Deep Thoughts: Galbraith had more insight than those fucking fundamentalist Chicago Boys, for chrissake

Galbraith’s lessons in death – by Evan Jones

American economist John Kenneth Galbraith died on 29 April 2006. An extraordinary number of obituaries appeared in the press. Galbraith was famous as possibly the most read economist in history (after Marx, whose numbers were enhanced by compulsion?).

Given the latter day indifference to Galbraith by mainstream economists and disdain by ‘free market’ economists, the obituaries in the prestigious New York Times (Noble & Martin 2006) and Washington Post (Barnes 2006) were notable for their extended coverage and non-committal tone.

A few were generous regarding substance—for example, Michael Stewart in the Guardian (2006) and Tim Colebatch in the Melbourne Age (2006). So too the unattributed obituary in the London Times (‘J.K. Galbraith’ 2006), whose author claimed:

… his method was to sort out the wheat from the chaff of economic history and theory, and to popularise what emerged without lowering his intellectual standards. His contribution was to apply fine judgment, experience and spirited writing to making the case for an intelligently run mixed economy. In the process, he produced devastating criticism of the ability of extreme market forces—or “the invisible hand”—to deliver the goods promised by the classical economists and their modern apostles, the propagators of Reaganomics and Thatcherism.

However, many critical obituaries appeared in the English language financial and/or right-wing press. The Economist (2006) was surprisingly generous, but ultimately dismissive—‘less an economist than a mixture of sociologist, political scientist and journalist’. More representative obituaries, including those in The Australian and the Australian Financial Review , went straight for the jugular.

What is the nature of the economic system that Galbraith so consistently failed to capture?

These pieces tell us more about the economics profession than they do about Galbraith. They provide an indirect vehicle for understanding the peculiar character of that profession. The criticisms expose what is acceptable ‘conventional wisdom’ as Galbraith himself would have called it. The reader can also discern in these criticisms dishonesty and incoherence. Some claims are wilful misinterpretations of Galbraith. There is even occasional tacit agreement dressed up as disagreement. The criticisms are specific, inconsistent and uniformly negative—in essence they argue that ‘it didn’t happen this way; that’s not how it was or it is’.

Well how was it? What is the nature of the economic system that Galbraith so consistently failed to capture? We aren’t told. It is, however, implied that the system is a thing of wonder, something to be uncritically applauded rather than queried and improved, as was Galbraith’s wont. We are being asked to applaud something the character of which remains conscientiously obscure.

In what follows, I outline and evaluate the critics’ distinct themes in turn, and conclude with the broad implications of the criticisms.

THEMES OF THE CRITICS

The presumed ephemerality of Keynesianism, exposing its innate lack of substance:

Galbraith was a Keynesian economist … but Keynesian theory lost its gloss after the 1970s when oil prices jumped and inflation jumped with them … (Stavro 2006).

Keynes’ macroeconomic theory was developed during 1930s Depression Britain. The theory has flaws, but it also has merits of permanent value. However, Keynesian theory doesn’t stand or fall on the crude version that went into the post-war textbooks. The political use, neglect, and abuse of the theory after the war has to be understood on its own terms. Neither the long boom after 1945 nor its demise in the 1970s can be attributed to the use of policy instruments to which the Keynesian label has been attached.

Keynesianism has been derided by its detractors for two key failings. First, Keynesianism has been damned for failing to explain or to provide ready solutions for the stagflation of the early 1970s. As a conceptual structure based on macroeconomic aggregates, Keynesianism is intrinsically restricted in explaining stagflation, but so also is the macroeconomics-based paradigm of Monetarism that was supposed to have provided both plausible explanation and policy solution to stagflation.

Second, Keynesianism is blamed for providing carte blanche for dismantling the ‘traditional’ attachment to fiscal prudence. The claim is erroneous. ‘Supply-side’ economics, on the Right side of politics, has been an ideological force as least as significant as Keynesianism in the real-world detraction from fiscal prudence—most stridently displayed in the yawning budget deficits under the Reagan and George W. Bush Administrations. The argument regarding ‘fiscal prudence’ is more appropriately understood as camouflage for an argument over the direction of public expenditure. This is essentially a debate over welfare versus warfare—Keynesianism is a scapegoat for those possessing an ideological preference against the welfare state.

Keynesian theory doesn’t stand or fall on the crude version that went into the post-war textbooks.

