Prolific polemicist who revealed the human face of money and power
By Stephanie Flanders
Published: May 1 2006 03:00 | Last updated: May 1 2006 03:00
FT.com

Asked to name an economist, many Americans over the age of 30 would think of John Kenneth Galbraith, who has died at the age of 97. But he was both somewhat less and much more than a professional economist: he was an institution of postwar US life.

"After visiting Concord, Lexington, the Old North Church and Harvard, travellers are moved, however oddly, to view Galbraith," he once wrote. The elder statesman of the Harvard economics department, Galbraith was much else: a New Deal bureaucrat, war-time planner, journalist, adviser of presidents and presidential hopefuls, diplomat, novelist. And, always and until the last, a committed polemicist. "If you can't comfort the afflicted," he told Harvard graduands, "then afflict the comfortable."

Liberal activists who believed, with Galbraith, that economies neither could nor should be left to an invisible hand lost almost every major political battle of the 1970s and 1980s. Yet while the triumph of free-market economics took his ideas further from the political mainstream, they did not make them irrelevant.

Indeed, many of the dangers of untrammelled markets he had described in the 1950s and 1960s, not least the coexistence of "private opulence and public squalor", seem rather more obvious in George W. Bush's America than they had been in Eisenhower's or Kennedy's. The return of an income distribution that looks increasingly similar to that of a century ago must make his work increasingly relevant.

Galbraith's persistent criticisms of Ronald Reagan's (and Margaret Thatcher's) policies culminated in the publication, in 1992, of a surprisingly influential book, The Culture of Contentment. It described how the emergence of a contented, voting majority in the US and elsewhere was hastening the emergence of a new and dangerously marginalised underclass; offering, in the words of one reviewer, "both a compelling logic and a tempting vindication of those disillusioned by electoral defeat".

In many ways, however, the 1992 book was a follow-up to an earlier, far more influential, polemic, The Affluent Society, published in 1958. No other academic title of that era, (with the exception, perhaps, of the sociologist, David Reisman's The Lonely Crowd) moved so effortlessly on to the bestseller lists, or had such a lasting impact on contemporary debate.

Today it is largely remembered for introducing phrases such as "the conventional wisdom", or "the bland leading the bland" into common circulation. Yet it is important to stress the novelty of some of the underlying ideas. Few had spoken before of a "consumer society", or worried about the implications of structuring an economy solely round consumption. These days, the notion that more may not always be better for the environment, or for the balance between private and public goods, is commonplace.

Time has been less kind to some of his other books: The New Industrial State, for example, a paean to economic planning by government and large-scale corporations, written in 1967, became outdated in the turbulent 1970s and 1980s.

But at least two of his historical books, The Great Crash, a layman's guide to the stock market crash of 1929, and his later short compendium of booms and busts throughout history, A Short History of Financial Euphoria, published in 1990, have become classics of the genre, admired by readers on all sides of the political divide. Both works exemplified an abiding feature of Galbraith's writings: a fascination with the power of conventional ideas, especially economic ones (or mass lunacy, in the case of financial booms).

Born in 1908 in Iona Station, a Scottish farming community of 23 souls in Ontario, Galbraith began his academic career inauspiciously, studying animal husbandry and soil management at Ontario Agricultural College in a lonely town called Guelph.

After graduating in 1931, he went on to complete a PhD in agricultural economics at the University of California, Berkeley, followed by a series of teaching and research positions at Harvard, Cambridge University, and Princeton.

When Galbraith went to Washington in 1934 to work for the Agricultural Adjustment Administration he was one of many flocking to the capital to join the early days of the New Deal. Few, however, stayed so closely connected to the world of public policy for so long.

He moved on to the American Office of Price Administration, where he ran the war-time system of price controls. Later, critics often claimed that he had deduced false lessons from this experience about the efficiency of government planning. At the time, however, the controls were deemed to have been very successful. His spell at the AOPA and, later, at the State Department running both the Strategic Bombing Survey and Office of Economic Security earned him both the Medal of Freedom and the President's Certificate of Merit.

It was after running Kennedy's successful 1960 campaign that Galbraith spent a controversial time in India as US Ambassador. He later claimed, only half jokingly, that the job kept him occupied for about an hour a day. (This in a country then constantly on the brink of war with at least one if its neighbours.)

