenous mechanisms of generation and diffusion of technology (NIS, Chapter 7). These mechanisms are subsumed in a context of intercapitalist competition. The linear vision of technical progress – from scientific to technical knowledge and afterwards its diffusion on the market – 241

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has been replaced by a systemic vision which takes into account the importance of interaction between actors and institutions devoted to the (re)production of knowledge. The national systems of innovation approach appeared as an alternative analysis to the comprehension of economic growth in developed countries and also to the technological catching-up process achieved by Japan and Korea (Freeman 1997; Edquist 1997). The systemic approach of innovation intends to be holistic and interdisciplinary by recognizing the importance of the economic aspects as much as the social and political. Despite the acknowledgement of the interdisciplinary importance, the national systems of innovation approach has prioritized a much more economistic analysis emphasizing the determinant factors of innovation linked to competitiveness and economic growth (Nelson 1995; Smith 1997). This kind of approach which omits the contradictory or negative aspects of technical progress, finds some favour in the policy-making instances of a number of countries notably concerned with competitiveness gains from S&T investments. In this context favourable to the fast approval of new technologies, the governmental organisms responsible for their regulation seek for legitimacy by supporting their decisions with expert advice in the science-based policy. On the other hand, the growing critical participation of organized society and of part of the scientific community, along with the limits and evaluation mistakes of experts over the adverse effects of technical progress, has generated a legitimacy crisis of the prescriptive uses of science. Thus, the gap between expert decisions and citizen claims has become part of the political and policy agendas, at least in developed countries (De Jong and Mentzel 2001; Weale 2001; Liberatore and Funtowicz 2003). The aim of this chapter is to discuss the process of technology regulation as a fundamental sub-system analysis in the national system of innovations approach. The emphasis on the regulatory process of technology is intended to recover the evolutionary analysis of technical progress, considered as a satisfactory allocation of resources and also a result of conflicts of interest on the part of different social actors. The aim, therefore, is to highlight the political dimension of the economic analysis of technical progress, which is central to the approach proposed by Galbraith (1967) and other institutionalist authors such as Dugger (1980) and Samuels (1989). The rest of the chapter is divided into three sections (Sections 2–4) and a conclusion. The first recovers the institutionalist analysis of the technostructure proposed by Galbraith, emphasizing two aspects: the mechanisms of the exertion of power of the technostructure; and the economic importance of the infrastructure of education and research. The second section discusses the limits of the economic analysis proposed by the evolutionary approach of the national systems of innovation concerning the regulatory process of

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technology and the management of the conflict of interests involved. The third section presents the discussion of the democratization of the science-based policy from an institutionalist approach. This means, considering the governance of science as a process of social and political learning capable of transforming the regulation of technology into a participating instance of decisions and not merely into the exertion of technocratic power. In this section the European experience concerning the governance of science will be discussed together with the Brazilian experience of attempts to regulate genetically modified organisms (GMOs).

2. THE PLANNING SYSTEM In his book (The New Industrial State) Galbraith carries out a critical analysis of the post-war capitalist system that prioritizes and diffuses the values of economic growth by way of a planning system that transcends the power of the market, traditionally identified by neoclassic economics. Using an institutionalist approach, Galbraith highlights the power of a planning system controlled by large corporations and sustained by the organized use of capital and technology. Given the ever-rising cost of investments to guarantee the expansion of these corporations, along with the inherent risks of research and development of new technologies, the activity of economic planning at both the macro and microeconomic level is superimposed on the ‘natural balance of the market’. The exercise of power would thus consist of an intense symbiosis between corporations and the state apparatus in such a way as to guarantee a certain stability of demand and socialize the risks of capital production. By proportioning a material basis for the reproduction of capital, scientific and technological knowledge becomes a fundamental instrument in the expansion strategies of companies. The (re)production of this knowledge depends in its turn upon the learning and research institutions which, according to Galbraith, tend to assimilate the preponderant values of the mode of capitalist production. In this institutional context, in which planning substitutes for the market, the frontiers between private and public organizations tend to become more fluid: ‘There is no longer a distinct frontier between the public and private sector; the line has become less clearly defined; the line is fluid, even imaginary. Each organization is important to the other; their members co-mingle in their daily tasks; each adapts the objectives of the other to their own objectives. In consequence, each is the extension of the other’ (Galbraith 1989, p. 359). And therefore large corporations become ‘an arm, an extension of public bureaucracy’, exercizing more direct political power than the individual businessman (p. 366) (this idea is developed in Chapters 14, 15 and 16).

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Following this line of reasoning, Stanfield (1995, p. 52) defines the power exercised by corporations as ‘the capacity to influence the allocation of society’s resources and therefore the quality of existence in society.’ And this power gains legitimacy in that it becomes an expression of the cultural values of society. ‘My argument is rather that now our consumptive desires are systematically and purposefully influenced to meet the needs of the corporate system. We live in a corporate culture – a culture which is shaped to a large degree by and for the corporate system’ (Stanfield 1995, p. 66). As a result, the economic power of corporations becomes a political power, capable of influencing the legal structure of institutions. ‘Our principal productive institutions have the means of persuasion, including political power, to clear their products from the market.’ (ibid.). Dugger (1980) analysed the hegemony of corporations, identifying four social control mechanisms which would form the superstructure of power: subordination; contamination; emulation and mystification. Subordination is related to the process by which the aims of other institutions correspond to the means of the dominant institution, in this case the corporations. Contamination implies the diffusion of the motivations of corporations along with other institutions. Emulation is the social acceptance, the prestige that the dominant institution (corporation) enjoys in the other institutions. And mystification promotes the construction or distortion of the symbols of society as a form of legitimizing the dominant institution. Thus, the power of corporations is exercised not by conspiracy but by the combination of these four mechanisms of control. The basis of power would not therefore be individual, but institutional in that the individuals who exercise it have already been submitted to certain rules and habits of thinking (the institutions). According to Dugger (1988), the market is therefore not the source of power. The market is merely a reflection of the rules established ex-ante, established by the power game, adjudication and legislation. Therefore, Dugger refers to the modern economy as an industrial economy or as a corporate economy, not as a market economy (Dugger 1988, p. 984). Samuels (1989) observes that, irrespective of where power originates, it is exercised within a space that is configured in a nexus that exists between economics and politics. The separation of the two spheres, in which economics would be the space for autonomy and freedom, and politics the space for authority and regulation, it is a false dichotomy. There would also be a legal–economic nexus in which politics and economics are constituted as interdependent activities which are continually (re)formulating. The legal–economic nexus is the social location wherein, on the basis of ideology or material interest, private individual and business attempt to influence the social agenda, and politicians and courts, through the exercise of government choice, translate pressures and influences into government policy

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and thereby determine the scope and performance of the market (Samuels 1989, p. 1566). According to Samuels (1989, p. 1577) governance is the central element in this nexus in which power is exercised: ‘in the sense of a process in which important decisions are made, whether by legislatures, courts, or administrative agencies; by giant manufacturing corporations, cartels, trade associations, pension funds, major banks and so on; or by alliances of governmental institutions and private organizations.’

3. THE NATIONAL INNOVATION SYSTEM Unlike the institutionalist analysis that concentrates on demonstrating the exercise of power by large corporations in the economy, the approach of the national system of innovations is rooted in the search for explanations for the variations in growth rates among industrialized nations. The micro-economic approach adopted by neo-Schumpeterians, identifying the innovative attitude of the firm as the central analysis element of technical progress has become relativized by a systemic vision of innovation, stressing the importance of coordinated action between certain actors (universities, companies, research institutes, financial institutions, public policy-making government organs) for the technological performance of countries. This view, proposed by Freeman (1987) in its most consistent form in the book Technology and Economic Performance: Lessons from Japan, allowed for the establishment of an explicative nexus between the differing growth rates of the economy and their association with technological innovation. The Institutional Ambient of the Firm When attributing to the firm the role of highlighting technological innovation, authors such as Lundvall (1988) and Nelson (1993) concentrate on the fact that firms do not innovate in isolation but rather within an institutional context that allows for interaction between producers and users of technology. This innovation is therefore recognized as a process of interactive learning triggered by evolutionary mechanisms of search and selection. ‘The notion of interaction paves the way for a systemic approach’ (Edquist and Hommen 1999, p. 67). The complex relationships established among actors by way of feedback and reciprocity mechanisms constitute networks whose connections are determined by a specific institutional context involving laws, norms, rules and cultural habits. A national innovation system may therefore be defined as ‘a set of institutional and organizational actors and of their interactions, having

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as their ultimate goal the generation and adoption of innovations’ (Saviotti 1997, p. 193). Institutions may be formal (patent laws, standards of technical norms, scientific assessment procedures, peer review) and informal (rules of behaviour, conventions, codes, etc.). The organizations that make up an innovation system involve a diverse set of actors, being grouped into three main sectors: the state; universities and research institutes; and industry (Galli and Teubal 1997). In this analytical framework the importance of institutions is recovered by fulfilling fundamental functions in the innovation process such as: providing information and knowledge in light of reducing uncertainties; ensuring the appropriation and diffusion of knowledge; and managing conflicts of interest. At the same time, institutions are seen as potential barriers to technical progress in that they can inhibit its pace through cultural barriers or tougher regulatory bodies (Edquist and Johnson 1997). The Regulation of Technology when Dealing with a Conflict of Interests Birgitte Gregersen (1992) analyses the role of regulation of technology as an institution of influencing the pace of technical progress in the national innovation system context. There are basically two types of regulations: those that establish technical and patenting standardizations; and those which are directed towards protecting the environment and health of consumers and workers. The latter tends to be reactive to technological innovations which can impose restrictions on the pace and direction of innovation, and guide them towards determined technological pathways. Despite the fact that Gregersen recognizes that the regulation of technology involves negotiation between specialists in both public and private sectors, her analysis does not take into account the conflicts of interest that arise as a result. She limits herself to discussing the interest of the public sector as a user of technologies and therefore being capable of stimulating innovation through favourable regulation (1992). Nelson and Winter (1982, p. 371) have already indicated in their book An Evolutionary Theory of Economic Change, the importance of laws and regulations for the formation of an environment for the selection of firms. The authors comment, for instance, that the mechanisms for the control of the quality of the air in California in the 1960s and 1970s, through the Clean Air Act, had a resounding impact on technological development in certain industries such as the automobile industry and the energy-producing industries. At the same time, this allowed for the consolidation of a more efficient institutional structure and that of specific organizations such as the Environmental Protection Agency (EPA). Henderson et al. (1999) analyse the process of co-evolution of technical

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progress, industrial structure and the institutional context of the pharmaceutical industry, indicating the conflicting aspect of regulation in the incentive to technical progress in this industrial activity. On the one hand, the system of patents in countries where the pharmaceutical industry is more advanced (USA, Germany, Switzerland) has resulted in more encouragement towards R&D, quickening innovation in pharmaceutical products and setting a faster pace than in certain other countries whose systems of intellectual property have been universally regarded as weaker (Italy, Japan). On the other hand, there is the mark of reminiscence of the 1960s for the reassessment of toxic effects in pharmaceutical products in several countries, the cause being attributed to the disaster resulting from the commercialization of thalidomide. This disaster ended up causing a serious impact on the pacing and the cost of introducing new drugs onto the market.1 In the case of developing drugs through genetic engineering, Henderson et al. (1999) mention the tendency of the large European pharmaceutical companies to set up R&D laboratories in the USA, where regulation and public opinion have proved to be less demanding and less concerned with the possible side effects which could result from this type of technology. A more systematized effort in the analysis of the influence of regulation on technical progress was made by Coombs et al. (1987). This influence is expressed through government policies and actions, through pressure groups (trade unions, both of employers and workers) and through the determination of companies in the process of innovation. In their book, the traditional view that the market and firms constitute a self-regulatory system without state intervention and the innovation demonstrates productivist neutrality, is discarded. Conversely, it is assumed that the adoption of new technology by society implies a struggling process in that ‘All innovations have costs and benefits, but some innovations provide benefits to one group of people and costs to a different group’ (1987, p. 209). Matters such as environmental pollution, scarcity of natural resources, the health of workers and the public at large have taken on a political as well as a technological connotation, and just as important, one which has led to the adoption of regulatory practices. In this case, resolving conflicts of interest is not restricted to a mere legal battle, but to a tug-of-war in which access to information, along with scientific and technological knowledge may play a deciding role. As Coombs et al. have observed: Groups with different interests are likely to conflict, and the outcome may be resolved on the basis of the power of the groups concerned, rather than abstract justice. The development of conflicting interests also influences the status of scientific and technical knowledge. Different interest groups frequently attempt to use experts and scientific information to back up their case, thus undermining the status that such knowledge claims generally. (1987, p. 245)

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The arguments put forward against the regulation of technology insist that it would cause serious damage and loss to some businesses, discouraging the innovative process or increasing the cost of their goods beyond tolerance levels. In this case, an exclusively economic approach tends to prevail, leading to extreme statements as in the study of Peltzman (1974), cited by Coombs et al. (1987, p. 252). In this study, a cost/benefit analysis of the regulation practices of medicines by the Food and Drug Administration (FDA) in the United States of America, suggested that it was economically more desirable for there to be a disaster like thalidomide than to impede the introduction of new substances which could save the lives of people with other illnesses. Coombs et al. (1987) recall that over 90 per cent of resources marked for R&D in Great Britain and the USA originate from private enterprise and government organs. This leaves these protagonists with a more active role in the determination of the pace and direction of technical progress than the trade unions, consumer associations or non-governmental organizations. Such concentration of power involves economic aspects and decision-making as much as the control of information inherent to analysis of risks from the technical progress being made.2 Despite the neo-Schumpetarian or evolutionary approach recognizing the importance of regulatory institutions in the pace and direction of technical progress, this current theory has not prioritized the analysis of the regulatory process itself. A co-evolutionary analysis has yet to be made that is capable of establishing an explicative referential of the nexuses that exist between market control strategies and public regulation policies of scientific and technological knowledge. To this end, Nelson (1995) remarks in his study of the evolutionary theory, little research has been carried out into the relationships of cause and effect that exist between regulatory laws, technology and industrial structure. He shares ideas with sociologists such as Tushman and Romanelli (1985), Rosenkopf and Tushman (1994) and Hughes (1983) concerning the importance of the political action of companies in the definition of rules and productive standards which cater to their interests.

4. SCIENCE AND GOVERNANCE As scientific knowledge gains importance as a productive force to be internalized in policies for the creation of innovation systems, governance of science is increasingly in the limelight in the political agendas of countries. The problem of governance in this case is twofold: the generation of knowledge through the definition of lines of research along with financial policies; and the regulation of the laboratorial and commercial use of scientific and technological knowledge. In the latter instance, the commercialization of

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products which directly affect human health, such as medicine and industrialized food, depends on a regulatory mark which, in a general way, tends to be more rigorous, especially due to four aspects which complement one another: the development of new analysis techniques which allow for a closer estimate of the adverse effects of technology; the largest organization of society in the sense of winning greater participation in the decision-making that affects general well-being; greater availability of information to the public; and greater consumer demands in terms of the quality of products. In the regulatory institutions, science has a highlighted role in two ways: aiding in decision-making in that it foresees and assesses the risks generated by new technologies; and by arbitrating disputes caused by the questioning of such decisions in that a status of neutrality is attributed to it vis-à-vis political and economic interests. Science therefore has a power of decision-making that legitimizes the actions of governmental agencies to find a balance between the profits of a company and the security of citizens. Even so, the room for this harmonizing effect is simultaneously occupied by conflicts of interest in which governance, as a collective action resulting from the interaction of a number of governmental and non-governmental actors, tends to substitute the monopoly of power in the hands of the government (Stoker 1988). European Union: Towards a New Governance Model As science and technology references and competitiveness grow at both the micro and macroeconomic levels, their governance tends to be determined according to market imperatives. Levidow and Marris (2001) highlight this concern in the European Union in relation to their main competitors (USA and Japan) by quoting a communiqué from the Social and Economic Committee: More than ever, investing in research and technological development offers the most promise for the future. In Europe, however, the situation is worrying. Without concerted action to rectify this, the current trend could lead to a loss of growth and competitiveness in an increasingly global economy. The leeway to be made up on the other technological powers in the world will grow still further. And Europe might not successfully achieve the transition to a knowledge-based economy. (CEC 2000, p. 4)

In this atmosphere of competition, determined by the so-called knowledgebase economies, regulatory institutions tend to stress the positive character of technologies in detriment of discussions into the associated environmental risks. (De Marchi 2001; Levidow and Marris 2001). In this way, the sciencebased legitimizing discourse increasingly reveals a character of partiality in favour of short-term economic interests. Callon et al. (2001) illustrate the role played by specialists in minimizing

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risks and impacts associated with leaks in nuclear power plants, nuclear waste deposits or in the radioactive cloud of the Chernobyl accident, all the while attempting to play down the suspicions and knowledge of the local populations who were most affected by the environmental impact of these events that marked the eighties. In the 1990s, the BSE case in the United Kingdom was emblematic in that it revealed that the actions of the government sought above all to protect the interests of farmers and the food industry by minimizing the risks of passing the disease on to humans. All of this was supported by committees of specialists and scientific evidence, and the results were, in some cases, manipulated or kept secret to reduce negative repercussions among consumers (Miller 1999; Millstone and van Zwanenberg 2001). Another emblematic case involved the regulation process of genetically modified organisms (GMOs) which became a source of intense controversy, especially among the national and European Union regulating agencies and the entities representing environmentalist groups and consumer defence associations. At the centre of the controversy were two fundamental and interdependent criticisms. One involved uncertainty over the environmental impact of GMOs. This uncertainty, however, was not limited to a simple lack of knowledge of the possible risks of the technology. Knowledge in itself may be interpreted in a number of ways due to the differing results of the different methods and theoretical models utilized, leading to controversy between specialists (Levidow and Marris 2001; De Marchi 2003). As Christoforou notes: The basic legal definition of scientific uncertainty reflects the potential for error inherent in science and scientific information. In law, uncertainty indicates evidence showing credible scientific disagreement among experts, which prevents the judge from rendering an informed decision on the scientific basis of the dispute. Legal systems and courts should, therefore, acknowledge scientific uncertainty in the presence of incomplete, inconclusive or contradictory evidence coming from credible and reliable sources (even if they are minority scientific views). (2003, p. 208)

The other criticism of the process of regulating GMOs emphasizes the way in which the problems associated with biotechnological agricultural risk are formulated. According to Levidow (1998), the risk analysis proposed by the majority of regulatory bodies tends to simplify the problems of transgenic agricultural diffusion, restricting it to a strictly technological ambient. Even in this ambient, transgenesis is dealt with in a very simplified manner, formulating agronomical problems in terms of genetic deficiency. As Levidow observes: The strategy of biotechnological control is often expressed through social metaphors codes, combat and commodities. In a computer metaphor, biotechnology

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precisely alters the genetic ‘code’ to enhance the predictable control of nature. With surgical precision, biotechnology redesigns nature to protect crops or to attack pests, and through ‘value-added’ genetics, searches for genetic changes which can enhance the market value of agricultural products. … Through these kinds of metaphors, design choices take the reified form of natural properties to be enhanced, thereby recasting nature in the image of biotechnology. … In these ways, R&D priorities take the form of external imperatives and opportunities discovered in nature. The undemocratic character of biotechnology arises from its selfperpetuating problem definition, which biotechnologizes both nature and agriculture. (1998, p. 215)

The technology assessment proposed by specialists and by the majority of regulating agencies, based on an analysis of the type of risk–benefit, limits the discussion to a quantitative and probabilist control analysis of previously established risks. The socio-economic impacts of adopting the new technology – as the loss of autonomy of farmers in the reproduction of their vegetal material – are discarded as it is presumed that the assessment of risk should be politically neutral.3 Levidow (2001) identifies the divergent visions which predominate in the EU around the diffusion of GMOs, classifying them in three fundamental approaches: the neo-liberal vision, linked to the biotechnological companies; the vision of environmental management associated with the regulating bodies; and the environmentalist vision, linked to the NGOs. In several EU countries the policy of development of biotechnology is based on a liberal vision of the concept of sustainable agriculture, ecoefficiency. Products which originate from this source would allow for a reduction in the use of agro-chemicals and an increase in agricultural productivity, generating greater competition as a result. On being submitted to pressures in favour of and against GMOs, the tactic of environmental managers would be to accommodate the liberal vision of sustainable agriculture. The potential risks of GMOs would be mitigated by the real risks of the intensive use of chemical raw materials. Thus, regulating bodies in Europe concluded in the mid-1990s that GMOs would not cause any more environmental damage than the traditional methods of intensive agriculture (Levidow, 2001). Resistance from activists in several European countries has made governments recoil at the adoption of GMOs. The harmonizing policy which was adopted between 1992 and 1995 in the EU ended up being destabilized by the initiative of some in declaring a moratorium on the adoption of GMOs within their borders (Morris and Adley 2000). The policy of harmonization, seeking the commercial liberation of GMOs, began to be re-established in 2000 when the EU demanded that foodstuffs containing a level of GMO over 1 per cent should be labelled as such (Regulation 49/2000) and in April 2004, this level was reduced to 0.9 per cent (Regulations EC 1829/2003; 1830/2003). The fact that the public has questioned the analysis procedures of

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technological risks adopted by the regulating bodies has become a source of concern for some governments that have faced a legitimacy crisis by adopting a governance model which is supposedly neutral scientifically. In the view of those agents interested in maintaining this model, the resistance of consumers to the new technologies is based in irrational arguments and the ignorance of the lay man. By this token, the proposed solution has been the need to provide better information concerning the risk of these technologies, which would lead to better understanding and acceptance on the part of consumers (Mayer 2003; De Marchi 2003; Levidow and Marris 2001). This view, that resistance on the part of the consumer public is based in ignorance of biotechnology, was questioned in a survey carried out between 1998 and 1999 (Public Acceptance of Agricultural Biotechnologies). The results of this survey showed that scepticism by the public concerning the legitimacy of the process of regulating biotechnology has much deeper roots in a critical assessment of the lack of transparency and the exemption of the regulatory bodies which the public associates with past experiences like pesticides, asbestos and BSE (Marris 2001). Following this critical view of the consumer public, some within the EU have had more in-depth debates on the new governance models for science and technology, as happened at the Science and Governance in a Knowledge Society Conference in 2000 at which a discussion was begun into the perfection and democratization of regulating bodies. Among the conclusion reached at the event, the following may be highlighted: Public inputs to policy debates are not merely ‘opinions’, but may be relevant knowledge, values or questions which scientists have neglected. There needs to be a long-term process of mutual learning between the public and science, which will necessarily involve new institutional relationships and forms. This will require deliberate experiments in the design of new hybrid institutions and roles. Tools should be explored to bring the public closer to debates on science and technology and its repercussions (e.g. consensus conferences, focus groups, etc.). The general diversification of knowledge sources and actors in modern society should be accepted and used as a platform for further development of democratic knowledge cultures, also including innovation cultures. (emphasis in the original) (DG-JCR 2000)

In the report White Paper on Governance, which was written following this conference, the need to democratize institutions at an EU level is reaffirmed: While such expert-based regulatory policy of the European Union can be seen as a guarantee of efficiency, it is often perceived as technocratic and need of review. This may be because many issues once dealt with at national level are now dealt at the European level, and have as a result become more visible. For example, the transboundary nature of BSE (‘mad cow disease’) requires decision at European as well as national levels. The criticism of ‘technocracy’ can also be seen as a part of

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the broader quest for more accountable institutions at all levels, and for more transparent and participatory procedures. (Liberatore 2001, p.4)

In this new governance model conceived by the EU, the most active participation of the public consumer in decisions relating to the adoption of new technologies is now evaluated through the experiences of hybrid discussion forums (citizens’ juries, consensus conferences, focus groups and public hearings) in countries such as Denmark, France, Germany, Norway, the Netherlands and the United Kingdom (Liberatore 2001).4 Brazil: in Search of a Governance Model In Brazil, the disputes surrounding the liberation of GMOs which led to a judicial ban on the planting of these crops (most notably transgenic soy) since 1988, became relevant both politically and economically because of the country’s position as the second largest producer and exporter of soy in the world. Since 1996, there has been an intense ongoing debate concerning the environmental effects and the effects on human health caused by GMOs that was initially restricted to the academic community. The controversy concerning the issue intensified further in June 1998 when Monsanto requested authorization from the Bio-safety National Technical Commission (CTNBio) for the right to commercialize Roundup Ready (RR), the herbicideresistant soybean. At that time, several organizations such as the Brazilian Society for the Progress of Science, Greenpeace and the Institution for the Defence of the Consumer (IDEC), came out against the approval of the seed, basing their arguments on the lack of studies into environmental impact to confirm the alleged harmlessness of the product. To follow up this argument, IDEC and Greenpeace filed a public civil lawsuit questioning the assessment procedures proposed by CTNBio.5 At this point, a long legal battle was begun in which Monsanto and the Federal Union, defending the position of CTNBio, which is directly subordinated to the Ministry of Science and Technology, presented appeals contesting the judicial decision. In June 2000, the Federal Courts extended the ban on the cultivation and commercialization of RR soy to include all genetically modified organisms in answer to another lawsuit filed by the same NGOs. The appeal of the Union and Monsanto was not heard until February 2002 by a collegiate of three judges. The final ruling was given in June 2004. By two votes to one, Monsanto and the Union won the cause as it was considered that CTNBio has the autonomy to decide on the demands of the studies into environmental impact. Nevertheless, as the ruling was not unanimously decided, there is still the possibility of an appeal by IDEC and Greenpeace in the higher courts, prolonging the case even further.

