The Affluent Society

by John Kenneth Galbraith

No student of social matters in these days can escape feeling how precarious is the existence of that with which he deals. Western man has escaped for the moment the poverty which was for so long his all-embracing fate. The unearthly light of a handful of nuclear explosions would signal his return to utter deprivation if, indeed, he survived at all.

But perhaps most important of all, people approve most of what they best understand.

For a vested interest in understanding is more preciously guarded than any other treasure.

In some measure, the articulation of the conventional wisdom is a religious rite. It is an act of affirmation like reading aloud from the Scriptures or going to church.

The conventional wisdom continued to emphasize the balanced budget. Audiences continued to respond to the warnings of the disaster which would befall were this rule not respected. The shattering circumstance was the great depression. This led in the United States to a severe reduction in the revenues of the federal government; it also brought pressure for a variety of relief and welfare expenditures. A balanced budget meant increasing tax rates and reducing public expenditure. Viewed in retrospect, it would be hard to imagine a better design for reducing both the private and the public demand for goods, aggravating deflation, increasing unemployment, and adding to the general suffering. In the conventional wisdom, nonetheless, the balanced budget remained of paramount importance.

The economic life of the Middle East never recovered from the imaginative destruction, pillage and massacre of Genghis Khan. In contrast with recent experience, Germany required a hundred years to recoup the destruction and disorganization of the Thirty Years’ War.

In a world that had for so long been so poor, nothing was so important as to win an increase in wealth. The prescription—to free men from the restraints and protection of feudal and mercantilist society and put them on their own—was sound, for it was already proving itself. This was not a compassionate world. Many suffered and many were destroyed under the harsh and unpredictable rule of competition and the market. But many had always perished for one reason or another. Now some were flourishing. This was what counted. One looked not at the peril and misfortune, for there had always been peril and misfortune, but at the opportunity.

Nothing else so completely and utterly underwrote the logic of the system. Inequality resulting from monopoly might be the warning of fatal flaws in the system itself.

Those who might themselves be subject to equalization have rarely been enthusiastic about equality as a subject of social comment. As a result, there has anciently been a muted quality about debate on the subject. Still, the economists in the central tradition stated their position with some clarity. There is, Marshall observed, “no moral justification for extreme poverty side by side with great wealth. The inequalities of wealth, though less than they are often represented to be, are a serious flaw in our economic organisation.”5 In the United States, Taussig was more specific. “No stretch of psychological analysis concerning the spur of ambition, the spice of constant emulation, the staleness and flatness of uniformity, can prevail against the universal conviction that the maximum of human happiness is not promoted by great, glaring, permanent inequality.”

The race for increased efficiency required that the losers should lose. If consumers were to rule, there must be rewards for those producers who were in the path of current tastes and penalties for those who were left behind. To seek to mitigate the penalties was to undermine the incentives—to separate the stick from the carrot.

Serious depressions are not accidental misfortunes. They are inherent in the conflict between industry and business and hence are organic aspects of the system. They occur “in the regular course of business.”7 Finally, in his immortal The Theory of the Leisure Class,8 Veblen dramatized, as no one before or since, the spectacle of inequality. The rich and successful were divorced from any serious economic function and denied the dignity of even a serious or indignant attack. They became, instead, a subject for detached, bemused and even contemptuous observation. One watches the struggle between hens for social pre-eminence in the chicken yard as an interesting phenomenon but, in so doing, one does not do much to underwrite the social values of the birds. So with Veblen on the rich. But equally with Ricardo, wealth and poverty were made inherent. And so, moreover, were their least ingratiating aspects. The ostentation, waste, idleness and immorality of the rich were all purposeful: they were the advertisements of success in the pecuniary culture. Work, by contrast, was merely a caste mark of inferiority.

If to be ignorant were as safe as to be wise, no one would become wise.

Much has been written of the appeal of Marx to intellectuals. How, in particular, could a doctrine that had so obviously acquired the standing of a dogma be attractive to inquiring, rational minds?