After Kennedy's death, Galbraith remained in the Johnson administration, before resigning over Vietnam to become a leading opponent of the war. "There are times in politics," he said in 1968 "when you must be on the right side and lose." He was rarely out of such times thereafter.

Galbraith was not a modest man: he did not suffer fools gladly, and, at 6ft 8½, was able to make those who did not measure up feel very small indeed. But it is fair to say that he was always more concerned with the role of economists and economic ideas in the world than with his own place in economics.

Galbraith often berated his academic colleagues for not perceiving how mainstream economic instruction both concealed and supported the "real" forces guiding economic and social affairs. "All economic history, including Galbraith himself, has been the expression of vested interest."

His own vested interest is best illustrated by the quotation from the 19th century economist, Alfred Marshall, with which he introduced The Affluent Society: that "the economist, like everyone else, must concern himself with the ultimate aims of man".

"Economics is not a science," he argued in a 1987 book, but a "continuing interpretation of current circumstances. All its useful propositions can be stated in clear, unembellished and generally agreeable English".

Galbraith's numerous books tended to be all these things; and, even rarer in economic writing, they were funny.

The first line of The Affluent Society is typical: "wealth is not without its advantages and the case to the contrary, although it has often been made, has never proved widely persuasive." Though his influence waned in later years, Galbraith's "fatal fluency", as he called it, and wry sense of humour ensured that people would pay attention to what he said, even if they seldom paid heed.

Galbraith was formidably productive, continuing to write articles and books into his mid-90s; The Economics of Innocent Fraud appeared in 2004. People also continued to read what he wrote. Of his contributions to American public life over the years, his rare urge, and even rarer ability, to make important economic ideas both comprehensible and amusing will be most missed.

"I think that when people are happy, comfortable, they tend to be more conservative ... but I am prepared to argue that the next time there is a slump, liberals will be back and it will be conservatism that is unfashionable."

He was quick to point out that the late-century triumph of market economics was more restrained than most people realized. In most advanced capitalist countries, the public sector still accounts for nearly half of GDP. And the United States, the epicentre of the market's triumph, has the most uneven distribution of income among all advanced countries.

"The family which takes its mauve and cerise, air-conditioned, power-steered, and power-braked automobile out for a tour passes through cities that are badly paved, made hideous by litter, blighted buildings, billboards, and posts for wires that should long since have been put underground. They picnic on exquisitely packaged food from a portable icebox by a polluted stream, and go on to spend the night at a park which is a public menace to health and morals. Just before dozing off on an air mattress, beneath a nylon tent, amid the stench of decaying refuse, they may reflect briefly on the curious unevenness of their blessings. Is this, indeed, the American genius?"

"Our nation stands at a fork in the political road. In one direction lies a land of slander and scare; the land of sly innuendo, the poison pen, the anonymous phone call and hustling, pushing, shoving; the land of smash and grab and anything to win. This is Nixonland. America is something different."

Markets, Politics and the Public Interest
John Kenneth Galbraith, a Great American
By PAUL CRAIG ROBERTS
Counterpunch.com
May 3, 2006

A great American has passed away--John Kenneth Galbraith. He was 97 years old and still involved with the issues of our time.

Galbraith's most famous book is The Affluent Society (1958). In this book Galbraith argued that Americans were good at making money, but neglectful of the wider public interest.

Alas, the same is true today. The environment always suffers from the greed of developers and a number of other well organized interest groups that pull political strings. I have seen enough in my life to know that Galbraith was right that the "free market" is not always the answer. All too often, the "free market" is merely organized interests pulling political strings behind ideological cover.

Today the greed of CEOs and short-term shareholders is destroying the American middle class. Why pay an American to do a job that can be outsourced to a foreigner for far less cost or performed by a foreigner brought in on a H-1B or L-l visa. American organizations and their public relations operatives spread disinformation that there are shortages of engineers, nurses, schoolteachers, and so on in America, and that the need has to be met by bringing in foreigners at less pay.

Offshoring of jobs and manufacturing are said to benefit Americans with lower prices, thus making them richer even as they lose their professional and middle class jobs. "Free market" economists, subservient to ideology or business research grants, produce "studies" that reassure the Americans who are being decimated that giving their jobs to lesser paid foreigners is good for America.
Just shut up and quit being so selfish. Millions of people are better off buying Wal-Mart's Chinese-produced goods thanks to your lost of job.