In any case, to criticise Keynesianism is to miss Galbraith’s critical detachment from crude Keynesianism, in theory and in practice. Galbraith argued: ‘The important, indeed decisive, failure of the [post-War bipartisan] consensus [on economic and social policy] has been in the macroeconomic management of the economy—its failure to deal effectively with inflation and unemployment’ (1981, p. 34).

Galbraith here criticises how monetary and fiscal policy have been applied (especially in the post-boom 1970s), highlighting the failure of the conventional theoretical and policy wisdom to confront the implications of changing institutional structures and the ascendancy of the corporate economy. Galbraith returned to the theme in A History of Economics :

Thus the fate of the Keynesian Revolution. Like so much in economics, it was right for its time, and its nemesis was the passage of time. The years have brought the political asymmetry and the microeconomic dynamic and change of a highly organized world with which Keynesianism cannot effectively contend (1991, p. 281).

By ‘Keynesianism’ Galbraith means the full complement of the conventional wisdom of economists, whether in academia or in policy posts—the unrelated duality of macroeconomic theory (whether bastard Keynesian or orthodox) and Neoclassical microeconomic theory, a combination conventionally known as ‘the Neoclassical synthesis’.

The Great Crash induced from within or without?

Galbraith blamed the [1929] Slump on the greed and inherent flaws of capitalism … [As noted by Professor Tim Congdon, a British monetarist] “We now know that monetary mistakes by the Fed were the real cause” (Evans-Pritchard 2006).

P.P. McGuinness accuses Galbraith of a ‘total lack of serious analysis’ of the 1930s Depression (2006). Yet Galbraith, as agricultural economist, began his career documenting the profound structural bifurcation of the Depression economy into monopoly and competitive sectors. Spurious also is McGuinness’ accusation that ‘he never considered the role of protectionism, as exemplified in the Smoot-Hawley Tariff Act’. The Smoot-Hawley Act was passed in June 1930. The summary of Smoot-Hawley on the website of the US State Department claims rightly that ‘The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause’.

The monetarists, led by their Messiah Milton Friedman, insist that the 1930s Depression was caused by the Federal Reserve system. What started out as a ‘normal’ recession was purportedly driven downwards by the authorities. Liquidity drained out of the economy after mid-1930 and the ‘Fed’ raised the discount rate in August 1931, driving more banks to the wall and cementing a downward spiral.

In The Great Crash 1929 Galbraith was concerned to examine the peculiar character of the 1920s American economy. He concluded that structural and cultural features produced the crash. The dominant cause was a pervasive ‘get rich quick’ culture, defended by senior bankers and by responsible authorities confusing hope with substance. The substance had fallen away, as the 1920s boom had generated an imbalance of investment over consumption and an imbalance of wealth and income. The fading substance highlighted an enhanced institutional fragility—extended corporate ownership structures of holding companies and investment trusts that demand unending profits to fund debt repayment, speculative borrowing on margin, and a banking system vulnerable to crisis.

The spirit of the age was embodied in the mid-decade real estate boom in Florida.

The spirit of the age was embodied in the mid-decade real estate boom in Florida—an episode of corruption and hysteria writ large. The world was introduced to one Charles Ponzi, whose name became synonymous with practices intrinsically built for implosion. Alas, the Florida boom and crash failed to dent a culture whose zenith in 1929 would bring more widespread trauma.

Galbraith’s explanation of the crash involved critical synthesis of the literature on and empirics of the period—in retrospect conventional and respectable, but at the time of publication nobody else had ventured systematically into the territory.

Unassailable corporate power, the consumer as pawn, and Galbraith’s ‘illiberal’ liberalism:

GM failed to “decree” the shape of automobiles in the 1980s and continues to fail today, leading to huge losses of both money and market share. It seems consumers, whom Galbraith regarded as manipulable by Detroit and Madison Avenue, somehow didn’t accept GM’s “decree.” (Henderson 2006)

Hayek conceded that most wants do not originate with the individual; our innate wants, he wrote, “are probably confined to food, shelter and sex.” All other wants we learn from what we see around us (Henderson 2006).

The large incorporated business firm is the perennial lead actor in Galbraith’s myriad publications. From The New Industrial State (1967) onwards, the corporate sector is a power centre without equal. General Motors ‘personified’ the argument. The dominant thrust of Galbraith’s critics is directed to this domain—that the claim of GM’s transcendence of the market is a chimera. The significant attraction after the 1980s of American consumers to automobiles made by foreign producers is presumed to be the acid test.

