Daily Media Quotation
Economics Has Lost Its Lone Ranger
May 2, 2006
by Tim Colebatch - The Age
No economist has been so widely read as John Kenneth Galbraith, who died last weekend. He was probably the only economist since Keynes to become a household name. For a generation, he influenced public debate on a range of issues, yet his influence on mainstream economists was minimal.
For Galbraith was a political economist, who focused on how power is used in the economy, while economists were learning to analyse microeconomic issues using mathematical formulas. They wrote in algebra; he wrote in elegant, maliciously witty English.
He epitomised the left, the "liberals" in American parlance, who argued for bigger government, a more equal distribution of income, for more spending on the arts, cities, welfare and the environment, and less on the military and consumer goods. But while his thinking had a wide influence in the '50s, '60s and '70s, public policy from the '80s on went the other way.
And while Galbraith, who stood two metres tall, was a formidable, indomitable writer and speaker, he was an iconoclast who polished and sharpened his own ideas, but learnt little from others. His masterpiece was The Affluent Society, published in 1958; many of his later books went down dead ends, or rephrased old ideas in new words.
Born in 1908, he grew up in a small farming community in Canada, imbibing austere Scottish values, and an egalitarian view of politics as a public service. They left their mark on him, and in an important sense, he remained a Canadian in values even as he embraced the US as the place to pursue them.
The young Galbraith began studying farming, but as the Depression hit, he became more interested in what drove the prices of farm goods than in how to plough. He took up agricultural economics, left Canada in 1931 to do a PhD at Berkeley, and never returned.
The 1940s brought two formative experiences. From teaching at Princeton, Galbraith joined the Roosevelt administration, taking charge of price controls on business to keep down inflation. While he later made light of it - "It is relatively easy to fix prices that are already fixed", he quipped, referring to the power of big firms over their markets - it caused intense conflict with influential people.
Galbraith was happy to take them on, but Roosevelt was not. He dumped him, and Galbraith took up economic journalism, spending five years on and off writing for Fortune.
The first experience sharpened his cynicism about corporate America, and the gulf between the theory of capitalism and its practice. The other sharpened his mastery of his weapon of choice.
In 1949 he returned to Harvard, his base for the rest of his life. He became influential in the Democrats. And he wrote: not for fellow economists, but for the US intelligentsia, to strip aside the myths about economy and society.
The Affluent Society was built on three key ideas. First, while economists eulogised capitalism as rewarding risk-takers, in practice, business was about avoiding risk. Second, most people in the West were poor no longer, so corporations used mass advertising to persuade them to buy what they did not need.
And third, the US had developed a culture of "private affluence amid public squalor", yet "the conventional wisdom" kept insisting that low taxes take priority over spending to meet public needs.
Galbraith is famous for the latter two ideas, but the first is the most relevant to our times. While textbooks introduce economics students to a world of perfect competition, where markets, not firms, set prices, Galbraith argued that most of the economy was in fact dominated by a small number of firms that tacitly connive to set prices and head off risks. (Australia's banks are an obvious example.)
While economists had developed the ideal of the competitive model into "a thing of precision and symmetry, almost of beauty", Galbraith wrote, "there was no equally explicit appreciation of the fact that it committed men to a remarkable measure of insecurity".
"The penalty for falling behind in the race for increased efficiency was bankruptcy . . . (The worker) could lose his job equally through his own shortcomings and those of others . . . The race for increased efficiency required that the losers should lose.
"However, this insecurity, valuable though it seemed in principle, was cherished either in the second person or the abstract . . . The development of the modern business enterprise can be understood only as a comprehensive effort to reduce risk."
Some say globalisation has destroyed this view of the business world, but that is true only in manufacturing. Look at the massive scale of global takeovers, which have left the global coal industry with just three dominant players. Look at Australia's most successful company, Macquarie Bank, and its portfolio of de facto monopolies in local markets. Look at Toll and Patrick. Risk reduction is fundamental to corporate strategy.
In later years, Galbraith lost his influence, but not his humour or sharpness. The Culture of Contentment (1992) explains the conservative hegemony in terms of using public policy to keep the majority of voters contented, rather than tackle long-term needs. It sounds depressingly familiar.
Tim Colebatch is economics editor.