Economic Theories are mere myths?
AUG 21, 2004
Many economic theories are mere myths, says Galbraith
In a new book, the famous economist challenges long-held ideas, calling them 'innocent fraud'
By Bhagyashree Garekar
ECONOMIC forecasts are not worth the time, the Fed is irrelevant, the market is a myth and the consumer is not king.
That comes from no oddball outsider but a richly decorated economist who has been at the centre of the American economy since before World War I.
John Kenneth Galbraith, a Harvard University fixture for 50 years, past presidential adviser and author of 31 books, takes just over 60 pages in a newly published book to challenge what many take for granted.
The economics of 'innocent fraud', he calls it in his book The Economics Of Innocent Fraud: Truth For Our Time. Innocent because no one in particular is at fault and no ill intent is meant by its practitioners. But it is fraud all the same.
After 70 years of teaching and practising the dismal science - he is 95 - he says: 'I have learnt that to be right and useful, one must accept a continuing divergence between approved belief and the reality.'
Out of pecuniary and political pressures and fashions of the time, he says, economic and political systems cultivate their own versions of the truth, which may bear little semblance to reality. Something, he says, of which all concerned should be aware.
Here is some of that 'conventional wisdom' questioned by the man who invented the term. But be warned that what follows is not lofty economic theory but an exercise in, as Galbraith says, 'identifying self-serving belief and contrived nonsense'.
THE WISE FED
The Fed, for all its power and prestige, effectively does nothing, says Galbraith.
In his view, America's Federal Reserve System (Fed), the central bank and agency to limit recession, unemployment and inflation, is 'our most prestigious form of fraud, our most elegant escape from reality'.
During a recession, the Fed cuts interest rates to stimulate borrowing and spur on production, consumption and, so, the economy.
In a boom scenario, on the other hand, the rate is raised to restrain business investment and consumer borrowing to level off excess optimism and prices.
Highly plausible and wholly agreeable, Galbraith says. But the difficulty, he says, is that this process 'exists only in well-established economic belief and not in real life'.
Business firms borrow when they can make money and not because interest rates are low.
And when times are good, higher interest rates do not matter. They do not have the effect of slowing down business investment because what is egging it on is the prospect of profit.
As he notes, the Fed could provide no remedies for economic ailments during and after World War I and during the Great Depression of the 30s.
Galbraith himself did have success controlling inflation, which was greatly feared during World War II, while he worked in the Office of Price Administration under president Franklin D. Roosevelt. He says this was because there was no reliance on the Fed.
But today, such is the faith in the Fed and its chairman, whom Galbraith calls an 'informed, confident and respected figure of no slight theatrical talent', that the Fed will receive credit if and when there is full recovery.
But please be gentle on the Fed, he says, for its action is 'reputable and well regulated' although nothing perceptible occurs as a result.
'Perhaps we should let their ineffective role be accepted and forgiven,' he says.
FINANCIAL FORECASTING
The inescapable yet universally ignored fact is that economic performance cannot be foretold, says Galbraith.
Forecasters contend with a lot of unknowns - government policy, corporate and individual behaviour, unforeseeable technological and other innovation.
And the combined result of the unknown cannot be known, says the man who was the editor of Fortune magazine for several years.
Yet, 'predictions from a financial firm, Wall Street economist or financial adviser as to the economic prospect for a corporation - recession, scheduled recovery or a continuing economic boom - are thought to reflect economic and financial expertise'.
There is no easy denial of an expert's foresight, he notes. But its fragility ought to be more widely accepted.
MARKET ECONOMY
Capitalism smacked too much of powerful, exploitative industrialists, the much-hated monopolies and the Great Depression in the United States, so the term fell into disuse.
Europe chose 'social democracy' with its image of a compassionate mix of capitalism and socialism.
But that was unacceptable to the Americans, who adopted the 'market system' - a term free of negative historical connotations and unassociated with fears of dominant individuals or firms.
But Galbraith believes in calling a spade a spade.
'Reference to the market system as a benign alternative to capitalism is a bland, meaningless disguise of a deeper corporate reality - of producer power extending to influence, even control, consumer demand.'
Far more realistic to call it a 'corporate system', he says.
KING CONSUMER
Economics textbooks teach consumer sovereignty - that the consumer is the ultimate power in the market system. He chooses to buy or not to buy, thus shaping the demand curve. And here, Galbraith cries foul again.
A formidable, well-financed management of public response makes a myth of consumer sovereignty, he says.
That was the theme of his 1958 bestseller, The Affluent Society. The book, which is still required reading for social science students, said firms decide what to make and then persuade people to buy it through advertising.
Not a novel idea, and criticised as such by other economists. But undeniably persuasive.
CORPORATE CULTURE
In common discourse, bureaucracy exists in government. Corporates proclaim not to be bureaucratic but they are, says Galbraith.
From the need for bureaucracy - which flows from the fact that the task of guiding modern corporations is beyond the ability of an individual - follows the 'fraud' of according the owners/investors 'a seeming role in the enterprise'.
Like the other topics in this book, Galbraith's convention-busting observations on the pretense of shareholder power are not hard to swallow. The question is whether his nudge and wink at them are enough.
Copyright @ 2004 Singapore Press Holdings. All rights reserved.
___________________________________________________________________
Conventional wisdom debunk. Great article.