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Despite the legal ruling which banned the commercial planting of RR soy in Brazil, in September 1998, many farmers went against the decision and illegally planted the seeds and this practice was widely expanded, especially in the southern state of Rio Grande do Sul. The agricultural ministry estimates that around 6 million tons of soy, over 10 per cent of national soy production (expectations were around 49 million tons in the 2002/03 harvest), are transgenic (Salvador 2003). This caused a serious judicial, political and economic impasse for the country in that the destruction of this illegal production would correspond to an estimated loss of between 1 and 1.3 billion dollars in exports (Zero Hora 2003). For as long as the judicial decision remains undefined, the juridical way out of this impasse has been for the federal government to resort to what has been termed ‘conduct adjustment’, through which lawbreakers have been forgiven as long as they promise to cease production of GMOs from the 2003 harvest onwards. Nevertheless, this commitment has not been adhered to and the Federal Government has extended the pardon to next year while attempting to pass a new bio-security law, which is less restrictive to GMOs, in Congress. In this new edition of the bio-security law, the central controversy between those in favour of the rapid liberation of GMOs and those against it concerns the attribution of decision-making power to CTNBio concerning the commercial liberation of GMOs. While those against the liberation of GMOs support a merely consultative role in the decisions of CTNBio, leaving the decision on commercial liberation to an inter-ministerial committee, those in favour defend a deliberative role for the Committee. In this case, other ministries, such as the Environment, would lose their power to demand environmental impact studies in the case of GMOs, leaving the final decisionmaking power to CTNBio, which is traditionally made up of a large majority in favour of GMO liberation. The resistance movement to GMOs in Brazil is part of a network of NGOs that are traditionally linked to the social and economic development of the small farming community. These NGOs are in networks that, among other things, aim to diffuse farming techniques at a nationwide level as the preservation and improvement of vegetal genetic material. Among these NGOs, AS-PTA (Advisory Project on Alternative Agriculture) stands out from the crowd. This is a network of NGOs which aim to develop alternative technologies in rural districts and currently coordinate the campaign against the rapid liberation of GMOs, organizing seminars, debates and by lobbying Congress. AS-PTA was especially involved during the discussion process and approval of the intellectual property law for seeds (Law on Plant Variety Protection) in 1997, supporting the interests of small farmers in their right to access genetic material. Mobilization and political disputes involving

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legislative power provided AS-PTA with an important learning experience which was later used in the disputes against the liberation of GMOs in Brazil (Pelaez and Schmidt 2002). The lobbying done by NGOs has demanded more transparency of the criteria for assessing GMOs adopted by CTNbio as well as the tightening of federal legislation to guarantee this transparency and avoid the approval of any transgenic products without a prior investigation into their environmental impact. The demand for a stricter regulatory framework when it comes to setting up commercial barriers is done in order to minimize the risk of small farmers losing control of the reproduction control of genetic material (Pelaez and Schimdt 2002). The mobilization of NGOs pressuring the legislative body of the National Congress and several state assemblies as well as entities in various states in the country has led to the establishment of discussion forums, contributing to the dissemination and politicizing of the debate concerning the socioeconomic and environmental risks involved in GMOs. The experience of mobilizing the Brazilian public at large when it comes to regulation of GMOs caused quite an impact in the pace of diffusion of this type of technology by impeding the legal commercialization of the product for seven consecutive years.6 The impasse of the judicial decision on the demand for studies into the environmental impact of the liberation of GMOs in Brazil indicates a weak side in the established regulatory framework while the state is shown to be inoperative when it comes to enforcing a legal decision that prohibits the commercial dissemination of these products. On the other hand, such an impasse reflects the democratic side of the dispute through which NGOs have accumulated experience of disputes and lobbying Congress. While official institutions in the EU seem to evolve towards a more participative governance model, the technocratic model is still predominant in Brazil and the predominant discourse of competitiveness is aligned with the political agenda of the current government which is chiefly aimed at increasing exports.7 The Regulation of Technology as a NIS Sub-system Regulation of technology is much more than an institution that establishes control mechanisms on the innovation process. It also constitutes a national innovation system subsystem involving the interaction of representatives of governmental agencies and specialists in the productive and academic sectors – the elements usually considered by the national innovation system neoSchumpeterian approach. At the same time that they generate scientific and

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Industry

State

Closed sub-system of S&T governance Expert commissions

Society

Universities, research institutes Figure 13.1

Technocratic governance model

technological knowledge, these actors are articulated in that they establish the analysis procedures for management and communication of the inherent risks of this knowledge, thereby indicating the possible technological pathways and the alternatives of public and private investment. In the technocratic governance model, illustrated in Figure 13.1, decisions concerning possible technological pathways, based on a positivist vision of science and technology, exclude the possibility of participation of the lay public. A dichotomous vision is established: on the one side, specialists with a supposedly objective and impartial view of the risks associated with technology; on the other side, the lay public whose aversion to risks is based on subjective arguments (values) and their ignorance of the procedures adopted by the specialists. This technocratic model of governance is the very picture of the technostructure described by Galbraith (1967), by which the capture of the public sector by the private sector is reflected in the mechanisms of social control described by Dugger (1980) and labelled as subordination, contamination, emulation and mystification. According to Callon, the technocratic model corresponds to the model of representative democracy that was configured and consolidated in the wake of the Second World War, leading to two forms of polarization: a neat division of roles between experts (or specialists) and political authorities, with the former producing reliable and ‘consensible’ knowledge (what is possible) on which the latter base their decisions (what is desirable); and the constitution of an ignorant public, incapable of entering into the abstract formalism of scientific knowledge … and whose support for science and technology requires constant education. (2003, p. 30)

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Such polarization corresponds to a dual delegation in which citizens delegate the power of decision making to their elected representatives and these in turn delegate decision of a scientific nature to specialists. This process of excluding the average citizen from decisions relative to analysis and risk management tends to lose legitimacy in that organized groups within society begin to question the supposed neutrality of the technocratic process of regulation of technology. As uncertainty towards the negative impacts of technical process grows, conflicts of interest between producers and consumers of technology tend to increase. In this context, regulation of technology transcends the conventionally adopted approach, in the neo-Schumpeterian theory, of an institution capable of limiting or encouraging technical progress, to acquire a more political dimension in that it reveals room for a conflict of interests. There now surface the possibilities of a new model of governance no longer based on a representative participative democracy in which room for negotiation tends to limit the subordination of regulatory institutions to private interests. In the same way, the diffusion of the motivations of private corporations together with other institutions (contamination), their social acceptance (emulation) as well as their values (mystification) become more visible, revealing the economic and legal nexus built up by the technocratic model of governance. In this new model of governance, which is labelled as pluralist, the subsystem of innovation, aimed at regulation of technology, incorporates the lay public, mainly through the action of an organized society, allowing for the inclusion of the citizen in the process of deciding which technological paths will be adopted and the evaluation of technological risks (Figure 13.2). This inclusion of society as an institutional element of the NIS concerns organizations of people – at collective level – and also the notion of citizenship – at individual level – by which the citizen claims their inclusion into the process of taking technical decisions as a generator and consumer of knowledge (Jasanoff, 2004). In this new institutional context, the practice of confrontation and management of conflicts generate a process of interactive learning through the constitution of hybrid discussion forums that incorporate technical and dimensions along with technology policies, eliminating the dichotomous view adopted in the technocratic model. The process of regulating technology through the correlated institutions and organizations is thus characterized as a subsystem in the systemic analysis of national economies when it comes to innovation policies and the technical pathways that are adopted. Furthermore, the possibilities for democratization of technocratic decisions constitute important institutional innovations that, according to Callon involve:

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(a) explicit recognition of the existence of constantly emerging concerned groups; (b) the existence of procedures intended to facilitate the expression, discussion and collective negotiation of these groups’ identities; (c) the establishment of incentives and structures aimed at encouraging, developing and funding collaborative research in all its forms; and (d) the construction of public spaces in which identities and research are discussed simultaneously. (2003, p. 61)

Industry

State

Opened sub-system of S&T governance Hybrid forums

Universities, research institutes Figure 13.2

Society NGOs

Pluralist governance model

5. CONCLUSION The NIS approach aims to study the causes of economic efficiency in industrialized countries, with an emphasis on the phenomena associated with the process of technological innovation. In this analysis referential, the role attributed to institutions corresponds to the incentives or barriers imposed on interaction between organizations whose aim is to generate and diffuse technology. By giving preference to a theoretical analysis based on the satisfactory allocation of resources under limited conditions of rationality, the evolutionist focus of the national innovation system ceases to discuss technical progress as a result of conflicts of interest and power struggles between the various actors involved. The institutionalist approach put forward by Galbraith and other institutionalist authors has in turn contributed to revealing the exercise of power which proceeds within a productive system in which the economic, political and social variables are combined to make the expansion of large corporations viable. The institutionalist approach to the practices of power and

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conflicts of interest contribute in a most consistent way to understanding the process of regulation of technology in which privileged knowledge of specialists becomes the object of governance on the part of those actors directly linked to innovation (companies), as already stressed by M. Pouchol (Chapter 4) and A. Kartchevsky and M. Maillefert (Chapter 12). In this process, the revelation of conflicts of interest allows us to identify the main mechanisms of negotiation as well as the strategies of the actors who are either interested in maintaining the status quo of technocratic knowledge or in questioning the decisions adopted by specialists. Therefore, the institutionalist approach of Galbraith allows us to identify important institutional innovations that proceed in society and which exert considerable influence on the determination of the pace and direction of technical progress.

NOTES * 1.

2.

3.

4.

This chapter is part of a research project ‘National and International Expertise Connections in Plant Biotechnology Regulation: Scope and Constraints of the Brazilian experience’, financed by the MacArthur Foundation Research and Writing Grants. According to Rigoni et al. (1985, p. 51), the average cost of obtaining a new pharmaceutical substance in the USA went from 1.5 to 2 million dollars in the period of 1956–62, to 20–22 million dollars from 1966–72. At the end of the 1980s, these costs were estimated at somewhere in the range of 150 million dollars (Ballance et al. 1992). In the 1990s, these costs had soared to as high as US$350 million (Halliday et al. 1997, p. 63). The average period for the development of a new product had reportedly risen from 2.7 years in 1966 to 6.6 years by 1973 (Rigoni et al. 1992, p. 74). According to Ballance et al. (1992), this period had been lengthened to around 20 years as the 1980s drew to a close. One example which illustrates this institutional control of regulation was the allegation made by USA Today (2000) claiming that 54 per cent of the experts hired by the FDA to evaluate the approval of medications had a direct financial interest in the substance or in that area of research. These interests included financial help for research or being hired as a consultant by the pharmaceutical companies involved in the development of these substances. Despite the US federal legislation generally prohibiting regulatory agencies from using experts with financial conflicts of interest the FDA waived that restriction more than 800 times between 1998 and 2000. The demands of NGOs in the EU countries to extend the technological risk analysis, including discussions of a socio-economic character have most notably been met in Denmark. In this country, the evaluation of the impacts of technology is conducted by a wide-ranging discussion in public forums. In that sense, the problem consists on being formulated not only by specialists in a neutral and irreversible vision of the technologies to be adopted, but by taking into consideration the adoption of technological trajectories and social alternatives (Levidow 1998). This far-reaching and participatory process of evaluation of the technology installed in Denmark is highlighted by Kaas (2000, p. 323) who observes: ‘In Denmark, democracy is seen as the institutionalisation of debate, deliberation and consensus; in the UK (and many other places) it is the institutionalisation of the rule of the majority subject to checks and balances’. In light of this new model of organization of hybrid-forum discussions, the experience of the Contact Group deserves to be mentioned. This group was organized by Unilever and the Green Alliance between 1994 and 2001. NGOs which represented environmentalists and consumers were invited to discuss questions related to the development and regulation of GMOs. Unilever’s strategy was to encourage more intense dialogue with consumers and was

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based on the assessment that controversy surrounding GMOs could not be adequately assessed by the company through traditional market research models, public relations and product development. Throughout these dialogues, the company adopted a new concept, that of consumer-citizen, through which they sought to discover the attitudes of the public towards GMOs, not in terms of preferences of the consumers but rather as a process of negotiating citizens’ rights. For an evaluation of this experience, see Doubleday (2004). 5. The use of biotechnology in Brazil was regulated with the approval of the National Congress, in 1995, of the Biosafety Law which set the basis for the control of genetic engineering and GMOs commercial release, in order to protect the environment, bio-diversity and public health. Following this law, CTNBio was set up with the purpose of: certifying and monitoring the quality of infrastructure and technical capacity of those institutions working on teaching, research, and on technological development in the field of GMOs in Brazil; analysing the requests for the release of GMOs, and issuing conclusive technical assessment. CTNBio is made up of 18 members including: academic experts; representatives from the Ministries of Science and Technology, Agriculture, Health, Environment, Education and Foreign Relations; representatives from bio-technology companies; representatives from groups for the defence of consumer rights and workers’ health. The president of the commission is appointed by the Minister of Science and Technology, from a short-list of three names put forward by a committee. 6. Clandestine cultivation of GMOs are currently estimated at around 8 per cent of national soy production according to estimates by the Agricultural Ministry (Folha Online, 25 June 2004). 7. Pelaez and Albergoni (2004) present a brief discussion on the power struggles among the main ministries involved in the regulation of GMOs.

REFERENCES Ballance, R., J. Pogany and H. Forstner (1992), The World’s Pharmaceutical Industries: An International Perspective on Innovation, Competition and Policy, Aldershot, UK and Brookfield, USA: Edward Elgar. Callon, M. (2003), ‘The increasing involvement of concerned groups in R&D policies: what lessons for public powers?’ in A. Geuna, A. Salter and W. Steinmuller (eds), Science and Innovation, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 30–68. Callon, M., P. Lascoumes and Y. Barthe (2001), Agir dans un monde incertain, Paris: Seuil. Christoforou, T. (2003), ‘The precautionary principle and democratizing expertise: a European legal perspective’, Science and Public Policy, 30 (3), 204–11. Commission of the European Communities (CEC) (2000), communication from the Commission to the Council, the European Parliament, the Economic and Social Committee of the Regions: towards a European research area, COM (2000) 6 final, 18 January, accessed at www.europa.eu.int/comm/dg06/envir/report/en/index.htm. Coombs, R., P. Saviotti and V. Walsh (1987), Economics and Technological Change, London: Macmillan Education. De Jong, M. and M. Mentzel (2001), ‘Policy and science: options for democratisation in European countries’, Science and Public Policy, 28 (6) (December), 403–12. De Marchi, B. (2001), ‘Risk and governance’, Journal of Hazardous Materials, special issue, 86, 1–3. De Marchi, B. (2003), ‘Public participation and risk governance’, Science and Public Policy, 30 (3), 171–6.

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DG-JRC & Research (2000), ‘Science and governance in a knowledge society: the challenge for Europe, 16–17 October. Conference conclusions’, accessed 15 July 2004 at www.jrc.es/csi-gov. Doubleday, R. (2004), ‘Institutionalising non-governmental organisation dialogue at Unilever: framing the public as “consumer-citizens”’, Science and Public Policy, 31 (2), 117–26. Dugger, W. (1980), ‘Power: an institutional framework of analysis’, Journal of Economic Issues, XIV (December), 897–907. Dugger, W. (1988), ‘A research agenda for institutional economics’, Journal of Economic Issues, XXII (December), 983–1002. Edquist, C. (ed.) (1997), Systems of Innovation: Technology, Institutions and Organizations, London: Pinter Publishers. Edquist, C. and L. Hommen (1999), ‘Systems of innovation: theory and policy for the demand side’, Technology in Society, 21, 63–79. Edquist, C. and B. Johnson (1997), ‘Institutions and organizations in systems of innovation’, in C. Edquist (ed.), Systems of Innovation: Technology, Institutions and Organizations, London: Pinter Publishers, pp. 41–63. Freeman, C. (1987), Technology and Economic Performance: Lessons from Japan, London: Pinter Publishers. Freeman, C. (1997), ‘The “national system of innovation” in historical perspective’, in D. Archibugi and J. Michie (eds), Technology, Globalisation and Economic Performance, Cambridge: Cambridge University Press, pp. 24–49. Galbraith, J.K. (1967), The New Industrial State, Boston, MA: Houghton-Mifflin. Galbraith, J.K. (1989), Le Nouvel état industriel, Paris: Gallimard. Galli, R. and M. Teubal (1997), ‘Paradigmatic shifts in national innovation systems’, in C. Edquist (ed.), Systems of Innovation: Technology, Institutions and Organizations, London: Pinter Publishers, pp. 342–70. Gregersen, B. (1992), ‘The public sector as a pacer in national systems of innovation’, in B.-A. Lundvall (ed.), National Systems of Innovation, London: Pinter Publishers. Halliday, R.G., A. Drasdo, C. Lumley and S. Walker (1997), ‘The allocation of resources for R&D in the world’s leading pharmaceutical companies’, R&D Management, 27 (1), 63–77. Henderson, R., L. Orsenigo and G. Pisano (1999), ‘The pharmaceutical industry and the revolution in molecular biology: interactions among scientific, institutional, and organizational change’, in D. Mowery and R. Nelson (eds), Sources of Industrial Leadership, Cambridge: Cambridge University Press, pp. 267–311. Hughes, T. (1983), Networks of Power: Electrification in Western Society, 1880–1930, Baltimore, MD: Johns Hopkins University Press. Jasanoff, S. (1990), The Fifth Branch, Cambridge, MA: Harvard University Press. Jasanoff, S. (2004), ‘Science and citizenship: a new synergy’, Science and Public Policy, 31 (2), April, 90–4. Kaas, G. (2000), ‘Public debate on science and technology: issues for legislators’, Science and Public Policy, 27 (5), 321–6. Levidow, L. (1998), ‘Democratizing technology – or technologizing democracy? Regulating agricultural biotechnology in Europe’, Technology in Society, 20, 211–26. Levidow, L. (2001), ‘Which sustainability for Europe? Policy dilemmas over GM crops’, accessed 17 April 2002 at www.-cies.geog.cam.ac.uk/www-cies/isa/ 3Levidow.html.

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Levidow, L. and C. Marris (2001), ‘Science and governance in Europe: lessons from the case of agricultural biotechnology’, Science and Public Policy, 28 (5), 345–60. Liberatore, A. (2001), ‘Report to the working group “Democratising Expertise and Establishing Scientific Reference Systems” (Group 1b). White Paper on Governance’, accessed 12 July 2004, at www.europa.eu.int/comm/gvernance/areas/ group2/index_en.htm. Liberatore, A. and S. Funtowicz (2003), ‘“Democratising expertise”, “expertising” democracy: what does this mean, and why bother?’, Science and Public Policy, 30 (3) (June), 146–50. Lundvall, B.-A. (1988), ‘Innovation as an interactive process: from user–producer interaction to the national system of innovation’, in G. Dosi, C. Freeman, G. Silverberg and L. Soete (eds), Technical Change and Economic Theory, London: Pinter Publishers, pp. 349–69. Lundvall, B.-A. (1992), National Systems of Innovation, London: Pinter Publishers. Marris, C. (2001), ‘Public views on GMOs: deconstructing the myth’, EMBO Reports, 2 (7), 545–48, accessed 23 July 2004 at www.emboreports.npgjournals.com/cgi/ content/full/2/7/545. Mayer, S. (2003), ‘Science out of step with the public: the need for public accountability of science in the UK’, Science and Public Policy, 30 (3), 177–81. Miller, D. (1999), ‘Risk, science and policy: definitional struggles, information management, the media and BSE’, Social Science and Medicine, 49, 1239–55. Millstone, E. and P. van Zwanenberg (2001), ‘Politics of expert advice: lessons from the early history of the BSE saga’, Science and Public Policy, 28 (2) (April), 99–112. Morris, S. and C. Adley (2000), ‘Evolving European GM regulation: an example of biopolitics at work’, Tibtech, 18, August, 325–6. Nelson, R. (1993), National Innovation Systems, Oxford: Oxford University Press. Nelson, R. (1995), ‘Recent evolutionary theorising about economic change’, Journal of Economic Literature, XXXIII (March), 48–90. Nelson, R. and S. Winter (1982), An Evolutionary Theory of Economic Change, Cambridge, MA: Belknap Press. Pelaez, V. and L. Albergoni (2004), ‘External and internal trade barriers to GMOs in Brazil’, International Journal of Biotechnology, 6 (2/3), 219–42. Pelaez, V. and A. Sbicca (2003), ‘Genetically modified organisms: the side not revealed by science’, International Journal of Biotechnology, 5 (3/4), 354–70. Pelaez, V. and W. Schmidt (2002), ‘The dissemination of genetically modified organisms in Brazil’, International Journal of Biotechnology, 4 (2/3), 211–27. Rigoni, R., A. Griffiths and W. Laing (1985), Les Multinationales de la pharmacie, Paris: PUF. Rosenkopf, L. and M. Tushman (1994), ‘The coevolution of technology and organisation’, in J. Baum and J. Singh (eds), Evolutionary Dynamics of Organizations, New York: Oxford University Press, pp. 403–24. Rothwell, R. (1980), ‘The impact of regulation on innovation: some U.S. data’, Technological Forecasting and Social Change, 17, 7–34. Rothwell, R. (1981), ‘Some indirect impacts of government regulation on industrial innovation in the United States’, Technological Forecasting and Social Change, 19, 57–80. Rothwell, R. (1992), ‘Industrial innovation and government environmental regulation: some lessons from the past’, Technovation, 7, 447–58.