FEW THINGS have been more productive of controversy over the ages than the suggestion that the rich should, by one device or another, share their wealth with those who are not. With comparatively rare and usually eccentric exceptions, the rich have been opposed. The grounds have been many and varied and have been principally noted for the rigorous exclusion of the most important reason, which is simply the unwillingness to give up the enjoyment of what they have. The poor have generally been in favor of greater equality. In the United States this support has been tempered by the tendency of some of the poor to react sympathetically to the cries of pain of the rich over their taxes and of others to the hope that one day soon they might be rich themselves.

Inequality has also come to be regarded as almost equally important for capital formation. Were income widely distributed, it would be spent. But if it flowed in a concentrated stream to the rich, a part would certainly be saved and invested. There are other arguments. Excessive equality makes for cultural uniformity and monotony.

In the last seventy-five years, the power and prestige of the United States government have increased. If only by the process of division, this diminished the prestige of the power accruing to private wealth. But, in addition, it also meant some surrender of authority to Washington. Furthermore, trade unions invaded the power of the entrepreneur from another quarter. But most important, the professional manager or executive took away from the man of wealth the power that is implicit in running a business. Seventy-five years ago Morgan, Rockefeller, Hill, Harriman and the others were the undisputed masters of the business concerns they owned, or it was indisputably in their power to become so. Their sons and grandsons still have the wealth, but with rare exceptions the power implicit in the running of the firm has passed to professionals.8 When the rich were not only rich but had the power that went with active direction of corporate enterprise, it is obvious that wealth had more perquisites than now. For the same reasons, it stirred more antagonism. J. P. Morgan answered not only for his personal wealth but also for the behavior of the United States Steel Corporation which he had put together and which ultimately he controlled. As a man of corporate power, he was also exceedingly visible. Today no sins of similar corporations are visited on their owners, for the latter do not manage the company and almost no one knows who they are. When the power that went with active busi...

Increasingly, in the last quarter century, the display of expensive goods, as a device for suggesting wealth, has been condemned as vulgar. The term is precise. Vulgar means: “Of or pertaining to the common people, or to the common herd or crowd.” And this explains what happened. Lush expenditure could be afforded by so many that it ceased to be useful as a mark of distinction. An elongated, richly upholstered and extremely high-powered automobile conveys no impression of wealth in a day when such automobiles are mass-produced by the thousands. A house in Palm Beach is not a source of distinction when the rates for a thousand hotel rooms in Miami Beach rival its daily upkeep. Once a sufficiently impressive display of diamonds could create attention even for the most obese and repellent body, for they signified membership in a highly privileged caste. Now the same diamonds are afforded by a television star or a talented harlot. Modern mass communications, especially the movies and television, ensure that the populace at large will see the most lavish caparisoning on the bodies not only of the daughters of the rich but also on the daughters of coal miners and commercial travelers who have struck it rich by their own talents or some facsimile thereof. In South America, in the Middle East, to a degree in India, and by travelers therefrom in Nice, Cannes and Deauville, ostentatious display by those of wealth is still practiced. This accords with expectations. In these countries...

Once the intellectual, politician or man of general ambition saw the rich man achieve distinction without effort and in contrast with his own struggle. He reacted by helping to focus the resentment of the community as a whole. Now he saw the man of wealth forced to compete for his honors. In this competition, the rich man retained undoubted advantages, but he did not automatically excel. Nothing could operate more effectively to dry up the supply of individuals who otherwise would make an attack on inequality a career. By graduating into the ranks of the professional managers, and after making his way up through the hierarchy of the modern corporation, the ambitious man could expect to compete on tolerably equal terms with the grandson of the founder.

But the best of men might suffer from a sudden change in consumer tastes or as the result not of their own inadequacy but of that of their employer. These unpredictable changes in fortune were both inevitable and useful. They were inevitable, for they were part of the capacity of thé system to accommodate itself to change. As requirements and wishes changed, men were employed in new places and disemployed in the old. Capital was sought in the new industries and written off as a loss in the old. The insecurity was useful because it drove men—businessmen, workers, the self-employed—to render their best and most efficient service, since severe punishment was visited impersonally on those who did not.

