Five years after the worst economic crisis since the Great Depression, the world waits for recovery. Last time it took a world war and forty million deaths to achieve. In 2008, a domino — Lehman Brothers — fell over, sparking a financial crisis that quickly threatened to bring the developed economies of the world crashing down. “This sucker could go down” was President George W. Bush’s pithy summary. Only concerted and unprecedented action by the central banks and Treasury departments of the major countries and their smaller trading partners — now known as the G20 — narrowly averted catastrophe. But it was a close-run and we are not out of the woods yet, as the economies of Europe, Japan and North America struggle to grow, weighed down with public debt and under-capitalised banks. A pall of pessimism pervades government and financial markets.
The world appears topsy-turvy, a Shakespearian scene from Twelfth Night, in which lord becomes servant and servant lord. The western economies hang on the action or inaction of a small number of men and two women (Christine Lagarde and Angela Merkel), cloistered in the board rooms of the central banks, IMF, and national governments. The captains of industry have been demoted, great companies drip-fed by whatever credit the ‘gnomes of Zurich’, the predators of Wall street, and the policy makers in Washington in their confused wisdom decree. In this upside down world, ‘fair is foul’, as every suggestion of positive economic news about recovery in the real economy sends financial markets into panic. Addicted to the US Federal Reserves’ money printing regime, more politely termed ‘quantitative easing’ (it sounds less inflationary), the markets take fright at any suggestion that the printing presses might slow down. In Europe, ‘austerity’ has triumphed as the official mantra of the European Union. The ‘Washington Dissensus’ has taken hold as ‘Austerians’ battle with ‘Keynesians’, repacing the easy neoliberal faith in efficient markets and fable of The Great Moderation. “All that is solid melts into air”, as economists and policy makers scratch their heads in frustration. Nothing seems to be working.
None of this would have surprised twentieth century American public intellectual Number One, John Kenneth Galbraith. An outsider who grew up in a small Canadian farming community, Galbraith retained this marginalised status in his chosen profession of economics. Eschewing the models, methods, and mathematics of modern economics, he devoted a long lifetime to attacking his colleagues in a prolific series of widely read books, the most famous of which was, of course, The Affluent Society, published in the first post-war period of American triumphalism. (The second period of US hubris occurred after the fall of communism in the ‘end of ideology’ era of the 1990s, to be pricked by nine-eleven, the subsequent failures in Iraq and Afghanistan and the outbreak of the global financial crisis.) Galbraith died two years before the fall of Lehman Brothers but his lifetime’s work would have prepared him for that event and for the muddled responses and blame shifting of both his colleagues and the bankers. Galbraith had written extensively on the nature of money and whence it came. He was deeply skeptical of the wisdom of the monetary authorities and the venality of actors in the financial sector. Like Keynes, he saw monetary policy as a week reed on which to base economic recovery.
On re-reading Galbraith’s book, the overwhelming truths that stand out for me in his critique of his society — and by extension, our own — amount to two. First, his famous construct — the conventional wisdom — has stood the test of time. Herd thinking and herd behaviour characterize us as a social species, in economics as everywhere. Being wrong in company is far preferable to being wrong alone, even if occasionally a stand against the wind proves to be right. It is the risk of being wrong alone that dissuades people, including economists, from seeking lonely ways of being right. Innovation is, as Galbraith observed about both politicians and businessmen, much lauded in principle but little embraced in practice; in later decades this insight was parodied in the mock warning of a fictional civil service chief to his political master: “that is very courageous, Minister”. Ideas about our world that predominate are those that are generally accepted and acceptable. This last point raises Galbraith’s other major point.
Policy is not just about disinterested scientific advice. Policy is about politics and politics is about power. Power is largely absent from orthodox economic accounts of how capitalist economies work. Even the limited use made of the concept — in models of imperfect competition — is ignored in the higher reaches of theory (exceptions, of course, exist) where the rarefied micro-foundations of mainstream macroeconomics assume perfect or near-perfect markets. Galbraith throughout his career saw power, its genesis, application, and outcome as central to understanding the development of post-war American capitalism and the latter’s export to the world. His view of the bifurcated nature of capitalism focused on the internal dynamics of corporate capitalism. His Presidential Address to the American Economic Association Conference in 1971, titled “Power in Economics,” left little impact on a profession rapidly turning to a highly formalistic and politically naïve discipline practice.
Both insights help us begin to understand the current mess that the global economy is experiencing.
Featured image credit: Money, by Negativespace. Public domain via Pixabay.