Two rejoinders are in order. First, the qualitative evolution of economic systems highlights that grand generalisations are necessarily period-specific. The character of the automobile market after the mid-1970s may be instructive, but it does not vitiate generalisations on its character before the mid-1970s.

Second, Galbraith’s generalisations regarding the unbridled power of the corporate sector retain direct relevance to other segments of the corporate sector—the military-industrial ‘complex’ (including constructors), big oil (centred on Exxon Mobil), the medical-insurance complex, big chemical, big tobacco, big retail (Wal-Mart) and big finance. It is curious that Galbraith’s critics have not sought to juxtapose Galbraith’s focus with current developments that involve corporate actors writing the legislation that governs their sector (medical-insurance), heading off legislation or penalties that adversely effect their sector (oil, chemical, tobacco, etc.), or channeling foreign policy with heinous implications (weapons contractors and constructors).

On the related issue of consumers as pawns, it is true that American consumers belatedly exercised autonomy in electing to buy the automobiles of foreign manufacturers (albeit a sub-sector of the market remains subservient to the US auto giants’ emphasis on sports utility vehicles and the preposterous Hummer). Galbraith rightly asked the rationale for the then vast sums spent by producers on marketing (a question never satisfactorily addressed by mainstream economists), but his analysis of consumer behaviour was ultimately not very sophisticated. He conflated the specifics of consumer purchases with the broader environment of a commodified culture.

Galbraith's analysis of consumer behaviour was ultimately not very sophisticated.

It is entirely appropriate for Galbraith to transcend the fairytale abstraction of the Neoclassical consumer and to place consumer behaviour in its social context—the only feasible basis for analysis. Yet Galbraith’s efforts are condemned not for their superficiality (behoving the critic to elaborate) but from two contradictory stances, that they are wrong and that they are self-evident—the latter claim appropriated by Henderson from a Hayekian proposition that bears little relation to the thrust of Hayek’s oeuvre .

George Will (2006) claims that Galbraith’s notion that consumers are not their own masters is a reflection of Galbraith’s illiberalism and condescension towards the common people. This claim of elitist paternalism amongst ‘liberals’ has been a common refrain on the Right of US politics. The presumption is that Conservative intellectuals (of which Will is an exemplar) bear a natural affinity with ‘the masses’ existing in a state of nature—implying that, by contrast, the liberal establishment speaks not for them but at them.

Will blithely overlooks the gargantuan struggle for the mass mind over the last century, involving a propaganda battle of some magnitude. The period after 1945, the raw material for Galbraith’s generalisations, was characterised by an historically unprecedented (outside of World War) domestic propaganda campaign oriented jointly towards destroying New Deal programs and political culture, restoring the public reputation of the business community, and creating a climate of fear using the Soviet Union as the universal bogeyman. Will’s criticism of Galbraith relies on a mythical past.

Private affluence, public squalor?

… he pointed out the contrast between “private opulence and public squalor”, never noting that the more that was spent on public institutions, the greater became the dissonance of public opulence, as huge sums were spent on public buildings and institutions, and private squalor, namely the middle-class beneficiaries’ reluctance to spend their own money on anything other than private material goods (McGuinness 2006).

McGuinness inverts Galbraith’s thesis with a preposterous and incoherent claim of ‘public affluence, private squalor’ that merits only derision. The ‘straightforward explanation’ of Henderson (2006) in terms of the tragedy of the commons (‘no one owns the streets and, therefore, no one has an incentive to take care of them’) provides merely a rude skeleton for which Galbraith’s story provides flesh.

Almost fifty years after the publication of The Affluent Society , Galbraith’s perhaps most famous epithet remains relevant. For example, the decay of Detroit has been fuelled by racial and class divides and deindustrialisation, but more than those dimensions is necessary to explain the parlous current state of this once proud city. The fate of New Orleans and displaced New Orleans residents in the wake of the Katrina hurricane in August 2005, compounded by the cynical indifference of federal authorities, presents a shocking endorsement of Galbraith’s dictum.

Galbraith as central planner?

Time has been less kind to some of his other books: The New Industrial State , for example, a paean to economic planning by government and large-scale corporations, written in 1967, became outdated in the turbulent 1970s and 1980s (Flanders 2006).

