Saving Capitalism and Ending Poverty: John Kenneth Galbraith

Vintage analysis: Id Magazine (Canada), January 23 to February 5, 1997

It was with hungry enthusiasm that I rushed to hear the great liberal economist John Kenneth Galbraith speak. It was with enormous disappointment that I found a genius emptied of solutions to the current political battles in today’s Ontario.

For those unfamiliar with Galbraith, think of him as a hybrid of the liberalism of former prime minister Pierre Trudeau and the manner of Jimmy Stewart. Now 88, the former Guelph agricultural economist became a servant of the US government just as president Franklin Roosevelt was beginning to introduce the New Deal - today’s rusting welfare state - as a solution to the cruel hardships imposed on Americans as a result of the Great Depression. Galbraith rode out the Second World War in a senior government position as Roosevelt’s price-control czar. He later advised Democratic presidents John F. Kennedy and Lyndon Johnson, before seeing his influence in American economic thought wane under Ronald Reagan’s Republicans.

Galbraith has long followed the ideas of British economist John Maynard Keynes, who believed goverments should keep money tight in good times, but should spend their way out of bad times to avoid undue hardship. Galbraith also made the plight of the poor one of the pillars of his economic theory, and criticized the unnecessary appetites and demands created by the goliath American advertizing industry. He has supported wage and price controls and once, in the 1930s, even wanted to join the American Communist Party.

Last week, Galbraith breezed into Toronto with his ivy league roadshow. Speaking to a stodgy crowd of liberals (and Liberals, including former prime minister Pierre Trudeau and failed Ontario leadership candidate Gerrard Kennedy) at the University of Toronto, Galbraith was at an institution that came as close as Canada gets to his current stomping ground, Harvard.

Symbolically, Galbraith couldn’t have visited Ontario at a better time. The Conservative government of Mike Harris is in the middle of an ambitious campaign to reverse everything that Galbraith has stood for: budget deficits to avoid depressions; social programmes to prevent poverty; taxes on the rich to fund those programmes; government policy subservient to public good. Harris oozes contempt out of every pore for the pillars of Galbraith’s thinking. In fact Ontario, once the bedrock of Canadian liberalism, is now joining Alberta in dismantling the welfare state.

A graduate of the University of Guelph when it was still the Ontario Agricultural School, Galbraith took his bitter memories of farming in southern Ontario to the University of California, Berkeley and subsequently to the Roosevelt government.

In his day, Galbraith was amongst a rare species of mainstream economists that earned respect from the once-abundant Marxists who cluttered universities. Not that the Marxists liked his compromises and complicity with the American government, or his assertions that he could save capitalism. But they thought he softened up the system for some body blows to be delivered by the workers’ revolution.

I am a member of generation that grew up on government largesse, well-funded public schools. family allowance, university grants, and make-work progammes. But we have seen a lot of that eroded over the past eight years, during a period of high unemployment not seen since the Depression. It was time to see if this titan of liberal thought had something new to say.

Galbraith’s talk had two main points: the market economy is the best system going; he supports a guaranted minimum salary to prevent poverty. Other than that, Galbraith’s speech was a rehash of the same ideas he has been mulling over for the past 50-plus years. It could be called Liberalism 101.

His speech was peppered with euphamisms like the “socially concerned.” Perhaps he was pulling his punches so as not to offend the “distinguished” audience. The most exciting moments displayed his dry wit: “In the United States , the war against the poor having now been won,” or “We, the socially concerned, do not seek the euthanasia of the rentier class.”

He struck out against annual balanced budgets because they have been used as an excuse in the US to cut off benefits to the poor. He also slammed the globalization uber alles philosophy that sees welfare policies as uncompetitive - a sentiment that doesn’t seem to be in vogue these days with liberals. Last week, Prime Minister Jean Chretien told the South Koreans they need to remove jobs-for-life provisions to join the global marketplace.

His ideas and his approach to communicating those ideas come from a special historical time. A time when governments under pressure from trade unions and the far-left and right political parties decided to make capitalism a little friendlier. But they needed advisers who could speak the language of the elite. Eloquent, confident, pragmatic - advisers who felt comfortable in the courts of the democratic government. They didn’t want hot-headed union guys or hectoring left-wing demogogues.

Galbraith takes credit for civilizing capitalism and ensuring its survival: “It would not have survived had it not been for our successful civilizing efforts. We, the socially concerned, are the custodians of the political tradition and action that saved classical capitalism from itself. We are frequently told to give credit where credit is due. Let us accept it when it is ours.”

Galbriath’s economic theories have always been grounded by morality, preferring to avoid being a servant to flow charts. It is his most insightful side. When many fear to speak in broad terms about current economic problems, where many fear to make connections, Galbraith has pieced the complex puzzle together, much to the frustration of those who believe capitalism should be left unfettered. It is his worthiest legacy.

The Galbraith Interview

You point out it is reforms that have given capitalism a new lease on life. What policies would alleviate the worst aspects of today’s capitalism?

