Saturday, August 06, 2011

Another perspective from the past

Last night came the stunning news that S & P had downgraded the obligations of the United States. I was shocked, because, as I tried to make clear last week, I do not see any evidence that the US is in any danger of meeting its day-to-day obligations, where are much less--about 40% less--than the $14 trillion figure we keep hearing. (For an explanation of that, see last week's post.) I don't know if we're likely to learn much about the internal deliberations of S & P, which, like all the rating agencies, was so dreadfully wrong about just about everything during the last decade, but I think there must be a very big story there somewhere. However, for the moment it seems better advised to wait and see what happens next week before commenting further.

Instead, today, I want to discuss an economist who died a few years ago at the age of almost 100, John Kenneth Galbraith. I knew him slightly, interviewed him a couple of times, and found him to be one of the earliest and most enthusiastic readers of my book, American Tragedy, to which he gave some unsolicited public plugs. I always enjoyed is writing very much, and in the stacks of the library the other day I happened accidentally upon a book of his essays from the 1960s and 1970s, Economics, Peace and Laughter. But the one I read this morning, "Economics as a System of Relief," paid huge dividends. Those of us who spend much of our time in the past have a great intellectual advantage: we are constantly exposed to perspectives that have become unfashionable and vanished from view that allow us to go beyond today's front pages. That is, come to think of it, the whole point of this blog.

The essential point of this essay was at the heart of Galbraith's work, embodied in three of his books: The Affluent Society, The New Industrial State, and Economics and the Public Purpose. The last one is the only one I ever read from start to finish and it was a mind-boggling experience. Essentially Galbraith argued that the classical theory of the market did not describe modern reality--if indeed it ever had. The market, as he explains again in this essay, is supposed to embody the sovereignty of the consumer, whose preferences theoretically determine what is produced. But in fact, he began arguing during the 1950s--the first great age of television advertising and mass consumption--the producer, rather than the consumer, often managed to determine in various ways what the latter would buy. Advertising helped create exactly the wants that were most profitable to satisfy. No one actually needed a new car every two years, but Detroit in those days was doing an excellent job of convincing American families that they did.

The market, then, as Galbraith saw it--especially any market dominated by large firms--was not an automatic regulator of supply and demand, but rather a game in which powerful producers had huge inherent advantages. He also noticed that because they were, inevitably, politically powerful, they could exert a lot of influence on what federal and state governments decided to spend money on. They could, and did, create a prejudice in favor of private consumption as against public goods such as mass transportation or a clean environment. If they made weapons--and it is my impression that the weapons industry was a much larger factor in our economy then than now--they could affect our foreign policy, as they certainly did as late as the 1980s, when the Reagan Administration, for example, finally brought to life the B-1 bomber, which successive Administrations had wisely rejected for more than 20 years.

Now it seems to me to be a big understatement to suggest that Galbraith was on to something. Indeed, he could not see forty years ago how far these trends were going to go. One critical symptom, it seems to me, is that marketing, rather than skill at production, has become the essence of American business strategy. Business focuses not on producing what people really need--which would be quite simple--but on making them want what they want to produce. I can see no reason why the SUV, a product I was never remotely tempted to buy, became the standard family car in the 1990s, and its promotion did enormous harm to the United States in several ways. But Detroit pushed it because it was the highest-profit item they could find, and it worked. That, however, is only the tip of the iceberg.

The energy industry, the food industry, the health care industry, and the financial industry, I have already noted, seem today to be the leading sectors of the American economy. Not only do they all create wants, but at least three of them deal in highly addictive substances. We have all read plenty and experienced a good deal of the way that the pharmaceutical companies have acquired unprecedented influence over the practice of medicine. They specialize in developing drugs of some (though often marginal) utility as palliatives for long-term conditions--because those will contribute the most, in the long run, to their balance sheets. We desperately need new antibiotics today, but I read about a year ago that no drug company wants to develop a product that will simply cure an infection in a week or so. We have an epidemic of emotional disorders now, recently discussed at length in the New York Review of Books, with a battery of drugs to treat them. Some of the hottest drugs of the last twenty years were those that enabled older men (and therefore, women) to have more sex. The food industry also pushes addictive substances like salt and sugar at every opportunity, apparently with enormous success.