In the conventional wisdom of conservatives, the modern search for security has long been billed as the greatest single threat to economic progress.

From the very beginning of modern capitalist society, businessmen have addressed themselves to the elimination or the mitigation of this source of insecurity. Monopoly or the full control of supply, and hence of price, by a single firm was the ultimate security. But there were many very habitable halfway houses. Price and production agreements or cartels, price-fixing by law, restrictions on entry of new firms, protection by tariffs or quotas, and many other devices have all had the effect of mitigating the insecurity inherent in the competitive economy.

The specter that for long haunted the economist was the monopoly seeking extortionate gains at the public expense. This dominated his thoughts. The less dramatic figure, the businessman seeking protection from the vicissitudes of the competitive economy, was much less in his mind. That is unfortunate, for the development of the modern business enterprise can be understood only as a comprehensive effort to reduce risk. It is not going too far to say that it can be understood in no other terms. Specifically, it falls within the power of the modern large corporation to mitigate or eliminate many of the more important risks to which business enterprises have anciently been subject. Consumer taste and demand may shift. The modern large corporation resists this by its advertising. Consumer taste is thereby brought partly under its control. Size makes possible a diversified line. This provides further protection. There is danger that technological change will render obsolete a product or method of production. The modern corporation is able, through its research and technological resources, to ensure that it will be abreast of such change. Therefore, technological change will occur under its own auspices or within its reach. A measure of control over prices means a measure of control over earnings. This means at least partial independence of the capital market for funds. Size, moreover, greatly diversifies the opportunities of the firm in raising money.

Organization replaces individual authority; no individual is powerful enough to do much damage. Were it otherwise, the stock market would pay close attention to retirements, deaths and replacements in the executive ranks of the large corporations. In fact, it mostly ignores such details in tacit recognition that the organization is independent of any individual.

This is partly because the corporation, unlike the worker, farmer or other individual citizen, has been largely able to reduce its insecurity without overtly seeking the assistance of government. It has required elaborate organization, but this has been the product of continuous evolution from the original entrepreneurial enterprise. Farmers, workers and other citizens, by contrast, have had openly to seek the assistance of government or (as in the case of the unions) they have had to organize specially for the purpose of reducing insecurity. Consequently, their search for greater security has been notorious.

Nothing has been more central to the purpose of General Motors or General Electric than to encompass and eliminate the perils to which the onetime entrepreneur was presumed to be subject. Nothing would be more damaging to an executive reputation in General Motors or General Electric than to launch a product without testing the market, to be caught napping by a technological development, to be unprotected on one’s raw material supply or to be caught in a foolish price war. These were once the commonplace risks of entrepreneurship.

The change in attitudes on macroeconomic security during the thirties was remarkable. At the beginning of the decade, it was almost uniformly assumed that cyclical fluctuations with accompanying price and employment uncertainties were inevitable. It was hoped by many that they would not be violent. But there was no general confidence that depressions could be tempered by government action without the risk of either eliminating the self-corrective features of the cycle or simply making things worse. By the end of the decade, under the combined influence of John Maynard Keynes and the sanguine and experimental mood generated by the New Deal, there was a widespread belief that depressions could be at least partially prevented. The notion that they should be allowed to run their course was virtually extinct.

In this time of change, the average man was simply showing the commonplace reaction to the insecurity of the competitive system. In doing so, he was following a path that had been pioneered by the modern business firm. He was showing, as ever, that insecurity is something that is cherished only for others. It was inevitable that farmers and workers in general would be the last to concern themselves with security. Before a man will try to protect himself from sudden changes in his economic fortune, he must have some fortune to protect. Businessmen were the first to develop a stake in economic society.

