American Capitalism - The Concept of Countervailing Power is a book by John Kenneth Galbraith

John Kenneth Galbraith

John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...

, written in 1952.

Not as well-known as some of his other works, it contains a critique of the view that markets, left to their own devices, will provide socially optimal solutions. Galbraith agrees with F. A. Hayek as far as the assertion goes that "the price system will fulfil [its] function only if competition prevails, that is, if the individual producer has to adapt to price changes and cannot control them."

Galbraith builds on work by Prof. E. H. Chamberlin of Harvard and Joan Robinson

Joan Robinson

Joan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...

 at Cambridge and the work done by Joe S. Bain of the University of California at Berkeley arguing that the America of the early 1950s no longer complied to a textbook definition of Perfect competition

Perfect competition

In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...

. On page 66 he sets out the conclusions which result from the abandonment of competitive behaviour in favour of oligopoly

Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...

 or crypto-monopoly:

"The producer now has measurable control over his prices. Hence, prices are no longer an impersonal force selecting the efficient man, forcing him to adapt the most efficient mode and scale of operations and driving out the inefficient and incompetent. One can as well suppose that prices will be an umbrella which efficient and incompetent producers will tacitly agree to hold at a safe level over their heads and under which all will live comfortably, profitably and inefficiently."

Just as the market at the micro-level may not always work to society's advantage, Galbraith concludes that Keynes was correct in his explanation of the deficiencies of the macro-model where an equilibrium was possible below the full employment

Full employment

In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....

 level of output and that without outside intervention, this equilibrium might persist.

Galbraith highlights the role of "Countervailing Power

Countervailing power

Countervailing power is the theory of political modification of markets, formulated by American economist John Kenneth Galbraith in his 1952 book American Capitalism....

" in dealing with market failure

Market failure

Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...

& outlines its operation at the micro, and at the macro levels. At the micro level, firms might merge or band together to influence the price. Individual wage earners might also combine in unions to influence wage rates. Finally, government might intervene in the market place where required to provide regulation where countervailing power failed to develop but was nevertheless required. He concluded that Countervailing power was legitimate and welcome as the alternative of state control would be much less palatable to the business community. Without countervailing power, Galbraith concluded (p181):

"private decisions could and presumably would lead to the unhampered exploitation of the public, or of workers, farmers and others who are intrinsically weak as individuals. Such decisions would be a proper object of state interference or would soon so become."

In concluding that his findings were unlikely to meet with applause from the business community (p183) Galbraith was correct.