One obvious problem with these claims is that when Americans lose good jobs to foreigners, the American economy loses consumer buying power. The corporations and their paid for economists are maximizing short-run CEO bonuses and short-run shareholder capital gains at the expense of the American consumer market and long-term strength of the US economy. The corporations think they will be able to sell to mass Chinese and Indian markets, but, of course, access to those consumer markets will be blocked by those governments once their domestic firms have the western technologies.

Galbraith could puncture the inanities that pass for "free market economics" better than anyone. Don't read me wrongly. There is a tremendous case for market economics. The fallibility of government is a well documented story. I am saying that there are a large number of special interests that disguise themselves with free market claims, and that these special interests, not true free market economics, determine US policy.

Today we need Galbraith more than we did in his own time. American economists have made themselves irrelevant. They don't address real issues. Lost in abstractions and ideology, the economy collapses around them while they give assurances that all is well.

America owes its former economic greatness to World War I and World War II, which destroyed Europe and Japan and left the US as the only manufacturer. As part of its cold war strategy, America gave itself away and has today a hollowed out economy based on consumer debt.

Under the Bush regime, the price of gold has sky-rocketed from $240 an ounce to $660 per ounce. That tells us something about the confidence the world has in the dollar as reserve currency.

John Kenneth Galbraith said "the total alteration in underlying circumstances has not been squarely faced. As a result, we are guided, in part, by ideas that are relevant to another world."

His words are more true today than when he wrote them.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review.

As Galbraith biographer Richard Parker noted in his essential review of his subject's attempt to prevent Cold War hawks from convincing Kennedy and then Lyndon Johnson from expanding U.S. military involvement in southeast Asia, it was in the fall of 1961 that, "Harvard economist John Kenneth Galbraith, then Ambassador to India, got wind of their plan--and rushed to block their efforts. He was not an expert on Vietnam, but India chaired the International Control Commission, which had been set up following French withdrawal from Indochina to oversee a shaky peace accord meant to stabilize the region, and so from State Department cables he knew about the Taylor mission--and thus had a clear sense of what was at stake. For Galbraith, a trusted adviser with unique back-channel access to the President, a potential US war in Vietnam represented more than a disastrous misadventure in foreign policy--it risked derailing the New Frontier's domestic plans for Keynesian-led full employment, and for massive new spending on education, the environment and what would become the War on Poverty. Worse, he feared, it might ultimately tear not only the Democratic Party but the nation apart--and usher in a new conservative era in American politics."

Galbraith, who tried harder than just about anyone else to avert the turn toward quagmire, sent back a memo in which he reflected on the difficulty of distinguishing "friendly jungle" from "Vietcong jungle" and asked, "[Who] is the man in your administration who decides what countries are strategic? I would like to...ask him what is so important about this real estate in the Space Age."

When he was responsible for assessing the effect of Allied bombing in Germany after the war, he found that the massive bombing of cities and factories had little effect on production. The equipment in bombed factories was moved to schools, churches, and hospitals, and production rose to its peak in the last year of the war under the direction of Albert Speer. Galbraith learned in conversations with Speer how badly the German economy had been organized. The Nazi leaders were a gang of inept mobsters who had taken over a country and had no idea how to run it. The American Air Force generals did not want to hear that the massive bombing raids had little effect on the German war effort, and they did all they could to keep the truth from coming out. Galbraith remarked to Orvil Anderson, deputy chief of the Army Air Force in Europe, "General, this is just a matter of intellectual honesty." The general replied, "Goddamn it, Ken, you carry intellectual honesty to extremes." Galbraith did carry intellectual honesty to extremes, and the published report had a large element of truth in it. He then went to Japan and found that the Japanese had decided to surrender two weeks before atomic bombs were dropped on Hiroshima and Nagasaki, but the high command was determined to demonstrate the effects of its new weapons. These incidents instructed Galbraith about the terrific struggles for power going on in public life, which did not exclude mendacity when mendacity served a higher purpose, namely, one's own interest. Review: John Kenneth Galbraith: His Life, His Politics, His Economics by Mike Sharpe

Through the whole structure of New Deal Washington, including the war years, the greatest mark of pride was to be a Roosevelt man. But this was, in turn, related to the fact that the president had great flexibility of accommodation to the disaster and despair of the Depression years.