If a man’s wage is barely sufficient for existence, he does not worry much about the greater suffering of unemployment. Life is a heavy burden in either case. Men who are engaged in a daily struggle for survival do not think of old age, for they do not expect to see it. When the normal expectation of life is very low, sickness and death are normal hazards. A man of eighty does not take out life insurance. He reconciles himself as best he can to the prospect of death. To the landless worker in an Indian village, unemployment is not even a misfortune. It is his normal lot. With increasing well-being, all people become aware, sooner or later, that they have something to protect.

One cannot stress too strongly, however, that if economic security is to be considered finished business, or largely finished business, depression and inflation must be prevented.

By the same token, inflation reduces the purchasing power of savings, undermines other steps by which people have insured their future income or had it insured. Prevention of depression and inflation remains a sine qua non for economic security.

Plainly, however, the notion that economic insecurity is essential for efficiency and economic advance was a major miscalculation—one of the greatest in the history of economic ideas. It was the common miscalculation of both Marxian and orthodox economists. Marx and his followers were deeply persuaded that capitalism would be crippled by efforts to civilize it.

The increase in economic security and the increase in economic product are accomplished facts. The conflict between security and progress, once billed as the social conflict of the century, doesn’t exist.

Not only is there no inconsistency between the mitigation of insecurity and the increase of production, but the two are indissolubly linked. A high level of economic security is essential for maximum production. And a high level of production is indispensable for economic security.

The immediate although not the ultimate cause of depression is a fall in the aggregate demand—meaning in the purchasing power available and being used—for buying the output of the economy. Unemployment insurance means that a man’s purchasing power is partially protected when he loses his job. It falls, but no longer to zero. Thus a measure designed to reduce the insecurity associated with unemployment also acts to counteract the loss of output—the economic inefficiency—of depression. And, to the confusion of the conventional wisdom, it acts on a central cause of inefficiency, one that is far more important than isolated malingering which unemployment insurance might conceivably have encouraged. This effect, of course, is not peculiar to unemployment insurance. Farm support prices, which force compensatory public outlays when farm prices, income and purchasing power fall, have the same effect. So do public welfare payments. Old age and survivor’s insurance ensure a modest but steady flow of purchasing power from those who are no longer able to work. This flow is unaffected by an ebb in economic activity and thus acts as a stabilizing influence. In the aggregate, these measures to minimize insecurity comprise a considerable part of what economists call the “built-in stabilizers” of the economy. Thus measures thought by the conventional wisdom to be hostile to productivity all support it at the most crucial point.

By contrast, to a very large degree in recent times, increased output has been sought not for the goods involved but for the effect on economic security. Whether we need or even wish the goods that are produced, their assured production means assured income for those who produce them. This serves the goal of economic security. Nothing else serves it so well. To falter on production, even though that production serves the most unimportant of requirements, is to expose some individuals somewhere to loss of employment and income. This cannot be allowed. The facts here are a matter of common observation. In the political life of western countries—the United States, the United Kingdom, the older British Commonwealths, Western Europe—nothing counts so heavily against a government as allowing unnecessary unemployment. It is not the lost production that is mentioned. It is always the unemployment. The remedy is, of course, more employment and higher production. Thus the effort to enhance economic security becomes the driving force behind production.

In industries where firms are few and comparatively large—oil, metallurgy, automobiles, chemicals, rubber, heavy engineering—the investment in technological advance is considerable. The research and developmental work on which this advance depends is well financed and comprehensive. But in many industries where the firms are numerous and small—home construction, clothing manufacture, the natural-fiber textile industry, the service industries—the investment in innovation is negligible. No firm is large enough to afford it on an appreciable scale; there is real question as to whether it is worthwhile for such firms.3 Unlike agriculture, where innovation is extensively supported by the federal and state governments, there is little or no publicly financed research and development. Yet the absence of investment in innovation in these industries, much though we value its fruits in other industries in which it occurs, excites not the slightest attention.

