John Kenneth Galbraith avoided technical jargon and wrote witty prose—too bad he got so much wrong
The Dow Jones Industrials spent 25 years in the wilderness after the 1929 Crash. Not until 1954 did the disgraced 30-stock average regain its Sept. 3, 1929, high. And then, its penance complete, it soared. In March 1955, the U.S. Senate Banking and Currency Committee, J. William Fulbright of Arkansas, presiding, opened hearings to determine what dangers lurked in this new bull market. Was it 1929 all over again?
John Kenneth Galbraith (1908-2006), photographed by Richard Avedon in Boston in 1993
One of the witnesses, John Kenneth Galbraith, a 46-year-old Harvard economics professor, seemed especially well-credentialed. His new history of the event that still transfixed America, “The Great Crash, 1929” was on its way to the bookstores and to what would prove to be a commercial triumph. An alumnus of Ontario Agricultural College and the holder of a doctorate in agricultural economics from the University of California at Berkeley, Galbraith had written articles for Fortune magazine and speeches for Adlai Stevenson, the defeated 1952 Democratic presidential candidate. He was a World War II price controller and the author of “American Capitalism: The Concept of Countervailing Power.” When he stepped into a crowded elevator, strangers tried not to stare: he stood 6 feet 8 inches tall.
On the one hand, Galbraith observed, the stock market was not so speculatively charged in 1955 as it had been in 1929 On the other, he insisted, there were worrying signs of excess. Stocks were not so cheap as they had been in the slack and demoralized market of 1953 (though, at 4%, they still outyielded corporate bonds). “The relation of share prices to book value is showing some of the same tendencies as in 1929,” Galbraith went on. “And while it would be a gross exaggeration to say that there has been the same escape from reality that there was in 1929, it does seem to me that enough has happened to indicate that we haven’t yet lost our capacity for speculative self-delusion.”
Reading List: If Not Galbraith, Who?
Maury Klein tells a great story in “Rainbow’s End: The Crash of 1929” (Oxford, 2001), but he also attempts to answer the great question: What went wrong? For the financial specialist in search of a tree-by-tree history of the forest of the Depression, look no further than Barrie A. Wigmore’s “The Crash and Its Aftermath: A History of the Securities Markets in the United States, 1929-33” (Greenwood Press, 1985).
In the quality of certitude, the libertarian Murray Rothbard yielded to no economist. His revisionist history, “America’s Great Depression” (available through the website of the Mises Institute), contends that it was the meddling Hoover administration that turned recession into calamity. Amity Shlaes draws up a persuasive indictment of the New Deal in her “The Forgotten Man” (HarperCollins, 2007).
“Economics and the Public Welfare” by Benjamin Anderson (Liberty Press, 1979) is in strong contention for the lamest title ever fastened by a publisher on a deserving book. Better, the subtitle: “A Financial and Economic History of the United States: 1914-1946.”
“Where are the Customers’ Yachts? Or A Good Hard Look at Wall Street,” by Fred Schwed Jr. (Simon & Schuster, 1940) is the perfect antidote for any who imagine that the reduced salaries and status of today’s financiers is anything new. Page for page, Schwed’s unassuming survey of the financial field might be the best investment book ever written. Hands-down, it’s the funniest.
An unfunny but essential contribution to the literature of the Federal Reserve is the long-neglected “Theory and Practice of Central Banking” (Harper, 1936) by Henry Parker Willis, the first secretary of the Federal Reserve Board. Willis wrote to protest the against the central bank’s reinvention of itself, quite against the intentions of its founders, as a kind of infernal economic planning machine. He should see it now.
Freeman Tilden’s “A World in Debt” (privately printed, 1983) is a quirky, elegant, long out-of-print treatise by a non-economist on an all-too-timely subject. “The world,” wrote Tilden in 1936, “has several times, and perhaps many times, squandered itself into a position where a total deflation of debt was imperative and unavoidable. We may be entering one more such receivership of civilization.”
