A Mind of His Own

1.

John Kenneth Galbraith has been a Harvard economist, an accomplished diplomat, a political activist, a close adviser to presidents, a novelist and memoirist, and the best-selling economic writer of his time. But among economists he was perhaps most known for, and proudest of, his economic apostasy. He refused to accept what he considered the simplifying assumptions and the mathematical models that were fundamental to both the liberal and conservative economic orthodoxy of his day. Richard Parker’s comprehensive biography arrives at an appropriate time; many of the basic assumptions of orthodox economic theory that Galbraith challenged for much of his career are now being questioned within the orthodox tradition itself.

In fact, Galbraith devoted a chapter to the inherently misleading nature of conventional economic wisdom in his best and most influential book, The Affluent Society, published in 1958; his status today as an outsider in his own profession was readily predictable even then. But he was also one of the leading progressive intellectuals of the post–World War II period. His disdain and sarcastic wit were most aroused when it came to discussing the abuses of business power and the accumulation of undeserved wealth, especially on Wall Street. His sympathies were for the worker, the poor, and the otherwise disadvantaged.

Advocating such views required considerable intellectual courage. In those early postwar years, even being a follower, as Galbraith was, of the British economist John Maynard Keynes, who advocated government spending to mitigate recession, could arouse suspicions of subversion. Galbraith’s still more outspoken views, already visible when he served as a government official during World War II, almost resulted in his being denied tenure at Harvard.

Galbraith will turn ninety-seven in October, and it is unlikely that many professional economists in their thirties, forties, and perhaps even their fifties have read him with much care. By contemporary standards, Galbraith was more an economic sociologist than a technical economist, a remarkably gifted writer who viewed economics more as an explanation of how we have lived, and how we might live better, than as a set of mathematically demonstrable hypotheses about how to maximize economic production. But this description does not do justice to his breadth and originality. Galbraith made errors, but his works incisively dealt with deeply consequential changes in the modern economy and its relation to government which he believed practitioners of orthodox economics were neglecting. Among the changes was an immense increase in corporate power that put in doubt much economic doctrine about the working of market forces. Had Galbraith devoted more effort to gathering empirical evidence to support his views and to finding ways to test them statistically, his influence on economics would have been greater. Galbraith bears the responsibility for failing to do this.

Richard Parker is an economist who teaches at Harvard’s Kennedy School of Government. Although he criticizes some of Galbraith’s work and corrects his occasionally distorted recollections of the past, Parker is a Galbraith partisan and had the economist’s full cooperation. With a strong grasp of complex economic issues that span some sixty years Parker succeeds in placing Galbraith’s economic contributions within the intellectual tradition—part Keynesian and part derived from the work of Thorstein Veblen—to which they belong.

Many of the themes Galbraith dealt with vigorously between the 1950s and the 1980s are again current. Among these are the view that consumers, contrary to one of the most important assumptions in orthodox economics, are not necessarily rational and they often do not act in ways that increase their happiness; that financial markets are not as efficient or rational as was once claimed; that large corporations do indeed have power to set prices and wages and influence consumers through advertising and marketing; that public goods such as health care and transportation are critical to social welfare and to economic growth; and that Keynesian fiscal policy—using government spending and changes in tax rates to stimulate growth—can be effective.

In tracing Galbraith’s intellectual development, Parker has also written a much-needed history of American progressivism. He provides thorough and often original descriptions of Galbraith’s part in many of the political events of the time. Parker’s work reminds us that between the Great Depression of the 1930s and the Reagan presidency the US did not follow an easy or inevitable path toward expanding social programs and accepting coexistence with the Soviet Union. There was a constant battle between America’s right and left, and Galbraith was at the forefront of both the economic and political conflicts of his time.