This was a terrible time, a perilous time in the history of the republic, and a singular feature of Franklin D. Roosevelt was his pragmatic accommodation to whatever needed to be done. If you ever hear a politician say, "I'm going to adhere strictly to principle," then you should take shelter because you know that you are going to suffer.

John Kenneth Galbraith
Galbriath Interview, Berkeley, March 27, 1986

“Economics as it is taught and studied has no way of assessing or measuring power and the will to power; the role of power and the impulse to its exercise cannot be brought within the ambit of geometrical expression or algebraic formula.”
The New Industrial State.(1976) p. xv.

“The two parts of the economy—the world of the technically dynamic, massively capitalized and highly organized corporations on the one hand and the hundreds of thousands of small and traditional proprietors on the other—are very different. It is not a difference of degree but a difference, which invades every aspect of economic organization and behavior, including the motivation to effort itself. It will be convenient, even in advance of more formulation, to have a name for the part of the economy, which is characterized by the large corporations. One is readily at hand; I shall refer to is as the ‘Planning System.’ The planning system, in turn is the dominant feature of the New Industrial State.”
The New Industrial State.(1976) p. 9

“There was a further, yet more disturbing thought. Might there not be a convergence between the great bureaucratic organizations of capitalism and those of the socialist world? I spent the spring months of 1959 traveling through the Soviet Union, talking with Russian plant managers and economists in the belief that this might be so. I concluded that there was such a convergence. When this conclusion was published—in the Soviet Union eventually as well as in the Western industrial lands—there was anther kind of convergence: Critics in both East and West united in condemning what seemed both socialist and capitalist apostasy.”
The New Industrial State.(1976) p. xix.

“…the enemy of the market is not ideology but the engineer. In the Soviet Union and the Soviet-type economies prices are extensively managed by the state. Production is not in response to market demand but given by the overall plan. In the Western economies markets are dominated by great firms. These establish prices, and seek to ensure a demand for what they have to sell. The enemies of the market are thus highly visible, although rarely in social matters has there been such a case of mistaken identity. They are not socialists. The enemies, in both cases, are advanced technology, the specialization and organization of men and process that this requires and the resulting commitment of time and capital….The modern large Western corporations and the modern apparatus of socialist planning are variant accommodations to the same need.”
The New Industrial State.(1976) p. 30.

“But if the producer reached out to influence or shape consumer wants, this socially admirable concept was in peril….This could not be”. The New Industrial State.(1976)p. xxiii.”

“The goal of these planning decisions could still be the greatest possible profit. We have already seen that a high and reliable flow of earnings is important for the success of the technostructure. But the market is no longer specifying and enforcing that goal. Accordingly, profit maximization- the only goal that is consistent with the rule of the market---is no longer necessary. The competitive firm had no choice of goals. The monopoly could take less that the maximum but this would be inconsistent with its purpose in being a monopoly. But planning is the result not the desire of exploit market opportunity but the result, among other factors, of the unreliability of markets. Subordination to the market, and to the instruction that it conveys, has disappeared."
The New Industrial State.(1976) p. 103

“Among the two hundred largest corporations in the United States—those that form the heart of the planning system-there are few in which owners exercise any important influence on decisions."
The New Industrial State.(1976) p. 77

“…corporate ceremony seeks also to give the stockholders an impression of power."
The New Industrial State.(1976) p. 78

“Monopoly is illegal. Oligopoly, which is agreed to have the same consequences but with diminished force, is not." (NIS, p. 169.)

“The conflict between the legal condemnation of monopoly and its de facto acceptance in slightly imperfect form as oligopoly is stark." (NIS, p. 170.)

“The form is prosecuted; the substance is exempt." (NIS, p. 171).

We were successful also because, even in those days, concentration in American industry had gone far beyond the current estimate or appreciation of the textbooks. Oligopoly, the monopoly of the few, which had impressed itself on my classical thoughts at Harvard, was on longer the exception by 1941. For around half of the economic system it was the rule. Where a few large firms dominated an industry, as the did steel, aluminum, oil, chemicals, pharmaceuticals, and many other, prices were already controlled by the seller. The pervening government control, however different in purpose, was not different in kind from what had been done under private auspices before. The administrative task was also greatly simplified. It is far easier to deal with a handful of large firms that with a plethora of small ones.
A life in Our Times, p. 173.