If the Obama economic program leaves you cold, puzzled or hot under the collar, turn to Hunter Lewis’s “Where Keynes Went Wrong” (Axios Press, 2009) or “The Critics of Keynesian Economics,” edited by Henry Hazlitt (Arlington House, 1977).
Re-reading Galbraith is like watching black-and-white footage of the 1955 World Series. The Brooklyn Dodgers are gone—and so is much of the economy over which Galbraith lavished so much of his eviscerating wit. In 1955, “globalization” was a word yet uncoined. Imports and exports each represented only about 4% of GDP, compared with 16.1% and 12.5%, respectively, today. In 1955, regulation was constricting (this feature of the Eisenhower-era economy seems to be making a reappearance) and unions were powerful. There was a lingering, Depression-era suspicion of business and, especially, of Wall Street. The sleep of corporate managements was yet undisturbed by the threat of a hostile takeover financed with junk bonds.
Half a century ago, the “conventional wisdom,” in Galbraith’s familiar phrase, was statism. In “American Capitalism,” the professor heaped scorn on the CEOs and Chamber of Commerce presidents and Republican statesmen who protested against federal regimentation. “In the United States at this time,” noted the critic Lionel Trilling in 1950, “liberalism is not only the dominant but even the sole intellectual tradition.” William F. Buckley’s upstart conservative magazine, National Review, made its debut in 1955 with the now-famous opening line that it “stands athwart history, yelling Stop.” Galbraith seemed not to have noticed that history and he were arm in arm. His was the conventional wisdom.
Concerning the emphatic Milton Friedman, someone once borrowed the Victorian-era quip, “I wish I was as sure of anything as he is of everything.” Galbraith and the author of “Capitalism and Freedom” were oil and water, but they did share certitude. To Galbraith, “free-market capitalism” was an empty Rotary slogan. It didn’t exist and, in Eisenhower-era America, couldn’t. Industrial oligopolies had rendered it obsolete.
Only in the introductory economics textbooks, he believed, did the free interplay between supply and demand determine price. Fortune 500 companies set their own prices. They chaffered with their vendors and customers, who themselves were big enough to throw their weight around in the market. As a system of decentralized decision-making, there was something to be said for capitalism, Galbraith allowed. As a network of oligopolistic fiefdoms, however, it needed federal direction. The day of Adam Smith’s “invisible hand” was over or ending. “Countervailing power,” in the Galbraith formulation, was the new idea.
Corporate bureaucrats—collectively, the “technostructure”—had pushed aside the entrepreneurs, proposed Galbraith channeling Thorstein Veblen. While, under the robber baron model, the firm existed to make profits, the modern behemoth exists to perpetuate itself in power while incidentally earning a profit. Planning is what the technostructure does best—it seems to hate surprises. “This planning,” wrote Galbraith, in “The New Industrial State,” “replaces prices that are established by the market with prices that are established by the firm. The firm, in tacit collaboration with the other firms in the industry, has wholly sufficient power to set and maintain minimum prices.” What was to be done? “The market having been abandoned in favor of planning of prices and demand,” he prescribed, “there is no hope that it will supply [the] last missing element of restraint. All that remains is the state.” It was fine with the former price controller of the Office of Price Administration.
As for the stockholder, he or she was as much a cipher as the manipulated consumer. “He (or she) is a passive and functionless figure, remarkable only on his capacity to share, without effort or even without appreciable risk, in the gains from the growth by which the technostructure measures its success,” according to Galbraith. “No grant of feudal privilege has ever equaled, for effortless return, that of the grandparents who bought and endowed his descendants with a thousand shares of General Motors or General Electric or IBM.” Galbraith was writing near the top of the bull market he had failed to anticipate in 1955. Shareholders were about to re-learn (if they had forgotten) the lessons of “risk.”