Were Galbraith’s books ‘a paean to economic planning’, heralding that ‘free markets could not work and that planning for the public and private sector was the best way to run a capitalist economy’?

Were Galbraith’s books ‘a paean to economic planning’?

Galbraith’s message was predominantly descriptive and evaluatory, with a prescriptive component. His observations of the evolving American economy led him to conclude that the capitalist economy generates ‘planning’ from within. It is a natural outgrowth of the desire of economic agents through their institutions for a modicum of stability and of control. The capacity to effect such control is naturally uneven. Thus there arises a hierarchy of power; thus there also arises a push by those rendered more vulnerable by the control structures of other institutions to construct ‘countervailing’ structures of their own. Galbraith’s prescriptive component was in the general support of this latter tendency. The critics’ juxtaposition of ‘market’ versus ‘plan’ is an idealist myth.

THE BLACK HOLE IN THE CRITICS’ CITADEL

The sum total of the criticisms amounts to bits and pieces, but is accompanied by a silence on essential considerations. The critics’ conceptual orientation remains elusive. What is the nature of the system that they say Galbraith has consistently misunderstood?

Economic thought in post-War America fostered disparate developments, albeit hierarchically structured. Samuelson’s Foundations of Economic Analysis (1947) legitimised mathematisation and its conceptual superstructure of constrained optimisation. One strand oriented towards ‘general equilibrium’ theory thrust into pure abstraction. Another strand continued with Marshallian-type ‘lower level’ Neoclassical theory, not least the University of Chicago’s George Stigler and Milton Friedman. Some adventurers were building the foundations of game theory. A new generation of econometricians was building empirical models on macroeconomic theories, including the Keynesian Lawrence Klein and, wearing another hat, the Monetarist Milton Friedman.

Two fundamental ingredients of any socio-economic system were consistently absent from these established strands—none of them countenanced the phenomenon and structuring of power or of systemic dynamism. The Austrian-born conservative Joseph Schumpeter published Capitalism, Socialism and Democracy in 1942, but the book’s idiosyncratic synthesis of big ideas went into relative obscurity. The core of the profession’s approach to power was encapsulated in the University of Chicago’s Arnold Harberger’s claim that the welfare losses from monopoly power in the United States were insignificant, estimated to be of the order of 0.1 per cent of GNP (Harberger 1954). By contrast, Chicago and like-minded economists devoted substantial effort to claiming that American unions (having achieved legitimisation belatedly belatedly in the 1935 Wagner Act) had acquired monopoly power over the labour market. Apart from the threat from worker collectivities, everything was seen to be in perfect working order.

Off centre stage ‘industrial organisation’ economists were endeavouring to understand the structure and behaviour of American industry, with greater attention to empirical detail and evolving precedent in the courts in ‘anti-trust’ litigation. The conceptualisation of these economists has been traditionally less dogmatic than that at the discipline’s core, but it has remained constrained by the core’s straight-jacketed conceptual imperatives.

Also off centre stage was the evolving Institutionalist tradition, of which Galbraith was part. A disparate sub-group were concerned precisely with the evolution of the American business corporation and in its broader context. Of particular relevance is a 1959 collection titled The Corporation in Modern Society (Mason 1959). One might feasibly place its contributors on the Right side of American Institutionalism. The book is concerned explicitly with the power of the contemporary corporate sector. Its leitmotiv is the prospect of harnessing the powerful corporate sector for the social good, by the conscious institutionalisation of a ‘soulful corporation’.

The book (and comparable literature) could be said to be a response to the corporation’s critics amongst ‘progressive’ Institutionalists. However, it was also a response to a substantial intrusion of Marxist thought theorising immanent systemic decay, emanating from the Soviet Union itself but also from a handful of American Marxists symbolised by Paul Sweezy, not least in his Theory of Capitalist Development (1946), and Sweezy’s associates at the journal Monthly Review .

The attack on Galbraith highlights that he had broken the unspoken rules on the consensus.

Galbraith’s preoccupations were compatible with those of the industrial organisation grouping and of the various Institutionalist strands. Indeed, by the early 1950s there was an active debate on the meaning of competition and the prospects of enforcement. The atmosphere is reflected in a multinational 1951 conference in France under the aegis of the International Economics Association (Chamberlin 1954).