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Salvador, F. (2003), ‘Grupo de estudos define hoje situação da soja transgênica’, O Estado de São Paulo, 6 (March), B4. Samuels, W. (1989), ‘The legal-economic nexus’, George Washington Law Review, 57 (6), 1556–78. Saviotti, P. (1997), ‘Innovation systems and evolutionary theories’, in C. Edquist (ed.), Systems of Innovation: Technology, Institutions and Organizations, London: Pinter Publishers, pp. 180–99. Smith, K. (1997), ‘Economic infrastructures and innovation systems’, in C. Edquist (ed.), Systems of Innovation: Technology, Institutions and Organizations, London: Pinter Publishers, pp. 86–106. Stanfield, J. (1995), ‘Legitimacy and value in corporate society’, in Economics, Power and Culture: Essays in the Development of Radical Institutionalism, article first published in the Nebraska Journal of Economics and Business, New York: St Martin’s Press. Stoker, G. (1988), ‘Governance as theory: five propositions’, International Social Sciences Journal, 155, 17–28. Thomas, L. (1990), ‘Regulation and firms size: FDA impacts on innovation’, RAND Journal of Economics, 21 (4), 497–517. Tushman, M. and E. Romanelli (1985), ‘Organizational evolution: metamorphis model of convergence and reorientation’, in B. Staw and L. Cummings (eds), Research in Organizational Behaviour, Greenwich, CT: JAI Press, pp. 171–222. Weale, A. (2001), ‘Science advice, democratic responsiveness and public policy’, Science and Public Policy, 28 (6), 413–21. Zero Hora (2003), ‘A encruzilhada dos transgênicos’, Zero Hora, 6 March, accessed 13 July 2004 at www.webrural.com.br/webrural/artigos/ambiente/commod.asp.

14. Privatization and the management of intellectual property rights: the case of the British defence research establishments Jordi Molas-Gallart and Puay Tang In the nature of the market, one organization or enterprise sells to another, and the boundaries between the two are sharp. This same delineation characterizes the private firm selling, say, powdered milk to the Department of Agriculture. But when planning replaces the market and identification and adaptation supplement pecuniary compensation, matters are very different. No sharp line separates government from the private firm; the line becomes very indistinct and even imaginary. … Each organization … is an extension of the other. John Kenneth Galbraith The New Industrial State 4th edn, pp. 324–25

1. INTRODUCTION The study of economic and political activity would be easier were we able to distinguish clearly between the spheres of government and private activity. Public policy analysts strive to establish a sharp distinction between the concepts of public and private,1 while economists usually assume the existence of such a division. In political discourse the dichotomy is also very convenient, either to depict a state (public) threatening individual (private) freedoms, or supplying a communal solution to the excesses of private greed. Yet more than three decades ago John Kenneth Galbraith argued that this distinction was either very tenuous or simply non-existent. This was particularly the case in areas like defence procurement (Galbraith 1985, p. 322). Here, following Galbraith, the need to plan and manage the acquisition of complex systems, leads to complex decision processes in which the ‘technostructure’2 of the supplying corporations and their peers in the public agencies work together through committees and working groups defining needs and the procurement programmes to supply them. Furthermore, 264

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the armed services often lack the technical and organizational capabilities to develop the tasks for which they are responsible and tend to contract them out.3 Galbraith argues that, as bureaucrats at public agencies and the industrial technocracy respond to similar incentives and ambient pressures, the distinction between what is private and what is public becomes blurred (see also M. Pouchol’s contribution, Chapter 4 and that of L. Mampaey and Claude Serfati, Chapter 15). The collaboration between private industrial suppliers and their defence customers has been reiterated by other theoretical approaches. Defence has been seen as a ‘special kind of business’, in which industry has developed a pernicious ‘intimacy’ with its customers in government, inhibiting adequate cost control and therefore proper democratic accountability (Adams 1982). From a completely different perspective, a closer collaboration between customers in the defence agencies and their industrial suppliers has been seen as a central requirement to improve the management and delivery of defence research and production programmes. Collaboration and ‘partnership’, delivered through ‘Integrated Project Teams’, are key concepts in the British effort to implement a programme of defence procurement reform, through the so-called ‘Smart Procurement Initiative’ (Kemp 2000; Dowdy 2000, 2001). All these perspectives share a common trait: they argue or assume that a confluence of interests exists between the industrial and customer organizations involved in defence procurement. This chapter examines this proposition with reference to the management of intellectual property at the interface between government agencies and large defence suppliers. Because of the heightened perception of the importance of knowledge assets in company performance and the generation of welfare (Teece 2000), the generation and management of knowledge and its associated intellectual property rights (IPRs) has become a key element of the interorganizational collaboration that characterizes defence procurement. However, this chapter argues that collaboration does not necessarily imply a confluence of interests. By analysing a context in which the technostructure of large, mature defence firms interact closely with scientists, technicians and managers working in government agencies, we can explore in detail how such collaboration works in practice and how it can be affected by changes in policy.

2. THE TRADITIONAL ROLE OF GOVERNMENT RESEARCH ESTABLISHMENTS Government research establishments (GREs) can be defined as research organizations, other than higher education institutions, which derive most

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of their resources from either central or local government (OECD 1989). They are usually government owned and they carry out basic and applied research, technological development and engineering, and provide a very broad range of technical services in support of government functions. GREs help in the formulation and enforcement of regulations, the procurement of products and services necessary to discharge government functions, and the management of government tasks (like for instance the management of environmental risks). In carrying out these tasks, GREs have played an important role in the science and technology policies of most industrialized economies. Although their genesis can be traced back to the seventeenth century, it was not until after the Second World War that the government research sector entered a period of rapid expansion (OECD 1989). During the 1950s and 1960s large public laboratories were set up to pursue research in ‘big science’ like nuclear and space research, and soon the networks of GREs expanded to cover almost all fields of science and technology. At the time science, policy was informed by ‘linear’ models of innovation, which saw social welfare flowing down from technological development, which in turn was triggered by scientific research. Government support of research activities was expected to lead, almost naturally, to improvements in social welfare. Since the 1980s this model of public support has been broadly questioned. GREs are now facing important changes in their tasks, the way they are organized, and their relationship with the state. This change is partly explained by a new understanding of the relationships between science, technology and innovation that emphasizes the systemic nature of technological change (O’Doherty 2003). This systemic view emphasizes that technological innovation does not necessary follow scientific research, and that to generate socially valuable outcomes, organizations that have traditionally carried out publicly-funded basic research like universities and GREs need to become closer to the ‘context of application’ (Gibbons et al. 1994). One avenue to achieve this goal is to increase commercialization pressures on research organizations that have so far conducted their work sheltered from market structures. GREs, including those related to defence work, are undergoing major structural changes in almost all industrialized countries. In this context, GREs are being required to become more accountable and responsive to societal and market demands; in other words, to become more customer-oriented. ‘New public management’ principles emphasizing the application to public functions of management tools like performance indicators, output controls, increased competition and ‘marketization’4 are being applied to public science and technology establishments (Boden et al. 1998). GREs are being asked to be more open in their relationship with commercial actors so as to promote

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technology transfer, while at the same time adopting commercial practices, extending in some cases to full-fledged privatization. The defence sector has not been exempt from these trends. On the contrary, here additional forces for change and reform are at play. R&D in key areas of interest to defence, like electronics and information technology, is increasingly being funded from industrial sources and for applications targeted to commercial (civilian) markets. In response, defence laboratories need to open up and scout for technological innovations generated elsewhere in the economy. During the 1990s these changes were combined with a reduction in defence R&D budgets. In the United States, for instance, it was argued that, in order to cope with the fall in government funded defence R&D in new materials, it was necessary for government agencies and laboratories to develop ‘new partnerships’ with industry and universities (National Research Council 1996). Yet the change in the institutional nature of research establishments opens unexpected challenges. Although there is an efficiency argument behind the thrust for the commercialization and privatization of public research organizations, injecting a commercial outlook to GREs can make it more difficult for them to discharge some of their traditional obligations. For instance, an analysis of the process by which the operation of the UK National Physics Laboratory (NPL) was contracted out to a consortium of organizations including private firms, showed improved efficiency in NPL’s management and research activities. However, the commercialization of NPL caused difficulties in relation to some of the public tasks it was carrying out (Whelan 2000). NPL is the British authority in charge of managing the National Measurement System. National measurement authorities regularly exchange information freely, but with NPL operating as a commercial organization other authorities feared that NPL could exploit this information for its own benefit.5 The emergence of potential conflicts of interest is a common problem when GREs are transferred to private control. As in the case of NPL, issues emerge when information to which the laboratories have access to carry out their public tasks could also be used for commercial purposes. The case presented in this chapter provides a further example of a situation in which the control of information has created unexpected difficulties with the privatization of GREs. Our case study shows how the complex institutional implications of privatization can be overlooked at the outset of the reform process, and how the ensuing problems can lead to tensions and sharp discrepancies between private suppliers and their government customers. We focus on the privatization of the Defence Evaluation and Research Agency (DERA), the main government defence research establishment in Britain and one of the

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largest of its kind in the world.6 Based on documentary sources we first trace the process by which British defence research establishments were merged under a single organization, which was then progressively encouraged to become more commercial in its outlook and eventually privatized.7 We then analyse the difficulties that the privatization of DERA caused in relation to the ownership of data that it had collected from private firms while contributing to projects as a government agency. Our analysis draws on a programme of interviews and meetings with the major UK defence firms and officials at the UK Defence Procurement Agency. Between November 2003 and June 2004 we carried out 66 hours of structured interviews and meetings with 32 executives in defence-related firms and the Defence Procurement Agency. We interviewed IPR directors, programme directors, commercial executives and IT systems directors in three of the largest UK defence-related manufacturers,8 and the Defence Manufacturers Association. Given the sensitive nature of the issues, we carried out the interviews on a non-attributable basis. In this case, however, all companies interviewed coincided in their assessment of the IPR issues raised by the privatization of DERA,9 and only differed in the ways these problems were internally managed.

3. INSTITUTIONAL CHANGE: TOWARDS THE PRIVATIZATION OF UK DEFENCE RESEARCH ESTABLISHMENTS In the 1980s a group of government owned and operated research facilities provided research and technological services to the UK Ministry of Defence. In April 1991 four previously separate defence research establishments, the Royal Aircraft Establishment, Royal Armament Research and Development Establishment, Royal Signals and Radar Establishment and Admiralty Research Establishment were merged into the Defence Research Agency (DRA), an executive agency of the Ministry of Defence (MoD). DRA was established as an Executive Agency of the MoD with the aim of providing cost-effective expert scientific and technical services to the MoD and other Government departments. DRA was also encouraged to provide services to non-government customers. DRA was converted to ‘Trading Fund’ status in April 1993; this meant making the Agency responsible for recovering its costs, project by project, from its customers, 90 per cent of whom were specific budget holders in the MOD. Although DRA remained an agency of the UK Government it was becoming increasingly commercial in its practice. Before becoming a Trading Fund, DRA and its predecessors would negotiate a global annual budget to

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fund its activities; from 1993 every activity had to have a specific ‘customer’ within the MoD or elsewhere. One of the effects of this shift towards a more commercial basis was that the defence research establishments became more open to technology transfer and other commercial operations. In 1994 it was noted that the pressure on DRA to make a return on capital invested, coupled with defence cuts, provided an incentive to increase technology transfer efforts as part of a search for a wider customer base for its scientific and technological services (House of Lords Select Committee on Science and Technology 1994). Further, the move to Trading Fund status freed the Agency from Treasury constraints applied to conventional civil service organizations, such as gross running cost and manpower limits. DRA could now consider ways of using its facilities for commercial activities involving non-defence customers, where, in the past, it might have been constrained by such factors as a prohibition on taking on the necessary extra staff necessary to supply services to new customers. The Trading Fund status allowed DRA to pursue commercial work for other customers, provided the work would not conflict with its primary role as MoD advisor and ‘supported MOD’s longer term interests’ (Ministry of Defence 1999). Through these changes DRA had passed from being funded through government grants to obtaining their funds from contracts with its ‘customers’ in the defence agencies. Yet, as commercialization goals gained prominence the DRA became more reluctant to disclose innovations with commercial potential through public-access means like databases (Spinardi 1992). In its 1994 report on the DRA the House of Lords Select Committee on Science and Technology recommended that DRA should have greater commercial freedom enabling it to support British industry more widely, yet it stressed that it was more important for DRA to have good relations with British industry than generate high revenue from its IPRs (House of Lords Select Committee on Science and Technology 1994). This warning points to the tensions and concerns that the early ‘commercialization’ of the DRA had already generated in the private sector. We will come back to this issue in the following section. Continuing with the process of concentration and commercialization, the Defence Evaluation Research Agency (DERA) was created in 1995 from a merger between DRA and other government defence establishments.10 With a staff of 12 000, DERA became the biggest research organization of its kind in Europe and sought to generate more funds out of commercial activities with private customers. In early 1999 DERA became able, for the first time, to own equity in its own business ventures.11 Rapidly, DERA established several joint ventures with private companies in areas like speech recognition and de-mining. Finally on 2 July 2001 DERA was split into two different organizations:

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QinetiQ, a limited company to be fully privatized, and the Defence Science and Technology Laboratory (DSTL) which encompasses the facilities retained as a trading fund of the MoD. This separation followed a protracted process of consultation that led to the publication of two documents by the Ministry of Defence in May 1999 and April 2000 (Ministry of Defence 1999, 2000). The consultation documents proposed several approaches to DERA’s privatization with the double objective of setting up a private sector DERA accompanied by mechanisms that would ‘preserve its essential character’ and ‘protect MOD’s interests’ (Ministry of Defence 1999). The first consultation document proposed what amounted to an almost complete privatization of DERA. This proposal met with considerable opposition from a variety of fronts, including British defence firms, independent research organizations, the UK Parliament, trade unions, and the governments of foreign allies, particularly the USA. It was felt that full privatization would deprive the MoD of impartial advice and knowledge integration capabilities, and that the new private British organization would not be able to collaborate with foreign governments in tasks that involved the disclosure of highly sensitive information. In response to these concerns the UK Government developed a second proposal under which a core competence would be retained within MoD. This would include in-house capabilities to manage and integrate science and technology, research facilities in the most sensitive areas (like chemical and biological weapons), and the ability to collaborate with allied governments in joint research programmes. These ‘retained’ activities (in DSTL) employ about one quarter of DERA staff, and the rest have been transferred to QinetiQ. The objective is to place QinetiQ fully in private hands. In December 2002 one third of QinetiQ was sold to the US firm Carlyle Group. The rest of the shares are being floated on the stock market. This was presented as a ‘partnering agreement’ by which Carlyle would assist in the future development of the company. On announcing the sale the UK Defence Minister Lewis Moonie stated: QinetiQ will remain a British company based in the UK. MOD will retain a Special Share in the business to ensure that the nation’s defence and security interests continue to be protected. There will also be robust safeguards to prevent conflicts of interest and to ensure that the integrity of the Government’s procurement process is not compromised. (The Carlyle Group 2002)

The reassurances were needed. Not only was DERA being privatized, but the main private shareholder was going to be a global investment fund, and one with a reputation for secrecy and, for some, suspect activities (Briody 2003).

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4. THE UNEXPECTED CONSEQUENCES OF PRIVATIZATION Tensions Long before privatization, the commercialization of DERA activities was causing some difficulties. For instance about one third of DERA’s budget was used for extramural contracts; in this way DERA was an important sponsor of research in universities and firms. As the Agency became more commercial in its approach, these research organizations started to perceive their research ‘client’ as a competitor and to question its practices and motives. There was also potential for the emergence of conflicts of interest. For instance, as client–supplier relationships become increasingly long-term and technology transfer practices customarily stress the need to establish longterm relationships between the actors at both ends of the ‘transfer’ it would be natural for DERA to establish long-term arrangements with some of its ‘partners’ in industry. Recognizing this trend, MoD officials became concerned that systematic long-term strategic arrangements between DERA and industry could affect DERA’s impartiality when for instance assessing its partners on behalf of the MoD for programme bids and programme evaluations (Molas-Gallart and Sinclair 1999).12 In general, it is in the provision of advice and evaluation services to defence customers that the commercial interests of a privatized agency may pose problems and are bound to raise suspicion. The Ninth Report of the House of Commons Select Committee on Defence stated: To remain an intelligent customer and decision-maker, the MoD needs to ensure that it has access to a foundation of knowledge covering a broad spectrum of technologies. This vital foundation layer must be impartial and independent of vested commercial interests. Impartiality and independence may be of lesser importance when constructing the towers of technological knowledge and expertise that the MoD’s new strategy proposes, but this involves a calculated risk. This risk will be compounded if that knowledge and expertise is being re-interpreted for the Department by a commercially motivated DERA with its own shareholder-driven agenda. The Department’s intelligent customer capability will need to be sufficiently strong to sift out any bias in the expert advice produced by vested commercial interests, be they those of industry or a commercialized DERA. (House of Commons Select Committee on Defence 1999)

It is in relation to this issue that a major problem in the privatization process emerged. This is discussed in the following section. Dealing with IPRs In order to carry out its work, DERA and the research agencies and

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establishments that preceded them had access to project information from the firms and companies working or wishing to work in UK defence contracts. DERA’s role was to assess the technical data for the defence customer and, in this way, to provide an independent ‘intelligent customer ability’ for the UK government. While DERA remained a government establishment, the firms saw providing technical information to DERA as tantamount to providing it to the government clients. Although in many cases, DERA was not allowed formally to keep the information once it had completed its task, firms did not actively request that the information be returned or destroyed. All this changed when DERA was turned into a company with the intention of fully privatizing it. The ownership of the data repositories that DERA had built over the years became then a matter of contention. It was one thing for a government agency to keep technical data belonging to firms for the purpose of advising other government agencies and departments. It was another matter for a private company who could use this information to compete with their legitimate owner or transfer it to third parties. Some of the technical data could be retained by the government customer, but it would have to be moved to the departments that remained under government control; i.e. the DSTL. Private firms required that all other technical data and information be returned to their private owners. The newly created QinetiQ had to respond to these requests; yet the information was dispersed across a very large number of sites, that had until recently operated independently of each other and used different systems for data archiving. QinetiQ did not have a central technical information archive and because filing and document coding systems varied, it could not even ascertain the IPR conditions and ownership attached to technical documents it physically controlled. Some firms, however, experienced similar problems. In companies without a strong central data management system, there was no complete traceability on all the documents supplied to DERA or its predecessors, both as deliverables in specific projects or as part of project proposals and bids. When, upon the insistence of private firms, QinetiQ started to return documents to the private firms several serious problems emerged: 1.

It turned out that the original reference numbers of the documents had often been erased and substituted by DERA and its predecessors internal numbering systems. These had no meaning for the firms, as they did not correspond to the numbering systems they used. The firms had difficulties in matching the documents sent from QinetiQ with their own records and, therefore, they could not easily check whether all documents had been returned.

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3.

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Disentangling the IPRs in software has been particularly troublesome. Often, the software supplied by firms had been adapted many times over for use in other projects.13 As a result of inadequate tracking of the changes it was not possible to identify precisely which portion of the software belonged to the firms, or even whether it was their software at all. More troubling for the firms was the discovery that DERA had labelled as ‘for other contracts’ and ‘for future use’ data that the firms thought they had submitted strictly for MoD purposes in relation to a specific contract.

In effect QinetiQ transferred to the companies the responsibility to identify the data sets to be returned, a task that proved difficult and very timeconsuming. Large defence contractors had to set up teams to inspect the documents DERA was delivering and linking them with their own technical repositories to be able to ascertain whether there were sets of data missing. In the majority of cases there were. In other words, defence-related firms had to make a substantial investment to track information and data that legally belonged to them.14 Firms are also concerned that the MoD and its procurement agency may make available to QinetiQ technical data belonging to the companies. When DERA existed as a government agency providing services to the MoD, this was a natural occurrence: to assess the proposals or contract deliverables DERA and its predecessors needed to access a variety of proprietary technical data and reports. Yet, once QinetiQ is set up as a commercial private company, which may occasionally compete for business with other defence companies, their potential competitors have become uneasy about the MoD using QinetiQ as a test and evaluation centre. This grants QinetiQ access to technical information or makes it party to technical discussions taking place, for instance, within integrated project teams. This is a privileged position affording QinetiQ a ‘window’ into the technical offerings and data of defence suppliers; as QinetiQ now operates as a commercial firm, we are encountering here another instance of the potential conflicts of interest that privatized GREs face by virtue of their privileged access to information. The outcome of this situation has been a substantial mistrust and suspicion among defence firms about the management of IP within government and government agencies. Just as the MoD is introducing new approaches to procurement and project management emphasizing the need for partnership and the creation of collaborative environments, firms have grown even more dubious about whether government can be trusted when it comes to the ways in which it deals with IP. In practice, all our interviewees in UK defence firms and organizations argued that firms were becoming more defensive in the

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ways in which they treat and protect their IP when dealing with defence customers.

5. CONCLUSIONS We can distinguish three main areas where conclusions can be drawn from the above discussion. First, our research has shown evidence that the problems surrounding the management of IP during the process of privatization of DERA have led to increased distrust between supplying firms and their defence customers. Therefore, the privatization of a GRE has affected the relationship between private (defence firms) and public (the Defence Procurement Agency) organizations that were not directly involved in the process. Privatization has implied a change in the structure of the defence market with the emergence of new corporate competitors that base their business model on their knowledge capital and their research facilities. In this framework, firms that were already paying growing attention to their IP as a corporate asset have found themselves entangled in an argument revolving around IP issues. Given this situation it is likely that they will become increasingly aggressive in their IP protection policy, and that IP issues will become more prominent in contractual negotiations. Second, we have provided an additional example of the potential conflicts of interest that the privatization of GREs can generate. Here, our research confirms previous work carried out in other areas of activity and taking as their object other cases of GRE privatization. What is common to these cases, including ours, is that the conflicts of interest emerge in relation to the access to information that the continued involvement in government assessment tasks affords to the privatized laboratories. In other words, it is again the access to information and data that is at the root of the conflict. This situation has an important policy corollary; namely, the need for GRE privatization initiatives to develop data management guidelines and structures to ensure fairness of use regarding private data to which the research establishment may have had or is likely to have access. Finally, the interviewees had a shared understanding of where the boundaries between the private and public sectors laid. DERA was a public organization whose main objective was to discharge its obligations towards the Ministry of Defence, and which had to follow the rules governing the activities of government agencies. When part of DERA was turned into a firm and partly privatized (with the objective to proceed towards a full privatization) the rules of the game were altered. Defence firms who had delivered reports and technical data to DERA in the past became concerned about the potential use that the newly created QinetiQ could make of this

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information. As a commercial organization QinetiQ was to be oriented primarily to the creation of value for its shareholders. Therefore, although our interviewees were part of what Galbraith would define as a ‘technostructure’, they did not see the boundaries between public and private as difficult to define. On the contrary, the interviewees saw the conflicts that emerged as a clear confrontation between the private firms and their public sector clients. Despite belonging to a relatively small ‘technostructure’ involving IP lawyers and commercial executives from a few large defence firms and contract officials and IPR experts, the community did not always share the same set of objectives. The problems we observed in our interviews could not be explained in the absence of a clear distinction between public and private sectors. While DERA and its predecessors were still public agencies, private firms were not particularly concerned about the use that DERA could make of the IP to which it had access. To this extent, this situation could respond to Galbraith’s depiction of a situation in which each organization had become ‘an extension of each other’. This is not to mean however that the distinction between public and private actors had been blurred. Once the privatization process was set in motion, difficulties rapidly emerged as the data and information that was in the hands of a public agency were to be transferred, de facto, to a private firm. The distinction between the private and the public sector remains sharp, despite the fact that, increasingly, private organizations are taking over the tasks that were until recently reserved for public agencies.

NOTES 1. 2. 3.

4. 5. 6. 7.