Galbraith was born in 1908 on a small farm in Ontario, Canada, to parents of Scottish descent. Here his political education began. Faith in the uses of government was powerful in the Galbraith household. His father was a government activist, a committed supporter of Canada’s Liberal Party, and an occasional local officeholder himself. The elder Galbraith’s local standing, which Parker writes was considerable, was no doubt enhanced by the fact that, like his son, he was six feet nine inches tall. Galbraith went on to Ontario Agricultural College to learn mainly about animal husbandry, not economics. Nevertheless, he early showed an ability to write clearly and helped start a school newspaper. In 1931, he won a fellowship to the doctoral program in agricultural economics at the University of California at Berkeley.

There he was well schooled in the prevailing neoclassical economic theory then dominated by Alfred Marshall’s 1890 study, The Principles of Economics. In the second half of the nineteenth century, neoclassical economists, culminating with Marshall’s work, formalized and refined the early thinking of Adam Smith and his classical peers. Smith’s central thesis was that the productivity of an economy—what it produces from its labor and other resources—will naturally increase and reach its maximum strength under the discipline of competition. If business owners pursue their economic self-interest, competing actively against one another, Smith’s invisible hand induces them to invest their time and resources in ways that produce desired goods as plentifully and inexpensively as possible.

Marshall, a professor at Cambridge University, created the elegant demand and supply curves with which all first-year economics students are familiar. The demand for goods (or services) will equal their supply at a specific price, known as the equilibrium point; the process of production will then be “optimized,” i.e., the maximum quantity of goods and services will be sold on the market at the fairest prices. Moreover, this will occur with no intervention by government, whose meddling for the most part can only disrupt the process. The market for labor works similarly. Workers will be paid what they are worth to the employer and the maximum number of jobs will be created. Left unfettered, neoclassical economics claims, competitive markets will both check the power and profits of business and induce them to allocate resources effectively enough always to return the economy to full employment.

The severity of the Great Depression threw the classical theory into disarray. At least 25 percent of the workforce was unemployed and the nation’s total production or Gross Domestic Product fell ultimately by half. Production of manufactured goods such as cars fell by 80 percent and production of railroad cars to zero. The economy resisted all attempts to rescue it. “Measured by its continuing imprint on actions and attitudes, the depression clearly stands with the Civil War as one of the two most important events in American history since the Revolution,” Galbraith later wrote.

Probably from the start, Galbraith was more attracted to the works of more progressive thinkers than Marshall, including Karl Marx and the American social critic Thorstein Veblen; and Veblen, Parker writes, left a deeper mark on Galbraith than did Marx. His famous book, The Theory of the Leisure Class, published in 1899, was still widely popular in the early 1930s, and its corrosive criticism of industrial wealth and unequal incomes remained as persuasive to Galbraith, especially during the crisis of the Depression, as to Veblen’s first readers during the age of the robber barons. With his degree in hand, Galbraith won a Canadian-sponsored fellowship to teach at Harvard. Harvard had long been considered America’s preeminent university, and his application there, as Parker notes, suggests that Galbraith, even in his youth, was not a timid man.

At Harvard, in the fall of 1934, Galbraith met John D. Black, a faculty member and leading agricultural economist with ties to Roosevelt’s New Deal, who changed his life. “In Black,” Parker writes,

Galbraith had come upon that critical figure so many talented young people seek (and need) at the beginnings of their careers: teacher, patron, mentor, protector. Unlike so many of the other senior men in the department, Black had no antipathy to Roosevelt or to the New Deal idea that government was needed to shape capitalism’s powers productively and equitably.

Galbraith’s thinking was also permanently influenced by studies arguing that there was a lack of strong competition in America’s markets, including the widely read 1932 book The Modern Corporation and Private Property, by Gardiner Means, a Columbia economist, and Adolf Berle, a successful Wall Street lawyer and liberal reformer. He was also impressed by the fresh economic analyses of a young Harvard professor, Edward Chamberlin, and the British economist Joan Robinson, who had been a student of John Maynard Keynes. Their combined message was that large business in America had undue power to control markets and prices, contrary to the Marshallian model derived from Adam Smith.

