May 09, 2005
In the latest issue of the New York Review of Books, a new biography of John Kenneth Galbraith is reviewed by Jeff Madrick. Mr. Madrick is a distinguished and experienced writer on economic and financial matters and has written for, among other publications, Business Week and the New York Times. Here are a few cranky observations about Mr. Madrick's review.
"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."
Hmm, why might that be? Let’s think about this. Think, think, think. Oh, could it be because he’s been spectacularly wrong?
"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."
Yes, it does help—at least in economics—if you support your theories with evidence.
"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."
This meme is spreading in the semi-informed mainstream press: maybe all people aren’t rational all of the time and maybe markets aren’t “perfect”. So what? We should replace individual decisions and market outcomes with what, then? With government decisions? With decisions made by . . . imperfect, not completely rational government employees? And who has a better track record of understanding and predicting social behavior and institutions than economists, flawed rationality assumption nonwithstanding?
Oh yeah, advertising and marketing completely brainwashes people. Tell that to General Motors and their zillions of heavily advertised but unsold cars.
Health care and transportation are critical to social welfare and economic growth: and which economists, exactly, ever denied this?
Using government spending and changes in tax rates to stimulate growth: cute sleight-of-hand here. At least when I was studying what became known as “Keynesian economics” there wasn’t a lot of discussion about tax rates. Increased spending—“priming the pump”—was emphasized. Now what Keynes wrote and what “Keynesian economics” became are not identical, but I don’t think Mr. Keynes was pounding the table for tax cuts. And if I’m wrong and he did, why were Liberals so upset about “supply side economics"?
"Marshall, a professor at Cambridge, 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."
“Fairest prices”?? If Mr. Madrick can produce one credible economics textbook or one credible economist who claims economics asserts this, I’ll buy him the best dinner in New York City. Economics does not, and never has, claimed that the market equilibrium is “fair”.
"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."
So we had the government provide more housing, transportation, and health, giving us Cabrini-Green, light rail and Amtrak, and the looming crisis that is Medicare. Quite impressive.
"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."
“Cost-push” inflation? Read any modern macro textbook and see if you find any evidence that macroeconomists still believe this. And, excuse me, but why didn’t those powerful corporations and labor unions goose up the inflation rate in the 50s and 60s?
I think Galbraith's most durable contribution will be his theory that increasing income inequality was a prime cause of the Great Depression, a dopey idea that still infests the high school history textbooks that my wife has to teach from.