See for instance the classic introductory book to public policy by Wayne Parsons (1995, pp. 1–16). Galbraith defines the technostructure as the group within a firm that ‘embraces all who bring specialized knowledge, talent or experience to group decision-making’ (Galbraith 1985, p. 74). Galbraith mentions the planning of logistics systems, the planning and development of base facilities and ‘even on occasion the definition of the missions of a particular service or one of its branches’ as examples of tasks that have been contracted out to external corporations (Galbraith 1985). The subject of ‘marketization’ of public services is dealt with by Blandine Laperche and Dimitri Uzunidis, Chapter 16. The new status also triggered tensions with its ‘sister’ US organization in the measurement area: the US National Institutes of Standards and Technology (NIST). NIST competes for business with other US standards institutes but is not allowed to compete with ‘industry’. The 1995 reorganization that created DERA by bringing together previously dispersed defence research establishments resulted in a large entity of 12 000 staff. DERA’s main function remained that of supporting the needs of the Ministry of Defence. A more detailed analysis of this process accompanied by a comparative discussion of similar changes in Europe and the US can be found in (Molas-Gallart 2001). DERA and its predecessors often acted as an evaluator and technical advisor to government in defence research and manufacturing programmes.

276 8. 9. 10. 11.

12.

13. 14. 15.

Charting the future: innovation, state power and the market system BAe Systems, Rolls Royce, Smiths Industries, and retired executives with experience throughout the UK industry. The differences across firms were small and related to the ways in which they had used their internal IPR management systems to deal with the administration of the ensuing problems. The Defence Test and Evaluation Organisation, the Chemical and Biological Defence Establishment and the Centre for Defence Analysis. This mechanism allowed DERA to obtain higher benefits from the commercialization of its technology through its direct relationship in joint ventures, and was seen as a way to help in encouraging the development of a more entrepreneurial and technology transfer oriented culture among its scientific and technical staff (Arthur D. Little 2000). The separation of DERA into a Government laboratory (DSTL) and a private company (QinetiQ) may address this problem if a division of work consolidates. Collaborative R&D work with industry could be carried out by the private firm while the responsibility to provide ‘intelligent customer’ capabilities to the defence customer would fall to the Government laboratory. Adaptation of software is not unusual in collaborative projects. Some firms estimated that they could not invest the necessary resources to carry out a comprehensive ‘search and match’ of technical documents but reserved the right to take action whenever they thought that their rights might have been infringed. This is not to mean that the relationship has broken down. The small interdependent network of large defence suppliers, their customers in the defence agencies, and the public and private defence research laboratories has to continue to work together and share data. Firms continue to develop, for instance, shared digital networks with the participation of QinetiQ. It remains to be seen however whether such networks will be used to their full potential technicality, or be used only for sharing information that is not considered to be commercially sensitive.

REFERENCES Adams, Gordon (1982), The Politics of Defense Contracting. The Iron Triangle, New Brunswick, NJ and London: Transaction Publishers for the Council on Economic Priorities. Braun, Michael et al. (2000), ‘Value from Good Practice in Research: Achieving Innovation with LPRIs’, Transfer from Large Public Research Institutions (LPRIs), Brussels and Luxembourg: European Commission. Brussels and Luxembourg: ECSC-EC-EAEC. Boden, Rebecca, Philip Gummett, Deborah Cox and Kate Barker (1998) ‘Men in white coats. … Men in grey suits: New Public Management and the funding of scientific research in the UK’, Journal of Auditing, Accounting and Accountability, 11 (3), 267–91. Briody, Dan (2003), The Iron Triangle. Inside the Secret World of the Carlyle Group, Hoboken, NJ: John Wiley & Sons. Dowdy, John (2000), ‘Transforming defence procurement in the UK: addressing the root causes of under-performance’, Defence Procurement Analysis (Autumn), 10–15. Dowdy, John (2001), ‘Scoring smart procurement’, Defence Procurement Analysis (Summer), 22–5. Galbraith, John Kenneth (1985), The New Industrial State, 4th edn, Boston, MA: Houghton Mifflin. Gibbons, Michael, Camille Limoges, Helga Nowotny, Simon Schwartzman, Peter Scott and Martin Trow (1994), The New Production of Knowledge, London: Sage.

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House of Commons Select Committee on Defence (1999), Ninth Report, London: HMSO. House of Lords Select Committee on Science and Technology (1994), Defence Research Agency, London: HMSO. Kemp, Damian (2000), ‘Breaking the bank’, Jane’s Defence Weekly, 26 January, 24–8. Ministry of Defence (1999), ‘A public private partnership (PPP) for the Defence Evaluation and Research Agency (DERA): United Kingdon Ministry of Defence Consultation Document’. Ministry of Defence (2000), DERA PPP consultation document, United Kingdom Ministry of Defence. Molas-Gallart, J. (2001), ‘Government defence research establishments: the uncertain outcome of institutional change’, Defence and Peace Economics, 12, 417–37. Molas-Gallart, J. and T. Sinclair (1999), ‘From technology generation to technology transfer: the concept and reality of the dual-use technology centres’, Technovation, 11, 661–71. National Research Council (1996), Driving Innovation Through Materials Research. Proceedings of the 1996 Solid States Sciences Committee Forum, Washington, DC: National Academy Press. O’Doherty, D. and E. Arnold (2003), ‘Understanding innovation: the need for a systemic approach’, IPTS Report, 71, 29–36. OECD (1989), The Changing Role of Government Research Laboratories, Paris: Organisation for Economic Co-operation and Development. Parsons, Wayne (1995), Public Policy: an Introduction to the Theory and Practice of Policy Analysis, Aldershot, UK and Brookfield, USA: Edward Elgar. Spinardi, Graham (1992), ‘Defence technology enterprises’, Science and Public Policy, 19 (4), 198–206. Teece, David J. (2000), Managing Intellectual Capital, Oxford: Oxford University Press. The Carlyle Group (2004), Sale of a Stake in QinetiQ PLC to The Carlyle Group 2002, accessed 2 April 2004 at www.thecarlylegroup.com/eng/news/15-news704.html/. Whelan, R.C. (2000), ‘Management of scientific institutions NPL 1995–98: the transition from agency to government-owned contractor operated (GOCO)’, R&D Management, 30 (4), 313-22.

15. Galbraith and institutionalist analysis: an assessment based on the US military–industrial system transformations in the 1990s Luc Mampaey and Claude Serfati 1. INTRODUCTION John Kenneth Galbraith’s interest in defence issues has remained remarkably constant throughout his life, and covers three different realms. As a decisive figure in American economic policy, he was in charge of the operational control of prices during the Second World War, and in the closing months of the Second World War, as a head of the US Strategic Bombing Survey, he developed a critique of the air campaign against Germany. This critique was based on two economic principles, the validity of which was demonstrated in Vietnam, Kosovo, and twice in recent years in Iraq (Galbraith 2004). As a concerned citizen, he was one of the founding trustees of Economists Against the Arms Race (ECAAR),1 with the goal of contributing to drastic cuts in military budgets. As an academic, he studied the Department of Defense ‘as the most highly developed planning system in the planning system’ (1979, p. 321). This chapter will focus on this last aspect of Galbraith’s activity. It deals with the contribution of John Kenneth Galbraith’s analysis to the understanding of the institutional shaping and economic role of the US Military–Industrial System (MIS), traditionally called the ‘Complex’ since Eisenhower’s 1961 farewell speech. The structure of the chapter is as follows. Galbraithian institutionalism makes a valuable contribution to an understanding of the growing role of managers in relation to technological development, and the close relation between the public and private sectors, in particular the powerful tendency of the Complex to self-enlargement. Other institutionalists, at the same time, shed a different light on the Complex. While C.W. Mills emphasized the 278

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political consequences of the increasing centralization of the means of oppression and exploitation, and of violence and destruction, Melman focused in a critical way on the macro- and microeconomic effects of military spending in the USA. These different streams of institutionalism are addressed in section 2. The ascendancy of institutional investors (pension, mutual, and hedge funds) in defence prime contractors, during the 1990s, along with the role of the ‘financial community’ (analysts, consultancy, etc.) in the shaping of consolidation in the defence industry, is documented in section 3. The changes in the corporate governance of defence companies were part of a broader move in all major corporations towards shareholder value maximization. They, along with other factors (new post-cold war geopolitical setting, new relations between military and civilian technologies, etc.) contributed to sweeping transformations in the Complex, indeed its re-creation as a Military and Security Industrial System which has significantly accelerated since 11 September 2001. This leads us to discuss the actuality of Galbraith’s technostructure theory in section 4. As Galbraith goes on claiming that, in the new century, the role of the stockholders has become ceremonial in the context of the supremacy of corporate bureaucracy, our findings are that, far from the euthanasia of stockholder power anticipated by Galbraith (1979, p. 409), what has occurred in recent years is a more complex and intertwined relationship between shareholders and top managers. The role of managers of major corporations has remained central, but their mode of management has little, if anything, to do with what is called managerialism. Rather, it is in keeping with financial interests. On these issues, Veblen’s analysis of finance, developed at the turn of the twentieth century, provides us with insights that are useful in understanding the transformations of contemporary capitalism. The end of ‘absenteeism’ and the massive activism of (institutional) shareholders brought about a new institutional configuration in major corporations, based upon an alliance between institutional shareholders and top executives (see on this subject the points of view of P. Petit, Chapter 2, B. Laperche, Chapter 8 and M. Dietrich and A. Sharma, Chapter 9). As the latter thrived at the head of mega-corporations, created through mergers and acquisitions, the strategies they implemented are at odds with what managerialism used to be, as it was described in the postwar decades. We conclude that the widening of the economic, social and political base of the MIS during the 1990s was followed, from 2001 onwards by the possibility that US ‘markets’ may be ‘internalizing’ within their behaviour the inevitability of new wars and military operations. They may, in fact, be forging a sort of ‘unlimited warfare’ convention in which the discretionary use of armed force by the United States becomes their new horizon.

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2. GALBRAITH AND THE INSTITUTIONALIST ANALYSIS OF THE COMPLEX Galbraith’s Analysis of the Complex The effects of arms production and public military expenditure on the economy are an issue which many economists have preferred to keep at arm’s length. The highly specific nature of arms production – a weapon is neither a capital good nor a consumer good – and the fact that decisions on public spending for military purposes have been generally perceived as responding primarily to extra-economic objectives, have always made it difficult to fit armaments into the great currents of economic thought. The neoclassical and Keynesian approaches essentially regard public spending, whether civil or military, as an undifferentiated whole. The basic hypotheses of the neoclassical model – rational behaviour by individuals (producers and consumers), free and available information, the Pareto optimum – turn out to be completely unsuitable for an efficient account of the role of military spending. Various ‘well-meaning adjustments’ to the model were therefore the price to be paid when certain neoclassical writers attempted to demonstrate that military spending contributes to the achievement of the Pareto optimum, to portray such spending as an endogenous growth factor or to justify a supposedly ‘optimal’ growth rate for public spending, but still without distinguishing between military and civilian. The legacy of this is a framework that is fragile in relation to the neoclassical paradigms and is so abstract – indeed metaphysical, according to Ron Smith (1977) – that it can still serve as a ‘scientifically founded’ justification for the militarization of economies. The contributions of the Keynesian and post-Keynesian models are indisputably richer, but still inadequate: ‘they all consider that military spending stimulates effective demand and economic growth either by generating new production capacity (Hansen) or by enabling the utilisation of potentially excess production capacities (Kalecki)’. But they do not explain the implementation of an industrial process, the utilization of industrial resources and manpower for the production of armaments (Serfati 1995, p. 28). For most theorists of the accumulation of capital, the great majority of whom refer to Marx, military spending, along with its political role, is a ‘functional’ instrument serving to resolve the problem of over-accumulation by ‘absorbing surplus’. However, a limited number of capital accumulation theorists hold a few more aces, inasmuch as they introduce public spending into macroeconomic reproduction while taking account of the destination of such spending by dividing it into three categories: the collective means of

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production, the valorization of manpower and the expenditure linked to the political functions of the state, including military spending, considered necessary but external to the process of capital reproduction. This analysis offers some similarities with the ‘depletion’ or ‘drain’ approach proposed by Melman and Dumas. The inadequacies of these major currents are the yardstick against which we can measure the originality of John Kenneth Galbraith’s contributions. The military–industrial system, and its central role in the neoclassical economists’ defence of the dogma of production and growth, is a focal point of Galbraith’s work right from the start. Consistently, he sets out to describe armaments production as the furthest-developed and most efficient example of the ‘planning system’, a term which he finally resolves, in his third and last edition of The New Industrial State, to substitute for ‘industrial system’ as his designation for the economy of the big industrial production groups, as opposed to that of the small enterprises that make up the ‘market system’. Galbraith was often amazed that something as important as power could be neglected by economic research. He stressed that ‘in eliding power – in making economics a non political subject, – neoclassical theory destroys the relation of economics to the real world’.2 In The New Industrial State, he argues that ‘in the last half century there has been a steady accumulation of evidence on the shift of power from owners to managers within the modern corporation’ (1979, p. 52). He puts forward a double explanation for this shift. First, ‘Power goes to the factor which is the hardest to obtain or hardest to replace. In precise language, it adheres to the one that has the greatest inelasticity of supply at the margin’ (1979, p. 58). Thus, the power conferred by capital decreases when capital becomes overabundant or easily replaceable. And indeed, while the planning system does use very large amounts of capital, Galbraith emphasizes that it obtains them with great ease – in peacetime, at least. Second, there is another agent of production which proves more and more difficult to increase or replace – the one that can meet the demands of technology and planning, the one constituted by ‘the association of men of diverse technical knowledge, experience or other talent which modern industrial technology and planning require’ (1979, p. 99). This organization, this organized competence which Galbraith comes to name the ‘technostructure’, and which is headed by the managers, is the one that now holds the power in the enterprise and in society. To Galbraith, this reversal of power relationships seemed inevitable. Within the constellation that would, he argued, lead the planning system, by developing, to merge with the state, it had not escaped him that the situation of the stockholder – ‘a passive and functionless figure, remarkable only in his capacity to share, without effort or even without appreciable risk, in the gains from the growth by which the technostructure measures its success’ (1979,

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p. 409) – was uncomfortable and even anomalous. ‘The euthanasia of stockholder power’ (1979, p. 409) seemed to Galbraith to be a natural development, easily explained by ‘the declining importance of capital in relation to trained manpower and the increasing complexity of decision-making in the modern corporation’ (1979, p. 417). Mills’ and Melman’s Analysis of the Complex Galbraith’s analysis was original, not only compared with the mainstream in economics or the Marxists, but also in comparison with other institutionalists who looked at the influence of the Complex in the US economy and society. Here, two path-breaking contributors should be mentioned. The first is C. Wright Mills who, in 1956, perceived a three-part system of elites in the USA. The power elites are ‘those political, economic, and military circles which in an intricate set of overlapping cliques share decisions having at least national consequences’ (1956, p. 19). As in the history of the West, the elite power has been limited by ‘the means of power and violence and organization that prevail in a given society … we also learn that there is a fairly straight line running upward through the history of the West; that the means of oppression and exploitation, of violence and destruction, as well as the means of production and reconstruction, have been progressively enlarged and increasingly centralized’ (1956, p. 23). This ‘straight line’ led him to pinpoint the ‘military ascendancy’ and the downfall of diplomacy, and the considerable autonomy enjoyed by the military. This situation has led to a seemingly permanent war economy in which military men and policies have increasingly penetrated the corporate economy (1956, p. 215). Whereas Mills argued that ‘American capitalism is now a part of military capitalism’ (1956, p. 276), a few years later, Galbraith was to some extent reversing the relationship by analysing the Complex as a part of the planning system dominated by big corporations. Mills, perhaps because of his background as a sociologist, does not address the industrial and technological impact of the permanent war economy. This is precisely the issue addressed by S. Melman, another outstanding figure in the institutional vein. Pentagon Capitalism (1970), as the title indicates, analyses the tremendous consequences brought about by the postwar emergence of the state-management. Melman refers to Mills, only to conclude that his analysis was appropriate to a period of transition whose closing was marked by the famous farewell address of President Eisenhower. In the course of the 1960s, a fundamental change was brought about in the governing institutions of the United States. The Secretary of Defense controls the nation’s largest network of industrial enterprises (1970, p. 1). Thus, while Melman welcomes the contribution of the Galbraithian notion of ‘technostructure’, he still observes the absence of any specification of the

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unique role of the military establishment and its technical and administrative managers. Moreover, he is considerably more critical than Galbraith of the role of these elites and of military spending on a technologically highly skilled workforce. His landmark theory of ‘depletion’ (or drain) is at odds with the macroeconomic Keynesian-like effect of military spending, as well as with the role of military R&D as a technological developer, as assumed in the Galbraithian analytical framework. Profits Without Production (1983) illuminates to what extent ‘Managerial success [went hand in hand] with production decay’ (1983, p. xi). The reason is that ‘managerialism’, defined as the main method of decision-making in industry, can operate in various organizational frameworks: according to whether managers are oriented primarily to profit or primarily to production, and to short- or long-term profits (1983, p. 15). Melman’s analysis of military spending is different from what Veblen called ‘waste’, a process brought about by conspicuous consumption (Veblen, 1899, in particular pp. 60–2). Two differences may be noted: Melman observes that ‘Veblen never viewed a militarized state capitalism with its unprecedented consumption of human talent, fuel, machinery, and raw materials of every kind’ (1997, p. 328). Further, as the slowdown in productivity is explained by Veblen as an outcome of a designed reduction of output (‘sabotage’) by absentee owners eager to keep up their profits, it results for Melman from short-term and power-oriented managerial practices, which may finally result in less profit (1983, p. 71).

3. INDUSTRIAL RESTRUCTURING UNDER THE THUMB OF FINANCE Finance Moves into Armaments Changes in the ownership of big companies are one of the major characteristics of the past 25 years. Investment funds (mutual and pension funds) have become the main shareholders in industrial production groups (Froud et al. 2000). Institutional shareholders were very active in the restructuring implemented by the US armaments industry during the 1990s. Today, they have a massive presence among shareholders of the prime contractor groups. The last column of Table 15.1 shows the shareholder structure of the 15 defence groups that make up the Amex Defense Index (DFI).3 It should be noted that the institutional investors control a considerably larger proportion of the capital within the DFI than in the capital goods industry or, indeed, the whole of the firms on the S&P500 index. On average, the institutional investors hold a

Table 15.1

The 15 US armaments groups that make up the Amex DFI index Total revenue (US$ million)

284

Amex Defense Index (DFI) Boeing Co. Lockheed Martin Corporation General Dynamics Corporation Northrop Grumman Corporation Raytheon Co. L-3 Communications Hldgs Inc. Rockwell Collins Inc. Alliant Techsystems Inc. FLIR Systems Inc. Engineered Support Systems Inc. The Titan Corporation United Industrial Corporation Drs Technologies Inc. Stewart & Stevenson Svcs Inc. EDO Corporation DFI (sum or average)

Total

Defence

Percentage Defence

50 485 31824 16617 26206 18109 5062 2542 2366 312 573 1775 311 1001 1176 461

27352 30097 12782 18704 16904 4369 1270 2102 234 555 1098 249 940 446 415

54.18 94.57 76.92 71.37 93.35 86.32 49.96 88.84 75.00 96.86 61.83 80.06 93.90 37.96 90.08

158819

117518

Percentage Market Net income Employees Percentage after taxes gain/share capitalization of shares from 10 March (US$ million) owned by (US$ million) 2000 to 11 institutional January 2005 investors

718 1053 997 808 535 278 236 120 42 28 –13 4 32 11 14

157000 130000 67600 122600 78000 38700 14500 13100 480 2412 9900 1600 3750 3600 1931

69.43 246.49 178.17 161.63 120.22 211.11 70.33 303.52 1118.74 1248.20 –54.25 318.20 317.84 133.18 360.70

42240 24246 19991 18834 16460 7947 6700 2412 2054 1507 1326 1176 1047 561 560

4861

645 173

182.23

147061

S&P 500

65.30 95.00 80.70 81.40 74.80 82.30 58.50 85.00 95.00 77.90 71.60 71.70 89.00 81.30 76.40 79.06 65.52

Note: Revenue, income and employment are 2003 figures, gain/share, market capitalization, and ownership are as at 11 January 2005. Firms are ranked according to their market capitalization. Sources: Prepared by the authors, based on Defense News, Wall Street Journal and Reuters.

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65.52 per cent share in the S&P500 firms, but an average of 79.06 per cent in the 15 firms making up the DFI. In Lockheed Martin, the world’s leading armaments producer, the institutional investors’ holding is all of 95 per cent. Vertical Concentration and Relational Power The continuous decline in military spending from 1986 onwards (up to 1998) convinced the Department of Defense (DoD) that it could no longer guarantee contracts to as a high a number of prime contractors as in the ‘fat years’ of the Reagan administration. So in January 1993, DoD Deputy Secretary William J. Perry called together the leaders of the main groups and asked them to merge their activities. The result was particularly spectacular, as Figure 15.1 shows. The DoD left the concentration process up to the shareholders – at least, it did so until, in 1998, the Department of Justice issued an unfavourable opinion on Lockheed Martin’s plans to acquire Northrop Grumman for US$8.3 billion. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 General Dynamics (GD)

General Dynamics Gulfstream Aerospace Veridian GE Aerospace Martin Marietta Lockheed Loral

cancelled

Lockheed Martin (LMT)

Titan Datron Systems LTV Grumman Northrop Grumman (NOC)

Northrop Westinghouse Litton Newport News Building TRW

Boeing (BA)

Boeing Rockwell McDonnell Douglas

(Hughes Space)

Magnavox Hughes E-Systems

(Hughes Electronics)

Raytheon

Raytheon (RTN)

Texas Instruments 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Adapted and supplemented by the authors, on the basis of The Economist, 20 July 2002.