At this point, Galbraith had not yet worked out a view of his own. In 1936 he produced a conventional analysis of the Depression with a businessman, Henry Dennison, which favored government planning and regulation of the economy in order to address the lack of competition in markets. In fact, that year, Galbraith had just read and been captivated by Keynes’s The General Theory of Employment, Interest and Money, as had so many of the young men around him, but he had not yet fully absorbed its implications. With Keynes, a new sort of economics was in sight, if as yet still dimly. Paul Samuelson, the Nobel Prize–winning economist and theoretical pioneer, who was then a graduate student at Harvard, later wrote that it was as intoxicating to read Keynes as it must have been for Keats to read Chapman’s translation of Homer. Though complex and technical, what made The General Theory so attractive was that it offered a straightforward explanation of the causes of depression, and, moreover, a simple solution.

Keynes argued, contrary to the claims of neoclassical economics, that falling interest rates did not always induce business to borrow more heavily in order to fully invest the nation’s savings. Without larger investment, the economy’s resources, including its labor force, would remain underemployed. To correct this, Keynes’s analysis suggested that government deficits, through additional spending or tax cuts, would stimulate enough demand to produce the investment needed for growth and ultimately the additional jobs that would satisfy the demand. The path to prosperity was thus not to be found in a set of complex regulations and detailed government oversight, for which the individualistic American people probably had no appetite anyway; prosperity could be achieved through the more attractive macroeconomic process of managing the business cycle through fiscal policy.

In 1937, Galbraith was, to his surprise and perhaps good fortune, not asked back to Harvard. That year he had married a Radcliffe student, Catherine Atwater; he became an American citizen and had arranged for an agricultural economics fellowship in Cambridge, England, in the hope of studying with Keynes himself. But the British economist was sick that year. On returning to America, Galbraith was offered a series of powerful jobs in government, for which he apparently had both talent and flair. By 1941, Galbraith at thirty-three was put in charge of controlling prices at the controversial Office of Price Administration. Inflation caused by soaring production of war materials was widely expected; but the price controls that were effective in controlling inflation during the war years aroused ideological retribution, and the OPA was under constant political attack. Leon Henderson, who was Galbraith’s superior and a respected friend of Roosevelt’s, soon had to resign, and after several more heads were demanded by the political opposition, Galbraith, too, was forced to leave, accused of among other things “Communist tendencies.”

Galbraith’s education was not yet complete, however. Henry Luce, the publisher of Time, Life, and Fortune, approved hiring him as a Fortune editor in 1943. It was an odd combination. Luce was an outspoken opponent of Roosevelt and the New Deal, but he approved of the Keynesian use of government spending to stimulate growth. In Galbraith’s first article for Fortune, he wrote that business would have to learn to condone government economic leadership in coming decades. As usual, Galbraith provoked ideological complaints, now among his Fortune colleagues, but Parker shows that Luce defended him. In contrast to The Wall Street Journal, Business Week, and Forbes, Fortune devoted some two dozen articles to a defense and explanation of Keynesian policies. In turn, Galbraith learned how to write for the general public.

His controversial days in government were not yet over, however. With the war ended, he was asked to return to Washington to run a study of how effective America’s bombing campaign had been in undermining German economic production. Using captured documents and interviews with Nazi officials, including Albert Speer, his team found that only 5 percent of German production capacity was destroyed by bombing. The Army Air Force was disturbed by Galbraith’s conclusions, and rushed out its own self-admiring analysis. Galbraith as usual stuck to his views but, Parker writes, they were played down in the final summary and survive intact only in the full report. Again, Galbraith won enemies in high places. He had also spent half a year in the State Department, where he saw the Truman administration’s policies contribute, he felt, to a cold war. He favored more cooperation with the antagonistic parties. But the leftist policies of Roosevelt’s former vice-president, Henry Wallace, also repelled him. As he tells Parker, Wallace

was advocating an advanced form of world government, in which the capital of this new system would alternate between Washington and Moscow. That’s an exaggeration, but…I decided this was not for me.

He not only opposed Wallace but, along with such allies as Reinhold Niebuhr, Arthur Schlesinger Jr., and Eleanor Roosevelt, founded Americans for Democratic Action, which opposed Soviet communism and expansionism and advocated liberal social and economic policies.