"That the Soviet system has made great material progress in recent years is evident both from the statistics and from the general urban scene... One sees it in the appearance of well-being of the people on the streets...Partly, the Russian system succeeds because, in contrast with the Western industrial economies, it makes full use of its manpower."
Globalisation Institute

I professed shock and said, “Surely your are not going to do that.”
“You must take our intentions seriously.”
“That,” I replied, “is what concerns me. Here in Moscow, the streets are wide; the automobiles, by American standards, are few. Yet already it is as much as life is worth to pass from curb to curb. Have you thought what a tenfold increase to New York standards, a fifteenfold increase to the Los Angeles level, would do to your traffic, would mean in parking space, would require in repair services, would do to your good, clean air? I am appalled that a planned economy should have no goal except to rival the worst mistakes of a unplanned one.”
A Life in Our Time, (1981) p. 370, John Kenneth Galbraith.

Academic, Political Elite Say Goodbye to John Kenneth Galbraith
Commondreams.org
by Randolph Holhut

CAMBRIDGE, Massachusetts - One could take a look at the list of speakers at John Kenneth Galbraith's memorial service -- feminist pioneer Gloria Steinem, former Sen. George McGovern, Sen. Edward "Ted" Kennedy -- and think that it was as much a requiem for a philosophy as it was for a man.

But Wednesday afternoon's service at Harvard's Memorial Church was not a nostalgia trip, a lament for the passing of liberalism and one of its great standard bearers. It was an afternoon of laughter and remembrance of a man who figuratively, as well as literally, towered over the intellectual landscape of America.

John Kenneth Galbraith

Galbraith, the famed author, economist, academic and public servant who died on April 29 at the age of 97, was remembered for his wit and intelligence, his generosity and kindness, and most of all, for his famously outsized ego -- referred to by his son James as "Galbraith's First Law -- that modesty is a vastly overrated virtue."

Of course, one might be entitled to a big ego if one has written 33 books, served an advisor to every Democratic president from Roosevelt to Clinton and was one of Harvard's most famed academics. Galbraith was all that and more, one of the most prominent public intellectuals of the 20th century.

At the same time, he was generous to his friends around the world, including Newfane, where he spent his summers with his wife Catherine and their family for nearly six decades on what he called his "unfarmed farm."

His biographer, Richard Parker, spoke of Galbraith's place in the past and present of economic and political life.

"Reading through the obituaries and memorial pieces after his death, I'm afraid that too many treated him mistakenly as synecdoche, the man that bespoke another era, an earlier time that he -- and we -- had long outlived," said Parker. "To the very end, he never was a synecdoche of a time gone by -- but of immense relevance today, a figure of exceptional and independent mind and spirit, a skeptic always of power and privilege."

That skepticism of power was cited by many of Wednesday's speakers.

Steven Schlesinger read a letter from his father, Arthur M. Schlesinger Jr., who couldn't attend due to illness. The 90-year-old historian and author was a neighbor and longtime friend of Galbraith's.

Schlesinger cited English author Thomas Carlyle's famous dismissal of economics as "the dismal science." "Carlyle never forsaw John Kenneth Galbraith," wrote Schlesinger. "(Galbraith) reconnected economics with human and economic realities."

Another longtime friend, as well as political sparring partner, William F. Buckley, recalled how Galbraith's "poker face" made him never quite sure whether he was teasing him or not.

"He told me once that the reason his prose was so perfect was because he rewrote everything five times, making sure he injected spontaneity into the fourth draft," said Buckley.

Steinem, who met Galbraith as a young reporter in the early 1960s, said what struck her first about him was that it was "rare that so much trust rested with so much power."

She spoke of how little difference there was between the public and private Galbraith.

"As John Kenneth Galbraith, he changed the world's consciousness," Steinem said. "As Ken he won our love and trust. The public and private selfs were never dissonant."

His eldest son Alan Galbraith spoke of how his father "was always working on that turn of phrase for our own amusement," such as one day when his father was asked how he was feeling. "He said, 'I'm old, sick, weak and intellectually perfect.'"

McGovern, the Democratic party's nominee for president in 1972, spoke of being at the Galbraith farm in Newfane, planning strategy for the election. "We assumed that anyone who won the Democratic nomination could beat (Richard) Nixon," McGovern said. "I guess our timing was off."

