J. K. Galbraith: a radical Keynesian (2006)

From the June 2006 issue of the Socialist Standard

An economist who remained loyal to the end to the discredited view that government intervention can make capitalism work in the interest of the majority.

John Kenneth (‘J.K.’) Galbraith, who has died at the age of 97, was probably – after John Maynard Keynes and Milton Friedman – the most famous economist of the twentieth century. For decades he argued against the dominance of the free market economy in favour of a reformed and humanised capitalism which could be made more equitable and tolerable by government intervention.

A Canadian by birth, he became part of a group of Keynesian supporters at Harvard University in the US that included Paul Samuelson and James Tobin. Galbraith’s career at Harvard led him to become Professor of Economics and something of a radical disciple of the Keynesian belief that poverty and inequality in capitalism – and the related phenomenon of the boom and slump trade cycle – could be reformed away by well-informed and -intentioned governments. From the 1950s onwards he was to write a number of books, all penned in a popular and readable style, which challenged popular misconceptions about society and the economy. In particular, his books The Great Crash: 1929 (1955), The Affluent Society (1958), The New Industrial State (1967), Economics and the Public Purpose (1974) and The Nature of Mass Poverty (1979) established him as a leading commentator on developments within the capitalist economy and a critic of many prevailing orthodoxies.

Galbraith liked to see himself as a rebel and an outsider, which was true up to a point. For a short time in the early 1960s, though, he served as the US Ambassador to India under John F. Kennedy, and was later an advisor to L.B.Johnson and other Western politicians (including, in a critical and somewhat ad hoc capacity, current UK Chancellor Gordon Brown). His pre-occupations were with aspects of the capitalist system that critical thinkers found most dysfunctional: its tendency to promote economic growth (in terms of capital accumulation) at all costs; its inability to address profound issues of wealth inequality; and the tendency for the concentration of capital and the growth of monopoly, in particular, to undermine the more idealistic free market notions of ‘consumer sovereignty’ within capitalism.

Crises and slumps

Arguably Galbraith’s finest work was his historical account – and critique – of the Wall Street Crash of 1929 and the subsequent prolonged trade depression. In many respects, his work serves as a warning to those who feel that capitalism naturally tends towards an equilibrium state of rising productivity and steady growth. What Galbraith detailed was the circumstances in which arguably the greatest trade depression the world has ever known came to develop and cause such widespread misery.

Although Galbraith over-emphasised the actions of the US government and the Federal Reserve banks, his underlying assessment of the crash was a sound one. He argued that it was caused in large part by the market-driven over-expansion of the producer goods sector of the economy (the sector producing factory machinery, steel, etc for industry) in comparison to the consumer goods sector during the preceding boom years. This had meant in practice that in the competitive drive to accumulate capital, profits were re-invested to expand productive capacity at a disproportionate rate: far more so than was justified given the fall at the time in the share of wages and salaries in National Income. It was this over-expansion of the producer goods sector which led to the production of consumer goods in excess of available market demand and the subsequent downturn in the economy.

Galbraith was affected quite profoundly at an intellectual level by the 1930s slump, as were many others who became attracted to Keynesian economics. Indeed, Galbraith was at the forefront of those who ridiculed the view that, if left to its own devices, the capitalist market economy would naturally tend towards an equilibrium state of steady growth and full employment and that it was somehow government intervention that prevented markets from working properly. Galbraith’s view, which he was to explore in different respects in his published books, was just the opposite.

For Galbraith, the ‘classical’ economists and the so-called monetarists who resurrected some of their views from the 1970s onwards posited an idealised version of the market economy that was as over-simplified as it was driven by a defence of privilege. Galbraith wittily deconstructed many of the economic models on which it rested, highlighting issues such as monopoly, price-fixing, imperfect information and the various possible influences exerted not just by abstract ‘producers’ and ‘consumers’ but by advertisers, suppliers and trade unions too. In the days before corporate scandals such as Enron, he recognised that corporations do not always carry on their activities for the benefit of investors like shareholders, and that the natural growth of large corporations within capitalism sometimes led to practices within organisations which were designed to benefit those who internally controlled them first and foremost.

In many respects, it was in his critique of wider capitalist society that Galbraith was on his strongest ground, recognising imperfections in the system that others willed away. One of his most famous remarks was that “the modern conservative is engaged in one of man’s oldest ever exercises in moral philosophy; that is, the search for a superior moral justification for selfishness”. His withering critique of Arthur Laffer’s theory of how lowering income tax on the rich would increase government revenue, and of the illusory benefits of ‘trickle down economics’ was a prime example. And in arguably his most famous work, The Affluent Society, he took up a critique of the way in which capitalist enterprises try to ensure their expansion by manufacturing artificial ‘wants’ through advertising and other means. While this owed something to an earlier analysis by Thorstein Veblen, it was nevertheless considered subversive and hotly disputed at the time.