John D. Black invited him back to Harvard and ultimately won his protégé tenure, despite opposition to his political record. In retrospect, we can see that Galbraith’s education was nearly complete and he was ready to leave an original mark on economics. He was partial to Keynesian economics but not to the new school of mathematical economics, led by Paul Samuelson of MIT, which married Keynes’s interventionist ideas with the earlier neoclassical economics. Galbraith could never square neoclassical assumptions with his own experience of the world. Meanwhile, economists such as Milton Friedman and George Stigler were using similar mathematical techniques to lead a conservative economic revolt against Keynes.

2.

Galbraith chose to write books for the public that were sophisticated and original tracts about an economy he believed was being transformed. His first major success was American Capitalism: The Concept of Countervailing Power, published in 1952 and a best seller. Part of the book is devoted to explaining and justifying new Keynesian policies. But its primary contribution was, ironically, to explain why big business was now necessary to the American economy and was central to the economy’s surprising prosperity after World War II. He argued that America’s large and dominating corporations, though they had power to control their markets, also sustained the modern technological progress fundamental to economic growth. Breaking up such large corporations, as traditional liberals typically demanded, was not merely futile but would also undermine America’s new prosperity. Only big business could make the large-scale investment in new processes, expensive equipment, and basic research required by a different kind of economy.

But big business also had to be kept in check. This, Galbraith wrote, was the role of “countervailing power,” whose forces included government regulation and oversight, labor unions’ bargaining power over wages, benefits, and decent working conditions, and the bargaining strength that large retailers and distributors could use against equally large producers and suppliers. But such a structure, he presciently warned, coupled with Keynesian demand stimulus, could lead to rising inflation. Companies had the power to raise prices, and labor unions could bargain to raise wages to compensate for higher prices, creating a vicious circle of rising inflation that government intervention through fiscal policy could control only with difficulty.

Galbraith’s book sold 400,000 copies and received highly favorable reviews, but its success attracted predictable criticism from economists on the right and the left, particularly over Galbraith’s refusal to present more than passing empirical evidence to make his case. Yet American Capitalism, even on rereading today, is a strongly argued, exciting book. Unlike most economists, Galbraith ambitiously and persuasively provided the answer to a large question: What caused prosperity? There was also Galbraith’s unusual gift for narrative, which was characterized by a constant stream of satisfying insights, along with barbed remarks about supporters of the conventional economic wisdom.

American Capitalism’s main weakness was that it explained only part of the economy’s success. It seemed to regard the rise of countervailing power as inevitable, and was thus too confident that government oversight and union bargaining power would remain undiminished. American-style Keynesianism was becoming widely accepted on college campuses, Parker observes, and promised to sustain prosperity indefinitely through macroeconomic management, not through the forces of countervailing power. Galbraith’s work on American affluence required taking this into account. He found a new place to reflect and write in Gstaad, the Swiss ski resort where he began The Affluent Society, probably his best-argued book, published in 1958.

The central theme of The Affluent Society was that the material prosperity brought about by Keynesianism was not in itself adequate. For the conventional liberal, Galbraith writes, “increased production solved, or seemed to solve, nearly all of the social problems of the day.” But for Galbraith, America was rich only in private goods. And they were goods Americans did not necessarily want; they were coaxed into believing them important by advertising and marketing. On the other hand, America was decidedly poor in public goods and services, including housing, transportation, and health. Thus, Galbraith made enemies even among his Keynesian friends. “Keynes concentrated the eyes of liberals on production,” he writes, “and their political successes gave them a vested interest in it. Keynesian attitudes became, as ever, the new conventional wisdom.”

The Affluent Society sold more than one million copies and remained on The New York Times best-seller list for most of 1958, helping to prepare the way for the progressive social policies that were to be implemented in the 1960s under John F. Kennedy and Lyndon B. Johnson, among them Medicare, Medicaid, and public support for low-income housing.

