At this year’s Canadian Economics Association meetings, the Progressive Economics Forum was thrilled to have James Galbraith come to inaugurate the John Kenneth Galbraith Prize and Lecture, to be given biannually, with the first Prize awarded next year at the CEA meetings in Vancouver, which will also be the tenth anniversary of the PEF. Here is the text of the speech, which was delivered yesterday:
The Abiding Economics of John Kenneth Galbraith
James K. Galbraith
It is a privilege and an honor to deliver the first John Kenneth Galbraith Lecture, and to do so before an audience of economists, and in Canada, my fatherâ€™s country, which he loved. In 1963, President John F. Kennedy met with Prime Minister Lester Pearson, to discuss among other things the need for a new civil aviation treaty, to accommodate the arrival of jet aircraft and make it unnecessary to stop in Buffalo on the way from Toronto to New York. My father had just completed his service as United States Ambassador to India, and Kennedy had decided to appoint him as the U.S. representative on this problem. Pearson responded, in effect, â€œHeâ€™s a good Canadian, Iâ€™ll appoint him too.â€ The result was a one-man bilateral negotiation. Dad held hearings, negotiated with himself, and otherwise settled the issue satisfactorily to both countries.
On two occasions in my academic life Iâ€™ve uncovered the hidden tracks of my fatherâ€™s work. The first came in 1973, when as an undergraduate I gained access to the Army library at the Pentagon to research the decisions behind the location patterns of government-owned ammunition factories. I discovered that these had been made in the National Defense Advisory Commission, around 1940, mainly by the young executive assistant to the Chairman, Agriculture Secretary Chester Davis. Eventually the typescript divulged the name: John Kenneth Galbraith. I completed my research a few days later, at the dinner table back in Cambridge.
More recently I became interested in the problem of achieving an accurate picture of John F. Kennedyâ€™s decisions in October, 1963, with respect to withdrawal of U.S. forces from Vietnam. Eventually I reached the conclusion, and obtained the proof, that the decision to withdraw in full by the end of 1965 had been made. And as this conclusion hove into view, I also realized the origins of Kennedyâ€™s determination to make that decision. They lay, in no small part, in the advice of the Ambassador to India: once again, John Kenneth Galbraith. This story is among the many now given its full treatment for the first time in Richard Parkerâ€™s magnificent biography .
I want however to speak about Galbraith the economist, and to go a bit beyond the comment I made at his 90th birthday almost nine years back. On that occasion I asserted — what I believe to be true â€“ that as an economist he transcends fame. In the long run, his name will be recorded alongside those of Adam Smith, Karl Marx, Thorstein Veblen, and John Maynard Keynes, among the greatest reform economists of all time.
I donâ€™t mean this as a remark about the man. My father always loved the many sessions of exegesis devoted to his work by the Association for Evolutionary Economics, the American Agricultural Economics Association, and even by the American Economic Association on occasional better days. He would be delighted, of course, to be honored now by the Canadian Economics Association and its Progressive Economics Forum. Iâ€™ve attended a fair number of such convocations. I could never bring myself to get quite as much enjoyment out of them as he did.
There is an element of the personal in such tributes that tends to be a little overwhelming. A frequent comparison is to Thorstein Veblen, as a brilliant mind, writer and social critic. At one level, who would not be content with that? But I always thought that Galbraith deserved more â€“ and that Veblen also deserves more than he characteristically gets from such comparison to Galbraith. The deficiency lies in the way they tend to be treated as economists. There is something in the appreciation of the luminous individual that speaks, also, to the dark side, that evokes the loner, the evanescent flare, the cul de sac â€“ the man whose message came and perhaps went, while the economists moved on. It never much bothered JKG but it bothers me. For, like Veblen, Galbraith in my view deserves to be recorded as a transforming figure. Like Veblen, he offers an approach, a manner of thought, a structure — to an economics that manifestly still waits, and greatly needs, to be transformed.