We still have the oldest problem. (That is) to eliminate the cruelties that are inherent in the system. In the United States, and I imagine also in Canada, we still have the terrible problems of the urban poor, of the people who do not make it. I see one of the central tasks of our time is to do two things: to provide a safety net so that in a modern rich society we don’t let people starve, and that we provide the means for escape from urban poverty.

How would you elliminate poverty?

No novelty about that. Two things are absolutely essential. One, that there be a basic safety net. That we accept in a modern society that there has to be a level of income below which people are not allowed to go. I do not join this attack on welfare, this notion the poor should be allowed to starve. Another thing is a strong educational system, which allows people to escape from poverty in the next generation. Those are the two absolute essentials.

Should government just concentrate on ending poverty and abandon universal programmes like public health care?

You can always have a conversation that separates itself from the reality. I think in Canada if some politician or some political group wantd to repeal the health system, they would soon find themselves in considerable disfavour. If they were committed to allowing the poor to starve, they would get a reputation for cruelty that no civilized society would tolerate. And if they started saving money on the schools, as some already have, we would find out how absolutely essential good education is for economic and social well-being. So we have a difference between what is possible in oratory and what is possible in reality … When the axing comes, it is a good deal less popular that it is in the previous rhetoric.

Who do you think, within or outside political movements, represents the socially concerned today?

I don’t speak generally on this. There is in all countries a substantial voting and politically expressive group. In the United States it is the political left, in Britain it is the Labour Party, in France it is the socialists, in Germany the social democrats. They are broadly committed to the welfare state and I think will remain so.

Would you include the Liberal Party in Canada amongst those?

I would include s substantial part of the Liberal Party in the United States. The Liberal Party in Canada, like the Democrats in the United States, have a double orientation, on one hand to the welfare state and on the other hand a more centrist attitude. Both parties have an internal problem to resolve.

Do you think they have lost interest in the welfare state?

To some extent I regret that. We must take some responsibility for human suffering and human well-being.

You don’t see that with the Democrat Party?

I prefer it to the Republicans.

Are some of these policies like welfare reform in the US making it harder for the poor?

I was not in favour of welfare reform.

I grew up in a very poor household but was able to go to the University of Toronto because of various government policies. In fact, they have kept me from destitution. You have written about a culture of contentment that prevents further social reforms. Will it whither?

Those of us who have been associated with the welfare state have made a lot of people comfortable, happy and conservative. We have undermined our own political influence by our success.

Do you think current levels of high unemployment and economic stagnation might erode that contentment?

No, if we suffer another recession there will be a desperate effort to have the government do something about it. The present conservatism is an aspect of good times. We had it in the 1980s under Reagan.

Are we still in good times?

We still have a lot of people who have a problem. We should have sympathy.

Do you see any political parties in Canada who defend the welfare state?

I’ve lived all my life in the the United States and I’ve always avoided coming back to give Canada advice. As I said in my lecture, anybody who does that should have stayed in Canada for his own lifetime. Let Canadians look after their affairs in Canada.

You said the socially concerned don’t seek income equality. I guess that is where you split with socialists?

I accept the inevitable, that people are going to be different in aspirations, ability and luck and probably different in parentage. All of this is going to mean differences in income.

LINKS

www.johnkennethgalbraith.com

www.savingcapitalism.com

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  John Kenneth Galbraith: Great Crash 1929, the (Penguin Business)

BIBLIOGRAPHY

Non-fiction

• Modern Competition and Business Policy (1938)
  
• A Theory of Price Control (1952)
  
• American Capitalism (1952)
  
• The Great Crash: 1929 (1955)
  
• The Affluent Society (1958)
  
• The Liberal Hour (1960)
  
• Ambassador's Journal (1969)
  
• New Industrial State (1971)
  
• Economics and the Public Purpose (1973)
  
• Money (1975)
  
• Age of Uncertainty (1977)
  
• A Journey Through Economic Time (1994)
  
• The Good Society: The Humane Agenda (1996)
  

Fiction

• The Triumph (1968
  
• A Tenured Professor (1990)
  

Extracts from "The Great Crash: 1929", John Kenneth Galbraith, First Published 1955

• The Crash of 1929 by John Kenneth Galbraith: http://www.btinternet.com/~dreklind/thecrash.htm
• The Crash of 1929 by John Kenneth Galbraith: http://hallbusinesses.com/biographies_primers/62.shtml
• The Crash of 1929 by John Kenneth Galbraith: http://www.amazon.com/exec/obidos/ASIN/0395859999/ref=ase_superstarinvesto/103-0508799-0839853

