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.