A working site for research and writing on the thinkers who developed the system that works.

Monday, June 29, 2009

James K. Galbraith in the series of those who got it right

In our series looking for the perspective of those who got it right, we turn to James K. Galbraith, son of the great economist John Kenneth Galbraith and apparently invisible to those who say nobody saw it coming.

We've promoted Galbraith's book the Predator State ad nauseum here on the podcast. Let's review a few of the anti-orthodox principles that organize that book.

One, and quoting:

Because markets cannot and do not think ahead, the United States needs a capacity to plan. To build such a capacity, we must, first of all, overcome our taboo against planning. Planning is inherently imperfect, but in the absence of planning, disaster is certain.

Two, and continuing to quote:

The setting of wages and control of the distribution of pay and incomes is a social, and not a market, decision. It is not the case that technology dictates what people are worth and should be paid. Rather, society decides what the distribution of pay should be, and the technology adjusts to that configuration. Standards -- for pay but also for product and occupational safety and for the environment -- are a device whereby society fashions technology to its needs. And more egalitarian standards -- those that lead to a more just society -- also promote the most rapid and effective forms of technological change, so that there is no trade-off, in a properly designed economic policy, between efficiency and fairness.

And three, with a final quote:

At this juncture in history, the United States needs to come to grips with its position in the global economy and prepare for the day when the unlimited privilege of issuing never-to-be-paid chits to the rest of the world may come to an end. We should not hasten that day. In fact, if possible, we should delay it. We should take reasonable steps to try to keep the current system intact. But given the rot in the system, we should also be prepared for a crisis that could come up very fast. The fate of the country, and indeed the security and prosperity of the entire world, could depend on whether we are able to deal with such a crisis once it starts.

Galbraith traces the fall of conservativism from the Reagan Revolution into the more or less overt plundering of the society by the politically well-positioned oligarchs of Big Oil, Big Pharma, Insurance, Finance, Agriculture and Media.

Galbraith in 1981 as a young director of the Congressional Goint Economic Committee organized what he called "a largely futile frontline resistance to Reaganomics." The vapid combination of Supply Side pap and Milton Friedman Monetarism resulted in immediate large deficits and the beginning of hte deindustrialization of America. (Whatever might be contested about the causes of the events, the timing is not debatable.) Earlier Galbraith drafted the Humphrey-Hawkins bill, which generated the dual mandate for the Fed, and other mechanisms that focused on full employment.

The bill was created by Representative Augustus Hawkins and Senator Hubert Humphrey and signed into law in 1978. Its full title is the Full Employment and Balanced Growth Act. As written it was a worthy successor to the most important piece of economics legislation, the Full Employment Act of 1946. As implemented, it has been a way to get the Fed Chairman before Congress a couple of times a year, but otherwise has been limited to creative footnotes. Lip service is a strong description.

In particular, the Act requires the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals and requires the Chairman of the Federal Reserve to connect the monetary policy with the Presidential economic policy.

The Act sets specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. The Act allows Congress to revise these goals as time progresses. If private enterprise is lacking in power to achieve these goals, the Act expressly allows the government to create a "reservoir of public employment." These jobs are required to be in the lower ranges of skill and pay so as to not draw the workforce away from the private sector.

Coordination between fiscal policy and economic policy has not occurred, of course, and it was actually one of the accomplishments of the Reagan Revolution to drive them as far apart as they have become. Unemployment rates of 3 and 4 percent are now considered the stuff of fantasy. A public employment program?

The Reagan Revolution, whatever its tenets, resulted not in principled conservativism, but in a corporate takeover of the state, as Galbraith has described in his book. By the way, this digression on Galbraith's early work is not from the book, but our contribution with an assist from Wikipedia.

The American economic model in Galbraith's view, is not the free rein to the markets and public be damned approach of Reagan and Bush, but is the structure created by the New Deal. The institutions, Galbraith writes, "are neither purely private nor wholly public. They are not like the socialist welfare institutions of Europe, but neither are they private enterprise."

Some are supported by state spending -- entitlements, but also bank credit, credit guaranetees, and implicit guarantees, and -- Galbraith is writing prior to the massive bailouts when he says -- quote --- the expectation of rescue in the event of trouble. Mortgages, health, agriculture, and the military are some of the other areas receiving massive public subsidies.

And Galbraith is also adamant about the need for standards, which rises from the delusion that markets will produce a competitive market price. Quoting

"As economic theorists know, the real world is necessarily devoid of any such thing [as a competitive market price]. If there is one administered, or controlled, or monopolistic price in the system -- an oil price or an interest rate -- then even if all the other markets are perfectly competitive, all of them will be "distorted" by the presence of that one monopolistic price ...


The fact is that monopoly and market power are not only pervasive, they are at the center of economic life. The very purpose of a new technology is, of course, to create a monopoly where none previously existed.



That being so, prices and wages would serve a quite different function in the real world than the market model assigns to them. Instead of being set so as to maximize efficiency in production, they are set essentially by social relations between groups of workers and by the pattern of prices that are explicitly controlled. They express, in other words, the preixisting matrix ...

... Seen in this light, deregulation of wages and prices ... is nothing more than a rearrangement of social power relations. And the consequences have little or nothing to do with the efficiency whereby a good or service is produced...

p. 179-180

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