• Emeritus Professor John Kenneth Galbraith's Biography: http://post.economics.harvard.edu/faculty/galbraith/bio.html
• Conversation with John Kenneth Galbraith, cover page: http://globetrotter.berkeley.edu/conversations/Galbraith/
• Biographies: The Economists: John Kenneth Galbraith (1908- ).: http://www.blupete.com/Literature/Biographies/Philosophy/Galbraith.htm
• John Kenneth Galbraith Talks About "The Good Society": http://www.mdle.com/WrittenWord/rholhut/holhut40.htm
• Booknotes Transcript: John Kenneth Galbraith Title: A Journey Through Economic Time: A Firsthand View:http://www.booknotes.org/transcripts/10076.htm
• A selection of quotations by John Kenneth Galbraith (One of the greatest pieces of economic wisdom is to know what you do not know):http://quotations.itgo.com/galbraith.htm
• Quotations by John Kenneth Galbraith http://www.cyber-nation.com/victory/quotations/authors/quotes_galbraith_johnkenneth.html
• Quotations by John Kenneth Galbraith: http://www.cyber-nation.com/victory/quotations/authors/quotes_galbraith_johnkenneth.html
• John Kenneth Galbraith (1908- ): http://schwinger.harvard.edu/~terning/bios/Galbraith.html
• Galbraith Warns of Stock Speculation and Tells Some Delightful Anecdotes: http://www.nieman.harvard.edu/events/seminars/galbraith2.html
• Conversation with John Kenneth Galbraith : Institute of International Studies, UC Berkeley : http://globetrotter.berkeley.edu/conversations/Galbraith/

• To Crash or Not to Crash
  • At http://www.zealllc.com/commentary/crash.htm

Galbraith saw this comingOn the 100th anniversary of his birth, the late, great economist's warnings resonate more than ever

• Stephen Dunn
• The Guardian,
• Wednesday October 15 2008
• Article history

One hundred years ago today, one of the intellectual titans of the 20th century was born. Had the warnings issued by JK Galbraith up until his death two years ago been better heeded by the policymakers of today, it seems unlikely we would find ourselves so deep in the economic mire.

A lifelong liberal who advised successive Democratic presidents and presidential candidates, Galbraith ceaselessly warned of the dangers of financial excess. In his extensive writings - most famously The Great Crash 1929 - Galbraith described the common events that precede and accompany particular financial crises, events that are conveniently forgotten by politicians, regulators and their advisers in the good times, when financial deregulation takes grip.

Galbraith, like Keynes before him, identified the instability of modern capitalism in terms of the drive to accumulate excessive wealth and the fragile nature of the financial system. As Galbraith remarked, all stockmarket bubbles exhibit "seemingly imaginative, currently lucrative, and eventually disastrous innovation in financial structures". Galbraith argued that an unfettered, competitive capitalist system, operating on pure free-market principles, was inherently cyclical and unstable, requiring robust regulation and active government.

Starting with the tulip bulb mania in the 1630s, bubble after speculative bubble has been erased from the popular memory: the South Sea bubble in the early 1700s; the Mississippi bubble, which caused a stockmarket crash in 18th-century France; the Florida real-estate bubble in the 1920s; the stockmarket crash of 1929; the stockmarket crash of 1987; the Nikkei bubble, which began in 1991; and the Nasdaq bubble of 2000.

These episodes share a theme: a perceived fundamental change in the economy arouses euphoria and heightened expectations of return, leading to excess, fraud and collapse.

This pattern underpinned the folly of sub-prime lending. The expansion in business activity feeds entrepreneurial and speculative behaviour in the financial sectors. It drives monetary innovation and the new forms of financing structures that are contrived to allow firms to participate in the boom.

Heightened expectations stimulate a credit boom, with the banking system keen to cash in on the new situation. As Galbraith remarked in his book, Money: "The banks, needless to say, provided the money that financed the speculation that in each case preceded the crash."

As Galbraith and Keynes before him warned, such speculation inevitably leads to euphoria or overtrading in which rising asset prices encourage speculative excess. As debt accumulates, soon it can only be serviced by the issue of new liabilities. As long as the financial markets are booming, it is possible to sustain low levels of cash inflow by issuing new stocks and securities to finance current liabilities. But when the hangover comes it hits hard.

When the financial markets slow their expansion, organisations that have covered their future liabilities through issuing more debt are forced to sell assets to meet their liabilities. These "distress" sales cause asset prices to fall, at which point the financial markets, and businesses with exposure to those markets, collapse. The next phase, in which investors try to get their money back out of the markets, naturally gives way to one of "panic". This is the essence of The Great Crash.

At this stage, prices freefall and asset markets break down. As Galbraith highlighted, both bank failures and the fear of bank failures have the same effect. Both are "forces of compelling power to induce deflation - to contract consumer spending, investment spending and therewith sales, output, employment and prices".

The flurry of action by governments and central banks around the world in recent days suggests that Galbraith's works have finally been pored over by politicians. The experience of the 1930s must be avoided. This financial crisis must be met with programmes designed to maintain demand and avoid another Great Depression. On the 100th anniversary of Galbraith's birth, his words matter more than ever.

• Stephen Dunn's The Economics of John Kenneth Galbraith will be published by Cambridge University Press next year

stephen.dunn@eoe.nhs.uk

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