Figure 15.1

Concentrations in the US armaments industry, 1990–2003

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Since 2001, mergers between major contractors have accelerated again, with Northrop Grumman’s acquisition of Newport News Building and TRW, in 2002, at respectively $2.6 billion and $7.8 billion, and more recently the acquisition of Veridian by General Dynamics (at $1.2 billion). Lockheed Martin’s attempt to buy Titan for $1.8 billion, announced in September 2003, failed even though the competition authorities raised no objections. It was mainly a persistent disagreement over the financial terms of the buy-out, which finally led Lockheed Martin to withdraw its offer at the end of June 2004. But analysts expect Titan to be the target of another bid within the next 12 to 24 months.4 The institutions that make up finance capital have thus, with the consent of the DoD, been active agents of the concentration process within the armaments industry. The institutional investors have been assisted by firms of analysts and advisers, the investment banks and the ‘opinion makers’ on the financial markets. The objective was to maximize the value that could be added to stocks by ceding/acquiring assets. The ‘financial community’ worked up an enthusiasm for this ‘industrial meccano’, with the help of top group executives lured by major financial incentives (stock options, amongst other things). Advisers and executives advocated strengthening the vertical integration of the defence groups, asserting that this would lead to greater industrial and technological efficiency. At the beginning of the 1990s, arms production saw many moves towards disengagement from activities considered non-core. At the same time, many groups involved mainly in civilian production ceded their defence assets. These were acquired mainly by the big arms system integrating groups, who are the main suppliers to the DoD. Thus, the concentration process within the US armaments industry was vertical, since these groups, which design and assemble armaments systems, bought subsystems and complex components manufacturers. Once again, it may be seen that technological trajectories are largely determined by institutional factors and the action of social groups (Serfati 2001). And indeed, the academic literature has not failed to emphasize, in contradiction to this vertical integration, that since the 1990s, technologies designed and produced for civil purposes have frequently been applied to the production of components and subsystems integrated into the new generations of armaments systems.5 ‘Dual-use technologies’ (meaning those used for both military and civil production) became a common topic during the 1990s. Some even expressed the belief that these technologies, together with other factors (for example, reforms in procurement) would lead to the gradual dissolution of the military–industrial systems. In fact, the priority placed on vertical concentration by the contractor groups reflected, rather more prosaically, a wish to strengthen what industrial

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economics calls ‘market power’. Control over the whole of the technological chain needed for production of armaments systems strengthens the barriers to the entry of possible competitors. It makes it very difficult for groups with capability in system integration to achieve the status of top-rank contractors. Thus, it places civil firms, which are producing often complex subsystems, in a position of dependence vis-à-vis their defence group clients. The top-ranking contractor groups’ strengthening of their ‘relationship power’ (a more accurate term than ‘market power’ in this particular industry) was, together with shareholder value and the fees paid to consultants, the main driving force of this ‘industrial meccano’. ‘Re-enclavement’ and Industrial Overcapacity Finally, far from achieving the goal of the discreteness of armaments production, the restructuring of the 1990s led to a ‘re-enclavement’ of the US armaments industry (Markusen 1998) and led the contractor groups into a very strong dependence on contracts with the Pentagon. The share of the military in their turnover reached considerable proportions for the foremost US armaments groups (Table 15.1). Promises that the restructuring would bring improvements in industrial performance proved hollow. Even today, the top-ranking contractor groups still have major production overcapacities and, as regards reducing costs to the customer (the Pentagon), their results are far removed from the objectives that served to ‘legitimize’ these mergers (Gholz and Sapolsky 1999). Thus, it may be observed that the analysts and management advisers have shown a level of competence rivalled only by the insight that led them to revere Enron as a model of excellence. The restructurings of the armaments groups have, in fact, further worsened their bureaucratic behaviour, while benchmarking studies show they are lagging seriously behind in the industrial efficiency stakes. At the end of 1996, for fear that these groups might gain excessive power, the DoD set up a working group to look into the issues and consequences surrounding this vertical concentration, which ran counter to established theory. Nonetheless, an examination of the mergers/acquisitions shows that, in marked contrast to their pursuit of anti-trust challenges in a number of high tech and other cases, the US anti-trust authorities have been remarkably handsoff in their treatment of mergers and consolidation in the defence industry (Crandall 2002). Confidence in industrial ‘rationality’ was summed up thus by the Deputy Under-Secretary in charge of industrial policy, during one of his testimonies to the Armed Services Committee of the House of Representatives: ‘we believe that the companies are sufficiently motivated by their interest in defence and the commitment of their shareholders to support

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innovation and costs reduction without excessive governmental intervention’ (Ciardello 2002). However, in a recent assessment study of the rotorcraft industrial base, the Pentagon worries that industry profitability may be at the expense of innovation. Pointing out the negative consequences of good financial health, the Pentagon believes that ‘the relative consistency and profitability of this business base has not encouraged structural changes or major technological breakthroughs’.6 Another main Pentagon concern is that the remarkable consolidation already illustrated in Figure 15.1 left it with few domestic choices since the new groups are, de facto, in a monopoly position within major segments (GAO 1998). Nonetheless, despite known inefficiencies, the difficulties in the innovation process and the Pentagon’s worries, the rapid expansion of the American MIS is continuing. The new MIS configuration has delighted the ‘markets’, and the institutional shareholders (pension funds, mutual funds), always on the lookout for innovations if they are the kind that might push shares up and prop up shareholder value, backed the industrial restructuring recommendations made by the ‘financial community’ of analysts, consultants and CEOs. Solid ‘Fundamentals’ and Self-fulfilling Prophecies The attraction of the ‘markets’ to the armaments industry did not start with the ‘windfall effects’ produced by 9/11. Between 1990 and 1997, the time of the major restructurings, the share value of the 20 top defence companies almost quadrupled, whereas the industrial index S&P 500 merely doubled (Delétang 1998). And yet, during this period, the cutbacks in military budgets that had begun in 1986 continued. Thus, neither the alleged ‘peace dividends’ reaped from this reduction in military spending and the demise of the USSR nor the presence (from 1992 onwards) of a Democratic administration, which is generally more prudent about military expenditure, dampened the optimism of the ‘markets’ about the restructurings then underway. This is scarcely surprising, as on the one hand, the ‘industrial logic’ of the concentrations was to reinforce the relational power of the main contractor groups and thus to increase the volume of orders for the big contractor groups, and on the other hand, the groups’ shareholders and CEOs were anticipating an increase in spending on R&D and the production of weapons systems. These anticipations, too, were ‘self-fulfilling’. Yet they had nothing in common with the ‘bubbles’ seen on the financial markets. The ‘fundamentals’ of the big contractor groups, rooted in the permanence of the defence role, are altogether more solid. Nonetheless, from 1997 onwards, the stock market value of armaments companies began to fall and this drop was for the most part concentrated within the major groups. This new downward slide, coming after the strong

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rally just described, was partially due to the disastrous results produced by the megamergers. But there are also other reasons for the drop in the share value of the big defence groups. The exuberance which broke out on the US financial markets after the Asian crisis (1997), and which is now seen to have been totally disproportionate to the real situation of American firms, manifested itself in an infatuation with new economy companies. The ‘old economy’, of which defence shares are part, was temporarily put on the backburner. But then, this drop in the market value of the big groups served as a reminder that the armaments group shareholders and the ‘financial markets’ were impatient to see their military budget hopes come true. It is interesting to note that the Department of Defense registered some very official disquiet about the market fall. Its officials attributed the collapse of some values to the ‘short-termist’ behaviour of the ‘markets’, and they emphasized that there is no justification for such behaviour in the case of a ‘long-term’ industry such as defence. At the same time, they declared that the falls posed a threat to the vigour of a ‘vital industry for the national security of the United States’ (Wall and Velocci 1999). And in fact, from 1998 onwards, the decline in the defence budget halted, on the initiative of the Clinton Administration. Starting in 1999, the military budget, and particularly spending on R&D and procurement showed a spectacular rise. The upward trend in military budgets therefore clearly predates the election of George W. Bush and 9/11. It took some time before the programme of increased military spending decided by Clinton reassured the markets and no longer seemed just a lucky accident (Figure 15.2). The rise in share values finally resumed a few months after 9/11, at a time of collapse on Wall Street and even more so on the NASDAQ. War Dividends: High Stock Exchange Performances, Limited Risks Since 2001, financial analysts have gradually provided the armaments sector with a separate identity, whereas until recently it was included within broader sectors and indexes. And indeed, the attraction exercized by the armaments groups is undeniable. Figure 15.2 compares the performances of the DFI index (composed of 15 major firms in the armaments sector) with those of four main US stock indexes: the Dow Jones Industrial Average, Standard & Poor’s 500, the NASDAQ and the Major Market Index (the 20 blue-chips). The base for this comparison is an index equal to 100 in November 2001, the first month for which a historical value is available for the DFI. The ‘Twin Towers effect’ is clearly perceptible: the rise in this new, specifically ‘defence’ index was rapid and sustained up to April 2002, but then fell back in the ensuing months. Upward movement returned in March 2003, when the war against Iraq was

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Charting the future: innovation, state power and the market system

250 DJI (Dow Jones Industrial Average) IXIC (NASDAQ Composite) GSPC (S&P500) XMI (Major Market Index) DFI (Amex Defense Index)

200

150

50

Jan-99 Mar-99 May-99 July-99 Sept-99 Nov-99 Jan-00 Mar-00 May-00 July-00 Sept-00 Nov-00 Jan-01 Mar-01 May-01 July-01 Sept-01 Nov-01 Jan-02 Mar-02 May-02 July-02 Sept-02 Nov-02 Jan-03 Mar-03 May-03 July-03 Sept-03 Nov-03 Jan-04 Mar-04 May-04 July-04 Sept-04 Nov-04

100

Note: The curve for the DFI index, although this index begins only at 21 September 2001, the date on which the index was launched. Source: The authors, from NYSE and NASDAQ.

Figure 15.2 Comparison of the Dow Jones Industrial, NASDAQ, S&P500, Major Market Index and DFI indexes from 1 January 1999 to 24 October 2004 (November 2001 = 100) launched. The certainty of a ‘short war’ at the military level, which had also been the wish of the IMF’s chief economist,7 coupled with the prospect of military engagements in the offing in consequence of the new doctrine of national security, rekindled investor confidence and even pulled all of the Wall Street and NASDAQ values along behind it – although at a goodly distance. Shareholders’ satisfaction with the defence groups had already been noted in previous studies. Higgs and Trevino (1992) calculated that, over a long period (1970–89), the stock market performances of the defence groups (measured by share price) were markedly superior to those of the S&P500 index. Higgs and Trevino explained these good performances on the exchanges by a rate of return on capital invested in production by armaments groups (ROI and ROA) that was superior to the rate of return on the average capital of firms making up the S&P. The data collected lead us to draw different conclusions for the recent period (1998-2002). Certainly, as we have seen, their performances on the

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exchanges are above average. But according to our calculations,8 most of the defence groups do, as regards rates of economic profitability based on data from the firms’ own accounting, put in performances that are inferior to the average for firms on the S&P. There may be several reasons for this situation. It is in part the consequence of the disastrous results produced by the acquisitions. It is also doubtless due to the costs generated by the very high remuneration of leading defence group executives. The scandals surrounding Enron, WorldCom etc. have placed particularly large question marks over the top management of the American groups, who are (rightly and properly) considered responsible for strategic errors but are also accused of bringing in lavish remuneration structures, well cushioned against falls in share value. However, this questioning does not yet seem to have reached the leaders of the groups contracting to the Pentagon. A study shows that, in 2002, the median income of a CEO in the defence groups was $5.4 million. That is 45 per cent more than the median incomes of all CEOs ($3.7 million). This difference is due mainly to the considerable increases that the defence group CEOs obtained in 2002 (+79 per cent, as against +6 per cent for all CEOs) (Hartman and Martin 2003). Two statements, using common financial indicators, may be made concerning the importance of this gap between economic profitability and Table 15.2 Remuneration of armaments CEOs (in thousands of US dollars) Firm

Lockheed Martin Corp. Boeing Co. Raytheon Co. Northrop Grumman Corp. General Dynamics Corp.

Name of CEO

2001

2002

Percentage rise

16556 3929 2588

25337 4145 8922

53 5 245

7352

9222

25

Nicholas D. Chabraja 5719

15245

167

2992 3490

5358 3700

79 6

–14

45

Vance D. Coffman Philip M. Condit Daniel P. Burnham Kent Kresa

Median ‘armaments’ income Median ‘industry’ income Difference armament/industry (%)

Note: This table is based on a study in Business Week (21 April 2003) which looks at 365 big American companies, 37 of which are in the armaments sector. Source: Hartman and Martin 2003.

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stock market performances. First, the Tobin’s q ratio9 suggests that the gap between the stock market and book valuations became in most cases more and more marked during the period 1998–2003. Second, the level reached by the q ratio does not indicate the formation of a ‘bubble’ around defence shares. Nor does it reflect excessive risk-taking, as confirmed by the calculation of the
coefficient.10 This fact therefore seems to disprove the correlation – positive, in principle – between return and risk as established by financial theory. The gap observed, from 1997 to 2002, between the economic profitability of the groups contracting to the DoD and their stock market performance seems rather to show that the markets’ assessments are guided more by the security offered by these groups (low risk, high return) than by industrial considerations (efficiency, etc.). The security offered by the arms groups is based both on their solid fundamentals and on their vital role, which makes them too strategic to fail.

4. MANAGERS VS. MANAGERIALISM: THE TRIUMPH OF FINANCE CAPITAL IN THE 1990s Galbraith: a Valuable Contribution in Need of Updating It is worth recalling at this point that Galbraith regarded the armaments sector as the best-developed and most effective example of the ‘planning system’. Armaments were the archetype of the ‘reversed sequence’ and the ‘seminationalized sector’ and, more than any other sector, they prefigured the progressive blurring of the borderline between the public and private sectors. It might therefore be expected that stockholder power would wane faster in this sector than in others, to the benefit of the managers. However, we believe that we have clearly demonstrated (section 3) that, during the 1990s, some 15 years after the third edition of The New Industrial State appeared in 1978, it is difficult to overlook the foreground role played by the institutional actors and the financial community in the restructuring of the American armaments industry. We believe that this raises a double question. First, did the changes in the stockholder structure in major corporations, along with the extraordinary gains the managers enjoyed, thanks to stock options and other incentives, cause Galbraith to revise his thesis of managerialism, as developed in The New Industrial State? And second, are these changes, which represent the major comeback of finance in the power structures, sufficiently great to disprove or alter the thesis of managerialism? The answer to the first question is wholly unambiguous, as already noted by P. Petit in Chapter 2 and Guy Caire in Chapter 5. Today, managerialism is still a credo which John Kenneth Galbraith persistently defends with a

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conviction that has remained intact. In his last work, The Economics of Innocent Fraud, published in mid-2004, the tone is firm and brooks no opposition. Here are three examples. The conclusion of the chapter on ‘The corporation as bureaucracy’ insists that ‘No one should be in doubt: Shareholders – owners – and their alleged directors in any sizable enterprise are fully subordinate to their management. Though the impression of owner authority is offered, it does not, in fact, exist’ (2004, p. 28). The conclusion of the short chapter on ‘The corporate power’ comes right out and tells us that we should be fearing for our sanity if, by any chance, we still harbour the slightest doubt: ‘The myths of investor authority, of the serving stockholder, the ritual meetings of directors and the annual stockholder meeting persist, but no mentally viable observer of the modern corporation can escape the reality. Corporate power lies with the management – a bureaucracy in control of its tasks and its compensation’ (2004, p. 31). And the closing chapter, ‘The last word’, drives the point home one last time in the most commanding of tones: ‘It must be accepted – the evident has its truth – that power in the modern great corporation belongs to the management. The board of directors is an amiable entity, meeting with self-approval and fraternal respect but fully subordinate to the real power of the managers’ (2004, p. 58). So, in this recent little book, the managerialist thesis is the leitmotiv. The only role conceded to the world of finance is the analysts’ presumptuous and highly lucrative claim that they can predict the future. The activism in which the institutional investors may engage, holding as they now do a big majority of the capital in the armaments groups, in order to influence industrial strategies, is a question that is simply sidestepped. And yet, by creating strong incentives to overcome the principal–agency conflict between managers and stockholders, through new forms of remuneration for senior management, the financial actors have not killed off the technostructure. Rather, the technostructure has expanded and now incorporates the capital-investment sector, thereby reinforcing an already significant relational power. But it is still the technostructure – even more hegemonic and reinforced by the financial engineers –which dominates big firms in the twenty-first century. Its aim is no longer ‘growth for growth’s sake’ but solely the maximization, in the short term, of the return on the capital invested by the institutional investors. More than ever, this new collusion, or convergence of interests, between managers and shareholders calls for the ‘countervailing powers’ demanded by John Kenneth Galbraith, from his first book onwards (American Capitalism 1952). The Manager–Owner Alliance at the Turn of the Century The manager–owner divide has a longish history dating back to A. Smith

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(Henderson 1986). And the debate has gone on unabated, with the emergence of the modern corporation, the separation of functions, and the increased division of labour within firms. In the academic literature, relations between managers and owners are mainly analysed as a separation which is more or less identified with antagonism. In a crude way, it can be said that ‘managerialism’ assumes that top managers must have the upper hand because of their technical and bureaucratic skills, while ‘new institutional economics’, in particular the type that addresses principal–agency issues, claims that only those who own corporations are entitled to have power and control. Jensen goes so far as to write that workers, when they do not self-restrict to working, e.g. when they go on strike, ‘destroy or damage their employer’s organization while attempting to serve their own interests’ (1989, pp. 12–14). In the 1980s and 1990s, he, as a leading figure of the principal–agency theory, was an advocate of the limitations of managers’ power. Shareholders have to organize their control over the companies they own, and limit management power. Managers would manage in the interest of shareholders if they had bigger stakes in the companies. There must be incentives for managers if they are to be closer to shareholders’ goals. During the 1990s, in keeping with this recommendation, bonuses, stock options, golden parachutes and other types of incentives made chief executives wealthier than they were in previous decades. Needless to say, they were not restricted to defence contractors. In other words, shareholder value-based governance has made top executives more, rather than less, mighty. That shareholders’ and top managers’ interests could be compatible was a point made by Baran and Sweezy as far back as 1966. In Monopoly Capital, they wrote that the top management was among the main company’s shareholders (1966, p. 34). Before them, Mills hade made insightful remarks about the chief executives and against the so-called silent revolution, the managerial revolution that led chief executives to be the ‘expropriators of old expropriators’ (the capitalists). In relation to the centurylong story of consolidation of the corporate world of centralized property, ‘the very fact of the spread of ownership among the very rich and the chief executives of the great corporations makes for the unity of the property class, since the control of many corporations has excluded the smaller but not the larger propertied interests’ (1956, p. 121, emphasis added). Now, the current macroeconomic setting as well as corporate governance is different from those existing at the time that Baran and Sweezy, and Mills, were writing. The institutional configuration that emerged from the 1990s in major corporations is based upon an alliance between institutional shareholders and top executives. It is an alliance of its own, which was created through a strategy including the implementation of shareholder value-based corporate governance. Shareholders and top management united to carry out vigorous downsizing, layoffs, and increased job flexibility and insecurity for

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workers. Top managers raised the shareholder value of the companies they were in charge of, while increasing their wealth thanks to huge programmes of stock options and other incentives. Top managers, for all the claims of changes in corporate governance during the 1990s, kept their grip on management and planning – insofar as such a word can be used, given the considerable shortening of the time horizons of strategic decisions. Still, the basic thrust of contemporary management has little to do with how it was interpreted and, to some extent, implemented during the era of managerialism. First, technology and the associated requirements for capital were a major explanation for the thriving of the technostructure. Although the 1990s are associated with a new wave of technological innovations (the ‘new economy’), its relation to the changes in corporate governance are highly controversial. As regards the role of finance capital in the development of technological innovations in the 1990s, an analysis based on what Schumpeter wrote on the relation between finance and innovation, showed a negative correlation (Leathers and Raines 2004). Top management, obsessed with shareholder values and self-serving high financial benefits, may have had a different attitude from that prevailing during the previous decades regarding technology. Second, in Galbraith’s view, positive feedbacks took place between the micro and macro levels. Growth at the company level brought about macroeconomic growth, while the latter buttressed the former thanks to the regulation of aggregate demand for the products of the planning system (Galbraith 1979, p. 307). Basically, the identification of the planning system with public goals, while requiring state intervention, along with the taking away of power from the owners, would lead to the ‘socialization of the mature corporation’ (Galbraith 1979, p. 409). This accounts for the fact that ‘the modern corporation has a highly serviceable role in contemporary economic life’ (2004, p. 31). The feedback between the micro and macro levels may have changed drastically in comparison with Galbraith’s expectations. ‘Socialization’ of production under the control of great corporations, as exemplified in the two last decades by the dotcom bubble, corrupt accounting and massive frauds that were revealed in the USA11 brought with it on an unknown scale, what has been described in the past as the making of ‘a new financial aristocracy … an entire system of swindling and cheating with respect to the promotion of companies, issues of share and share dealings’ (Marx 1981, p. 569). A foundation for the triumph of the financial institutions was the growth of companies through mergers and acquisitions (M&A). This process, which was in accordance with the so-called ‘market control’ advocated by neoclassical economists, was designed as a conscious strategy by CEOs not only to make their companies grow bigger but also to increase the share value by incredible margins. Its micro- and macroeconomic effects have been quite disappointing. Companies were made less, not more, efficient. The very high rate of company divestitures in the few

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years following the mergers, has been analysed as an outcome of the priority given in M&As to ‘financial logic’ over ‘industrial logic’. At a macroeconomic level, even in industrialized countries which were more protected from creeping recessions and crisis than the rest of the world (including emerging countries), the link between the accumulation of capital goods and shareholder revolution seems negative in three major countries, the USA, the UK and France (Stockhammer 2004). Re-exploring Veblen’s Analysis of Finance The Galbraithian claim of the overwhelming role of management and the subordinated role of finance capital and the owners of financial assets can be contrasted with the views of Veblen, another outstanding institutionalist.12 Even though Galbraith is rather critical of Veblen’s inability to propose an alternative economic system (Tsuru 1993), he recognized that his analysis of conspicuous consumption has remained compelling. Throughout his works, Veblen was concerned, as was Galbraith a few decades later, with the role of technology, which he saw as a prime driver of economic and social development. That technology is a major force in the transformations of economic systems is a key point shared by all institutionalists (Samuels 1995). Veblen goes so far as to welcome the advent of a ‘Council of Technological Workers’ (and because he did know what power meant, Veblen added to this the need for a Council of Soldiers’ Deputies). This reveals, as Heilbronner puts it, ‘a romantic idealization in the image of the rational engineer, technologist, scientist, turning against the pecuniary-minded business tycoon’ (1997, p. 263). Veblen also underlined, as Galbraith did later, the separation between ‘industry’ and ‘business’, along with the distinction between the ‘engineer’ – also called the ‘technologist … the technological expert who controls and correlates the productive processes’ (1908, p. 537) – and the capitalist who is the owner of material equipment. Still, for Veblen, this separation refers to a fundamental issue, namely to what economists call capital. As a committed evolutionist, Veblen considered that capital is not a fixed category, but is borne by different sets of institutions. As ‘it has been the habit of economists and others to speak of “capital” as a stock of the material by which industry is carried on … as a business proposition, “capital” means a fund of money values’ (1904, pp. 134–6). He claims that ‘loans on property which is already engaged in the industrial process … represent, for the purpose in hand, nothing more substantial than a fictitious duplication of material items that cannot be drawn into the industrial process’ (ibid., p. 102) since the value of capital, materialized in corporate securities, is based on the ‘capitalization of anticipated income-yielding capacity (which) stands in no definable time

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relation to their underlying assets … and dissociated from the technological circumstances and processes of the industry’ (ibid., 129). On this matter, his analysis may be compared to the ‘fictitious capital’ category dealt with by Marx in Capital (1981).13 For Veblen, the point of departure for the rise of the separation between productive and income-yielding capital may be found in the late 1890s, with the creation of the holding company, ‘the more perfect order of absenteeism’ (1997 [1923], p. 33), along with the decisive role held by investment bankers, the great creators of mergers and holding companies. This ‘unfolding’ (or disconnection) of capital into productive and income-yielding categories is matched by the separation between managers or engineers, who are in charge of industry, and owners, in charge of business. Veblen saw the balance of power between engineers (the technostructure) and owners in a way different from Galbraith. While Galbraith’s expectation and hope was the ‘euthanasia’ of the latter, Veblen was more muted. Examination of this issue shows Veblen’s ambiguous attitude. He hesitates as to whether there is genuine conflict between engineers and owners. The latter behave as saboteurs: they use whatever means are available to disturb the industrial system and effect price manipulations (1904), but there is a possible reconciliation in his later studies, in particular in The Engineers and the Price System (1921). A few years later, he instead argues that, because the credit resources have been drawn together under the responsible surveillance of half-a-dozen massive credit institutions, the control exercised by the keepers of credit over the conduct of business and industry at large has dramatically increased (1997 [1923], p. 362). To sum up, in Galbraith’s approach, ownership is so scattered along a multitude of shares that owners are present but impotent. Hence, the ‘shareholder in the modern corporation is without power and without functions. He (or she) has become obsolete’ (1979, p. 278). Instead, in Veblen’s approach, owners, while absent, are potent. In early twenty-first century capitalism, it is clear that, with the end of ‘absenteeism’ and the return to shareholder activism, the emphasis put by Veblen on money capital as well as the role of owners is still strikingly relevant to understanding the new institutional configuration in major corporations, based upon an alliance between institutional shareholders and top executives.

