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'The speculative bubble always comes to an end'--John Kenneth Galbraith

October 26, 2008 |  8:00 am


John_galbraith
Photograph by the Associated Press

John Kenneth Galbraith, 1908 - 2006, in a 1998 photo. 
Dec. 12, 1999

John Kenneth Galbraith

'The speculative bubble always comes to an end--and never in a pleasant or peaceful way.'


By Elizabeth Mehren
New England bureau chief for The Times

CAMBRIDGE, MASS. -- The economy is thriving, boasts the president. Never been healthier, agrees Alan Greenspan. Buy, buy, buy, urges Wall Street.

But in a grand, wood-paneled salon a mere percentage point from Harvard Yard, the guru of modern economics is a bit more temperate. The next time someone in authority announces that America has entered a new era of prosperity, cautions John Kenneth Galbraith, run for cover. If, he adds, the word "unprecedented" happens to be part of the conversation, take especially deep cover.

At 91, Galbraith thinks, speaks and writes in rich, eloquent paragraphs. His 31 books are marked by the same balance of self-effacement and self-congratulation that characterizes his conversation. "Galbraithspeak" is what William F. Buckley Jr., a skiing buddy of Galbraith's in Gstaad, Switzerland, calls this distinctive lingua franca. Galbraithspeak permeates speeches and correspondence that the economist has authored for presidents from Franklin D. Roosevelt to Lyndon B. Johnson. Among the many titles he claims credit for on the bookshelf in his living room, Galbraith likes to joke that his personal favorite is "The Speeches of Adlai E. Stevenson."

A farm boy from western Ontario, Galbraith went to work for Roosevelt in 1936 and demonstrated that at least one economist was not as dismal as the science he practices. Partly because of his uncanny ability to translate Keynesian theory into terminology that even politicians could understand and partly because of his habit of slipping his arch wit into those translations, Galbraith won the ears of a succession of postwar Democrats. For Republicans, meanwhile, he was a perpetual thorn in the side: a Harvard professor with a huge audience, a sense of humor and an intolerance for any capitalism that forsakes humanism.

Presidential candidates from Stevenson to Eugene J. McCarthy chose Galbraith as their key advisor on the economy. He served President John F. Kennedy as ambassador to India and remained close to the Kennedy family after the president's death in 1963. While not in President Bill Clinton's inner circle, Galbraith is on friendly terms with Clinton and has visited Arkansas as his guest.

Without his two hearing aids, Galbraith is "quite deaf," and age has caused his 6-foot, 7-inch frame to stoop a bit--perhaps to a mere 6 foot 6. Yet, Galbraith and his wife of 62 years, Kitty, travel relentlessly, often to the countries whose welfare he worries about most. Recently, he found himself an honored guest at the 50th-anniversary celebration of Newfoundland. Days later, he was lecturing at the University of Texas at Austin, where his youngest son, James Kenneth, 48, is a professor of economics. Another son, Peter Woodard Galbraith, 49, was Clinton's ambassador to Croatia and now teaches at the Naval War College, while John Alan Galbraith, 58, is a lawyer in Washington.

The eve of the millennium seemed an appropriate moment to check in with America's economic eminence grise.

*

Question: In sounding a skeptical note about the current economic climate, you're at odds with some leaders, as well as some leading thinkers. Have you appointed yourself chief curmudgeon, or do you think others are turning blind eyes to the dangers of runaway success?

Answer: I see people generally happier with economic life than in many years. And there's a reason for that. There's no question that the economy, at the moment, is doing well by the people at large. On the other hand--and, I remind you, Harry Truman once said he wanted a one-armed economist who didn't always say "on the other hand"--we have, as we all know, a sort of securities-market speculation: a lot of innocent participation in the stock market. We have far more mutual funds and other stock-market apparatus than we have intelligence to manage it. Out of this, everyone should be aware of the oldest rule in economics, for which I take credit, which is that when someone says we have entered a new era of permanent prosperity, you should take cover. That has been said many, many times in the last 300 years.

Q: One result of all these people playing around with the market is we have a new class of enormous wealth. How does this affect our economy?

A: We should always remind ourselves that capitalism, now politely called the market system, has always, basically, been unstable. My old, much-admired colleague, Joseph Schumpeter [the Austrian economist], argued that it was necessary to clean out, periodically, incompetent and reckless bankers, incompetent and reckless corporate executives, incompetent and reckless government officials and other misdirected people involved in the economy. He gave it a name: creative destruction. I hasten to add, Schumpeter was a stalwart conservative. To the rest of us: If we have a setback--which, historically speaking, is possible--it would have an adverse effect on consumer spending, an adverse effect on investment and thus an adverse effect on the economy as a whole. On the other hand, we have a much more secure economy than we had, for example, after the 1929 crash.

Q: How are things different now?

A: There was no banking insurance, so the crash led directly to a banking crisis. There was no Social Security. And there was no real commitment to helping people in distress--though it must be said that that commitment is still weak.

Q: Granted that economics is known as the dismal science, we hear terms like "crash," "correction" and now "creative destruction." What's the difference?

A: It's a matter of which term is selected by the particular speaker to either minimize or exaggerate the situation.

Q: Can you offer guidance as to which words minimize and which exaggerate?

A: If you are very optimistic about the future, you say it will only be a correction. There are other terms that are considerably rougher. I see them as quite possible in terms of historical precedent. But I don't make predictions. I long ago discovered that my wrong predictions are wonderfully remembered, and my right ones are quickly forgotten. So I rely on the history of capitalism.

Q: Which tells us?

