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Gaga Over Galbraith

Mises Daily: Thursday, November 08, 2012 by

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John Kenneth Galbraith (1908-2006)

Based on his book sales, John Kenneth Galbraith was probably the most read economist of the 20th century. From the publication of his first bestselling book The Great Crash in 1954 through the 1980s, the American left-liberal intelligentsia and media breathlessly anticipated and wildly celebrated the publication of each new book. Nonetheless, most technical economists, regardless of their political orientation, did not take his work seriously. By the 1990s Galbraith's work had been thoroughly discredited among professional economists. Indeed, in his 1994 book, Peddling Prosperity, leftist economist Paul Krugman held up Galbraith as the prototype of a left-wing "policy entrepreneur" who, like his supply-sider counterparts on the Right, sought an audience among policymakers and the educated public, outside the cozy circle of academic economists.

In his book, Krugman ridiculed The New Industrial State, Galbraith's magnum opus. He pointed out its wildly erroneous predictions regarding the evolution of the US economy toward greater dominations by giant corporations that were insulated from market forces, manipulated consumer preferences at will through advertising, and whose interlocking managerial and technological elites (the ominously labeled "Technostructure") could make decisions without regard to the interests of stockholders. With rhetorical understatement, Krugman concurred with the sentiments of earlier academic critics, characterizing the book as one that "could safely be ignored."

But discredited economists, much like disgraced politicians, never remain out of favor for long, especially after they have passed from the earthly scene. So it is that Galbraith's reputation has been undergoing something of a rehabilitation in the past decade. Especially among those mainstream academic economists who are vaguely cognizant of the rapidly accumulating failures of their discipline in explaining economic reality, Galbraith is increasingly perceived as a misunderstood thinker whose insights were ahead of their time and whose work was too hastily dismissed.

For example, Nobel laureate Amartya Sen was positively elegiac in his appraisal of Galbraith, exclaiming that he "doesn't get enough praise." In an interview, Sen opined that Galbraith's work would indeed endure and that his book The Affluent Society exemplified Galbraith's "great insight." The book, Sen effused, "has become so much a part of our understanding of contemporary capitalism that we forget where it began. It's like reading Hamlet and deciding it's full of quotations. You realize where they came from."[1]

J. Bradford DeLong is a Berkeley economist and former Treasury Department functionary during the Clinton administration. He also writes the clumsily titled and soporific blog, Grasping Reality with Both Invisible Hands: Fair, Balanced, and Reality-Based: A Semi-Daily Journal. DeLong is even less restrained and discriminating than Sen in extolling Galbraith's brilliance, declaring that history professors can do no better "than to assign his books The Affluent Society and The New Industrial State to teach students how the midcentury U.S. economy came to dominate the world." Anyone who wants to learn about the Great Depression, according to DeLong, "should start with The Great Crash; there is no other history of the stock-market crash of 1929 that is as short and even half as worthwhile."

DeLong even praises Galbraith's turbulent and ill-fated stint as deputy director in the Office of Price Administration during World War II, where he apparently performed the miracle of "squar[ing] the growth-inflation circle by pushing production far above economists' measures of potential output without sparking runaway price increases that would threaten the economic mobilization."[2] Although the title of the aforementioned blog doubly touts DeLong's intellectual engagement with "reality," his paean to Galbraith's administration of draconian wartime price controls betrays minimal contact with economic reality.

Recently, prominent mainstream economists with strong inclinations toward behavioral economics have also jumped on the Galbraith bandwagon. George Akerlof and Robert Schiller, for example, have favorably cited Galbraith in their bestselling book Animal Spirits. They refer to Galbraith's Great Crash as one of the "seminal historical accounts of bubbles and panics," and characterize it as "very much in the same spirit as the analysis in [their own] book." They are quite taken with Galbraith's discovery of an alleged causal relationship between the mysteriously waxing and waning prevalence of "bad faith" — defined as "economic activity that, while technically legal, has sinister motives" — and economic cycles.[3]

Robert Frank is another economist with impeccable mainstream credentials who has a predilection for behavioral economics and a soft spot for Galbraith. He has argued that Galbraith's position that the market economy systematically misallocates resources between private and public sectors "was right for the wrong reasons." If only Galbraith's training had been grounded in modern game theory, Frank contends, he would have been better able to defend himself against his academic critics.[4]

Now there are probably various reasons for the burgeoning Galbraith lovefest among mainstream economists. But, I believe, the primary reason is the growing dissatisfaction within the economics profession with the transmogrification of economics into a hyper-mathematical, model-driven discipline that tells us exactly nothing about the real world, as the financial crisis has plainly revealed. Compared to the arid and mechanistic "theorems" of modern economics, even Galbraith's unsystematic and pedantic musings are a breath of fresh air, because at least they are expressed in English and make reference to real and meaningful phenomena. This is, of course, not an endorsement of Galbraith's approach to economics or his various positions. Indeed far from it: rather it is an attempt to explain the unjustified accolades his work is beginning to receive from professional economists.