It was nearly another decade before Galbraith extended further his ideas about the American economy, though he wrote several books in the interim, including a novel and a memoir, and, with a coauthor, a book on Indian art. Beginning with Kennedy’s election to the presidency in 1960, he again left the campus for public life. Galbraith had remained active in politics in the 1950s. He worked for Adlai Stevenson in his bid against Dwight Eisenhower for the presidency. But with the election of John Kennedy, Galbraith had the ear of the president. Galbraith had known Kennedy since his undergraduate years, and on taking office, Kennedy named him to a post he had long dreamed of holding, ambassador to India. But even from afar, Galbraith made his views well known to Kennedy, commenting on the crisis over Berlin, the Indochinese war, the Bay of Pigs, the Cuban missile crisis, and the war in Vietnam. Parker’s book is particularly valuable for his account of Galbraith’s persistent advice on Vietnam. In October 1961 Galbraith presciently wrote the following to Kennedy:

Although at times I have been rather troubled by Berlin, I have always had the feeling that it would be worked out. I have continued to worry far, far more about South Viet Nam. This is more complex, far less controllable, far more varied in factors involved, far more susceptible to misunderstanding. And to make matters worse, I have no real confidence in the sophistication and political judgment of our people there. Harriman, incidentally, shares my view.

But Averell Harriman, the former New York governor and foreign pol-icy adviser whom Kennedy promoted to assistant secretary of state, turned against Galbraith. In the spring of 1962, Galbraith had successfully raised doubts in Kennedy’s mind about US involvement in Vietnam and sent him a long memo disagreeing with the views of his national security adviser Walt Whitman Rostow, his military adviser General Maxwell Taylor, as well as Defense Secretary Robert McNamara and Secretary of State Dean Rusk, all of whom wanted to send significantly more troops to defend South Vietnam. Harriman attacked the memo, as did the other Kennedy advisers.¹ “Ken Galbraith was particularly lethal because he presented his views with the wit Kennedy relished,” McNamara wrote.

After Kennedy’s assassination, Galbraith maintained a close working relationship with Lyndon Johnson. Parker writes that he saw in the new president the possibilities for great accomplishment in domestic policies. But the escalation of the Vietnam War turned Galbraith away after two years; he became a tireless antiwar activist in his writings and strongly supported Eugene McCarthy’s campaign to be the Democratic nominee for the presidency in 1968.

He also started writing the third major book in his analysis of the American economy, The New Industrial State, published in 1967 and widely read. Extending his earlier views, he argued that the dominant American corporations made up what he now called a technostructure that was necessary for the development of technology, but they were not dedicated to maximizing profit in ways familiar to neoclassical economists. To the contrary, he argued, through advertising and marketing, they closely controlled both consumer demand and market growth. Moreover, government and big business were no longer natural enemies but worked hand in hand to maintain stability. In fact, Galbraith was beginning to think that Soviet economic planning was not all that different from American economic planning, and that in time the two systems might converge.

Here he was naive. The Soviet economy collapsed under the heavy weight of militarism and badly conceived state planning policies. And Galbraith overestimated the degree of control and the staying power of the American technostructure. Demand for goods from Japan and Europe began to undermine America’s big businesses in the 1970s. The increasing size of financial markets made them vulnerable to hostile takeovers and shareholder demands. But it would be hasty to dismiss the fundamental points he made in The New Industrial State. Many corporations did have a large measure of control over prices, distribution, and marketing, and this is all the more evident today with the decline in union power and reduced government regulation. Galbraith was right to think that large corporations were necessary to maintain and improve expensive technologies as well as to exploit economies of scale, a point he did not adequately emphasize. Finally, the persistent inflation in the 1970s was to a large degree a product of the market structure Galbraith described, in which corporations and labor unions could resist market pressures and participate in what he called an “arms race” which led to ever higher rounds of wages and prices.