A: Any person given to excessive optimism should step back to 1637, the wonderful year when all the sober and somber people of Holland believed you could get rich on tulip bulbs. Call it tulip-mania. The whole country was committed to that speculation. Holland and its 17th-century residents did not get rich on tulips or anything else. Or, at the beginning of the next century, when all of Paris was excited endlessly, wonderfully, by the prospect of gold in Louisiana, something that has not yet been found--except in Louisiana politics.

Q: With so much new wealth are we living in a new gilded age? Does the economy as a whole benefit when there are so many with such enormous wealth?

A: The enormous inequality in wealth and income, and the way it has been increasing, is the other important factor that distinguishes our economy. This kind of extreme is against both the economic and political stability of the economy. It means that large sums of money can move rapidly in one direction or another and be deflationary. And a socially stable society has not an equal, but a reasonably fair distribution of wealth and income. I say that because I am, socially, a conservative. I don't want to see the political effects of this kind of unequally distributed income. On the other hand, I willingly retreat to realism and say that equality in income distribution is neither likely nor possible.

Q: Back to the new wealth. This class accounts for a very tiny segment of the population, less than 1%. But the total amount controlled by this small group is between 40% and 50% of the wealth in this country. What do you make of this?

A: That's a good question, for which there is a very good answer: It has always been true. In the early part of this century, there was enormous excitement about the wealth being created by the railroads. In 1929, it was technology, something called the Radio Corporation of America--in short, technology. And now we have the world of the computer. This is perfectly normal. Speculative excitement always centers on something that seems to be wonderful and new. That adds to the speculative excitement, the belief that you can get wonderfully rich on the basis of your own exceptional intelligence.

Q: Some get wonderfully rich on the basis of stock-option offerings. How much influence do corporate captains have?

A: We have a large community which enjoys senior positions in the great corporations of this country. They set their own salaries--and stock-option deals--subject to the approval of the boards of directors that they have appointed. Not surprisingly, the directors go along. Very high incomes are returned to those who are in command; the great economic rewards go to people who have a big stake in the corporation--but particularly those who have a stake in combination with position. So the modern corporation involves a very large number of people who have a large command in their own income. That's the nature of modern corporate society.

Q: That's great for the folks in command, as you put it. What about the rest of us? Where's the balance?

A: There is no balance. We have made ourselves into the most unequal society in terms of income in the world, and certainly the most in the recent past.

Q: Will the vast caste of people who are not so rich simply be left behind?

A: We must not doubt the importance of the great Republican innovation of President [William H.] Taft, which was the progressive income tax, and we must distribute the cost of government in accordance with wealth. But going beyond that, I have long been persuaded that a rich country such as the United States must give everybody the assurance of a basic income. This can be afforded and would be a major source of social tranquillity. It will be said that this will cause some people to avoid work, but we must always keep in mind that leisure is a peculiar thing. Leisure is very good for the rich, quite good for Harvard professors--and very bad for the poor. The wealthier you are, the more you are thought to be entitled to leisure. For anyone on welfare, leisure is a bad thing. I am prepared to take a tolerant attitude on this matter.

Q: What kind of a basic income would you advocate?

A: I would want a decent income for an urban family, adjusted to living costs, but I would not venture to come up with a particular figure. Let us always keep in mind that nothing so denies liberty as a total absence of money.

Q: In the past, compassion was often a characteristic of the very rich. Now, it seems that personal advancement tends to leave little room for social conscience. Is noblesse oblige a thing of the past?

A: There has always been some socially beneficial action by the rich. Possibly that is as strong now as it ever was. Rockefeller and Carnegie immortalized themselves by their foundations and their charity activity. But there were a lot who didn't. And I would say that is the same situation today.

Q: Do you see a government commitment to helping people in distress?

A: That commitment is very weak. Too weak.

Q: How much of this should we blame on Ronald Reagan, whose presidency marked an era of avarice?

A: What's generally not recognized is that Ronald Reagan was the first true Keynesian president. He came into office with a recession, even a mild depression, and sustained a high level of well-being by borrowing and by encouraging public expenditure. The only difficulty was that the expenditure was overwhelmingly on armaments, most of which we didn't need--and Ronald Reagan was ignorant of any personal knowledge of Keynes. Still, I don't blame the disproportionate affluence on Reagan. There are deeper factors in the system which reward the corporate great, including, needless to say, those who are on the frontiers of new development.

Q: While this narrow segment of the population has gotten even richer, what has happened to the face of poverty?

A: If you look back at the social problems of the last century, the dominant one is the number of people in the rich countries--particularly in the United States, particularly in the great cities--who are desperately poor. It used to be that we thought of poverty as a rural phenomenon, something we saw only in Appalachia, or in the deep South, something we could dismiss as a result. But now we see aching poverty in every one of our great cities. The second part of this problem is, internationally, the number of countries where millions of people are still living at the very margin of life. Locally, in the United States, we must be suspicious of an economic theory that was invented on behalf of the rich. And I remain fully persuaded that in a rich country, like the United States, we can also provide for the poor.

Q: For all our free-spirited marketing, it seems that, in the past, Americans have been ambivalent about capitalism.

A: That's true. But we no longer talk about capitalism within a negative connotation--Marx, J.P. Morgan, Rockefeller or the robber barons. We talk about the market economy, which is bland.

Q: To go back to this boom, this euphoric moment of economic prosperity, real or imagined. Will it inevitably come thudding down around us?

A: We are now experiencing a classic manifestation of the speculative bubble. The only thing I can say is the speculative bubble always comes to an end--and never in a pleasant or peaceful way. *

 
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