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Economists at High Noon

Economics in Perspective: A Critical History

by John Kenneth Galbraith
Houghton Mifflin, 324 pp., $19.95

There are many things wrong with John Kenneth Galbraith’s twenty-fifth book, but there is one important thing right with it. What is wrong will disturb economists—an often slapdash exposition of economic ideas, occasional mistakes of some consequence, a few cavalier historical expositions. But what is right is a perspective on economics that will enlighten its noneconomist readers. Galbraith sees his discipline not as a majestic creation of disembodied intelligence but as the unfinished, still inadequate product of a struggle to understand and master the perplexities and problems of capitalist society. His view is that economic ideas can only be understood as products of their time, and that times change, whereas “at best, change in economics has been reluctant and reluctantly accepted.” Like generals, economists fight the wars behind them.

I shall have more to say about Galbraith’s useful approach to economics, but I am obliged to say at first some critical things. Economics in Perspective is a tour of the thinkers and circumstances from which economics emerged, as well as an account of the gradual and reluctant evolution of its central ideas. This is surely the right way to go about the task, and it is in fact the strategy taken by virtually all books in the field, although one might gain the impression that Galbraith had invented it. In fact, his approach differs mainly insofar as his gallery of thinkers includes a number of interesting lesser historical figures (for instance, Friedrich List, who provided an early rationale for tariff protection), as well as illuminating but usually over-looked questions such as the American squabbles over central banking or the “trusts.” These elements are dealt with in Galbraith’s characteristically sardonic, often witty, anecdotal style. I quote a footnote:

A Harvard legend tells of Veblen’s being invited to the university by President A. Lawrence Lowell to be considered for an appointment as a member of the department of economics. After being entertained by fellow economists, he had a lastnight dinner with Lowell, who used the occasion to bring up, in a suitably careful way, Veblen’s most noted academic drawback, which was then being much discussed.

You know, Dr. Veblen, if you come here, some of our professors will be a little nervous about their wives.”

To which Veblen is said to have replied “They need not worry; I have seen their wives.”

There is, I believe, no truth to the story.

In addition, unlike virtually all other conventional historians of economic thought, Galbraith devotes much attention to the New Deal era, so that the reader will meet the characters (Alvin Hansen, Leon Keyserling, Simon Kuznets, Wassily Leontief) who created the approach to the understanding and control of the economy that is the basis for contemporary working as contrasted with theoretical economics. All this is to the good, although I should warn that Galbraith’s exposition of contemporary figures tends to become little more than a blur of names and dates of birth and death, and that he tends, even with “historical” figures, to substitute mention of their work for analysis.1

More important are the errors and omissions I referred to at the outset, although, as I have said, they are of more interest to economists than to the general reader.2 I cannot, however, pass so easily over a theme that pervades the book, to the miseducation of the lay reader. This is Galbraith’s insistence that a single point of view runs like a red thread through economic thought from its founding fathers to the present day. Despite what Galbraith rightly refers to as its “professionalization” after the 1870s, he writes,

In deeper essentials the ideas—one can now say the system—of Smith, Ricardo and Malthus remained without serious challenge…. In its later, more refined and polished form, it would be called the neoclassical system, a designation that survives to describe much of the economics in our own day but one that does not reflect a basic change in substance.

For Galbraith, the red thread throughout the last century has been a fascination with price theory—that is, the way prices, wages, interest, and profits are determined. To my way of thinking, that view overlooks an extraordinary inflection point in the developmental curve of the discipline around 1870, dividing its classical forebears—Smith, Ricardo, Malthus, and in important ways John Stuart Mill—from its postclassical practitioners, starting with William Stanley Jevons and Léon Walras through the commanding Alfred Marshall, whose Principles was still used as a text when I first studied economics in the late 1930s.

Both groups, to be sure, were interested in what we call the “price mechanism,” but the classical founders investigated prices (including the prices of labor, land, or capital) under the aspect of “value theory.” They were not seeking to explain transient market prices or wages or rents so much as to discover the background forces that imposed a hidden order on them. The postclassical economists, in contrast, investigated the immediate forces—mainly demand schedules and availability of supplies—that gave rise to prices or income payments of the moment, rather than searching for long-run considerations, such as labor time, that might provide the underlying explanations for these prices or payments. After this change of emphasis, there was no longer a theory of value distinct from one of price.

To place these two groups of thinkers under a single rubric, as Galbraith does, is to overlook the gulf between their approaches to economics. The early great figures were primarily engaged in exploring the large-scale, long-term dynamics—the growth and decline—of the economic system. The later practitioners were mainly searching for a tendency to “equilibrium” in the economy as a whole as well as in individual markets.