The financial industry is a special case altogether. Galbraith had studied bubbles--one of his first books was about the 1929 crash--but he never imagined in the 1970s that the regulatory reforms of his youth would be undone, creating megabanks with the right to borrow from the Federal Reserve, trade stocks and options, leverage at 30 to 1, and devise unregulated financial instruments. That industry certainly created wants, not least the desire to own a home in people who could not afford one, or to take out a mortgage that was obviously going to be unsustainable. A bubble, actually, is probably the inevitable consequence of an unregulated market, particularly a financial one in which the supply of money is more or less endless. It seems that it would be hard to argue that the financial markets of the last two decades designed either the financial instruments people really wanted or the ones that were best for the general good.

Galbraith concluded his essay with some musings about the economic profession. He did not think his contemporaries would ever adopt his ideas about corporate power, because they were too subversive of traditional theory. He had more hopes for younger economists, that is, for my generation. With very rare exceptions--including his own son James!--they have let him down. He noticed that the Boom generation was rebelling against materialism in the 1960s and 1970s, but as we all know, that did not last. And indeed, Boom economists adopted Milton Friedman, not Galbraith, as their intellectual patron saint, and spent most of the last three decades elaborating free-market theories. Perhaps it will take yet more catastrophes to start a serious re-examination of economic principles.

A free market is not a self-regulating mechanism dispensing economic justice. It is a jungle in which the strong live off the weak. It can be made more just only by giving an independent agency--the state--regulatory authority and the will to use it. That is the real lesson of the last century. Sadly, it must be learned again. Galbraith always had a great sense of humor, which helped him enjoy nearly ten decades of life to the fullest. Like so many of our greatest thinkers, he seems to be most useful in allowing us, as Dr. Johnson said, better to enjoy life, and better to endure it. I miss him, but his words live on.


Gerald Meaders said...


Wonderful essay re Galbraith, and how things are, and have been!

I recently listed a few points which seem to me analogous to your great observations here.

Terms search: Krugman Klein Keynes there, if you wish.

(Of course my site is filled with a lot of other nonsense only entertaining to myself. Please just ignore there what offends, is impertinent, or too irreverent.)

Many thanks,

galacticsurfer said...

Economics theory is the wrong area to study. Regardless of whether we establish a capitalist, communist or theocratic system it will be destroyed over time by slefish human interest. This is what generational theory teaches us. The children destroy the paradise of the parents.

That said, which is obvious in the sense of your blog, I have been reading older books and find being too in the present to give a lack of perspective on current life. I just read a 700 page biography of EA Poe and find his tragic life a typical Nomad life, as in my X generation. Since I learned the theory it colours everything I learn about (like Jesus or Buddha as "Prophets" or the Iliad as a crisis war, etc. )

Economics is not anything more than a social science based on static information, i.e. It does not take into account the rolling generational changes over time to account for the various changing waves of recessions to stagflation to debt depression to war and back to strong economic development (rebuild) then to recessions, etc. Industry created the war and manfactured the peace (IG Farben, Ford, GM, etc.).

The invisible hand only works with a democratic economy of many small trading partners but in large scale capitalism or communism the big money controls everything from govt. on down. Casino capitalism and massive concentration of wealth takes place in the late stages of the multigenerational timeline but in the earlier stages the appearance of fairness and buildup of new infrastructure builds up these massive entities who eventually destroy everything. Engineeering companises or manufactruring were good investments in the 50s but now finance is where the money is. The Nomads want quick money so they can get rich quick and cash out. The greater good is just a joke. See Pirates of the Carribean films with Xer Depp as star.