5. CONCLUSION: FINANCE AND THE ‘COMPLEX’, OR THE TRIUMPH OF COLLUSIVE ARRANGEMENTS The transformations in the military-industrial system (MIS) during the past decade are sufficiently important for us to consider that the period that began

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with the Second World War has now drawn to a close. It is our hypothesis that an American military-security system is developing and that it has significantly accelerated since 11 September 2001. The main thrust of our argument is that, in relation with other sweeping changes (in the geopolitical context, within the relations between military and commercial technologies through ICT, etc.), the new role of financial institutions is bringing about dramatic change in the political and in the industrial configuration of the US military-industrial system, with the doctrine of ‘preventive war’ as a major component of this. The increasing role of financial institutions in the American arms industry – and progressively in the European arms industry – has to be placed in the context of their increasing role at the macroeconomic and world level. To a certain extent, this role is what some might call a finance-driven accumulation regime. Within this new environment, the view held by Galbraith that private and public sector interests overlap remains quite valid, as does the analysis of the core role of the MIS in the US economy. As section 3 demonstrated, the MIS further enlarged its influence at the turn of the century. This resulted not from a marginalization of stockholders, but from the widening of its social base through the new role of finance capital institutions. To put it another way, industrial restructuring together with the new manager–owner alliance – or ‘collusive arrangements’, to quote Veblen – has made the MIS even mightier. As may be observed over the past two decades, the financial markets base their behaviour on ‘conventions’ – whose essence, according to John Maynard Keynes, ‘lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change’.14 The collapse of the NASDAQ from 10 March 2000 onwards marked the end of the ‘Internet convention’, which was indissociable from the ‘new economy’, and ushered in some topsy-turvy times on the US financial markets. The war against Iraq, despite the context in which the decision was taken (relative isolation of the United States), the bogging down of the US forces and the very high financial cost of the operation, did not stop the upward trend on Wall Street during 2003 and 2004. This contradicts the conventional assertion that the financial markets feel revulsion at the use of military violence: ‘markets’ and war are compatible. One explanation is that the US ‘markets’ may be ‘internalizing’ within their behaviour the inevitability of new wars and military operations. They may, in fact, be forging a sort of ‘unlimited warfare’ convention in which the discretionary use of armed force by the United States becomes their new horizon. This new convention is based on very real ‘fundamentals’ – such as the gigantic size of military expenditure, the technological drive on the security front and the strong relational power of the MIS – which underlie the conviction that military interventions by US

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armies, alone or within alliances, are going to become more frequent. More prosaically, this convention is based on the hope that military supremacy may, for as long as possible, keep the American economy sheltered from the consequences of a pattern of production and consumption that is ‘unsustainable’ for a large portion of the planet.

NOTES 1. ‘Economists Against the Arms Race’ (ECAAR) was founded in 1989 by Dr Robert J. Schwartz. In 1993, following the end of the US–Soviet arms race, ECAAR became ‘Economists Allied for Arms Reduction’. In the fall of 2004, ECAAR became EPS (‘Economists for Peace and Security’) to reflect the full range of concerns of its members and programme, and the increasingly complex interrelationships among disarmament, development, security, conflict, war and peace. Website: http://www.epsusa.org. 2. Annals of an Abiding Liberal, here quoted from The Essential Galbraith, Houghton Mifflin, Boston, 2001, p. 136. 3. Investors’ new infatuation with the armaments industry, since the collapse of the ‘new economy’ and even more so since the 9/11 attacks, is reflected in the decision of several exchanges to establish separate indexes exclusively for the arms sector. The Amex Defense Index (DFI), launched on 21 September 2001 by the American Stock Exchange (Amex), is a response to this investor expectation. It contains 15 stocks (see Table 15.1), including the top-ranking contractors. The DFI is a very broad sample of the highly capitalized firms in the armaments sector and is sufficiently representative of the sector as a whole. 4. Wall Street Journal online, 28 June 2004. 5. Many second-rank suppliers (subsystems) and third-rank suppliers (components) produce both for military and for civil users. At this level, a certain degree of diversification does exist. 6. Wall, Robert, ‘Where’s the innovation?’, Aviation Week & Space Technology, 16 August 2004, vol. 161, issue 7, p. 22. 7. The chief economist declared that a short-term military action in Iraq would probably have only a minor impact on the world economy, and could even produce a ‘positive effect’ by eliminating uncertainty over the situation. Quoted in A. Friedman, ‘IMF Chief sees upside of a short war in Iraq’, International Herald Tribune, 20 September 2002. 8. They are not reproduced in this chapter. For additional data, see Luc Mampaey and Claude Serfati, ‘Les groupes de l’armement et les marchés financiers: vers une convention “guerre sans limites”?’, in F. Chesnais (ed.), La Finance Mondialisée, La Découverte, Paris, 2004. Also available on http://www.grip.org/bdg/pdf/g1014.pdf. 9. Tobin’s q ratio is based on the approximation given by the formula suggested by Chung and Pruitt (1994), according to which q is equal to the ratio of the sum of the market value of own capital (market capitalization) and of the book value of the debt, to the book value of the economic assets. A q equal to 1 therefore indicates identical sharemarket and book valuations. Although the theoretical basis of this is subject to discussion, a high value for q is often interpreted as a sign that a speculative bubble is forming. 10. The
(beta) coefficient is a measure of the systematic (or non-diversifiable) risk of a share – in other words, of the risk linked to market movements and therefore not reducible through a better diversification of the portfolio, contrary to the specific risk linked to the company itself. Shares with
coefficients above 1 are more volatile and are therefore considered to be higher-risk than shares with coefficients below 1. 11. For sure, the USA was not the only country to be plagued with financial scandals. Cf, in Europe, Vivendi and Crédit Lyonnais (France), Parmalat (Italy). 12. On the relevance of Veblen’s theory of finance capitalism to the analysis of contemporary corporate capitalism, see Cornehls (2004).

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13.

See in particular, volume 3 in which the specific nature of money capital is dealt with at length. Marx analyses ‘fictitious capital … known as capitalisation. … In this way, all connection with the actual process of capital valorisation (in the sense of process of production of goods) is lost, right down to the last trace, confirming that capital is automatically valorised by its own powers’ (1981, p. 597). 14. John Maynard Keynes, The General Theory of Employment, Interest and Money, London: Macmillan, p. 151.

REFERENCES Baran, Paul A. and Paul M. Sweezy (1966), Monopoly Capital: An Essay on the American Economic and Social Order, sixth printing, 1968, New York: Modern Reader Paperbacks. Bernhut, S. (2003), ‘An interview with Professor John Kenneth Galbraith’, Ivey Business Journal Online (September–October). Ciardello, V. (2002), ‘Global changes in the defense industrial bases: challenges and opportunities’, mimeo, Deputy Under Secretary of Defense, 31 January. Cornehls, James V. (2004), ‘Veblen’s theory of finance capitalism and contemporary corporate America’, Journal of Economic Issues, XXXVIII (1) (March), 29–58. Crandall, M.S. (2002), ‘Antitrust in the digital age: an overview’, ICAF Economics instructional paper, National Defense University, January. Delétang, F. (1998), ‘La consolidation de l’industrie de défense américaine: un défi pour l’Europe’, L’Armement, 61 (March), 36–43. Froud, Julie, Colin Haslam, Sukhdev Johal and Karel Williams (2000), ‘Restructuring for shareholder value and its implications for labour’, Cambridge Journal of Economics, 24 (6), 771–97. Galbraith, John Kenneth (1956), American Capitalism: The Concept of Countervailing Power, revised edition of original edition, published in 1952, Boston: Houghton Mifflin. Galbraith, John Kenneth (1977), The Age of Uncertainty, London: British Broadcasting Corporation. Galbraith, John Kenneth (1979), The New Industrial State, 3rd edn revised, Boston, MA, New York: Houghton Mifflin. Gabraith, John Kenneth (2004), The Economics of Innocent Fraud – Truth for Our Time, Boston, New York: Houghton Mifflin. Gholz, E. and H. Sapolsky (1999), ‘Restructuring the U.S. defense industry’, International Security, Winter. Hartman, Chris and David Martin (2003), More Bucks for the Bang: CEO Pay at Top Defense Contractors, Boston: United Fair Economy, p. 3. Heilbroner, Robert (1997), Teachings from the Worldly Philosophy, paperback edition, New York: W.C. Norton. Henderson, J.P. (1986), ‘Agency or alienation? Smith, Mill, and Marx on joint-stock company’, Review of Political Economy, 18 (1), 110–31. Higgs, R. and R. Trevino (1992), ‘Profits of US defense contractors’, Defense Economics, 3, 211–18. Hodgson, Geoffrey M. (2000), ‘What is the essence of institutional economics?’, Journal of Economic Issues, 34, (2), 317–29. Jensen, M.C. (1989), ‘The evidence speaks loud and clear’, Harvard Business Review, 89, (November–December).

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Keynes, John Maynard (1936), The General Theory of Employment, Interest and Money, republished 1967, London: Macmillan. Leathers, Charles G. and Pat Raines (2004), ‘The Schumpeterian role of financial innovations in the new economy’s business cycle’, Cambridge Journal of Economics, September. Markusen, Ann (1998), ‘The post cold war persistence of defense specialized firms’, in G.I. Susman and S. O’Keefe (eds), The Defense Industry in the Post Cold-War Era: Corporate Strategies and Public Policy Perspectives, Oxford: Elsevier, pp. 121–46. Marx, Karl (1981), Capital, vol. 3, originally published 1897, London: Penguin Classics. Melman, Seymour (1970), Pentagon Capitalism – The Political Economy of War, New York: McGraw-Hill. Melman, Seymour (1983), Profits without Productivity, London: Knopf. Melman, Seymour (1997), ‘From private to state capitalism: how the permanent war economy transformed the institutions of American capitalism’, Journal of Economic Issues, XXXI (2) (June), 311–30. Mills, C. Wright (1956), The Power Elite, New York: Oxford University Press. Samuels, Warren J. (1995), ‘The present state of institutional economics’, Cambridge Journal of Economics, 19, (4), 569–90. Serfati, Claude (1995), Production d’armes, croissance et innovation, Paris: Economica. Serfati, Claude (2001), ‘The adaptability of the French armaments industry in an era of globalisation’, Industry and Innovation, 2 (August), 221–39. Smith, Ron (1977), ‘Military expenditures and capitalism’, Cambridge Journal of Economics, 1 (1). Stockhammer, E. (2004), ‘Financialisation and the slowdown of accumulation’, Cambridge Journal of Economics, 28 (5), 719–41. Tsuru, S. (1993), Institutional Economics Revisited, Cambridge: Cambridge University Press. US General Accounting Office (GAO) (1998), Defense Industry Consolidation: Competitive Effects of Mergers and Acquisitions, GAO/NSIAD-98-112, 4 March, accessed at www.gao.gov/archive/1998/ns98112t.pdf. Veblen, Thorstein (1899), The Theory of the Leisure Class, originally published New York and London: The Macmillan Company, 1899, Kessinger Publishing, electronic edition. Veblen, Thorstein (1904), The Theory of Business Enterprise, New York: Charles Scribern’s Sons. Veblen, Thorstein (1908), ‘On the nature of capital’, Part 1, Quarterly Journal of Economics, 22 (4) (August), 517–42; Part 2, id., 23 (1) (November), 104–36. Veblen, Thorstein (1921), The Engineers and the Price System, New York: B.W. Huebsch. Veblen, Thorstein (1997), Absentee Ownership. Business Enterprise in Recent Times: The Case of America, originally published in 1923, New Brunswick, NJ: Transaction Publishers. Wall, R. and A.L. Velocci (1999), ‘Hamre’s stock concern draws mixed reaction’, Aviation Week & Space Technology, 151 (20), 35.

16. What has happened to the public sector? Marketization and financial logic Blandine Laperche and Dimitri Uzunidis 1. INTRODUCTION For more than 30 years now, capitalist economies, especially those with a high level of scientific, technical, industrial and service development, have been groping their way. The model of growth which emerged after the Second World War and created many financially sound markets was characteristic in that it included in the same tendency, the strategy of private profit making, the spreading of material welfare and the role of the state. Big private and public corporations (often in a monopolistic position) as well as large numbers of employees profited by this impetus given by state supervision. As a matter of fact, the resulting mass consumption of more or less undifferentiated goods was accompanied with a strong demand for services of similar standard: health, education, transport and communication, water and electricity. Such a model, inscribed in the Keynesian tradition, is only viable in a period of shortage or economic reconstruction: the economic growth (i.e. the expansion of solvent demand: opening and expansion of markets) is so strong then that the profit made by organizations is considered by their managers as sufficient to cover present and anticipated production costs. In this context, investment takes the economy towards a virtuous cycle characterized by enlarged production basis, the creation of jobs, income, savings and an increase in consumption. At the same time, the state drains part of the capital and earned income in order (a) to maintain market organization and dynamics through public expenditure and other direct and indirect intervention, and (b) to provide firms with the means of production they use in their development and people with means to meet their ‘basic needs’ (in relation to the level of socialization reached by the market economy). This accounts for the way standardized and slightly differentiated public mass services were born in order to synchronize activities within the production systems of highly industrialized countries (especially those of Western Europe). 302

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This model of growth became obsolete, on the one hand, when goods surplus grew and on the other hand, when the standardization of supply of and demand for public and private goods was questioned. The questioning of this model is due to (a) the deceleration of the profit rate growth and the consecutive increase in direct and indirect earned income in the redistributed wealth – following social and political strife of a similar massive and standardized nature – and (b) the saturation of the demand for standardized goods and the new interest of middle and lower classes in varied and collective productions (customized goods and services, local facilities, etc.). In response, according to the monetarism and ‘laissez-faire’ tradition, the state implemented a set of structural measures characterized by opening and sacrifice to recover the profit rate growth: it boosted internal growth by making competitiveness a priority of the social and economic policy and by opening new markets abroad (in emerging markets). These measures found expression in the liberalization of markets and capital flows, thus making it possible to step out of costly and loss-making activities, redirect the supply towards strategies of permanent innovation,1 reduce state intervention, privatize many public corporations and progressively bring all public services to the marketization stage. Renunciation by the state of its economic and social functions is necessary to increase corporations’ profits and competitiveness: any sector which may offer new opportunities of accumulating capital, under good conditions of cost, has been or is being transferred to the private sector. Meanwhile, social policies (in which public services are pivotal) have gradually lost their significance in favour of finance: the TSV indicator – total shareholder value – sanctions any economic and social measure implemented by any government. This new accumulation framework shows the change from the welfare state which was sustaining demand during the period of growth following the Second World War to a providential state for capital holders. In his works (and notably in the Affluent Society, published in 1958 and Economics and the Public Purpose, 1973), J.K. Galbraith stressed the role of the state and of public services in the economy. Public services are essential to maintain a ‘social balance’, as well as to sustain demand. However, these ideas which were essential in his project to develop a Good Society (1996) have not been followed by mainstream economists and influential politicians (see also Le Masne 2006). Today, more than ever, the Culture of Contentment (1992) seems to prevail into which, the ‘satisfied’ ones (the well-offs) have imposed the reduction of all types of public expenditure, with the exception of sunk costs and military expenses. We could thus say that supply policies (financing of sunk costs, creation of a general climate favourable to the valorization of individual fortunes) actually correspond to the aims of the liberal theories (contestable markets) combined with welfare mix policies (these policies

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systematically associate public and private sector in the production and diffusion of all individualized or collective goods or services). A new form of state control appears which, under cover of liberalism, unifies in one movement (same destiny) the interests of the state and those of well-off and politically influential groups of people. The result is that the border between public and private sector is more blurred than ever, with a public sector dominated by the interests of big private corporations: an innocent fraud?

2. WHAT DOES ‘MARKETIZATION’ MEAN? ‘Marketization’ means liberalization, privatization or the introduction of flexible and contractual methods of evaluation based on competitiveness criteria and on economic efficiency into the management process of public corporations and utilities. According to the reports of major international organizations (OECD, IMF, World Bank, WTO), marketization is a sign of modernization. According to this argument, the new economy results from scientific and technological progress while information and communication technologies, health-related technologies and material ones alike make state economic and social intervention obsolete, and reference to the national space is not used any longer. All around the world, the political action of the state should be limited to the supervision of the optimal functioning of markets, so that technical progress may create a favourable environment to social progress. According to the same argument, state intervention (or even nationalist intervention) is counter-productive (except for intervention aimed at fostering competition) (see notably Williamson 1990, 2000 and also Krugman 1997; Bagwati 2004) and any social policy goes against the new ‘conditions’ created by the diffusion of new technologies. State social intervention is restricted by the requirements of economic competitiveness. The conditions, content and environment of work are dependent on this introduction of competitiveness, feasibility and profitability criteria in the running of the economic activity. The principle of governance (i.e. the evaluation of a private or public organization – an administration or a corporation – according to the method of the profitability and return on investment ratios) is implemented in all economic structures: in fact, similarly to limited companies, the organizations which offer services to the community and the people working for such organizations or receiving such services, have to adopt a market-based behaviour: individuals have to build and follow a career path, a pre- and post-working life plan (schooling, training, insurance cover, and pension); utilities have to design and sell profitable productions, adapted to an individualized, fragmented and more or less solvent demand. But the question is: are all public activities concerned by marketization?

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According to the definition given by the Marrakesh Agreement (1994) when the World Trade Organization (WTO) was created, any public service can be liberalized, except for the army and the law. As a matter of fact, according to the WTO, a public service is defined as ‘any service which is provided neither on a commercial basis nor in competition with one or several providers’ – a very brief and liberal definition. Public sector and public service are often confused. The notion of public sector is, above all, a legal one. It means the aggregate of all state-owned enterprises and administrations (Duharcourt 1997). The public sector includes, on the one hand, enterprises whose activities could be made profitable by the markets but which concern the whole economy and society (national or international) due to their nature and the significance of the externalities they cause on the community or the power they give to their holders: e.g. armament, transport and communication, energy, banking. On the other hand, it includes institutions in charge of socially (not only individually) useful activities which are (or have to be) assumed by the community (community goods, health, education, security, law and so on). The development of the public sector, meant to manage the supply of goods and services to the community, can be considered as a response to the obligation of satisfying the needs of the community (first and foremost those of the working class: unskilled workers, craftspeople, low-income farmers) and to socialize part of the cost of the workforce (education, insurance, pensions and entertainment). The public sector (and notably marketable or semi-marketable services: electricity, transport, telecommunications) has a more general role of formation and enrichment of a substantial part of the production resources (capital and labour force) and in a Keynesian perspective, of support to the demand. In the Affluent Society (1958), J.K. Galbraith questions the ‘conventional wisdom’ according to which public services are a source of waste. Referring to V. Leontief’s analysis (input–output table) which shows the necessity of an equilibrium in the different parts of the national production, he develops his argument on the importance of a balanced production of public and private goods and services. ‘It is convenient to have a term which defines the satisfactory relationship between the goods and services due on the private initiative and those which the State provides. We can qualify these satisfactory reports/ratios of “social balance”’ (Galbraith 1961 [1958], p. 239). He nevertheless regrets that this social balance is far from being achieved, which has negative consequences on education, public health and accidents; in short, on social order and the running of the economy. When public services are neglected, ‘It is the reign of material goods in an atmosphere of private opulence and public squalor’ (Galbraith 1961 [1958], p. 241). How is it possible to differentiate between the ‘nationalized sector’ and

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‘public services’? Because of the diversity of activities and the evolution of their social and technological content, the borders of the public sector are blurred and more or less opened to change. Can the regalia of the state (army, law and police) forever stay ‘outside the market logic’? Their privatization is politically improbable and economically unrealistic; however, nothing can impede the introduction of rationalization criteria or the determination – by way of contract – of targets to be reached, or to outsource some tasks to the private sector (monitoring, control etc.). In that case, the administration is evaluated ex-post (according to the recorded results). Conversely, several goods and public services are marketable or semimarketable or likely to be so (transport, communication, information, health, education, etc.). The transfer from public to private and from private to public depends on the characteristics of the organization of society and its evolution. The latter depends on the balance of power between social players with diverging economic interests. The size of the public sector, the nature (collective or more or less individualized), the accessibility and the wealth of public services depend on political options and on the regulatory mode which translates the state of this balance of power at a given historical time. Marketization of the public sector includes the opening of public monopolies to competition, their privatization and the opening up of their capital to private investors, the introduction of the market logic in the management of utilities and other public services, the subcontracting to the private sector of activities and functions linked to the creation of value (subcontracting, supplies, procurement, creation of joint-venture companies mixing private and public capital, etc.), contractual employees managed in a private way. This process of liberal re-regulation2 of the public sector began in the late 1970s, with the political options taken by the Thatcher Administration in the United Kingdom and the Reagan Administration in the USA. All sectors of state intervention are concerned with marketization but ‘network services’ best illustrate this wave of private re-appropriation of the public space of value creation and realization. ‘Network’ means the system of relations linking a set of enterprises, individuals and institutions around a project of value creation, and of circulation of people, capital and information (Innovations, Cahiers d’économie de l’innovation 2003). Networks have a territorial dimension and play an important part in the construction of the space. Energy, transport, telecommunications are technological networks achieved by transmission, distribution and commutation equipments which once connected, create technical networks that make it possible to circulate material and informational flows. From an economic point of view, networks represent means of distributing resources which link suppliers and consumers of goods and services (Curien and Gensollen 1992). Their role is to organize the space and as such, they play a central part in the cohesion of activities achieved in a

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given productive system and in the dynamics of accumulation in a given national economy. Nationalization (and the creation by the state) of many transport and telecommunication infrastructures but also of enterprises – before, and above all after, the Second World War, especially in Europe – as well as the implementation of the complex system of welfare states (health, education, providence, insurance) show the important role of the state in achieving the objectives of reconstruction and growth in an environment favourable to labour and workers alike.

3. MARKETIZATION AND NEW STATE INTERVENTION In the UK and the USA, the liberalization of these sectors (opening to competition, total or partial privatization, marketization) in the 1980s could be accounted for by the disadvantages of the monopolistic position of enterprises and of public and private operators. The theoreticians of contestable and sustainable markets (Baumol et al. 1982) established the foundations for the dismantling of corporations and for deregulatory policies: the power of the monopoly and information asymmetry may lead to situations of misuse of a dominant position, i.e. to the appropriation of secure income thanks to exorbitant prices which are prejudicial to the consumer, and a source of waste and inflation. In order to recover profitability, market entry has to be free and its exit has to be at no cost. This means that all the barriers (due to the law or to the misuse of economic power) have to be lifted and, at the other end, that all the enterprises willing to leave the market must be able to do so without losing money. Such a situation is optimal (sustainable) when none of the firms in the market work at a loss and when none of the firms which can potentially enter the market can make a superior profit. In such equilibrium, in relation to a given cost structure, it is normally impossible to secure income, even if production cannot be achieved by a single enterprise. In the latter case, due to the pressure of potential competition, the monopoly can be efficient and innovative. It also means that free competition (transparent and open) has to exist between established enterprises and those which can enter the market. The role of the state has to be limited to the guarantee of free entry and exit conditions and to the evaluation of segments of networks which have to be nationalized or subsidized (especially the diverse infrastructures) and those which can be opened up to competition (especially services). The state bears the social sunk costs (rail networks, airports, cable and satellite) and assigns the task of making profits to the private sector. State economic intervention subsequently gains ground, as well as the costs of administrative operation, monitoring and sanctioning. The competition

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policy has to maintain the sustainability of markets or look after the threat of potential competitors, by guaranteeing entry and exit efficiency. This permits the achievement of equilibrium prices of the market (the same as those obtained on a perfect competitive market). Those prices prevent secured income (if enterprises established in a market were tempted to practise higher prices, they would immediately trigger off entry by imitators). Thus, the state has to manage and organize competition. It finances the infrastructures (telecommunication networks, airports etc.) and on the whole, it bears all the sunk costs (i.e. the expenditures needed to enter an industry which cannot be recovered in case of exit) which may impede entry or make the exit costly (e.g. basic research, basic education). These sources of sunk costs, which produce externalities, are similar to the new factors of production (public capital, human capital, technological capital) which are, according to the theoretician of the endogenous growth, at the origin of self-maintained growth. These factors of production have the particularity to create externalities and then, their private output is lower than the social output. The liberal theories take up the parts of the Keynesian theory which enable them to bypass the deadlocks of their own theories: the state has to improve the running of markets and manage externalities (as demonstrated by Lucas, 1988; Romer, 1990). Furthermore, in Barro’s model (1990), public expenditure is a driving force and the state switches from being a creator of externalities to a purveyor of public goods: the investment in public capital (transport, telecommunications) but also in the other goods and services supplied by the public administration, e.g. security and education, are at the origin of multiplying effects on private investment. Some econometric studies show the narrow relation between investment in infrastructure and growth: e.g. Röller and Waverman (2001), using evidence from 21 OECD countries over 20 years, show the relationship between telecommunication infrastructure investment and economic performance, which is notably explained by the fact that one of the important characteristics of the information and telecommunication technology is network externalities. State involvement is essential to the good running of the economy. Liberal theories, fed by Keynesianism, lead to this paradox! However, even if the theoreticians of contestable markets emphasize the improvements of well-being due to state intervention, we are far from the strategy of demand support which existed in the particular context of growth after the Second World War, and which was underlying the development of the welfare state. Because of its budgetary constraints, the state is showing a great deal of interest in private well-being and implements supply policies in favour of capital holders (which doesn’t exclude neomercantilist practices, see Uzunidis and Laperche 2004). The state creates a new accumulation framework, but in return would like firms to prove and express their patriotism

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(by way of enterprise and job creations, innovation, strengthening of their competitiveness). However, as J. Robinson explained it, firms do not prove any patriotism for their country of origin. They only prove patriotism for capitalism as such, make no distinction between internal and external production (Robinson, 1979), and manage their profits as they think it best, repatriating, depositing or investing them here as anywhere else. And all the more so when the pressure of competition is stronger. In fact, as J.K. Galbraith clearly exposed in The Economics of Innocent Fraud (EIF) (2004), ‘there is a strong corporate presence and initiative in what is still called the pubic sector’ (EIF, p. 49). The big private corporation decides what should be under state control (all sunk costs) and what must be under private sector control (all the profitable segments of ‘public’ services). If Galbraith mainly refers in his last book to the case of the military sector, this analysis may easily be extended to all public services subject to marketization.