What are the core propositions of Galbraithâ€™s thought? Let me note in passing that there are two technical areas so unfashionable that he was, for sixty years, not only the leading expert in them but just about the only economist who would admit to having expertise at all. These are first the economics of the effects of strategic bombing, revealed in the work of the United States Strategic Bombing Survey in 1945, and still valid today though studiously ignored by the enthusiasts of bombs. Second, there is the economics of price control, a disreputable topic today but nevertheless an indispensable component of victory in World War II, and in the creation of the modern American middle class. As Tom Ferguson and I have shown , it was precisely in the forced draft of mobilization under price control that the post-war financial wealth of the American middle class was forged. In our household we call this the â€œGalbraith effect.â€ I canâ€™t let this topic pass without also recalling JKGâ€™s remark when we learned, on the imposition of price control on August 15,1971, that he had won a convert in Richard Nixon. â€œI feel like the streetwalker,â€ he said, â€œwho has just been told that her profession is not only legal but the highest form of municipal service.â€
Let me go on to some of the major points of Galbraithâ€™s contributions as an economic theorist. The following is emblematic rather than exclusive. But this list, drawn from his greatest books, captures three themes that are in my view essential.
1. From The Great Crash, we have of course the conviction that financial panics affect real activity. No one in the 19th century or with experience of agriculture ever seriously doubted that the economy runs on credit or that real activity depends on banks. Only in the higher reaches of academic life could such a thing be denied. The denial, nevertheless, took powerful hold. The Great Crash is a wonderful corrective. It has remained continuously in print for over fifty years â€“ outselling all of Galbraithâ€™s books into the bargain.
Still more important than the melody are the notes. Here we have not only mass psychology and vulnerable technology â€“ the panic that outruns the ticker, as it did again in the market break of 1987. But The Great Crash also gives us the subtle interplay of players: How National City bribed the son of Peruâ€™s president $450,000 for the privilege of marketing fifty million dollar loan. As Galbraith notes, â€œJuanâ€™s services were of a rather negative sort. He was paid for not blocking the deal.â€ The debts so accrued forced Peru and other countries similarly traduced to attempt export-led growth. This was blocked by rising tariffs, which precipitated default and helped to set off the panic against the banks.
The Great Crash is built on such stories. Taken together, they teach us that economics, like history, is made at least in part by particular persons. This is a message that the profession has stoutly resisted, preferring always the denatured maximizing abstraction homo economicus to the flesh-and-blood of Ivar Krueger, the Match King. Krueger shot himself, on March 12, 1932, in Paris. JKG notes that â€œwith the cooperation of the Paris police, the news was withheld until the [New York] market closed…. [however] the security system of the Paris police was less than perfect. It is fairly certain that there was heavy selling that morning â€“ including heavy short selling â€“ of Krueger and Toll by continental interests.â€
The Great Crash is one of the first great works on the subtle economics of insider operations and financial fraud. But itâ€™s not just stories. Here is one example of the economic method it contains:
â€œTo the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in â€“ or more precisely not in â€“ the countryâ€™s businesses and banks. This inventory â€“ perhaps it should be called the bezzle â€“ … varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed… Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.â€
Though the essential precedent for this approach â€“ generalization from example â€“ goes back to Adam Smith, there are not many passages in economics since Smith that illuminate a new subject with such penetration. Can anyone doubt that we could do with more?
2. The Affluent Society is now remembered for its endearing, enduring phrases, above all the â€œconcept of the conventional wisdom,â€ and for its evocative passages on private opulence and public squalor, such as the one about the â€œfamily which takes its mauve and cerise, air-conditioned, power-steered and power-braked automobile out for a tour [and] passes through cities that are badly paved, made hideous by litter, blighted buildings, and posts for wires that should long since have been put underground…â€ before going on to â€œpicnic on exquisitely packaged food from a portable icebox by a polluted stream [and spending] the night at a park which is a menace to public health and morals.â€
But again it is more than that. In The Affluent Society, we find a logical demolition of the orthodox theory of consumer choice. It proceeds from the unassailable observation that stable preferences cannot exist for goods that do not exist. The process of innovation necessarily entails the creation of markets. Thus the Dependence Effect: the dependence of consumption on production and not the other way around. This is, in essence, a plain-English version of the point about instability of preference fields that Philip Mirowski drove home in More Heat than Light three decades later. More Heat than Light is a great book, but enormous trouble could have been saved if the profession had taken the hint the first time.