Kennedy called him "an eloquent voice of reason for our times" and thanked Galbraith for how he and Schlesinger supported John F. Kennedy's 1960 presidential campaign and "gave Jack the gravitas he need to become a serious candidate. There might not have been a 'New Frontier' without Ken."

Peter Galbraith, his youngest son, had the last word. He saluted his father for all the things he learned, from the importance of clear and persuasive writing, to how all of his children and grandchildren have pursued careers in public service and the public good, to the appreciation of beauty from the hills of Vermont to the canals of Venice.

"My father was always an optimist," he said. "When someone asked what he hoped for when he died, he said 'I'm hoping for heaven, but I'll settle for Venice.'"

Galbraith fought for years against what he famously called "the disparity between private affluence and public squalor," in his most famous book, "The Affluent Society,"

"We do not have 'the Good Society' that my father wanted," Peter said, "but he helped bring us closer to one."

The service ended with a chorus of "Auld Lang Syne," and as the mourners walked to nearby Annenberg Hall for a post-service reception, they were led by a bagpiper, a nod to Galbraith's Scottish heritage.

More than 500 people attended the service, which was taped by C-SPAN for future broadcast.

Copyright © 2006 Associated Press

Ambassador claims shortly before invasion, Bush didn't know there were two sects of Islam
Christian Avard
Rawstory.com
August 4, 2006

Former Ambassador to Croatia Peter Galbraith is claiming President George W. Bush was unaware that there were two major sects of Islam just two months before the President ordered troops to invade Iraq, RAW STORY has learned.

In his new book, The End of Iraq: How American Incompetence Created A War Without End, Galbraith, the son of the late economist John Kenneth Galbraith, claims that American leadership knew very little about the nature of Iraqi society and the problems it would face after the overthrow of Saddam Hussein.

A year after his 'Axis of Evil' speech before the U.S. Congress, President Bush met with three Iraqi Americans, one of whom became postwar Iraq's first representative to the United States. The three described what they thought would be the political situation after the fall of Saddam Hussein. During their conversation with the President, Galbraith claims, it became apparent to them that Bush was unfamiliar with the distinction between Sunnis and Shiites.

Galbraith reports that the three of them spent some time explaining to Bush that there are two different sects in Islam--to which the President allegedly responded, 'I thought the Iraqis were Muslims!'

Research by RAW STORY has confirmed a surprising lack of public statements from the president regarding the branches of Islam, but did uncover at least one mention of their existence. A fact sheet released by the White House in December of 2001 does indeed use the term Sunni to describe a Lashkar-E-Tayyib, "the armed wing of the Pakistan-based religious organization, Markaz-ud-Dawa-wal-Irshad." Other mentions, not originating from the White House, were common in government documents and proceedings, as well as in media coverage of the middle east.

Other reports also place Bush announcing newfound knowledge of the differences between Muslim groups shortly before entering the Iraq war.

In an interview with RAW STORY, Ambassador Galbraith recounted this anecdote from his book to exemplify 'a culture of arrogance that pervaded the whole administration.'

'From the president and the vice president down through the neoconservatives at the Pentagon, there was a belief that Iraq was a blank slate on which the United States could impose its vision of a pluralistic democratic society,' said Galbraith. 'The arrogance came in the form of a belief that this could be accomplished with minimal effort and planning by the United States and that it was not important to know something about Iraq.'

The Bush Administration's aims when it invaded Iraq in March 2003 were to bring it democracy and transform the Middle East. Instead, Iraq has reverted to its three constituent components: a pro-western Kurdistan, an Iran-dominated Shiite theocracy in the south, and a chaotic Sunni Arab region in the center.

Galbraith argues that because the new Iraq was never a voluntary creation of its people--but rather held together by force--America's ongoing attempt to preserve a unified nation is guaranteed to fail, especially since it's divided into three different entities.

'You can't have a national unity government when there is no nation, no unity, and no government,' said Galbraith. 'Rather than trying to preserve or hold together a unified Iraq, the U.S. must accept the reality of Iraq's breakup and work with the Shiites, Kurds, and Sunni Arabs to strengthen the already semi-independent regions.'

Galbraith further argues that the invasion of Iraq destabilized the Middle East while inadvertently strengthening Iran. One of the administration's intentions in invading Iraq was to undermine Iran, but instead, the Iraqi occupation has given Tehran one of its greatest strategic triumphs in the last four centuries.