That is by no means the only reason to dispute Galbraith’s claim that the development of economics can be understood as the evolution of a single core of what he calls “classical-neoclassical” ideas. The founding fathers all discussed the dynamics of economic change with reference to classes, meaning by this word not merely functionally differentiated groups within the population but sociopolitical groups with characteristic behavioral tendencies. Adam Smith, for example, deplored the incapacity of the landowning class to shape economic policy because the effortless manner in which rents accrued removed any incentive to understand the ways of the material world. He also thought that the laboring classes were handicapped by virtue of their routine work and lack of education from forming any intelligent opinion on economic matters, and warned that merchants were, by their active engagement in the social process, the class into whose hands influence over economic policy would most likely fall. Nothing of this sort is to be found in the work of the postclassical theorists who expunged the notion of class by spreading the veil of “productivity” over differences in social station and thought. Land, labor, and capital thereupon became “factors of production,” distinguished one from the other only by their respective contributions to the value of output.

So, too, the classical approach to economic understanding derived from different fundamental premises from those of the postclassical. The earlier thinkers began from conceptions of natural law and from generalizations about historical experience, the later school from Benthamite assumptions about the individual’s drive for pleasure and from a desire to go beyond the untidy stuff of history to precise answers to small questions of household matters or business management. It is not surprising that the first approach led to economic theories centering on the historical problem of capital accumulation, and the latter to ahistorical theories directed to the most efficient allocation of resources. Thus the economics of the classical economists was not at all that of the postclassical economists. When Galbraith establishes and lambastes a “classical-neoclassical” tradition he is, in my view, diverting attention from the fundamental question of why the classical tradition failed, and why no new model, comparable in scope and grandeur, took its place, pace the Marxian model, which is declared out of bounds in conventional circles.3

If I have objected strenuously to some aspects of Economics in Perspective, I must now try to redress the balance by commending the central message of the book. The message is that economics has grown under the duress of circumstances; that it reflects the rise and fall of pressing social issues as much as, or more than, the sheer refinement of thought. “Refinement,” to Galbraith, expresses the professional and academic tone that overtook the discipline in the 1870s, as well as the loss of inquisitive energy that followed from the relative social calm of that period. “During war and depression, in rationalizing or, more rarely, contending with poverty and deprivation, economists are forced or encouraged to thought,” he writes, referring to another period of calm, the post–World War II boom. “In good times there is an agreeable tendency to relax in self-approving contentment. If there are no great and pressing problems, none is addressed.”

Galbraith’s account of the development of economic thinking, alternately driven by the storm of intransigent problems and becalmed in the doldrums of satisfaction, is perhaps the strongest single impression the lay reader will come away with, and a very salutary impression it is. This view attains its sharpest expression in Galbraith’s account of the intellectual struggle that attended the Great Depression and culminated in the birth of Keynesian economics. The struggle required that economists escape from the thrall of Say’s Law, propounded by Jean-Baptiste Say, the famous early nineteenth-century French economist who translated Adam Smith. The “law” explained the “impossibility” of a general shortfall in demand, because every act of production created, through the payments to the land, labor, and capital needed to bring it about, the very purchasing power required to remove its products from the market. Say’s Law was much admired by Ricardo, although not by Malthus, and was keenly criticized by John Stuart Mill, who noted in 1830 that its operation hinged on spending, not hoarding, all incomes earned—a criticism over-looked by Mill himself in his later Principles of Political Economy. Keynes’s extrication of himself from this intellectual straitjacket (along lines not too different from Mill’s forgotten critique) is another great turning point in the evolution of economic thought, and it is given a spirited exposition in Galbraith’s account.

As part of this account, Galbraith takes delight in pointing out that Keynes introduced the workings of government into the theory of the “macro” economy, but was silent about the workings of the marketplace. As he points out, this essentially conservative aspect of Keynes’s policies was overlooked:

In the next two decades, especially in the United States, Keynes’s name would acquire a marked overtone of radicalism. In the business and banking community Keynesians would be considered as inimical to the established order as Marxists and rather more of a clear and present danger. Here another great constant in economic life: as between grave ultimate disaster and the conserving reforms that might avoid it, the former is frequently much preferred.

Hence, as Galbraith is at pains to point out, the war economy itself, not the power of disembodied thought, established the validity of the basic Keynesian contention that the volume of production was the great variable, not the reliable constant of the economic process. Thereafter we enter the period of High Noon, as Galbraith calls the postwar years. With prosperity came equanimity. The Keynesian analysis of the economy was gradually stripped of its original stress on the volatile character of businessmen’s “animal spirits,” and the economy was conceived of as a semiequilibrating system “determined” by its presumably well-behaved proclivities to invest and its presumably controllable money supply.

Modern “neoclassical” economics was thereupon born, or perhaps one should say misbegotten; for the economy was now conceived as a kind of twin system, half driven by the “Keynesian” interactions of large sectors such as government and business and households, half by the “classical” activities of individuals and firms. This account was a great convenience for textbook authors, who compartmentalized their subject into the “macro” and the “micro” economics known to tens of thousands of students, but it contained the awkward difficulty, rarely mentioned by these writers, that there was no way of connecting the operations of the macro and micro systems into a single model that reflected the dynamic and often disorderly characteristics of the living economy.

