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Galbraith on the new economy « Previous | |Next »
May 2, 2006

John Kenneth Galbraith died on the weekend.

PortraitGalbraith.jpg An institutional economist, he became one of America's best known public intellectuals. He was an economist, professor, government official, journalist, ambassador, novelist, antiwar activist, and he is known for his "private wealth and public squalor" analysis of American capitalism.

It's a nice turn of phrase that captures the way that the liberals desire for market capitalism to work for the benefit of the people is thwarted by the big corporation looking out for its market share.

Far from the economy consisting of small, competitive firms whose decisions were determined by consumer choice, as the textbooks held, the economy was actually ruled by big corporations, independent of the market, and run by managers who were able to fix prices and control sales through advertising.

However, the effect of globalisation has meant that monopoly power within a national market has been exposed to international competition.

Yesterdays Australian Financial Review had an edited extract from a speech John K. Galbraith gave in 2002 on the new economy. In it Galbraith says that the idea of the new economy had three main elements, all of them articulated in offical documents of the late 1990s, expecially by the US Federal Reserve. Galbraith says:

The first held that new technologies were generating a permanent boost to growth. The second held that government need play no major role in economic life, and that government debts could be eliminated through budget surpluses. The third held that economic management, in the short and medium term could be entrusted to the Fed. High rates would cool inflationary ardour. Lower rates, when required, would fuel the investment to keep the country at work.

These are familar ideas in Australia are they not? In the extract, Galbraith goes to work on them in the context of the American economy. He argues that the new economy began to expire around 2000 as the prosperity of the techno boom gave way to the current slump.

More importantly, Galbraith's argument is that you cannot rely on monetary policy run by the Fed (or the Reserve Bank of Australia) to get you out of a jam. By themselves lower interest rates cannot rekindle the info-tech boom, nor induce most households to buy new durable goods. He then says something that applies to Australia now:

... monetary policy would support growth only as long as households and business were willing to expand their debt loads. When debt loads become high, rising interst rates become especially dangerous. And once the willingness to take on new nerw debts declines, lower interest rates can provide only minor relief of a reduction in servicing costs.

Australian housholds currently have high debt loads and the media economic talk is for the Reserve Bank to raise interest rates to contain local inflationary pressure due to petrol prices, workforce shortages, and foreshadowed tax cuts in the 2006 federal budget.

I was much taken with Gralbraith's economic realist texts: The Affluent Society (1958) that criticized the myth of "consumer sovereignty"; the New Industrial State (1967) which argued that firms were oligopolistic, autonomous institutions vying for market share (and not profit maximization) which wrested power away from owners (entrepreneurs/shareholders), regulators and consumers; and Economics and the Public Purpose (1973) that explored political capture by firms. As an institutionalist Gailbrath desribed and analysed the capitalist economy as it was, as distinct from the simplifying assumptions and the mathematical models that were fundamental to both the liberal and conservative economic orthodoxy of his day. His questioning of many of the basic assumptions of orthodox economic theory can be seen in this quote:

In making economics a non-political subject, neoclassical theory destroys the relation of economics to the real world. In that world, power is decisive in what happens. And the problems of that world are increasing both in number and in the depth of their social affliction. In consequence, neoclassical and neo-Keynesian economics regulates its players to the social sidelines. They either call no plays or use the wrong ones. To change the metaphor, they manipulate levers to which no machinery is attached.

That phrase 'they manipulate levers to which no machinery is attached' has real bite, hasn't it.

Update: 2 MayAn assessment of Galbraith's legacy can be found here, the one by by Evan Jones is at Alert and Alarmed. Robert Skidelsky, professor of political economy at Warwick University in Britain, says in the Canberra Times that Galbraith position was:

a non-Marxist version of class struggle, with the intelligentsia as the engine of social innovation and carrier of the "public purpose". His position seemed to be that as long as the Democrats were in power and advised by the right people, the state could be trusted. This is dangerously close to the Marxist belief that the problem of the abuse of power, and the need to build safeguards against it, would disappear when the dictatorship of the proletariat was established.

It's a form of statism quite at odds with the neo-liberalism of today.

| Posted by Gary Sauer-Thompson at 9:12 AM | | Comments (0)