Keynesian economics

Whatever insights Galbraith developed into the workings of capitalism and despite his attacks on its most vigorous defenders, he was hampered by two key, related aspects of his approach. First, his unremitting adherence to Keynesian economic theory and second, his inability to be able to countenance anything that went beyond a reform of capitalism.

Galbraith’s view was that where capitalism failed (and he acknowledged that it failed frequently) it was the duty of governments and the ‘public sector’ generally to step in, whether in terms of economic management, regulatory frameworks for corporations, or measures designed to assist the ‘underclass’ of unemployed and unemployables. A consistent thread in all his writings was an overly-optimistic and exaggerated view of the ways in which capitalism can be reformed so as take power and wealth away from the rich and give it to the poor. His views on this had been influenced by his experiences as an economist and civil servant in the wartime Roosevelt administration. Then he had been put in charge of price controls in a period where, due to the central direction needed because of the war effort, the US was the nearest it has ever come to having a ‘command’ style economy. As unemployment and inflation were both low at the time, Galbraith saw this as confirmation of the powers Keynesian ‘demand management’ techniques possessed in dealing with the inefficiency and inequality of unfettered capitalism.

When the economy returned to ‘normal’ in the decades after the war, the supposed benefits of the Keynesian approach soon proved elusive, not just in the US but in other countries too where his advice was sought. And even when the radical Keynesian approach was given explicit government backing and was implemented with some enthusiasm (on the grounds that the patient hadn’t previously been receiving a high enough dosage of the medicine), the results were not encouraging. This was the case across much of Western Europe as well as the US, where prices began to rise alongside increased unemployment.

One of the most notable examples of radical Keynesian failure was in the UK, where in the first two to three years of the Labour government of 1974-9, state regulatory measures generally were increased, a prices and incomes policy was instituted, state borrowing rose to pay for increased government capital expenditure, and the tax system was restructured to disproportionally hit those on the highest incomes. But the result was a near doubling of unemployment and annual price rises at nearly 27 per cent (the latter mainly caused by an over-issue of paper currency not convertible into gold, which became the ubiquitous outcome of the type of lax monetary policy favoured by radical Keynesians).

In this respect, Galbraith is likely to be remembered as an economist who was far more adept at criticising the indefensible than he was at promoting a workable alternative to it. Indeed, it was precisely the failure of his type of Keynesian approach which heralded the return from the 1970s onwards of the free market economic orthodoxy he detested, championed by his sparring partners like Milton Friedman.

Missed opportunity

Unfortunately, the political economist who had a rounded explanation of why the free market does not work, and whose theories indicated why reform of capitalism in the guise of Keynesian economics would be no more successful, was not someone Galbraith was ever attracted towards or studied really seriously: Karl Marx. While Galbraith was capable of making pithy and apposite comments about the Soviet Union – “under capitalism, man exploits man. Under communism, it’s just the opposite” – he never seemed to get too far past the popular prejudice against Marx existing in much of US academia. That so-called ‘Russian communism’ was in reality an extensive and dictatorial form of the type of planned state-run capitalism that he otherwise had a penchant for, in particular seemed to escape him.

In the rather lazy fashion of other American academics he was wont to attribute to Marx views which were distorted interpretations of his theories, such as that capitalism would somehow collapse because of the long-run tendency of the rate of profit to fall, or that the working class in capitalism was condemned to endure conditions of ever increasing misery. This was a shame, because although capitalism is so complex and anarchic that no one individual can attain a perfect insight into it, Marx came a lot nearer than most. The great body of his work still stands the test of time, and far more so than that of either the apologists for the free market or Keynesian interventionists like Galbraith himself.

While Galbraith thought that certain types of capitalism (particularly free-market capitalism) were highly problematic, Marx took a rather different view. This was that it was capitalism itself that was the problem because it was fundamentally based on the pursuit of profit before human needs, was at root anarchic and uncontrollable, and was characterised by class division and an antagonistic system of income distribution that could not be planned or wished away.

It is interesting to look back on the 97 years of Galbraith’s life, and to reflect on the capitalist trade cycle, inflation, the concentration of capital, the nature of commodity production and much more that he addressed. Marx provided a framework that could successfully account for these phenomena while at the same time demonstrating why capitalism can never be reformed so as to run in the interests of the vast majority of its inhabitants. These were insights that Galbraith flirted with but no more, and this was to the detriment of his otherwise urbane and pithy analysis, and most certainly to the detriment of those who lived under the governments he advised.

Dave Perrin