Here is where Galbraith himself enters as an influential economist, although his account gives inadequate recognition to the importance of his own work. His contribution to economics has been to insist that vast bureaucratic organizations, private as well as public, change the manner in which the economy works in ways that are entirely outside the assumptions of perfect competition common to both classical and postclassical theory. (Here he is right in combining the two.) Michal Kalecki, the now famous Polish émigré who was a contemporary of Keynes, first found a bridge between micro and macro economics through his conception of the “degree of monopoly” that affected profits, and thereby the level of investment and income. But Galbraith’s more institutional approach has been responsible for reviving American interest in the consequences of organization—whether corporate, government, or labor—as a central fact of economic life. Galbraith has always insisted, although not in the formal models nowadays regarded as evidence of serious theory, that the sheer scale of big enterprise has macro as well as micro repercussions, evidenced, for example, in the manner in which giant firms compete (a micro question) and in their collective investment strategies (a macro question). Thus it is not surprising that Galbraith’s prognosis for the future of economics stresses its need to recognize that bureaucratic organization must be accorded a conspicuous place in economic theory.

This would require that economics find a new theoretical model, and Galbraith concludes his survey by implying that the sheer pressure of necessity may—he seems to vacillate between “should” and “will”—force it to develop one. For instance, a recognition that the interaction of unions and corporations affects both inflation and unemployment will or should lead to a blurring of the “suffocating” distinction between micro and macro economics. The rift will be further healed as the cause and remedy for unemployment—a “macro” problem—is seen to lie at the doorstep of industrial senescence:

The compartmentalization of economics between microeconomics and macroeconomics hides the most stubborn cause of present-day unemployment in the mature industrial countries: the decline of the older industries.

As with earlier portions of the book, Galbraith raises and disposes of large topics with a wave of the hand. He declares in a sentence that macroeconomic policies can “ameliorate or deepen general unemployment, but cannot remedy it” (because unemployment is lodged in the specifics of declining industries), but he ignores the considerable evidence here and in Europe that unemployment can be traced to slow economic growth, not to international competition. He is enthusiastic about the manner in which the Japanese perceive and cope with the problems of modern ecnoomic life but he is silent about the immense difficulties of transplanting a Japanese approach into an American setting. He speaks of the tangled relationship between our domestic budgetary deficit and our foreign trade deficit and concludes that these matters “will be much a part of future discussions.”

Thus the attentive reader will find that Economics in Perspective promises a good deal more than it delivers; and that once again “mention” all too frequently substitutes for analysis. Nonetheless, it is economists who are most likely to be aware of these failings. For the non-economist who wants to gain some notion of how the dismal science got to be so dismal there is still much to be learned from this redoubtable critic of the conventional wisdom.

  1. 1

    In Chapter VIII, for instance, John Law is accorded one sentence as the originator of a banking scheme that “astonished, delighted and then ravaged” eighteenth-century France. This mention is footnoted as follows: “I deal with John Law in Chapters IV and XII of this history and have written about him in more detail in Money: Whence It Came, Where It Went.” The reader without a copy of Galbraith’s book on money might be interested to see how Law is “dealt with” in this book. In Chapter IV he is named, again in one sentence, as the creator of the fabled Mississippi Company, the center of a vast speculative eighteenth-century bubble, but there is no account of any bank. In Chapter XII Law is given another one-sentence description as “perhaps the most innovative financial scoundrel of all time,” but there is no explanation of the nature of his innovative schemes. So much for “dealing with” John Law.

  2. 2

    For example, Galbraith presents a quite erroneous explanation of Marx’s theory of profits, as if surplus value derived from the operation of the law of diminishing returns. This is certainly not what Marx had in mind with the idea of unpaid labor. There is also the statement that the juxtaposition of production statistics and the National Income Accounts developed by Simon Kuznets forced on observers the recognition that aggregate income had to be sufficiently large to buy Gross National Product. This overlooks the fact that the National Income Accounts were designed to be identical in sum with GNP.

    Then there is the curious statement that “in the early years of the Industrial Revolution the men and women who flocked to the industrial towns and factories of England and southern Scotland almost certainly had an impression that their lives would improve.” This cheerful account ignores the enclosures that drove the dispossessed agricultural proletariat to industrial employment, the abundant evidence that factory life was feared and loathed, and the fact that living standards fell in the early years of industrialization and did not begin a substantial improvement until the 1870s.

  3. 3

    I should note that many contemporary economists who profess a “neoclassical” faith would disagree with my view that a break divides early and later economic thought, maintaining instead that a single model, centered on price formation, characterizes the whole. I doubt that Galbraith would be comfortable in their intellectual company, or they in his. They are certainly not to be found among those modern-day economists he singles out for praise, many of whom base their work on Marxian thought.

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