In its way, “The New Industrial State” was as mistimed as “The Great Crash.” In 1968, a year after the appearance of the first edition, the planning wheels started to turn at Leasco Data Processing Corp., Great Neck, N.Y. But Leasco’s “planning” took the distinctly un- Galbraithian turn of an unsolicited bid for control of the blue-blooded Chemical Bank of New York. Here was something new under the sun. Saul Steinberg, would-be revolutionary at the head of Leasco, ultimately surrendered before the massed opposition of the New York banking community. (“I always knew there was an Establishment,” Mr. Steinberg mused—”I just used to think I was a part of it.”) But the important thing was the example Mr. Steinberg had set by trying. The barbarians were beginning to form at the corporate gates.
The cosseted, self-perpetuating corporate bureaucracy that Galbraith described in “The New Industrial State” was in for a rude awakening. Deregulation became a Washington watchword under President Carter, capitalism got back its good name under President Reagan and trade barriers fell under President Clinton. Presently came the junk-bond revolution and the growth in an American market for corporate control. Hedge funds and private equity funds prowled for under- and mismanaged public companies to take over, resuscitate and—to be sure, all too often—to overload with debt. The collapse of communism and the rise of digital technology opened up vast new fields of competitive enterprise. Hundreds of millions of eager new hands joined the world labor force, putting downward pressure on costs, prices and profit margins. Wal-Mart delivered everyday low, and lower, prices, and MCI knocked AT&T off its monopolistic pedestal. The technostructure must have been astounded.
Galbraith in his home in Cambridge, Mass., in 1981
Here are the opening lines of “American Capitalism”: “It is told that such are the aerodynamics and wing-loading of the bumblebee that, in principle, it cannot fly. It does, and the knowledge that it defied the august authority of Isaac Newton and Orville Wright must keep the bee in constant fear of a crack-up.” You keep reading because of the promise of more in the same delightful vein. And, indeed, there is much more, including a charming annotated chronology of Galbraith’s life by his son and the editor of this volume, James K. Galbraith.
John F. Kennedy’s ambassador to India, muse to the Democratic left, two-time recipient of the Presidential Medal of Freedom, celebrity author, Galbraith in life was even larger than his towering height. His “A Theory of Price Control,” which was published in 1952 to favorable reviews but infinitesimal sales, was his one and only contribution to the purely professional economics literature. Thereafter this most acerbic critic of free markets prospered by giving the market what it wanted.
Now comes the test of whether his popular writings will endure longer than the memory of his celebrity and the pleasure of his prose. “The Great Crash” has a fighting chance, because of its very lack of analytical pretense. “History that reads like a poem,” raved Mark Van Doren in his review of the 1929 book. Or, he might have judged, that eats like whipped cream.
But the other books in this volume seem destined for only that kind of immortality conferred on amusing period pieces. When, for example, Galbraith complains in “The Affluent Society” that governments can’t borrow enough, or that the Federal Reserve is powerless to resist inflation, you wonder what country he was writing about, or even what planet he was living on.
Not that the professor refused to learn. In the first edition of “The New Industrial State,” for instance, he writes confidently: “While there may be difficulties, and interim failures or retreats are possible and indeed probable, a system of wage and price restraint is inevitable in the industrial system.” A decade or so later, in the edition selected for this volume, that sentence is gone. In its place is another not quite so confident: “The history of controls, in some form or other and by some nomenclature, is still incomplete.”
At the 1955 stock-market hearings, Galbraith was followed at the witness table by the aging speculator and “adviser to presidents” Bernard M. Baruch. The committee wanted to know what the Wall Street legend thought of the learned economist. “I know nothing about him to his detriment,” Baruch replied. “I think economists as a rule—and it is not personal to him—take for granted they know a lot of things. If they really knew so much, they would have all of the money, and we would have none.”
Mr. Grant, the editor of Grant’s Interest Rate Observer, is the author, most recently, of “Mr. Market Miscalculates” (Axios, 2009)
Full article and photos: http://online.wsj.com/article/SB10001424052748703556604575501883282762648.html