However, this significant debate remained on the periphery of the economics discipline, in spite of its political significance. The core of the discipline was constrained to abstract theory and to high technique. Ironically, some well-known economists presided in the empirically-based debate over competition and in the theoretical heartland—in a sense, displaying a split-brain intellectual life. With the exception of macroeconometric modeling, then showing promise, the emphasis lay on various intellectual strands that were essentially game-playing. The ensuing 50 years has witnessed a reinforcement of this emphasis.

The elevation to pre-eminence of an unholy but convenient alliance of technical and ideological imperatives has produced a disciplinary core in economics that is elaborate yet weightless. There has been no consensus on a project to understand the economic system in the large. On the contrary, there has been an implicit consensus that no such project will be contemplated.

The attack on Galbraith by his detractors highlights that he had broken the unspoken rules on the consensus. The attack also highlights how significant has been the ideological imperative in the economic discipline’s channeling of ‘credible’ academic research. Criticism of the prevailing socio-economic system is deemed unpalatable, and inhibition of criticism is enhanced by the maintenance of a project that declines to identify and understand the essential character of that system. The life’s work of Galbraith’s contemporary, Milton Friedman, who died in November 2006, is a testament to that vacuum (Jones 2006).

GALBRAITH’S THREAT TO ECONOMIC ORTHODOXY

The central lesson in Galbraith’s death is that respectable economic opinion, rooted in academic economics, is essentially an ideological project. Elegant technique, code-named ‘rigour’, is the white noise that fills what would otherwise be a curious vacuum in the journeyman’s path to enlightenment.

The lessons from Galbraith’s life are captured by University of California economist Brad DeLong (2005) in a review of a new Galbraith biography: The biographer claims that Galbraith was an embarrassment to economists because he demonstrated the potential breadth and relevance of economics. For DeLong:

Late-twentieth-century American economics centers on the use of mathematical models to reach one of two conclusions: that the market is already doing a good job, or that some imperfection is causing “market failure” and correcting or counterbalancing the imperfection will make everything okay. …

Just what a “Galbraithian” economist would do, however, is not clear. … He starts from the ground and works up: What are the major forces and institutions in a given economy, and how do they interact? A graduate student cannot be taught to follow in Galbraith’s footsteps. The only advice: Be supremely witty. Write very well. Read very widely. And master a terrifying amount of institutional detail.

In the second half of this last cited paragraph DeLong wanders from his own line of argument. He had earlier highlighted that:

Galbraith propounded no such easily summarized doctrine. … His work as an economist was a scattered but comprehensive attempt to think through the consequences of the transition from a nation of small farms and workshops to one of large factories and superstores. In doing so, he took on many of the questions most central to the new U.S. economic landscape.

On DeLong’s own articulation, a graduate student can readily ‘be taught to follow in Galbraith’s footsteps’—s/he can be directed principally to the question ‘What are the major forces and institutions in a given economy, and how do they interact?’

Galbraith’s faults had nothing to do with ‘lack of rigour’ at all.

DeLong highlights the claustrophobic impact of the imperative for simple stories (driven by the alliance of technique and market ideology), but he also highlights that Galbraith’s ‘failure’ is integrally related to the particular ethos of American politics.

[The American national] self-image is also a very powerful social fact, and this more than anything else explains [Galbraith’s] waning influence on U.S. politics. It is not that the Democratic establishment has lost its nerve or been seduced by law firms and lobbyists; it is that the old Horatio Alger myth has proved extraordinarily durable. At the beginning of the twenty-first century, it has become clear who John Kenneth Galbraith really is: Sisyphus, constantly pushing the boulder of social-democratic enlightenment up the hill. But the hill, it turns out, is too steep, and Galbraith not mighty enough.

Here is the source of the poison that suffused the obituaries of Galbraith in the financial and right wing press. Galbraith’s faults had nothing to do with ‘lack of rigour’ at all. Galbraith’s fault was that he had his eye on the essential character of modern capitalism. Galbraith’s analysis and prescriptions were pervasively softer than that of his left-wing contemporaries, but Galbraith was for long a figure in the Democratic Party establishment and had the attention of the broad literate public. Galbraith was thus a figure whose contribution had to be negated.

Galbraith’s lesson in death is that the successful reproduction of the capitalist socio-economic system requires the perennial obfuscation of how it works.

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(Evan Jones is an Honorary Research Associate in Political Economy in the School of Economics and Political Science at The University of Sydney. His research on industry policy has been published in such journals as the Australian Economic History Review, the Australian Journal of Public Administration, and the Journal of Australian Political Economy.)