It is easy to overlook the absence of appreciable advance in an industry. Inventions that are not made, like babies that are not born, are rarely missed. In the absence of new developments, old ones may seem very impressive for quite a long while. Until the combine appeared, the self-binder had been the mechanical marvel of the farm machinery industry for forty years. But if we were serious about increased output, we would be much more searching in these matters. Certainly we would regard the absence of investment in innovation in an industry as intolerable. But, in fact, large numbers of industries make little or no such investment, have little or none made on their behalf, and we are quite untroubled.

In the general view, it is privately produced production that is important, and that nearly alone. This adds to national well-being. Its increase measures the increase in national wealth. Public services, by comparison, are an incubus. They are necessary, and they may be necessary in considerable volume. But they are a burden which must, in effect, be carried by the private production. If that burden is too great, private production will stagger and fall. At best, public services are a necessary evil; at worst, they are a malign tendency against which an alert community must exercise eternal vigilance. Even when they serve the most important ends, such services are sterile. “Government is [held to be] powerless to create anything in the sense in which business produces wealth . . .”5 Such attitudes lead to some interesting contradictions. We welcome expansion of telephone services as improving the general well-being but, on occasion, accept curtailment of postal services as signifying necessary economy. We set great store by the increase in private wealth but regret the added outlays for the police force by which it is protected. Vacuum cleaners to ensure clean houses are praiseworthy and essential in our standard of living. Street cleaners to ensure clean streets are an unfortunate expense. Partly as a result, our houses are generally clean and our streets generally filthy. In the more sophisticated of the conventional wisdom, this distinction between public and private s...

They must be provided for everyone if they are to be provided for anyone, and they must be paid for collectively or they cannot be had at all. Such is the case with clean streets and police and the general advantages of mass literacy and sanitation, the control of epidemics, and the common defense.

Alcohol, comic books and mouthwash all bask under the superior reputation of the market. Schools, judges, patrolmen and municipal swimming pools lie under the evil reputation of bad kings.

In western countries, in modern times, economic growth and expanding public activity have, with rare exceptions, gone together. Each has served the other, as indeed they must. Yet the conventional wisdom is far from surrendering on the point. Any growth in public services is a manifestation of an intrinsically evil trend. If the vigor of the race is not in danger, personal liberty is. The structure of the economy may also be at stake. In one branch of the conventional wisdom, the American economy is never far removed from socialism, and the movement toward socialism may be measured by the rise in public spending. Thus even the most commonplace of public services, for one part of the population, fall under the considerable handicap of being identified with social revolution. Finally—also a closely related point—the payment for publicly produced services has long been linked to the problem of inequality. By having the rich pay more, the services were provided and at the same time the goal of greater equality was advanced. This community of objectives has never appealed to those being equalized. Not unnaturally, some part of their opposition has been directed to the public services themselves. By attacking these, they could attack the leveling tendencies of taxation. This has helped to keep alive the notion that the public services for which they pay are inherently inferior to privately produced goods.

The explanation of consumer behavior has its ancestry in a much older problem, indeed the oldest problem of economics, that of price determination.2 Nothing originally proved more troublesome in the explanation of prices, i.e., exchange values, than the indigestible fact that some of the most useful things had the least value in exchange and some of the least useful had the most. As Adam Smith observed: “Nothing is more useful than water; but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use: but a very great quantity of other goods may frequently be had in exchange for it.“

The urgency of desire is a function of the quantity of goods which the individual has available to satisfy that desire. The larger the stock, the less the satisfactions from an increment. And the less, also, the willingness to pay. Since diamonds for most people are in comparatively meager supply, the satisfaction from an additional one is great, and the potential willingness to pay is likewise high. The case of water is just the reverse. It also follows that where the supply of a good can be readily increased at low cost, its value in exchange will reflect that ease of reproduction and the low urgency of the marginal desires it thus comes to satisfy. This will be so no matter how difficult it may be (as with water) to dispense entirely with the item in question.