4. THE FINANCIAL DIMENSION OF MARKETIZATION Today, the economy is considered as a network of diverse activities and enterprises, but the liberal theory recommends the segmentation of such activities which could nevertheless be achieved by enterprises and institutions and, most of the time, collectively. Then, how is it possible to explain these kinds of theories dealing with the liberal re-regulation of public utilities? Following liberal economists, more theoretical, structural and more interventionist arguments have to be added: deregulation is a necessity but is insufficient. It only represents the first step in the way of market and economy (as a whole) efficiency. Subsequently, the market will guide the action and strategies of the firms, which have to organize themselves in order to satisfy (and even create) a changing demand because of their need for immediate financial profitability of their investment, buyouts, mergers, takeovers and so on. Finance will incite firms to build networks ensuing from the segmentation of activities which used to be monopolistic. For example, in the telecommunication sector, we can find upstream infrastructures and equipments; downstream, services are on the increase in order to link telephone and computer activities very closely. This is the way the new accumulation framework takes place in core industrialized countries. The notion of accumulation framework refers to the forms, modes and means of competition and co-operation between economic agents which facilitate the achievement of the production process; i.e. the link between the social relation of production and the forces of production (Uzunidis 2000, 2002). This framework needs state involvement in order to support and guarantee the drawing up and the enforcement of a coherent set of rules meant

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to organize public and private activities and then, to give birth to the accumulation process. The role of the state in the regulation of production and markets is essential and clear. It has to accompany, with the greatest determination and the most subtle supervision, the evolution from a financing and risk system taken over by banks and state to a system in which financing is directly taken over by savers and in which stock markets determine the ‘value’. The financial profitability of a firm’s securities conditions its investment and growth strategy. This approach to liberalization is based on the idea according to which states are no more able to manage the economy. In order to stimulate accumulation, it is necessary to reinforce individual initiative and spirit of enterprise. Regulation is thus considered harmful: only a liberalized and developed financial market may increase the efficiency of the production system and improve the general well-being in the global economy. A developed and accessible financial market multiplies financing sources, reduces the cost of investment and stimulates a sound growth. The removal of credit restriction and of the administration of the indebtedness interest rate, as well as the elimination of the exchange rate control facilitated the creation of a large, global market of capital which can easily circulate thanks to information and communication technologies. However, the state has its own reasons for transferring some of its post-war functions to the private sector. The segmentation of marketable or mixed public services and their auction sale to the private sector (characterized by strong competition), as well as the privatization of infrastructures were, as a matter of fact, explained by the structural public deficit of the 1970s which increased with the oil shocks and, according to the monetarist theory, and in particular, M. Friedman (1968), caused inflation. The domination of finance on economic activities was caused by the securitization of public and private debt, by the systemic resorting to the savings captured on financial markets and of course by the privatization and opening up of state-owned firms’ capital to new shareholders. All of this occurred in a context of free circulation of capital and of determination of monetary rates on stock markets. The new liberal policies of market deregulation and of privatization thus contributed to the globalization of finance and to excess on financial markets (Plihon 2002). They built the basis of corporate – financial – governance. The growing role of institutional investors (bank, insurance, mutual funds) as financial intermediaries gave birth to the so-called ‘shareholder capitalism’ or more reasonably offset the power of managers of big bureaucratic corporations. Nevertheless, the last years have demonstrated not only the new alliance between managers of industrial technostructures with managers of financial technostructures but also the new characteristics of today’s

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managerial capitalism: the internal weakness of technostructures and the development of corruption (see also Chapters 2, 8, 9, 15). Pension funds and mutual funds want the state to continue the privatization of public services, especially utilities, in order to benefit from new investment opportunities and to encourage savers to invest on stock markets. They also demand the transformation of ‘social’ capital into private capital, by way of a private system of insurance and pension (pension funds). Does this new liberal framework of accumulation mean that finance has deprived the state of all its means of economic intervention? Or in other words, have the welfare state and the industrial state transferred their power to a state whose main function is to regulate the economy through permanent transfer of a substantial part of the social wealth to capital holders? If such is the case, it is then a strong political choice. The financial behaviour of the state, in terms of capital accumulation, is more and more similar to the one of big industrial and financial groups. The strong links of interdependence between those big organizations justify the transfer of resources from the public to the private sector. This transfer is achieved in two ways: (a) by defining a policy meant to encourage innovation based on the socialization of costs and the privatization of gains, i.e. a policy promoting all the scientific means of research, development, and implementation and facilitating technological choice in order to create new products and processes; (b) by implementing policies of valuation of stock gains, with low taxation of capital-gains according to the principles of total shareholder return guarantee.

5. FINANCE, MARKETIZATION AND THE STATE This dual process of accumulation (marketization and growing role of finance in the functioning of public services, jointly produced by the public and the private sectors), has attracted the attention of the liberal economic thought for two decades. It has led to the rehabilitation of state intervention in the fields which generate appropriable and critical resources for the purpose of making profit: e.g. in research and development (in this field, the stock of knowledge cannot be amortized, and an enterprise, in its production process, can use all the produced knowledge); or in the formation of ‘human capital’ (in this case, the qualifications and skills of the employees benefit to the other employees and to the employers). State intervention in the management of the socialization of production aims at facilitating private accumulation. This is the essence of the new accumulation framework. It can take different forms: encouraging savers to invest in activities which create resources appropriable by private interests,

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individually or collectively; creating mechanisms which facilitate the private re-appropriation of the return ensuing from the investment in economic infrastructures (e.g. basic research, health, means of communication, etc.); implementing cooperation procedures between public and private entities, in order to guarantee private large-scale-effect investment (see the theory of endogenous growth Lucas, Romer, Barro; for a clear and synthetic presentation, see Guellec and Ralle 1995; Aghion and Howitt1998). The network is therefore reintroduced in the contemporary economic thought (Castells 1996, 1997, 1998). However, the network becomes the financiers’ playground. It extends as a form of private organization for all community services. But the contemporary analysis of networks often ignores the struggle for power and domination that firms exercise on labour and state. The creation of a stock of appropriable productive resources is considered by liberal economists as the main aspect of state intervention in the accumulation process. Concerning especially innovation, Branscomb and Keller (1998) have the following argument: they note that the creation and diffusion of knowledge boost the performance of a national economy (of the big firms that compose it) and they argue that the traditional scientific and technological policy (based on the financing and the achievement of large R&D programmes, especially in the fields of defence, energy, space and medicine) has been replaced by a policy of research and innovation. To reach its goals in terms of competitiveness, this policy must associate public research programmes (financed by public funds) with the diffusion of their results to the users (competitive enterprises). The state must guarantee the efficiency of privatization (commercialization) procedures by way of regulation (intellectual property rights, anti-trust laws, etc.), tax system, budget, etc. in order to facilitate the accumulation of ‘social capital’. By this concept, these American economists conceptualize the processes of value transfer from enterprise to enterprise, from a public institution to a private organization (without clear reference to the impacts of domination and inequality, except for the case of the monopoly, i.e. in the commercial sphere. They accept the need to take into account the discriminating positions linked to innovation, to the size and the quantity of capital raised); they also conceptualize the constitution of a ‘stock’ (tank) of resources shared in this multiform, multifunctional and multi-partner cooperation. Furthermore, is this advanced version of the liberal thinking (linked to a systemic analysis) tenable? As a matter of fact, it ignores the relations of power which occur in the processes of appropriation of private scientific resources, of creation of ‘new productive combinations’ and of creation and distribution of gains. Wouldn’t it be more plausible to come back to the debates related to the monopoly and to the externalities it causes or which it benefits from in order to discuss the ‘breach’ made by the financial power in

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the neo-classical theory (Robinson 1971)? The fact is that the new accumulation framework favours the expansion of capital while it ensures its exploitation (innovation, opening of markets, profits) on a national, but also international basis. That is probably the reason why the junction (which has important theoretical and ideological consequences) between the marketization of public services (by way of segmentation) and the centralization of capital, by way of the construction of those famous networks, has not clearly been established in the neo-liberal contemporary thought. In particular, the place of big firms is still very important, and they take advantage of their size to appropriate, within the networks, all available public resources. Let us repeat it once again: according to the theories of contestable markets combined with those of endogenous growth, the state has to bear sunk costs (infrastructures, R&D, human capital, environment) in order to create free entry and exit conditions and to boost the accumulation of private capital; this requires the withdrawal of the state as entrepreneur and the liberalization of markets, which finally permits the creation of networks. When the contradictory social and political relations existing in the economy (between enterprises, but also between enterprises and workers and between enterprises and state) are reintroduced in the analysis, the differences between enterprises (in terms of size and financial power) clearly appear: all firms do not similarly profit by the new accumulation framework. The case of R&D is meaningful. According to the theory of endogenous growth, the state must support basic research expenditure and basic education. The ensuing scientific and technical resources have to be available both to small and big enterprises. All firms must be allowed to freely draw from the stock of basic knowledge and have a skilled and potentially versatile labour force. However, many studies actually assert that those resources are mainly appropriated by big firms, due to their financial, scientific and technical power (Laperche 2001). In the same way, the withdrawal of the state, especially in the field of applied research, aims at facilitating cooperation between public and business research, i.e. creating private scientific and technical networks. Once again, big firms benefit from the experience they gained during the years of state protectionism, and often dominate the network. Small firms are integrated in those networks, as subcontractors or as innovation laboratories (as explained by S. Boutillier, in Chapter 3). The new public science policies make science a force of production of major importance in the competition between big firms (see Uzunidis 2002). What kind of growth is there in the long run? The new forms of state intervention must, in theory, give birth to self-maintained growth (endogenous growth). But, the cost borne by the state to create this new accumulation framework is very heavy: the state has to finance infrastructures and to prop up enterprises, especially the former monopolies, which sometimes are faced

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with very important difficulties, as was demonstrated by the case of European telecommunication operators in the latter years. Such expenses are heavy for public budgets. As a consequence, the state relinquishes some activities which nevertheless (and even according to the theoreticians of endogenous growth) are part of its prerogative. The case of R&D here is particularly significant. The effects of this new accumulation framework can be contradictory with the aims defined by theories. As a matter of fact, if technical progress is now considered as a determining factor of growth (and no more as a residual factor), the lack of interest in the social and economic mechanism of its creation (especially the key role of basic research in the creation of new products and processes, which tends to be underestimated), could contribute to the reduction of the common stock of knowledge. This stock helps enterprises reinforce their technological strength and promote self-maintained growth. Once again, the narrow approach of today’s analysis may jeopardize the expected positive results of the theories (see Laperche 2003). Moreover, the introduction of finance in the running of public services transforms them into large accumulation fields and is at the origin of stock market and economic uncertainty. After the financial scandals and the burst of the speculative bubble, this uncertainty now creates new barriers which impede new entries into markets dominated by established enterprises: such enterprises are stronger and benefit by the support of public policies. Entry thus becomes difficult and costly. The new forms of state intervention, aimed at creating the liberal accumulation framework, are not as efficient as the models expected them to be: in fact, public investment is very significant in infrastructures, in the creation of an environment favourable to private investment but does not give birth (because of the uncertainty created by competition) to the expected ratchet effects.

6. CONCLUSION The marketization of public services is inscribed in a double process which links the failure of the social state and the crisis of the system of enterprises based on the short-sighted growth of the scale of production. By way of finance, the state tries to reduce its expenses, and big enterprises look for new profit sources. However, subsequently, the financial logic invalidates the notion of community services. The question of public services and state is mainly linked to the question of the social logic and of the regulatory mode. There is an individual and a collective rationality. They are interdependent and irreducible from one to the other. The former is linked to individual interest, and the latter to general interest. This one is in charge of collective goods (infrastructures), of social utility (health, education) and of people’s

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fundamental rights (liberty, security, equality before the law and for the access to common goods). Each of these fields can be defined by its function (Passet 2000). Nowadays, it is obvious that this notion of public services is obsolete. Community goods are totally or partially transferred to the private sector and considered as markets or as profit-making fields. Due to their relations of power and financial strength, big firms become an area of convergence of science, techniques and capital which combine to feed their innovation process. To evolve from the concentration stage of production to the current stage of contractual integration of centralized property, market economy forces and the state have invented a new accumulation framework; economic policies aimed at ‘contesting monopolies’, privatizing and introducing flexible methods of labour management, and introducing finance and policies of international integration, have in a certain way succeeded in destroying inefficient capital. They thus create the framework of securitization and marketization of all individual and collective patrimony (science, education, health, communication). At the same time, former state-owned enterprises are no longer in charge of any public service missions. State subsidies increase according to popular contesting (when users contest the cost, the quality or the access capacity to the service sold) in order to ensure the achievement of a ‘minimum social service’ without questioning the profitability of the enterprise. The regulatory strength of finance thus creates a vicious cycle of subsidies (in aid of big private enterprises) and of deterioration (to the detriment of users) of public services. The current ‘short-term’ regulation of the economy requires direct economic and financial intervention by the state, but also a punctual one in order to cope with the difficulties created by marketization and its consequence, i.e. the drop in profit rate. It requires an intervention based on a heavier and heavier set of rules in order to make the expansion of big fortunes possible through the global games of competition and finance, and to allow all savers to – mortgage the future: a not so innocent fraud.

NOTES 1. 2.

Permanent innovation is a strategy focusing on ‘productive combinations’ (Schumpeter 1942), as barriers to entry and as a means to reinforce the commercial and financial power of the firm. ‘Re-regulation’ means that state intervention focuses on supply boosting and no more on demand pushing.

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REFERENCES Aghion, P. and P. Howitt (1998), Endogenous Growth Theory, Cambridge, MA: MIT Press. Barro, R.J. (1990), ‘Government spending in a simple model of endogeneous growth’, Journal of Political Economy, 98 (5), 103–25. Baumol, W., J. Panzar and R. Willig (1982), Contestable Markets and Theory of Industrial Structure, New York: Harcourt Brace. Bhagwati, J. (2004), In Defense of Globalization, Oxford: Oxford University Press. Branscomb, L. and J. Keller (eds) (1998), Investing in Innovation, Cambridge, MA: MIT Press. Castells, M. (1996, 1997, 1998), The Information Age: Economy, Society and Culture, (3 vols), Oxford: Blackwell. Curien, N. and M. Gensollen (1992), Economie des télécommunications, ouverture et déréglementation, Paris: Economica. Duharcourt, P. (1997), ‘Les enjeux de la modernisation des services publics’, La Pensée, 310, 5–17. Friedman, M. (1968), Dollars and Deficits, Englewood Cliffs, NJ: Prentice-Hall. Galbraith, J.K. (1958), The Affluent Society, Boston, MA: Houghton Mifflin. Galbraith, J.K. (1973), Economics and the Public Purpose, Boston, MA: Houghton Mifflin. Galbraith, J.K. (1992), The Culture of Contentment, Boston, MA: Houghton Mifflin. Galbraith, J.K. (1996), The Good Society: the Humane Agenda, Boston, MA: Houghton Mifflin. Galbraith, J.K. (2004), The Economics of Innocent Fraud, Boston, MA: Houghton Mifflin. Guellec, D. and P. Ralle (1995), Les Nouvelles théories de la croissance, repères, Paris: La Découverte. Harcourt, G. (2001), L’Économie de Joan Robinson, Economie et Innovation, série Krisis, Paris: L’Harmattan. Innovations, Cahiers d’économie de l’innovation (2001), special issue ‘Joan Robinson, Hérésies économiques’, 14. Innovations, Cahiers d’économie de l’innovation (2003), special issue ‘L’économie du siècle, points critiques de l’accumulation’, 17. Keynes, J.M. (1991), The General Theory of Employment, Interest and Money, originally published 1936, Rowman and Littlefield. Krugman, P. (1997), Pop Internationalism, Cambridge, MA: MIT Press. Laperche, B. (2001), ‘Potentiel d’innovation des grandes entreprises et Etat, argumentation évolutionniste sur l’appropriation des informations scientifiques et techniques’, Innovations, Cahiers d’économie de l’innovation, 13 (1), 61–86. Laperche, B. (2003), ‘Les critères marchands d’évaluation du travail scientifique dans la “nouvelle économie”. La science comme “force productive” et “outil marketing”’, Innovations, Cahiers d’économie de l’innovation, 17, 105–38. Le Masne, P. (2006), ‘Le rôle des services publics pour Galbraith’, Innovations, Cahiers d’économie de l’innovation, 23, 173–92. Lucas, R.E. (1988), ‘On the mechanics of economic development,’ Journal of Monetary Economics, 22, 3–42. Organisation for Economic Co-ordination and Development (OECD) (2002), Recent Privatisation Trends in OECD Countries, Paris: OECD.

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Passet, R. (2000), ‘Contre les privatisations, une économie plurielle’, Le Monde diplomatique, May. Plihon, D. (2002), Le Nouveau capitalisme, Dominos, Paris: Flammarion. Robinson, J. (1971), Economic Heresies: Some Old-Fashioned Questions in Economic Theory, London: Basic Books. Robinson, J. (1979), Aspects of Development and Underdevelopment, Cambridge: Cambridge University Press. Röller, L.H. and L. Waverman (2001), ‘Telecommunications, infrastructure and economic development: a simultaneous approach’, American Economic Review, 91 (4), 909–23. Romer, P. (1990), ‘Endogenous technical change’, Journal of Political Economy, 98 (5), 71–102. Schumpeter, J.A. (1942), Capitalism, Socialism and Democracy, London: Routledge. Uzunidis, D. (2000), ‘Cycles, innovation et changement social’, La Pensée, 323, 89–98. Uzunidis, D. (2003), ‘Les facteurs actuels qui font de la science une force productive’, Innovations, Cahiers d’economie de l’innovation, 17, 51–78. Uzunidis, D. and B. Laperche (2004), ‘Power of the firm and new mercantilism. An analysis based on Joan Robinson’s thought’, in L. Randall Wray and M. Fortstater (eds), Contemporary Post Keynesian Analysis, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 333–47. Williamson, J. (1990), ‘What Washington means by policy reform’, in J. Williamson (ed.), Latin American Adjustment: How Much has Happened?, Washington, DC: Institute for International Economics. Williamson, J. (2000), ‘What should the World Bank think about the Washington consensus’, The World Bank Research Observer, 15 (2), 251–64.

