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May 31, 2006

John Kenneth Galbraith (1908 - 2006): a great observer of economic life but a bad economic theorist

Posted by William Coleman

J. K. Galbraith was a great observer of economic life but a bad economic theorist. Thus argues Dr William Coleman - Reader in Economics at the Australian National University.

John Kenneth Galbraith (1908 - 2006) was the stylish chronicler of the economic life and times of "the American century". In 63 books - ranging from marketing in Puerto Rico to painting in India - he crafted scenes that conveyed the morals he drew from what he saw.

He is usually described as an "economist". But he was not an economist's economist. Despite his Harvard chair, and his presidency of the American Economics Association, the cold truth is that he was barely taken seriously by economists.

Perhaps Galbraith's best claim for economists' attention was his 1967 book The New Industrial State, that purported to record an economic transformation. In Galbraith's telling, the charismatic entrepreneur (Ford, Carnegie, Rockefeller) had disappeared. So had the Victorian paterfamilias, briskly dispatching his capital to the location of the greatest profit. The economy was now controlled by a small number of corporations, each a little bureaucratic state. Prices were administered, planned, and "institutionalised". So were production, sales, investment, and profits.

The New Industrial State distilled a swarm of ideas of the inter-war period, and the events of the day. In the 1920s "scientific management" had championed the importance of rationalistic planning in the corporation. In the same decade Thorstein Veblen had pressed the ability of business to contrive and thrive on waste. Adolf Berle and Gardiner Means in their 1932 The Modern Corporation and Private Property, and James Burnham in his 1941 The Managerial Revolution, had announced the usurpation, by managers, of the control of the limited liability company. And at Harvard, Cambridge and Oxford, respectively, Edward Chamberlin, Joan Robinson and Robert Hall had articulated the significance of advertising, the irrelevance of costs at the margin, and the power of the modern business to control prices.

The events that shaped The New Industrial State were two. First, the Great Depression saw a precipitous drop in prices of (competitively produced) agricultural commodities, but rigidity in (oligopolised) manufacturers' prices. The second was Galbraith's appointment to Office of Price Administration in 1942. Galbraith later recalled that in joining the OPA he brought with him the economist's conviction that it was not "honourable" for the government to fix prices. Prices should be stabilised by reducing demand, as Keynes was arguing. But his experiences at OPA, he believed, taught otherwise. In 1946 he announced:

The simple fact is that price control worked.
It worked because all manufacturing prices were "administered" anyway. They could either be administered by the corporation, or by the OPA.

The New Industrial State provided a credal statement of his vision of the invulnerable corporation. It has since lost its resonance with reality. Corporate icons like PanAm have expired. Once sturdy "industrial states" have been waylaid by huge losses (GM lost US$ 8.6 billion in 2005). And the entrepreneur-owner has come back - Gates, Jobs, Brin, Bezos, Ellison, and Murdoch, too). This empirical disconfirmation was not unforeseeable, as Galbraith never came close to grappling with the theoretical issues that were at stake.

The fact is that Galbraith was a good observer, but a bad theorist.

This, of course, was no disadvantage when it came to selling his books to the public. Putting aside text-book authors, surely no one else ever sold more books on economics in the English language. This celebrity did not come without him seeking it. He wished for public renown. He felt it was his due to be near the centre of power, and in the midst of things. Part of this "engagement" was his long association with the Democratic Party. He was, however, never crudely partisan in this. Galbraith once said:

The Democrats recruit people who want change, mostly for themselves.
His own preferred self-description was "Liberal". This denoted a particular historical type; the mid-century, intellectual cum public servant, of footloose "progressive" inclination, of which Keynes was perhaps the best exemplar. In the United States this category believed its hour had come with the Kennedy administration, but it promptly wilted under the twin attacks of the New Left and the New Right. Galbraith was not equipped to fight either effectively. So he lingered on as a vestigial New Dealer, who could untroubledly announce:
I have always thought that there are few problems New York City could not solve by doubling its city budget.
Galbraith's career bespeaks of a mistaking of talents. He spoke ill of the economic historian. But most of what he did was history, of some sort. And his best book is one of economic history, The Great Crash. With his delicacy in observation, and his sensitivity to rhetoric, personality and advantage, he could have told the tale of Du Pont, or J.P Morgan or Henry Ford. He never did. But he left behind a massive trove of testimony to what he had witnessed, which is all, and much more, one can ask of anyone blessed with the writer's muse.

Dr William Coleman is Reader in Economics at the Australian National University and the author of Economics and its Enemies: Two Centuries of Anti-Economics, (Palgrave Macmillan, 2002).

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