For a more accurate view of Galbraith the man and his work, we turn to economists who were masters of verbal-logical economic theory that had reached its high point in the 1930s. Two eminent British economists of widely different political persuasions, Lionel Robbins and James Meade, were steeped in this kind of economic analysis, which used mathematics for illustrative purposes only and sought to explain economic phenomena by tracing them back to their essential causes using logical deduction based on realistic premises. Robbins and Meade each assessed Galbraith in their private wartime diaries based on personal interactions with him.[5] Neither was particularly impressed, although their respective assessments of Galbraith could not take into account the works for which he would later become famous.

For much of the 1930s Robbins was a follower of the Austrian School of economics, having been influenced by the writings of Ludwig von Mises and by Friedrich A. Hayek, with whom he developed a close personal relationship. In the late 1930s and especially during the war, Robbins fell more and more under the personal influence of Keynes whom he had gotten to know personally, although he still remained for the most part a generally market-oriented economist. Robbins did not think much of Galbraith's mental acuity and dismissed him as a shill for New Deal policies, writing,

I knew Galbraith in the old days; he sat for some little time in my seminar. I must say I am not altogether surprised at what has happened; for I have always thought him a dull fellow, well intentioned enough, but a sort of pedant of New Deal economics — just the kind of man to upset the business community without himself bringing any startling administrative ability to offset the loss of that which he had antagonized.[6]

Meade was a co-recipient, with Bertil Ohlin, of the 1977 Nobel Prize in economics. Throughout his career Meade was deeply concerned with the inequality of income and wealth and wrote voluminously on the subject. Meade also was a vigorous supporter of "incomes policy," i.e., permanent wage and price controls, as a remedy for "stagflation," which he believed had become an endemic feature of industrialized market economies.[7] Meade was, therefore, in no sense a conservative or free-market economist and in fact could be classified as a Fabian socialist or social democrat in his policy leanings. Yet he viewed Galbraith in much the same light as Robbins. He wrote in a diary entry,

Later I dined with Galbraith and his wife at the Cosmos Club and then went on to their home in Georgetown to talk. He is the "relentless" type of radical, believes that Russia should be permitted to absorb Poland, the Balkans and the whole of Eastern Europe in order to spread the benefits of Communism, that the outlook for American politics is very black because even if the Roosevelt administration wins the next election the liberal New Dealers are now all a crowd of tired, cautious, conservative liberals etc. I think he may be a little embittered at the punishing experience at the OPA where there was a witch hunt against liberal College professors of which he was the main victim.

In a footnote to this entry inserted right after the word "Communism," the diary editors state, "Meade now suspects that he may have unfairly misinterpreted Galbraith's views, and Galbraith denies that he ever held such views."[8] But whether Meade's suspicions 47 years later about what Galbraith did or did not mean is more accurate than his recollection of what Galbraith said on the day he made the diary entry is beside the point. It is clear that Meade the economist was not favorably impressed by Galbraith.

We might also cite the views expressed about Galbraith's work by two Austrian economists, Friedrich Hayek and Murray Rothbard, both of whom masterfully employed the verbal-logical deductive approach in advancing economic theory.

Hayek, a co-winner of the Nobel Prize in 1974, demolished the central thesis of Galbraith's Affluent Society in a short piece he published in 1961. Galbraith had argued that most consumer wants in a modern economy are the outcome of the "dependence effect," that is that they depended on and were created by the very process of producing the goods that were meant to satisfy them. Therefore, according to Galbraith, the really important needs were already satisfied in an "affluent society," and the only real problem was not producing more for private consumption but rationally distributing the available resources to produce things that are most urgently needed, specifically more collective goods and public services to be provided by the state.

Hayek perceptively identified this argument as a modern version of the naïve socialist argument first put forth by the nutty Utopian socialist Saint-Simon and his followers in the mid-19th century. According to this argument the problem of production had been solved and all that remained was the problem of distribution. Hayek wrote that such a contention was "absurd" and that Galbraith's book embodied "the latest form of this old contention."[9] Hayek then went on in his brief article to neatly dispose of Galbraith's argument by demonstrating that most wants in a civilized society are indeed dependent on (but not determined by) the existence of goods intended to satisfy them. And this is not just true of Galbraith's oft-quoted example of cars with oversized tailfins. There would be no demand for literature without the invention of the printing press and the production of books, no demand for cell phones or even telephones in general without their invention and production, no demand for a vaccine against poliomyelitis without its formulation by Jonas Salk and production by pharmaceutical companies, and so on and on. Thus Hayek showed Galbraith's central thesis to be a vacuous "non sequitur," for the fact that most wants "depend" on the production of the goods necessary to satisfy them does not imply that expanding production for (private) consumption is unnecessary. Because of its brevity and incisiveness, Hayek's critique of Galbraith stands as one of the most brilliant examples of economic demolition ever penned. One cannot imagine such a piece being written today by an economist schooled in modern model-building techniques.

