Postwar Liberalism and “American Capitalism”

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

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

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

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

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

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

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

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

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