Alfred Marshall, who on this, as on so many other things, laid down the rules to which economists have since adhered, noted that “the economist studies mental states rather through their manifestations than in themselves; and if he finds they afford evenly balanced incentives to action, he treats them prima facie as for his purposes equal.”5 He almost immediately added that this simplification, which indeed has rendered profound scientific service to economics, was only a “starting-point.”

The fact that wants can be synthesized by advertising, catalyzed by salesmanship, and shaped by the discreet manipulations of the persuaders shows that they are not very urgent. A man who is hungry need never be told of his need for food. If he is inspired by his appetite, he is immune to the influence of Messrs. Batten, Barton, Durstine & Osborn. The latter are effective only with those who are so far removed from physical want that they do not already know what they want. In this state alone, men are open to persuasion.

The businessman, with many exceptions, has for long been suspicious of the state—or at least of those activities of the state, the national defense being such an exception, which do not usefully provide him with markets and support to needed research and development. This, it has always been assumed, is because he is an important taxpayer and vulnerable to regulation. But we are too addicted in our social comment to this kind of mechanical economic determinism. Modern government is a major threat to the businessman’s prestige. To the extent that problems of conservation, education and social welfare are central to our thoughts, so the administrators, teachers and other professional public servants are the popular figures. As their prestige, along with that of the men who are associated with the problems and disasters of foreign policy, has increased, businessmen have reacted by pointing out that the government does not produce anything, that it is a barren whore. “Government is powerless to create anything in the sense in which business produces wealth and individuals produce ideas [and] inventions . . .”1 The case involves some rather strained argument—it makes education unproductive and the manufacturer of school desks productive—but, nonetheless, it has a position of considerable prominence, especially in the older business liturgy.

If production is nearing capacity, a considerably increased output will require an increase in capacity. The increased investment that this implies will, in the form of wages, payments for materials, returns to capital and profits, add to purchasing power and the current demand for goods. It does so before the added capacity resulting from the investment is in place to meet the demand. Thus the effort to increase production adds to the pressure on current capacity—and to the prospect for inflationary price increases. A cat chasing its own tail may, by an extraordinary act of feline dexterity, succeed on occasion in catching it. To overcome inflation by increasing production, while superficially similar, will not so often be successful.

Thus, by way of illustration, farmers have little or no control over the prices at which they sell their products. Inflation reaches them by way of impersonal market movements. For the wheat or potato farmer, the income elasticity is very low—as wage incomes rise, individuals spend no more for bread or potatoes and, on occasion, spend less. Meanwhile, the farmer’s costs of fuel, fertilizer and other factors from the oligopolistic sector of the economy will have risen. For the beef-cattle producer, by contrast, income elasticity is rather higher. He is the beneficiary of the well-known and statistically quite demonstrable tendency of people who have an increase in pay to celebrate with red meat. Other things being equal, and in the cattle business they frequently are not, his position will be happier than that of the producer of bread grains or potatoes. Such discrimination is pervasive. The individual or firm which, either in line of business or as the result of speculative acumen, holds large unhedged inventories, benefits from the increased demand for these and from the consequent increase in price. At the other extreme are those who experience the rising costs but whose own prices remain largely unaffected because they are fixed by law or custom or, at a minimum, by someone else. This is the position, during inflation, of the teacher, preacher and other of the white-collar community and of those who are reaping the reward of past services to society in the form of pensi...

In the early days of World War II, a grateful and very anxious citizenry rewarded its soldiers, sailors and airmen with a substantial increase in pay. In the teeming city of Honolulu, in prompt response to this advance in wage income, the prostitutes raised the prices of their services.

In the nineteen-thirties, the prestige of monetary policy was, for a time, very low. The Federal Reserve System, deeply uncertain in its purpose, had failed to arrest the speculative boom of the late twenties; low interest rates and easy money were equally ineffective in dealing with the great depression. Bankers, in these years, as a result of error, unhappy accident and the enthusiastic denigration of left-wing critics, had suffered a severe decline in popular esteem. Down with them went the faith in monetary policy. Keynes argued that the rate of interest was a roundabout way of influencing economic activity and of small practical utility.