Many economic theories are mere myths, says Galbraith
In a new book, the famous economist challenges long-held ideas, calling them 'innocent fraud'
By Bhagyashree Garekar
ECONOMIC forecasts are not worth the time, the Fed is irrelevant, the market is a myth and the consumer is not king.
That comes from no oddball outsider but a richly decorated economist who has been at the centre of the American economy since before World War I.
John Kenneth Galbraith, a Harvard University fixture for 50 years, past presidential adviser and author of 31 books, takes just over 60 pages in a newly published book to challenge what many take for granted.
The economics of 'innocent fraud', he calls it in his book The Economics Of Innocent Fraud: Truth For Our Time. Innocent because no one in particular is at fault and no ill intent is meant by its practitioners. But it is fraud all the same.
After 70 years of teaching and practising the dismal science - he is 95 - he says: 'I have learnt that to be right and useful, one must accept a continuing divergence between approved belief and the reality.'
Out of pecuniary and political pressures and fashions of the time, he says, economic and political systems cultivate their own versions of the truth, which may bear little semblance to reality. Something, he says, of which all concerned should be aware.
Here is some of that 'conventional wisdom' questioned by the man who invented the term. But be warned that what follows is not lofty economic theory but an exercise in, as Galbraith says, 'identifying self-serving belief and contrived nonsense'.
THE WISE FED
The Fed, for all its power and prestige, effectively does nothing, says Galbraith.
In his view, America's Federal Reserve System (Fed), the central bank and agency to limit recession, unemployment and inflation, is 'our most prestigious form of fraud, our most elegant escape from reality'.
During a recession, the Fed cuts interest rates to stimulate borrowing and spur on production, consumption and, so, the economy.
In a boom scenario, on the other hand, the rate is raised to restrain business investment and consumer borrowing to level off excess optimism and prices.
Highly plausible and wholly agreeable, Galbraith says. But the difficulty, he says, is that this process 'exists only in well-established economic belief and not in real life'.
Business firms borrow when they can make money and not because interest rates are low.
And when times are good, higher interest rates do not matter. They do not have the effect of slowing down business investment because what is egging it on is the prospect of profit.
As he notes, the Fed could provide no remedies for economic ailments during and after World War I and during the Great Depression of the 30s.
Galbraith himself did have success controlling inflation, which was greatly feared during World War II, while he worked in the Office of Price Administration under president Franklin D. Roosevelt. He says this was because there was no reliance on the Fed.
But today, such is the faith in the Fed and its chairman, whom Galbraith calls an 'informed, confident and respected figure of no slight theatrical talent', that the Fed will receive credit if and when there is full recovery.
But please be gentle on the Fed, he says, for its action is 'reputable and well regulated' although nothing perceptible occurs as a result.
'Perhaps we should let their ineffective role be accepted and forgiven,' he says.
FINANCIAL FORECASTING
The inescapable yet universally ignored fact is that economic performance cannot be foretold, says Galbraith.
Forecasters contend with a lot of unknowns - government policy, corporate and individual behaviour, unforeseeable technological and other innovation.
And the combined result of the unknown cannot be known, says the man who was the editor of Fortune magazine for several years.
Yet, 'predictions from a financial firm, Wall Street economist or financial adviser as to the economic prospect for a corporation - recession, scheduled recovery or a continuing economic boom - are thought to reflect economic and financial expertise'.
There is no easy denial of an expert's foresight, he notes. But its fragility ought to be more widely accepted.
MARKET ECONOMY
Capitalism smacked too much of powerful, exploitative industrialists, the much-hated monopolies and the Great Depression in the United States, so the term fell into disuse.
Europe chose 'social democracy' with its image of a compassionate mix of capitalism and socialism.
But that was unacceptable to the Americans, who adopted the 'market system' - a term free of negative historical connotations and unassociated with fears of dominant individuals or firms.
But Galbraith believes in calling a spade a spade.
'Reference to the market system as a benign alternative to capitalism is a bland, meaningless disguise of a deeper corporate reality - of producer power extending to influence, even control, consumer demand.'
Far more realistic to call it a 'corporate system', he says.
KING CONSUMER
Economics textbooks teach consumer sovereignty - that the consumer is the ultimate power in the market system. He chooses to buy or not to buy, thus shaping the demand curve. And here, Galbraith cries foul again.
A formidable, well-financed management of public response makes a myth of consumer sovereignty, he says.
That was the theme of his 1958 bestseller, The Affluent Society. The book, which is still required reading for social science students, said firms decide what to make and then persuade people to buy it through advertising.
Not a novel idea, and criticised as such by other economists. But undeniably persuasive.
CORPORATE CULTURE
In common discourse, bureaucracy exists in government. Corporates proclaim not to be bureaucratic but they are, says Galbraith.
From the need for bureaucracy - which flows from the fact that the task of guiding modern corporations is beyond the ability of an individual - follows the 'fraud' of according the owners/investors 'a seeming role in the enterprise'.
Like the other topics in this book, Galbraith's convention-busting observations on the pretense of shareholder power are not hard to swallow. The question is whether his nudge and wink at them are enough.
Copyright @ 2004 Singapore Press Holdings. All rights reserved.
___________________________________________________________________
Conventional wisdom debunk. Great article.
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