Galbraith argues that power over capital no longer lies with the CEO or the entrepreneur or anyone who is in a position of ownership of a firm, including the stockholders. Rather, it is what he defines as the technostructure, a group of people consisting of technicians, engineers, managers or anyone who is engrained in the “leadership of the modern industrial enterprise down to just short of the labor force” (72). The need for a technostructure in a firm is, again, derived from the requirement from technology that there are specialized people who not only preform specialized production tasks, such as the design of the product, but also the management of the different sectors of the firm.
In fact, he maintains that there is a “divorce of the owner of the capital from the control of the enterprise…[i]t replaces the entrepreneur, as the directing force of the enterprise with management” such that all the power for decision making, control of production and control of profits now lies with the technostructure, not the owners (87).
This is not to say that profits are not necessary, for if the firm was not producing profits, the owners could restructure the firm and disrupt the technostructure. Such is the case then it is important to maintain profitability, but it is not the case that there is a desire to maximize profits. Galbraith contends that rather it is the pursuit of the security of the technostructure and the pursuit of the growth of the firm that is important. The technostruture may seek to maintain profitability, but only in self-preservation.
Could it be possible that this focus on growth rather than pure profits led GM's recent collapse? GM's operations were heavily reliant on advanced technology that necessitated a deep seeded technostructure within the corporation. It's plausible to argue that GM's technostructure was so focused on growth, it not only lost track of its profitability, but also it grew beyond capable self management which may have been a key factor in its declining profitability. However, before ownership was able to realize this and rearrange its management system, it was too late.
I'm aware there were other things besides managerial incompetence that led to GM's demise, but I think it stands to reason that this may be a good example of Veblen's and Galbraith's theory at work in the real world.
-GS
I like this post, I would also stipulate that one can use Galbraith's framework of thought to understand the incredible growth of financial firms in the American economy. Starting with the incentives for working in a firm like GM, and comparing them to the incentives with working in a financial firm, one would be able to show that the different incentives for workers makes a financial firm much more competetive and profitable for shareholders than a firm concerned with producing in a traditional manner. In a firm like GM the technostructure attempts to preserve its role in production - it is fundamentally conservative. Whereas the incentive structure for a worker in a financial firm is directly related to increasing the profit for that firm in a quantitative manner.. This means that Financial firms, because of the incentive structure faced by workers will be much more profitable than that of a traditional firm, money and investment flows into these lines; as a consequence the role for financial firms grows in the economy.
ReplyDeleteAlso as a side note, I recently read somewhere that the financial division of GM is actually responsible for upwards of 50% of GM's profits, so this may support the idea expressed above.. Any thoughts?
Dan
Interesting post. Hubris is a major driving factor in many large companies... Economists of my managerial economics textbook have a theory that most firms expand till the become incompetent at doing anything, this reminds me of that.
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