Index absenteeism 297 abuse and corruption 26 academic research 132 accountability 28 of government research establishments 266 accounting 96 corrupt in USA 285 falsification 177 statements, fake 26 accumulation 57 acquisitions 44 advertising 6, 109, 145, 230 creating need 74 persuasion 107 Affluent Society, The (Galbraith) 1, 5, 12, 35, 73, 108, 232 ageing of population 43, 45 agency theory 43 Alzheimer’s disease, drugs for 132 American Capitalism (Galbraith) 2, 5, 35, 73 American planning 65 Amex Defense Index 283, 284, 290, 299 analysis procedures of regulating bodies 251–2 Anatomy of Power, The (Galbraith) 73, 149 Andersen, Arthur 48 anti-inflationary measures 92 anti-militarism 41 arbitration opportunities 45 Arendt, Hannah 5, 71–3, 84 aristocracy 21, 23 armaments sector 41, 62, 76, 77, 292 in US 280–83, 284, 285, 288 armed force by US 298 arms race 62, 63, 76, 77 Asia 33 assets, intangible 25, 49 asthma, drugs for 132

auditing process corruption 169 authoritarian tendencies 34, 189 automation causing unemployment 193 automobile industry 122, 50 automotive industry 44 Aventis and Genopole Evry 132, 136–7 Aviation Week and Space Technology 299 bankruptcies 57 Barings Bank collapse 168 Bayer CropScience 133 benefit allocation 99 beta (
) coefficient 299 big business 213 biological knowledge and IPR 195 Bio-safety National Technical Commission 253–5 biotechnological control and computers 250–51 biotechnologies 9,11, 188, 190 Boeing Co. 291 bond market 177 bonus options 26 bottom-line profit, increase 158 BP company 100 branch bargaining 95 Brazil 30, 31, 253–5 Bretton Woods system 38 British defence research establishments 264–77 BSE in United Kingdom 250 bureaucracy 20, 32, 62, 63, 76 business enterprises 21, 22, 25, 28 business information graduate courses 26 business of firms 74 capital and knowledge 30 concentration of 143 concept of 23–6

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320 internationalization of 188 value of 25 capital accumulation 18, 22, 220 capital management 62 capital markets 111–12 capital ownership 65 capital reproduction, risks 241 capitalism 2, 3 American 61, 63, 87, 144 and democracy 17–37 and socialism 61–5, 67 end of 53–70 global restructuring of 185–201 large corporation as keystone 143–9 managerial 38–52 of professionals 17–37 Capitalism, Socialism and Democracy (Schumpeter) 60 capitalist accumulation process 56 capitalist change 59 capitalist class 18, 19, 21, 30, 31 capitalist concentration 79 capitalist economies 39 capitalist ideology 32 capitalist mode of production 53 capitalist ownership 22 capitalist revolution 34 carbon emissions 241 cardiovascular diseases in Germany 132 career plans 45 Carrefour 151 cartels 89 cash flow 22, 25 Cayman islands 177 centralization 57 of R & D activities 127–8 chain stores 150, 159 change and industry 2 changes, structural 87 chemical and pharmaceutical industry 122 Chernobyl accident 250 citizenship rights 36 civil servants 27 class tensions 194 Clean Air Act, California 246 Coca-Cola 100 cognitive proximity 129–30 coherence 168 Cold War 32, 61

Index collaboration between firms 219 collective bargaining 93, 95 collectivization of private property 57, 62 collusive arrangements 297 commercial banks 30, 89 commercialization 56 of Defence Evaluation Research Agency 271 commercial pressures on research 266, 269 commodification of scientific knowledge 195 common agency 164 common goals 82 common interest 93 common values 72 communication networks 90, 189 communicative knowledge 18 Communism 76, 77 companies 217–18 and market, boundaries between 64, 115, 116 corrupt 168–70 globalized organization of 159 grouping of 209 interactions between different 125 large and small 7, 53, 54, 62, 63, 100, 155, 163 power of large 71–85, 109, 153, 218, 219 without capital 88 company bargaining 95 company directors’ remuneration 47 Company Executive Officer (CEO) remuneration 46 company executives, fraud 48 company performance 47 competence and skills 95 competition 39, 43, 49, 53, 57, 63, 114, 249 among global technostructures 154–8 competitive market environment 92 competitive market firms 166 competitiveness gains 242 competitive sector corruption 163 Complex, the 282–3 computerization 63–4,129 concentration of capital 54

Index of property 54 conditioning of individual 81 conformity to set rules 84 conglomerates 89 large, development of 189 conservative groups 33, 94 consistency principle 9, 115 consumer choice 92 consumer goods 74, 87 consumer needs 64, 89 consumer society 62, 232 consumer sovereignty 6, 77, 107, 214, 233–4 consumers 3, 7, 40, 74 ruling market 74 consumption increase and investment 302 contracts of employment 95 control by groups 84 conventional wisdom 35 cooperation 49 among global technostructures 154 coordination mechanism in the firm 115–16 copyrights 191 corporate action on consumers 230 corporate agreements 99 corporate bureaucracy 12, 67 corporate corruption 162–84 corporate effectiveness, taxonomy of 169 corporate governance 42, 91,95, 107, 157 corporate profits 47 corporate R&D 7 corporate sector 165 corporations corrupt 3, 6–9, 96 large, power of 77, 84 management of 89 modern, as dominant force 31, 160 planning 109 value of 25 corruption 8, 165–70 and the corporate technostructure 170–74 in the corporate sector 180–82 corrupt practices 164 Council of Soldiers’ Deputies 296 Council of Technological Workers 296

321

countervailing powers 142, 150, 151–4, 159 craftspeople 305 creative destruction 58 credit 21 Culture of Contentment, The (Galbraith) 71, 77, 303 culture of organization 82 currency exchange operations 51 data computerization 129 death of smaller stores151 decentralization 124 decision-making 89, 112–14 defence budget 77 Defence Evaluation Research Agency (DERA) 11–12, 268–74 defence firms, private 12 defence procurement 264 defence research establishments 264–77 delocalization threat 51 demand control 76 demand generation by firms 74 democracy 3, 18, 26–9 and accountability 27 and capitalism 17–37 democratic regimes 31 democratic revolution 29 departments of firm, interactions 125 dependence effect 1 DERA see Defence Evaluation Research Agency deregulation 43, 66, 94 deterrence 81 devaluation of capital 56 developed countries 33 developing countries 163 corruption 176 difference armament 291 diffusion of technology 241 digital information technology 26 digital technology and spatial proximity 134–6 direct and indirect wages 32 discipline against thought 82 dividends, collection of 57 division of labour 44, 66 domination by large companies 4, 65 of consumers 4, 238

322

Index

dotcom bubble 285 Dow Chemical 100 Dow Jones Industrial Average 290 drugs and R&D activity 132 Dutch Shell, corruption 174, 179–80 ecoefficiency 251 economic business of society 58, 61 economic change 1–13, 24, 43, 58 economic growth 31 in Latin America 33 economic inequality 194 economic opportunities 78 economic policies 53 economic reality 63 economic restructuring 109, 190 economic stability 31 economic theories 1, 82–3 Economics and the Public Purpose (Galbraith) 1, 71, 75, 303 economics crisis of 1970s 66 Economics in Perspective: A Critical History (Galbraith) 1 Economics of Innocent Fraud, The (Galbraith) 9, 158, 293, 309 economies of scale 45 economist, status of 71 ‘Economists against the Arms Race’ 299 ‘Economists for Peace and Security’ 299 economy as decisive force 78, 93 education 26, 77 and research 216, 241 privatisation of 195 educational improvements 45 Eisner, Michael at Walt Disney 48 electricity 305 electronic data transmission 125 emoluments, extravagance of 47 employability 99 of university students as goal 80 employee-managers 54 employees, domination of 159, 238 endogeneity 223 Engineers and the Price System, The (Veblen) 297 Enron 26, 291 corruption 174–6 enterprise, spirit of 4 entertainment 305 entrepreneur 4, 20, 21, 53, 54, 60–64, 67

and risk 166 remuneration 92 entrepreneurial capitalist class 34 entrepreneurship 10, 23, 36, 58–60, 211–12 environment and health 246 environmental degradation 73, 194, 198 equilibrium 58 Esso 100 Europe 42, 153 European Union 11 countries 251, 252 governance 249–53 United States cooperation 131 evolutionary approaches 86, 115–19, 223 evolutionism 10–21, 107–21 exchange equilibrium in the market 110, 111 exchange rates 31 Asia 33 Brazil 30 exchange system 88 executives, top, remuneration of 22, 26 expansion of the technostructure 241 expansionism 78 exports, increasing, in Brazil 255 externalities 58 fabrication of permanent need 78 family firms 17, 20, 34 farmers, low-income 305 Fiat 100 figure massaging 176 financial globalization, regulation of 49 finance and armaments 283–5 and the Complex 297–9 and the state 311–14 in the 1990s 42–4 finance capital in the 1990s 292–9 institutions 12 finance managers 44, 96 financial capitalism, power of 39 financial institutions 29, 30 financial liberalization 94 financial markets, development 42, 45, 67 financial motivation 8, 156 financial practices, innovative 48, 49

Index financial sector 3, 29, 45 power of, in Brazil 30 firms see companies First World War 58 fiscal policy 32, 93, 94 flexibility, search for 90 food industry in United Kingdom 250 Ford 100 Fordism 40–42 forecasts 76 foreign exchange transactions 44 foreign trade 56 France 45 globalization 138 research and development (R&D) 132 fraud 26, 46, 48 in USA 285 multiplication of 49 fraudulent behaviour 4, 48 freedom of thought 82 free-market 91, 93–6, 185 Friedman, Milton 43, 93–4 fund managers 158 Galbraith, John Kenneth 1–13, 53–70 and Post-Keynesian perspective 220–22 Galbraithian capitalism 86–104 General Dynamics Corp. 291 General Foods 100 generation of technology 241 genetically modified organisms (GMOs) 250, 251 in Brazil 253–5 resistance from activists 251 genetic engineering 241 genetic therapy 137 Genopole Evry and Aventis 132, 136–7 Germany 29, 30, 45 research and development (R&D) 132 Gillette 100 Ginesco 100 global competition 124–5, 153 global financial markets 49, 62, 66, 91, 157 globalization 2, 5–6, 8, 32–3, 87, 94–5, 124–30, 149–54 globalization versus proximity 127 global R&D networks 122–41, 138 global technostructure 156–8

323

GMO see genetically modified organisms Good Society, The (Galbraith) 35, 303 goods, production of 241 governance, good 42 governance model pluralist 258 technocratic 256 government agencies 12, 89 government intervention 77 government research establishments 265–8 government sector 163 government spending 77 Greenpeace 253 group personality of firm 118 growth for the sake of growth 75 growth model, American 33 growth of firm 92 health of workers 247 hedge funds 12, 279 hidden information 166 hierarchical function organizations 41 hierarchy 113, 116 higher education, enrolment for 109 Honda 100 Honeywell 100 household spending 45 housing 73 human resources, skilled 26, 55, 112, 131 human value debasement 80 IBM 100 information and communications technology (ICT) 7, 9, 45, 87, 122–41, 190 and R&D 126, 127, 129, 130 and spatial proximity 134–8 investment opportunities 66 identification 9, 82 with firm 114 ideologies 32–4, 43 immigrants 78 impartiality of research endangered 271 Imperial Chemical Industries 100 incentives and barriers 8, 11 income maximization 91, 114 independence, loss of individual 80

324 individual over collective 99 individual property 57 individualism 96, 114, 223, 231 individuals liberation from technostructure 234 power of 64 industrial and financial groups 73 industrial capitalism 3, 10, 29, 40, 43, 55, 58 industrial competition 61 industrial development 56, 144 industrial firm, domination of 73 industrial location clusters 215 industrial property 129 industrial restructuring 283–92 industrial system goals 147 industrialization 34 industry and universities 216 inflation 94 information and communication technology (ICT) 5, 90 and corporate sector 165 databases 191 flows 112 transfer 125 ‘information enclosure’ 194–5 ‘innocent fraud’ 84 innovation 2, 10–13, 23, 61, 206, 207, 209, 210 and the scientists’ role 234–9 financing of 21 instability 215 policies 130 process 128, 212, 213, 214 systems, national 11, 241–63 technological 222 instability 185 institutionalism 12, 115–19 analysis 278–302 investing 156–8, 279 perspective 213–17 restructuring 190 institutions 245–6 insurance companies 91 insurance system, private 99 intellectual property 11, 129, 185–201 intellectual property rights (IPR) 9, 187, 188, 191 196, 197 intellectual resources 113 intelligence, organized 112

Index interaction 124–30 interest rates 331 internal cohesion 159 international competition 150, 152 international elite 50 international exchange 45 internationalization 50 International Labour Organization 152 International Monetary Fund 304 internet 66 negative impact on postal services 90 inventions and patents 192 inversion 43 investment 34, 22, 223 and growth 34 and job creation 302 income 302 in innovation 214, 216, 218, 220 in R&D 147 opportunities 39, 53, 56, 58, 59 investors, new types of 156 Iraq war and Wall Street 298 iron and steel industry 55 ITT 100 Japan 42, 45, 153 John Deere 100 joint stock companies 57, 60, 68 Keynes, John Maynard 24, 31, 75, 185, 300 macroeconomics 32 knowledge 18, 19, 22 and capital 32 and information 190, 192 and innovation 117, 229–40 production of 242 knowledge capitalism 20, 23, 26, 27, 34 knowledge control 29 knowledge coordination 112 knowledge economy 5, 87 knowledge flows 128 knowledge legitimacy 21 knowledge, technical 24 knowledge-based economy 249 labour 32, 110, 191 and production 86 displacement 193 market, segmentation 92

Index requirements 89 value 56 labour-management relations 95, 99 laissez-faire 211–12 land and power 29 landowners 21 Latin America 33 learning and research institutions 243 legal ownership 22 legal system 17 liberal capitalism 12, 13, 22, 23, 32, 35 liberalization 304, 310 limited companies 4, 54 litigation procedures 167, 195 local interactions and proximity 128, 131–2 location selection 130 Lockheed Martin 291 low-wage countries 45 machine industry 86 machines replacing manpower 109 macro- and micro-economy 75 macroeconomic policy 29, 30, 34, 40 Major Market Index 290 management 26, 231 management theory 168 managerial action 231 managerial capitalism3, 4, 5, 6, 38–52, 88–90 to business 46–50 managerial class and technology 213 managerial fraud 158, 159 managerialism 279 managerial policies 95 managerial power 89, 90, 146, 293 manager-owner alliance 293–6 managers 20, 22, 65 managers and shareholders 67 managers, salary increases 46, 158 managers versus managerialism 292–9 manufacture production 86 manufacturing industries 110 marginalization 47 marketization 13 market 233 and firm 107–21 balance 243 competition in 20, 34 control 45

325

coordination 18 deregulation 310 economy 19, 86 perspectives 208–13 rules, priority 94 sector corruption 166 shares 39 system 10–13, 22, 83, 92 uncertainty 64, 65, 110–12 marketization 302–17 market-led economy 76 markets 17, 34, 56, 124 and war in US 298 subordination of 10, 232–4 Marx, Karl 4, 5, 20–24, 53–70, 78, 185 Grundrisse 190–91 Marxism 29, 86 and abolition of private property 79 mass distribution companies 151 Massey-Ferguson 100 materials, new 9 mechanical engineering industry 55 media 28 median ‘armaments’ income 291 median ‘instruments’ income 291 medical care 73, 77 Melman, S. 282–3 mergers and acquisitions 44, 45, 47, 150, 285–6 microeconomy 39 microelectronics 190 middle class, professional 3, 27 middle management, socio-professional 41 military and industrial bureaucracy 77 military expenditure 41, 180–82, 298 military-industrial system 278–301 military power 23, 29 military research 61 military response, American 77 military sector 2 military supremacy in US 298 Mills, C. Wright 282–3, 294 Ministry of Defence 274 mixed economies 35 mobility of capital 42, 43 modernization 304 monetarism 72, 310 money capital 297 monopolies 24, 58, 74, 89, 142, 207, 211

326

Index

Monopoly Capital 294 Monsanto Chemicals 253 motivation of large companies 74, 148 multidivisional structure 42 multinational companies 49, 65, 150 NASDAQ Composite 290 national currency 30 national defence 76, 109 national interest 33 nationalization 66, 79 national security 77 nation-states 32, 33, 189 natural resources, scarcity 247 nature, privatization of 193–6 need creating and satisfaction 74, 75, 232 neoclassical economics 58, 71, 73, 83, 192 neo-institutionalism 107–21 neo-liberalism 32, 33 Nestlé 100 network society 18 networks of firms 122 New Industrial State, The (Galbraith) 2, 5,18, 38–9, 41, 71, 73, 76, 108 new technologies 66, 185–201 newly industrialized countries (NICs) 32 Nikon 100 Nobel Prize in Economics 26 non-profit organizations 20, 27, 35 Northrop Grumman Corp. 291 nuclear technology 63 leaks 250 risks 241 waste deposits 250 oligopolistic power 74, 186 operational knowledge 18, 24, 25 opportunistic behaviour 91, 117 opposition , absence of 82 Organisation for Economic Co-operation and Development (OECD) 46 organizations 17, 65, 79, 88 complexity of 23 over individual 82, 118 power of 64 outsourcing 45 owner authority 293 owner-managed companies 74

ownership 21, 163, 165, 297 Palmolive 100 Parmalat, corruption in 174–8 patents 94, 191, 195 patrimonial bureaucrats 27 pecuniary award, power of 81 pension funds 43, 45, 66, 89, 57 pensions 12, 279 Pentagon Capitalism 282 personal enrichment of managers 149 person as a function of society 84 persuasion in sale of goods 81, 109 pharmaceutical industry 137, 247 Philips 100 planning 64, 65, 76, 88–9, 110–12, 232 planning system 73–8, 83, 91–3, 243–5 power of 79, 80, 84 political change 58 political economy criticism of 10, 61–3 of technological innovation 205–8 political legitimacy 34 political philosophy 72 political power 29, 34 politics, right wing and left wing 99 pollution 247 poverty of working class 53 power 5, 23, 28–9, 46, 73, 93 and counterpower 97–8, 149–54, 229–40 elites 282 in industrial society 232 of capitalists 79, 145 of corporations 83, 244 of large companies 71–85, 107 of managers 145–6 relationships 48, 281–2 seeking 9, 171, 173 structure 145 predatory behaviour 46, 49 price control 145 price fluctuation 86 price mechanism 88, 89, 116 price manipulation 297 prices 7, 76 prices and incomes policy 93 private and public sectors 154, 186 private appropriation of capital 9 private organizations 35

Index private property 4, 57, 60–62 private sector wealth 73 privatization 66, 94, 193, 197, 304, 310 and intellectual property rights 264–77 consequences 271–4 of UK defence research 268–71 producer organization 87 producer sovereignty 214 product diversification 111 production 28, 34, 86, 188, 189 production processes, rigidity 110 productivity 23, 24, 41 products and demand 234 professional expertise 49 professional middle class 18, 21, 24, 27, 34, 35 professionals 20, 24, 30, 31 and capitalists, alliance 29–32 and organization 19–23 profit and growth rates, fall 32 profit maximization 39, 63, 74, 92 rejection of 114 profits 25, 147 motive 20, 86 rate 4, 9, 31–4, 56 profitability of capital 42 profitability, immediate 40 property 21 of professionals 22 private 187 property rights 43 on natural resources 194 proximity 124–30 cognitive 7, 125, 126, 127 inter- and intra-organizational 128 organizational 125 spatial and organizational 7, 125, 127 public interests and planning interests 79 public intervention 40, 51 public investment measure 40 publicity 230 public limited companies 5, 74 public procurement 40 public professional class 31 public profitability 40 public sector 35, 73, 302–17 public services 93, 305–6 public spending on military 180–82 public transport 73

QinetiQ and DERA 270, 272–4 quality of life, erosion 73 quasi-integration 1211 R&D 126, 221, 247 and innovation 61 funding 214 global network 122–41, 130 management and spatial proximity 134–8 Raytheon Co. 291 railways 55 rationality of behaviour 88 raw materials 59, 89 regulation 185 of environment 162 of stock options 47 of technology 242 transnational 189–190 relations with the environment 88 remuneration 22, 46, 48 of armaments CEOs 291 of Company Executive Officers (CEOs) 47 of company directors 47 of managers 157 Renault technocentre 134–6 rentiers 30, 31 research 45, 125, 131 and commercialization 267 centres, extended 134–8 establishments, British 11 sponsors, commercial firms 271 resistance of consumers 252 resource allocation 244 resource-based view (RBV) 217–20 respectability, search for 83 revenues 40 revolutions, liberal populist 43 rheumatoid arthritis, drugs for 132 rights of ownership 163–4 risky technology and exclusion of lay public 42, 64, 257 role of the state 17, 144 rural depopulation 53, 55 S & P500 index 290 salaries extravagant 49 of managers 46

327

328

Index

of professionals 31 Sarbanes-Oxley Act of 2002 48, 176 savings and investment 302 schools 73 Schumpeter, J.A. 2, 4, 53–70, 86 on entrepreneurial process 211 science 58 and governance 241–63, 248–58 and technology research 9, 195, 266 inhibition of 196 privatisation of 193–6 scientific and technical progress 18, 57 scientific management 41 scientific reasoning 30 scientific resources, local 131 scientists 20 and consumers 252, 253 and democracy 236–7 and knowledge 236–7 role in technostructure 235–6 Second World War 12, 31, 39, 59, 65, 74 securities, valuation of 46 segmentation of activities 309, 310 self-destruction of capitalism 60 self-regulating firms 152 self-regulatory systems 247 shareholder capitalism 5, 88, 90–91, 310 shareholder control 294 shareholder power, weak 89, 90, 297 shareholder value 3 shareholders 43, 53, 62, 65 conflict with management 2–6, 68 deception of 48 development of 60 interests 149 money misappropriated 157–8 rights of 47, 164, 165 role 279 small 47, 49 shareholding and globalization 156 share options 176 share redemption 51 share value creation 95 sharing of experiments 125 short termism 42 skill coordination 117 skilled labour 92 skills 109 slow-down in economic growth 66

Smith, Adam 54 social accountability organizations 28 social and anti-social entrepreneurial behaviour 166–7 social and political process 28, 34, 35 social attitudes 115 social conditioning, power of 81 social conflict 196–9 social groups, defenceless 98 social housing 77 social integration 66 social protection system 99 social restructuring 190–93 social spending, government 66 social stability 34 social transfer 40 social welfare 195 socialism 4, 19, 60–62 and capitalism 54, 65 socialist mode of production 53, 285 socialization process 53 societies, inegalitarian shift of 50 society and state 75 socio-economic regulation 189 software 24, 25 Soviet Union 19, 22, 32, 36, 65, 77 soy and genetically modified organisms (GMOs) 253–5 illegal planting of GMO in Brazil 253–5 space exploration 109 spatial contiguity 133, 136, 138 spatial decentralization of firms 122 speculation 47, 91 speculative bubble 47 Spirit of Innovation (Galbraith) 13 stability and growth 34 state 75, 76, 163, 230 and economic activity 109 power of 10–13 state intervention 75, 80, 92, 85, 304, 307–9, 311–14 state organization 27, 231 state policy, supportive 223 state regulation 189 steam engine 55 Stock Exchange 44, 46, 96 performance in war dividends 289–92 stockholders 12, 20, 22, 26, 43, 146, 148 stock market role 94

Index stock options 26, 40, 47, 49, 157 stocks and shares 96 strategic planning 223 stress in work 45 strikes 152 subcontracting 111 sunk costs 303 supply and demand 2, 64, 86 supply policies 12 supply source 64 takeovers 150 taste-shaping of consumers 74 taxation 93 technical evolution 6 technical knowledge 18, 24, 62 technical progress 11, 23, 55, 57, 59, 241 technobureaucracy 18 technocratic governance model 256 technocratic ideology 31 technological change 109 technological competition 61, 131 technological development 2, 10, 56, 144, 149 technological innovation 205–28 technological revolution 187, 188, 191 technological shares 96 technological systems 39 technologies causing unemployment 193 modern productive 112 new 187, 190–93 technology 10, 64, 111, 232 and large firm 109 and modern state 75 and production 110 decisions on, exclusion of lay public 256–7 diffusion of 11 generation of 241 implementation 117 modern 8, 87, 146 privatization of 193–6 regulation of 246–8, 255–8 technostructures 39, 41, 44, 46, 54, 61–5, 74, 75, 119, 146–7 and control 230–32, 281 and scientists’ role 234–9 as decision-making basis 213, 214

329

financial 8, 49 globalized, 6–9, 122 motivations 231, 233 objectives 114 power of 65, 92, 112 and large corporations 142–61 thalidomide and drugs 247 Theory of Economic Development (Schumpeter) 59 think, inability to 84 time, unity of 90–91 totalitarianism 5, 9, 72 toxic residues 241 trade groups 36 trade liberalization 94 trade unions 51, 88, 109, 150, 151, 153, 159 membership 153 trading blocs, large 188 tradition 83 transaction cost theory 116, 117 transborder mergers and acquisitions 17 transgenesis 250 transnational corporations (TNCs) 53, 189, 192 transport 305 transportation networks 189 uncertainty 117, 145, 206, 210, 223 unemployment 61, 66, 193 Unilever 100 United States and developed countries 32 and European Union cooperation 131 armaments industry 285 military industrial system (MIS) 12 R&D 132 universal suffrage29 universities 41 and research institutes 256, 258 system in Europe, reform of 80 USSR and USA 63, 76 value systems 96–100 values and incentives 113–15 Veblen’s analysis of finance 296–7 venture capital 66 vertical concentration 285–7 vertical integration 64, 67, 89, 111, 145 vertical reorganization of capital 189

330 Vietnam war 41 critical of United States 72, 73 volatile shares 299 wage and salary earners in Europe and Japan 153 wage inequalities 75 wage labour 188 wage restraint policies 94 wages and salaries 27, 31 at Wal-mart 151 Wall Street 290, 298 Walrasian entrepreneur 59 Walt Disney 48 war dividends 289–92 wealth creation 23, 66 welfare 58, 77, 94, 97–8 welfare state 5, 6, 12, 31, 34, 41, 303

Index women, emancipation of 81 workers, unskilled 305 workfare 5, 97–100 working class 21, 31, 55, 191, 305 movement 198, 230 struggle 186 workshop labour 86 world economy 65 core of 87 World Bank 304 Worldcom 291 World Trade Organization 304, 305 worldwide integration of financial markets 45 worldwide interconnection of markets 90 zero growth 53

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Financial Liberalisation and Intervention A New Analysis of Credit Rationing Santonu Basu Why the Bubble Burst US Stock Market Performance since 1982 Lawrance Lee Evans, Jr. Sustainable Fiscal Policy and Economic Stability Theory and Practice Philippe Burger The Rise of Unemployment in Europe A Keynesian Approach Engelbert Stockhammer General Equilibrium, Capital, and Macroeconomics A Key to Recent Controversies in Equilibrium Theory Fabio Petri Post Keynesian Principles of Economic Policy Claude Gnos and Louis-Philippe Rochon Innovation, Evolution and Economic Change New Ideas in the Tradition of Galbraith Blandine Laperche, James K. Galbraith and Dimitri Uzunidis

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