3. Then we have the theory of economic organization in The New Industrial State. Here Galbraith built on the foundation of Berle and Means, on Joseph Schumpeter and to some extent on Max Weber, on the behavioral formalisms of Herbert A. Simon, and on his own American Capitalism of 1952 and its concept of countervailing power. I love the opening lines of American Capitalism, and used them to open my fatherâ€™s memorial service a year ago:
â€œIt is told that the such are the aerodynamics and wing-loading of the bumble-bee that, in principle, it cannot fly. It does, and the knowledge that it defies the august authority of Isaac Newton and Orville Wright must keep the bee in constant fear of a crack-up. One can assume, in addition, that it is apprehensive of the matriarchy to which it is subject, for this is known to be an oppressive form of government. The bumblebee is a successful but an insecure insect.â€
But the portrait in TNIS is altogether richer, conveying understanding not only of the separation of ownership from control but also the significance of the specific bureaucratic processes that generate corporate decision-making and the interplay of company and state. In The New Industrial State, Galbraith challenges us to contemplate rigorously what happens when power passes irrevocably into the organization. He forces us to recognize that the fundamental decision-making process of modern economics â€“ maximization subject to constraint â€“ is untenable in a world of asymmetric information (as Stiglitz has taught us to call it) and negotiated decisions representing the compromised interests of established players.
The New Industrial State did not anticipate later developments in many respects. The incursion of the Japanese technostructure (especially in steel and autos) onto the American scene in the 1970s, eventually stabilized by market sharing deals under President Reagan, wasnâ€™t foreseen in the book. Nor was the return to power of high finance in the 1980s, as the demolition of Bretton Woods restored the role of the banks, and as high interest rates first permitted them to rake in their gains and then, in a repeat of the early 1930s, nearly ruined them all. Galbraith also did not anticipate that part of the technostructure would spin away from the large industrial corporations in the 1990s, becoming a distinct and independently financed economic force, susceptible (as we learned) to bubble and pop. He was certainly well aware of the rich capacity for financial fraud in corporate life; still in 1967 he thought the organization would retain a capacity to police itself; he did not spell out just how the combination of financial pressures, the defection of the technical elite to their own enclaves, and the rise of a predatory CEO class would together create conditions for looting on an epic scale.
Nevertheless, The New Industrial State gives us something that nothing else at that time did: a framework for analyzing all of these phenomena in complex organizational terms. This is missing from the class analysis of the Marxists, different from the macro and sectoral analyses of the Keynesians, alien to the denatured firms and representative households of neoclassical equilibrium. And it is much closer than any of these to the actual decision-making institutions of American capitalism.
One may argue that in the new millennium the large corporation has regained its central position on the American political scene â€“ that we who are south of the border live in what Iâ€™ve called the â€œCorporate Republic.â€ Indeed one may argue for an understanding of the present American government almost precisely in terms of corporate governance as The Industrial State teaches it to be.
â€“ We have the essentially clientelist character of decision making, unable to deliberate in an extended, goal-seeking way, because of the overriding necessity of deference to players who happen to occupy particular roles. Thus we have the capture of strategic direction â€“ in national security, finance, regulation and other areas â€“ by cliques who (like the Technostructure) can lay claim to expertise not available to outsiders, who can manufacture bogus expertise at will, claiming the privilege of dispensing it without fear of substantial contradiction.
â€“ We have the public relations apparatus with the unique characteristic of a corporate propaganda machine, namely an inability to tell a truthful story that is consistent from one day to the next. Yet like the press releases of large corporations, this apparatus nevertheless expects and receives deferential treatment from the press. Meanwhile challengers and critics are treated as the financial papers handle trade unionists and tort lawyers.
â€“ We had, until the rebellion of 2006, a rubber-stamping Board of Directors, to which in the modern United States we referred by the deferential title of â€œCongress.â€
â€“ We have the shareholders, nominal owners and participants in occasional elections, which the management was determined never under any circumstances to lose. Just how far that determination went, from rationing voting machines, to the â€œcagingâ€ of African-American voters (a felony crime), to the spurious prosecution of voter registration groups as revealed in the present scandal over the dismissal of United States Attorneys, and as many believe to electronic manipulation of the vote count itself, we are only beginning now to learn.
â€“ Above all, we have the Chief Executive Officer as specialist in public relations â€“ the man who spends his time on the golf course (or at the ranch) in order to show that he can, in order to advertise to the world that things are under control. Or more precisely to obscure the fact that they are not.
All of these characteristics have analogs in the corporation of The New Industrial State â€“ or would have them, in any modest updating of that analysis.
