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The Managers Have Stolen Capitalism

John Kenneth Galbraith, perhaps America's most prominent economist, was interviewed for NPQ at his home near Harvard University by Andrea Seibel of the German daily, Die Welt. His forthcoming book is The Economics of Innocent Fraud.

NPQ | Are you surprised at today's economic crisis after so long an economic boom?

John Kenneth Galbraith | No, because I assume the business cycle takes place. So, the fact that we should be having another recession does not surprise me. What I was not prepared for was having an administration in Washington that thinks it is normal and does nothing about it and instead proposes legislation advantageous to the big corporations and tax reductions not only for the rich but for the very rich. The Bush administration has basically done nothing useful to smooth out the business cycle.

NPQ | To many, the go-go 1990s looked very much like the Roaring '20s with so much wealth splashing around before the crash. Were these economic eras more similar or different from each other?

Galbraith | They are much the same. The deepest instinct of the affluent, whether in America or Germany or Argentina, is to believe that what is good for them is good for their country. This has been a particularly strong manifestation in recent times here in the United States.

Nothing is more normal for people who are prosperous than thinking that prosperity will go on forever. And nothing is more normal for prosperous people who are facing a recession or a depression than to believe cutting their tax burdens is what will lead to the return of prosperity.

I have now been associated with the subject of economics for around 60 years. I can honestly say that the major feature of this discipline is how little influence it has had on national economic policy. In the US, we still have the same problem that we had back with Herbert Hoover on the eve of the depression.

NPQ | Yet, hasn't the good old welfare state, itself a creation of the affluent postwar society, failed? It has become a burden because it can't be financed any more.

Galbraith | It is not really so much an issue of the welfare state, at least in the US, as it is Keynesian economics. We had better economic policy in the years of the Great Depression and after—the affirmative economics of the Roosevelt years—than we have now. That mood has long since passed. We assumed that countercyclical action—and particularly stimulus for the poor and needful so as to boost consumption—was a problem that had been solved forever. It now is evident that it has not been solved. By the time of Ronald Reagan only a glimmer of affirmative economic policy remained. George W. Bush is well back in the 19th century.

NPQ | Nineteenth century or not, the market is stronger than ever—Milton Friedman has won. Mustn't you admit this?

Galbraith | Indeed, my concern is that we will at least for a time continue policies that leave the economy to the market—that is, to the great corporations. I did not foresee clearly how arrogant the great corporations would be. Enron, Global Crossing and so on were not part of my thinking. My new book, The Economics of Innocent Fraud, warns that the taking of full power in the modern business enterprise by management has distinct dangers. But I did not foresee the dangers would manifest themselves as quickly and dramatically as they have. The temptation for personal enrichment and wild speculation accorded by the modern corporate structure could be too great, I was writing. And while I was making the argument, it happened!

NPQ | What should, and what could, government do to at least control modern management if it does not do so itself?

Galalbraith | We have two problems there. In the US, less so in Europe, government is ideologically opposed to controls. Simply, the state will not strongly recognize the possibility for misuse that lies in corporate power. The other problem is the scale of the task. It's easy to be critical of WorldCom or Enron or any of those companies, including General Electric. But it is not so easy to take corrective action because these companies are as big as some countries, and often they have more legal resources than the state.

NPQ | The market is a sort of gospel in America, isn't it? Hearing your critique, you almost sound anti-capitalist.

Galbraith | I would not say that I am anti-capitalist. (Smiles) I spent my life on matters of personal judgment. I am one of the three or four senior economists who shaped US and, to some extent, global economic policy during World War II and its immediate aftermath—policies that were highly successful. We came through that period of enormous stress and danger with no inflation, no memory of inflation. And that was my responsibility until my enemies outnumbered my friends. We have failed in these last years, and particularly now, to make the adjustment to the new form of the business cycle. This was something that President Clinton had in mind, which we discussed. It is not something that the corporate executives, who swarm to Washington and to President Bush, will really recognize.

NPQ | Joseph Schumpeter, the economic historian, said capitalism is as creative as it is destructive. Shouldn't economic policy "civilize" capitalism?

Galbraith | Schumpeter wouldn't disagree with that. I have the elderly distinction of having been a colleague of Schumpeter for several years. I came to know him well. He was also a fascinating teacher, and there should be no doubt that he was one of the early scholars to identify the role of the great business enterprise, to draw attention to it and place an emphasis on its behavior. And there was also one other feature that I particularly remember: He loved argument and dissent. For a long while every afternoon he met with a group of us to express views that he thought would be annoying to young American liberals.

NPQ | There is one word Milton Friedman and all the defenders of the liberal case put in the center of their reflections: freedom. For you, is justice more important than freedom?

Galbraith | Freedom is certainly rewarding for those who exercise it, and it is the only way that diverse ideas can be available for economic choice. Freedom of expression and political action is one of the basic frames of civilized existence.

On the other hand, it is not desirable if you are a friend of freedom to assume, as many do, that freedom consists of no public action, that freedom exists of standing aside when public action is necessary. I am not a friend of that kind of freedom. One of my arguments with my old friend Milton Friedman has been on that point. For the last 40 years we have lived in the summer in the state of Vermont. We regularly met each summer to persuade each other. And we never succeeded.

NPQ | Is there a state or government you admire or would say does its job the best way?

Galbraith | In my lifetime as a student of economics and as a teacher of economics, there are two countries for which I have had the greatest admiration: both Germany and Austria innovated economic thought. I have long seen Britain socially as one of the most civilized countries in the world. If you have to be poor, or you have to be otherwise distressed, you should become a British subject. You will always be assisted within the context of your personal freedom. And that is a combination which I have always admired.

NPQ | At the age of 94, you have just completed a new book. Intellectual life, I guess, never retires?

Galbraith | I don't accept the inevitability of age. You can do less, but there are some things where age gives you an advantage.

NPQ | Which things?

Galbraith | I haven't heard a word yet of any major deficiency in my economic or political views. (Smiles)