Galbraith’s only serious flirtation with radicalism showed itself with Economics and the Public Purpose, published in 1973, the fourth book of what turned out to be a tetralogy on the economy. Galbraith wrote it at a time when many of his views were still favored by the profession: he was elected president of the American Economics Association for 1971. In Economics and the Public Purpose he called for the nationalization of parts of the economy, particularly public services such as health care, even mischievously invoking the inflammatory word “socialism” to describe his new policies. He was castigated more strongly over his advocacy of wage and price controls to subdue the inflation of the 1970s, a natural outgrowth of his analysis of the nation’s market structure. Richard Nixon imposed controls in 1971, but Galbraith felt they were half-heartedly applied, and this accounted for their failure.

In the inflationary 1970s, many Keynesians were discredited because, as Galbraith had long warned, restrictive polices would not easily restrain inflation once it was firmly underway in an economy with noncompetitive corporations and labor unions. The decline of confidence in Keynesian policies and renewed fears concerning federal budget deficits gradually reduced Galbraith’s influence as well, and created an opening for monetarists, like Milton Friedman, who argued that inflation could be controlled only by limiting the growth of the money supply and disregarding the rising level of interest rates. Later in the 1970s, the new economic theory of “rational expectations” argued that government economic policies didn’t matter; the calculations of producers and consumers drove the economy.² Both schools of thought failed to anticipate the harsh recession of 1982. Galbraith did. Neither the Friedmanite emphasis on the money supply nor the claims by rational expectationism theorists that government has no influence are held in high regard today.

In the 1980s and 1990s Galbraith kept writing books, some of them widely read. But conventional eco-nomists were increasingly showing the deficiencies in the neoclassical arguments that Galbraith had repeatedly discussed. A book called Happiness, published by Richard Layard, a London School of Economics economist, is the most recent effort, on the basis of expanding psychological research, to show that a higher GDP does not yield more happiness, a view central to Galbraith’s The Affluent Society. “Our wants are not given, in the way that elementary economics assumes,” Layard writes. “In fact they depend heavily on what other people have, and on what we ourselves have got accustomed to. They are also affected by education, advertising and television.”³ Layard particularly cites the work done by Princeton psychologist Daniel Kahneman, who won a Nobel Prize in economics in 2002, for systematically expanding views Galbraith had partly anticipated.

This is but one example. In addition, the market power of corporations that Galbraith emphasized time and again in his major economics works has been the subject of studies by several economists including Joseph Stiglitz and George Akerlof, both Nobel recipients, based on new ideas about the imperfect information in markets. One popular macreconomic theory, called new Keynesianism, and advocated by economists like Gregory Mankiw, formerly President Bush’s chief eco-nomist, depends on the assumption that corporations do indeed have some control over prices.

The importance of public goods, the central theme of The Affluent Society, has received perhaps the most serious attention, especially in the economics of human development. Few economists still believe that stimulating economic growth is all that matters. Social programs for health care, education, transportation, and other infrastructure are now widely considered integral to long-term development. The Human Development Report of the United Nations Development Programme publishes indexes of human development, based in particular on the work of Harvard’s Nobel laureate Amartya Sen, which include measures of health, education, and gender discrimination.

There also has long been a constant flow of pertinent criticism from in-dependent economists emphasizing the importance of institutions and economic structure that Galbraith always believed were central to economic understanding.⁴ Galbraith refused to make simplifying assumptions that lent themselves to economic methods and other quantitative techniques. I do not think this excuses him from the obligation to have supplied empirical support for theories, or to acknowledge the benefits that mathematical modeling might have contributed. But at the same time, the misuses and abuses of mathematics and physics in economics are also becoming a favorite theme of economics critics.⁵

“Most economic philosophers needed only to be right as regards their own time,” Galbraith writes in The Affluent Society. Galbraith’s intellectual courage, sensitivity to the abuse of power, understanding of the limits of economic growth, and grasp of the institutions of everyday life will combine to make his body of work relevant well beyond his time. The US would have done well to heed much of his advice, especially his concern for America’s failure to supply public goods. Parker suggests his influence has permeated the work of those who followed him, even though many of them may not realize it. That certainly seems true.