And that, my friends, brings me to my final message for today. Where do we go from here? What are we doing here? Are we merely paying tribute to a great man? Or can we muster a deeper purpose? Are we willing to be part of a project of changing the way economics conducts its affairs? And if so, then what should we do about it?
The answer will not be found in wit, in literary genius or political celebrity. It can only be found in research. And one thing my father did not do â€“ one thing that he never seriously attempted â€“ was to build a research tradition that would carry on the spirit of his work. Nor, in the struggles of his day between Marxians, Keynesians, and neoclassicals would economics have permitted any such thing. But if the ideas are to survive, that task is before us now.
The Galbraith paradox is that the great theorist of organizations worked aloneâ€“he was an intellectual entrepreneur. Meanwhile the academic phalanx who scorned his ideas were organization men, conformist in view, careful tenders of their departmental franchise. Few of them will be remembered as individuals, yet their hold on reputable thought remains absolute. Galbraithâ€™s heresies triumphed in the open market; within the university they were repressed by methods on which he literally wrote the book.
Galbraith foresaw this. â€œThe captious,â€ he wrote, â€œwould be critical of any description of the social geography of the United States which, by assuming away New York, Chicago, Los Angeles and all other communities larger than Cedar Rapids, was then able to describe the country as essentially a small-town, front-porch community.â€ But so, in economics, are undergraduates still largely taught. They imagine that if they stick with the subject, then sometime in graduate school they will at last get to study the world of big firms and complex organizations. The few who make it that far are disillusioned, but by then it is too late.
Critics of the neoclassical doctrines have penned, over more than a century, millions of words. Our task now is to build the alternative, one that is not merely a variant or a gloss on neoclassical doctrine. Arenâ€™t we tired of embedding our originalities in critical restatements, however elegant, of what is already clear to thousands of bright undergraduates on the second day of class?
It is time to get on with it. We need a replacement for neoclassical economics. A new curriculum. Letâ€™s build it. My fatherâ€™s work provides major markers of direction. Let me suggest a few key characteristics of what should follow.
1. My father opposed the micro/macro distinction and it should be abolished. It exists in principle to separate irreconcilable doctrines. The new classicals have recognized this, and have abolished macro. (As Evelyn Waugh said of Randolph Churchillâ€™s surgeons, it was a miracle, they found the only part that was not malignant, and removed it.) We should take the opposite tack: toward a unified economics of human behavior based on principles of organization and a recognition that macroeconomic forces shape personal and group response.
2. Empirical work should be privileged. Real science does not protect bad theory by concentrating on matters that cannot be observed. It is, rather, a process of interaction between conjecture and evidence. In the history of science, new technologies for measurement have often preceded new ideas. Believe it or not, this could happen in economics too.
3. Mathematics should mainly clarify the implications of simple constructs, not obscure simple ideas behind complex formulae. Dynamical systems, fractal geometries, cellular automata all help us to understand the principles underlying evolutionary social dynamics. They are also fascinating. They help students learn to think. Mathematics should lie, in other words, at the essential core of a new curriculum; it should not be deployed defensively, as the protective belt. Properly used, mathematics is a language; the point of a language is to extend the range of communication, not to restrict it.
4. Our economics should teach the great thinkers, notably Smith, Marx, Keynes, Veblen and Schumpeter â€“ and John Kenneth Galbraith. We need not reinvent the field; nor should we abandon it. Economics over the sweep of history is not mainly about scarcity (which technology overcomes) nor about choice (which is generally neither free nor the defining characteristic of freedom). Rather, economics is about value, distribution, growth, stabilization, evolution, and limits. The great ideas in these areas, and the history in which they were embedded, are fundamental. They should be taught, not as dogma but rather as a sequence of explorations.
5. Pop constructs derived from neoclassical abstractions–social capital and natural capital are current examples–are noteworthy as efforts to reconcile neoclassical ideas to real social problems. But to a degree these constructs also extend, rather than attempt to overcome, the logical defects of that system. They resemble the anti-trust laws, which Galbraith always saw as an exercise in futility, aimed at making the real world resemble the neoclassical model so that the latter would be more realistic than it is. This is something to be wary of.