Finally, we note Murray Rothbard's opinion of Galbraith's work. Rothbard's multi-volume treatise on economics Man, Economy, and State, which still stands today as the most comprehensive and advanced statement of economic theory in the verbal-logical or "causal-realist" tradition that has its roots in the Austrian School, in early American neoclassicism of John Bates Clark and Frank A. Fetter, and in the London School of Economics in the 1930s.[10] Rothbard had little use for the style and substance of Galbraithian economics. In a review of books on inflation and the business cycle in the late 1970s, one of which included a book by Robert Heilbronner, Rothbard remarked,

Robert Heilbroner, like John Kenneth Galbraith, might be said to fall into the category of "popular economist": that is, someone who knows virtually nothing about economics, yet manages to write a series of best sellers on the subject, read avidly and almost exclusively by noneconomists, who exclaim over the profundities therein.[11]

Rothbard goes on to utilize Galbraith as a standard of economic ignorance, describing Heilbronner as "a lightweight, for he knows even less economics than Galbraith does and lacks the mordant wit (derived, if not cribbed, from Veblen) and the aristocratic life style of the famous opponent of affluence."[12]

In another article criticizing The Affluent Society, Rothbard points out that Galbraith never provides an objective standard according to which the public sector can be judged to reach its optimum as ever more resources are siphoned off from private consumption to feed its growth.[13] In fact Galbraith categorically denies that a test of the appropriate balance between the satisfaction of private and public needs exists: "The answer is that no test can be applied, for none exists.… The present imbalance is clear.… This being so, the direction in which we move to correct matters is utterly plain."[14] Galbraith does not even make the perfunctory pseudo-scientific appeal to a social-welfare function or the Kaldor-Hicks compensation principle — his own naked and arbitrary personal whim is evidently a sufficient standard to guide society and the economy.

Rothbard also reveals the flaws and contradictions in one of Galbraith's supporting arguments. Galbraith contends that as living standards rise, additional increments of goods decline in value. But Galbraith somehow deduces from this correct principle that satisfaction of additional wants are now worth nothing to the individuals concerned. But, as Rothbard points out, even if Galbraith's unwarranted deduction is granted, what about government services? The US government, for example, has grown much more rapidly than the private sector relative to national income in the 20th century. This prompts Rothbard's query: "But if that is the case, then why should government 'services,' which have expanded at a much faster rate, still be worth so much as to require a further shift of resources to the public sector?"[15] Needless to say, no answer to this question is forthcoming in Galbraith's book.

So Galbraith is indeed, as Robbins keenly observed, "a dull fellow." More important, what does this reveal about the state of a discipline whose distinguished members have begun to hail him and embrace his doctrines?

Notes

[1] Amartya Sen, quoted in Richard Parker, John Kenneth Galbraith: His Life, His Politics, His Economics, New York: Farrar, Straus and Giroux, 2005, p. 669.

[2] J. Bradford DeLong, "Sisyphus as Social Democrat" Foreign Affairs (May/June205).

[3] George A. Akerlof and Robert J. Schiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton, NJ: Princeton University Press, pp. 26, 177 n. 7, 181 n. 1.

[4] Robert H. Frank, "Right for the Wrong Reasons: Why Galbraith Never Got the Prize," New York Times (May 11, 2006).

[5] The Wartime Diaries of Lionel Robbins & James Meade 1943–1945, ed. Susan Howson and Donald Moggridge, London: Macmillan (1990).

[6] Ibid. p. 61. The last sentence refers to Galbraith's unceremonious dismissal from his position as deputy administrator of the US Office of Price Administration (OPA).

[7] For an overview of Meade's life and works, see Mark Blaug, Great Economists since Keynes: An Introduction to the Lives and Works of One Hundred Modern Economists, New York: Cambridge University Press, pp. 161-63.

[8] Howson and Moggridge, p. 153 fn. 74

[9] Friedrich A. Hayek, "The Non-Sequitur of the 'Dependence Effect,'" in idem, Studies in Philosophy, Politics, and Economics, New York: Simon and Schuster, 1969, pp. 313-17.

[1] Murray N. Rothbard, Man, Economy and State: A Treatise on Economic Principles with Power and Market: Government and the Economy, Scholar's Edition, 2nd ed. , Auburn AL: Ludwig von Mises Institute, 2009.

[11] Murray N. Rothbard, "Boom! Crack! Crash!" A review of The Inflation Crisis, and How to Resolve It by Henry Hazlitt (Arlington House, 1978); Beyond Boom and Crash by Robert L. Heilbroner (W.W. Norton, 1978); Manias, Panics, and Crashes: History of Financial Crises by Charles P. Kindleberger (Basic Books, 1978), Inquiry (October 30, 1978), pp. 21–22.

[12] Ibid.

[13] Murray N. Rothbard, "The Fallacy of the Public Sector," in idem, Economic Controversies, Auburn AL: Ludwig von Mises Institute (2011), pp. 419–26.

[14] Galbraith quoted in ibid., p. 423.

[15] Ibid., p. 425