James50 said...

I read the "New Industrial State" in about 1970. My recollection is that its message was that the large corporations were bigger than the market and could control it with marketing and advertising.

History has not shown this to be true. In 1960, the Fortune 500 were led by General Motors, Exxon Mobil,Ford Motor, General Electric, and US Steel. GM was unable to fend off the Japanese challenge, and eventually declared bankruptcy. US Steel today produces only slightly more steel than it did in 1902.

In 2011, the Fortune 500 was led by Walmart, Exxon Mobil,Chevron, Conoco Phillips, and Fannie Mae. Now perhaps Galbraith were he alive today would still be talking about the all powerful corporation that uses its marketing to make us buy stuff whether we need it or not, but history does not bear that out. The only companies that seem immune to the market are the oil companies and advertising and marketing are hardly the keys to their success. Fannie Mae is a product of the government and was a bold attempt to manipulate the market for home mortgages. It too will succumb to the market.

The market still rules in the end.

Patricia Mathews said...

The downside to the producers driving the market by telling people what hey want, is that it gets harder and harder to find what you really want.

At my age (72) I have no need for jeans cut below my hipbones and tops that show off my belly. Try to find anything else except in specialized catalogs aimed at the older set.

Then they, too, "catch up to the times" fashion-wise.

No wonder the old ladies in Boston didn't buy new hats, "we HAVE our hats!"

Bob in NC said...

For those of us Silents less facile in web stuff, can you give us an email address or other way for us to forward things of substance?
Thanks,Loyal reader in NC

David Kaiser said...


You can put a link in a comment. For obvious reasons I hesitate to post my email. There are too many hostile visitors here. Sorry.


Jude Hammerle said...

Dear Dr. Kaiser,

A hidden pattern in consumer buying challenges Galbraith's myth in detail. While consumers sometimes behave irrationally, every purchase appears to be a move in an elegant and endless competition. If you want to read about this, my email address is in my profile.

To your ultimate point, government regulation of sellers actually hurts buyers. By specifying behaviors that sellers can and cannot engage in, the government effectively sanctions buying from them. Bernie Madoff talked the talk of a federally-regulated securities broker--it just happens that no regulator ever bothered to open his books.

There are only two ways to protect buyers. The first is government regulation of buyers. The second is to add one more pithy maxim to our legal tender and coinage: Caveat emptor!

With respect and affection,
Jude Hammerle

JR said...

Hey Jude,

Government regulation of sellers requires, for example, that real estate be surveyed and written deeds recorded, and that gallons, pounds, months, kilowatt-hours, acre-feet, APR and MPG always mean the same thing.

If you think that sophisticated, well-informed, market-leading, profit-maximizing entities won't lie and cheat if allowed to, I think you will be disappointed. Consumers, individually, are in no position to monitor the details of the many transactions in which they engage every week, except as to price and soft variables such as friendliness, ambiance, convenience, etc.

"Caveat emptor" is a ridiculous principle for standardized transactions. Sorry, I don't have time to check if the "16 oz." in my coffee cup today is the same "16 oz." measure I bought yesterday.

I'll go further: outlawing slavery and usury, and severely limiting gambling, was a good thing. (We're still OK on slavery, thank goodness.) Desperate or foolish people will make bad decisions, and sophisticated counterparties can, and will, easily manipulate the weak.

Beleck said...

the law of the jungle, Lord of the Flies is what we have now. having seen the Free Hand of the Market for the last 30 years, the absence of Government Regulations speaks volumes.

all those lies of the Free Marketers have led to this mess we are in now.

but i would never expect them to say they failed. that the Free Market is really an "Owned" Market.
such truths will never be found in their "reality." Reality is not their concern. the Free Hand of the Market is. and we know what that means.

Propertydoctor said...

Folks, I can break all of the economic problems of the world and our country down into one word... GREED. If you want to see the cause, follow the money.