6. An economics of modern capitalism should study the actual, existing features of our system. Households, business enterprises of all the types (including some characterized by diminishing and others by increasing returns, some with monopoly power and others without), money and credit systems, governments and their budgets, and the international system are all parts of a nested, hierarchical structure of rule- and convention- setting institutions, of interacting and sometimes conflicting sources of power. Their behavior is characteristically unstable and sometimes violent. To have reduced the subject to shapeless households, firms and markets, all linked by a uniform conceptual structure of supply and demand curves (labor market, capital market, goods markets…) – and in equilibrium! â€“ that was the original neoclassical mistake.
7. Accounting matters, and counting can be done in many ways. We should work with and teach from the full spectrum of information sources, not merely sample surveys (with their obsessive focus on personal characteristics such as years of schooling) and the national accounts, but also credit, trade, industrial and financial data. Not to mention linking economic measurements to other information: political events, the environment, quality of life, demography, health.
8. A focus on social structures and the data that record them requires new empirical methods. To take an example close to my own work, the study of dispersions, of inequalities, is intrinsic to the study of power. Neoclassical economics with its bias in favor of the sample survey, the Gini coefficient, and the assumption of normality in the distribution of errors has, to a degree, neglected the mathematics and statistics of dispersion measures. There are large gains to be had here, for small investments of effort.
9. Likewise the study of social structures cannot be done wholly and solely with parametric techniques held hostage to the dogma of hypothesis and test; there is no single formula for empirical learning. Numerical taxonomy, discriminant functions, multidimensional scaling, and like techniques are available for studying the phenomena of real economic systems. We should learn, use, and teach them. Again, the study of inequality and social formations provides the way to link Keynesian macro principles to the behavior of groups and organizations. It is, in other words, the missing numerical component of my fatherâ€™s broad agenda.
10. Finally, our economics is about problems that need to be solved. There remain before us the pursuit of full employment, balanced growth, price stability, development, a sustainable standard of life, and the vast, daunting challenge of climate change. The chance to work on problems once attracted the most talented students to our field. The disappearance of that chance explains, in part, why many abandon it now. But if we develop a coherent research program, and a teaching curriculum derived from it, that broadly respect the principles outlined above, we will once again make economists useful, and we will prevail in the long run.
I have no desire to dictate a specific course of action. Pluralism can and indeed must be combined with discipline and rigor. But letâ€™s be conscious of two fundamental tests. One of them is well captured by a remark of Paul Samuelsonâ€™s, quoted by Richard Parker. Samuelson writes: â€œIn the history of ideas, the thinker who creates a new synthesis and speaks in telling fashion to a new age is the one who plays the pivotal role in history.â€ Galbraith met that test and so should we.
And then there is a comment by Parker himself, capturing the essence of my fatherâ€™s world view. â€œThe â€˜truthâ€™,â€ he writes, â€œof an economic theory ultimately lay in its success or failure when applied to policy.â€ Letâ€™s not forget our political obligations. Our task is not only to understand economics and the world that economics attempts to describe. It is also to change it. And to do so in a spirit of abiding liberalism, generosity of spirit, openness and fair play, combined always with humor and a touch of detachment. Those are my fatherâ€™s enduring traits and they should also be ours.
Thank you very much indeed.
These remarks were prepared for the Progressive Economics Forum’s inaugural John Kenneth Galbraith lecture at the Canadian Economics Association, Halifax, N.S. on June 3, 2007. Earlier versions were delivered to a joint URPE-AEA session on John Kenneth Galbraith at the annual meetings of the American Economic Association, January 7, 2006, and a joint seminar of the Brookings Institution and the New America Foundation, April 3, 2005, in turn adapted in part from â€œGalbraith: A Partisan Appraisalâ€ published in the Brazilian Journal of Political Economy, January-March 2005. Parts are also adapted from â€œCan We Please Move On? A Contribution to the Guerrien Debate,â€ Post-Autistic Economics Review, No. 15, September 4, 2002.
James K. Galbraith holds the Lloyd M. Bentsen, jr. Chair in Government/Business Relations at the LBJ School of Public Affairs, the University of Texas at Austin, and is a Senior Scholar of the Levy Economics Institute, and Chair of the Board of Economists for Peace and Security.
- (Macro) Econ 101 (December 16th, 2014)
- Economics 101 (October 26th, 2014)
- The Novel Observations of Jean Tirole? (October 14th, 2014)
- Mike McCracken: Winner of the 2012 Galbraith Prize in Economics (March 8th, 2012)
- Call for Nominations: 2012 Galbraith Prize in Economics (December 12th, 2011)