Once considered to be Iraq's worst enemy, Iran has now created, financed and armed the Shiite Islamic movements within southern Iraq. Since the Iraqi Parliamentary elections of 2005, the Shiites have made considerable political gains and now have substantial influence over the country's U.S.-created military, its police, and the central government in Baghdad. In addition, Iraq is developing economic ties with Iran that Galbraith believes could soon link the two countries' strategic oil supplies.

Galbraith says that, 'thanks to George W. Bush, Iran today has no closer ally in the world than the Iraq of the Ayatollahs.' As a result, he argues, sending U.S. forces into Iraq, has in effect, made them hostage to Iran and its Iraqi Shiite allies and left the U.S. without a viable military option to halt Iran's drive to obtain nuclear weapons.

A seasoned diplomat, Galbraith served as the first U.S. ambassador to Croatia, where he negotiated the 1995 Erdut Agreement that ended the Croatian war.

Galbraith fears the United States may have lost the war on the very day it took Baghdad. 'The American servicemen and women who took Baghdad were professionals--disciplined, courteous, and task-oriented,' said Galbraith. 'Unfortunately, their political masters were so focused on making the case for war, so keen to vanquish their political foes at home, felt certain that Iraqis would embrace American-style democracy, yet they were so blinded by their own ideology that they failed to plan for the most obvious tasks following military victory.'

Galbraith believes that the Bush Administration's effort will only leave the U.S. with an open-ended commitment in circumstances of uncontrollable turmoil. In the end, he believes, America's most important objective is to avoid a worsening civil war.


'There is no easy exit from Iraq,' said Galbraith. 'The alternative, however is to continue the present strategy of trying to build national institutions-displaced in the 2003 invasion-but how can you do that where this now is no longer an existing nation?'

Challenging the Vested Interests
The Legacy of John Kenneth Galbraith
By RALPH NADER
Counterpunch.org
August 19 / 20, 2006

I first came across the name of John Kenneth Galbraith during my student years at Princeton where I picked up his book American Capitalism. Wondering why it was not on any reading list for my economics course, I put the question to the professor. He replied: "It's really not about economics. It's about political economy."

Before the discipline of economics broke off from what students used to major in--"political economy"-early in the 20th century, my professor's comment would not have been a put down. Today, most economists see economics as a branch of mathematics and tend to dismiss economists who bring into their study the variables of politics and power.

The passing at age 97 of Harvard Professor emeritus Ken Galbraith was a loss to the political economy of the United States. His books, articles, letters, testimony and advice to Presidents, members of Congress and the general public for over 60 years connected numbers to understanding what was really going on between the powers-that-be--the haves--and the powerless--the have nots. He proposed policies that were designed to lift the livelihoods of regular people and their essential public services.

What would a Galbraithian economy look like in the United States? For starters, major public investments--fueled by corporate tax reforms--in public works--public transit, repaired schools, clinics, upgraded drinking water systems, good parks and libraries, and environmental health projects. These forms of public wealth for everyone, he believed, would also advance the objective of a full employment economy.

Galbraith believed that uncontrolled capitalism, especially the giant corporations, required prudent regulation to diminish the damage their out-of-control greed and power inflict on society. Always a realist, he was more than aware of the capture of regulatory agencies by the very companies that they were created to regulate.

He saw sham in the pretense that the large defense manufacturers are free market corporations. Since over 90% of their business comes from the Department of Defense, he urged that they should be taken over and treated as public corporations shorn of their profiteering, waste and unaccountable lobbying pressure.

It was not for mere rhetorical flourish that he coined the phrase "the conventional wisdom." All his life he was challenging the "vested interest" in one's ideas. He described "economists" as being the "most economical about ideas. They make the ones they learned in graduate school last a lifetime."

Full of sharp wit, humor and irony, Galbraith was a joy to read and a pleasure to correspond with--he responded to letters of all kinds. A man of many causes, he spoke out very early against the Vietnam War, poverty, violations of civil liberties and almost anything that degraded our struggling democratic society. He was one of the founders of Americans for Democratic Action. What impressed me so much about this great political economist was his mostly unfailing good judgment and solid reasoning behind it.


He was quick to see a trend, sense a decay and reprimand both with his fundamental public philosophy. As far back as July 1970, he wrote an article in Harper's magazine titled "Who Needs Democrats? And What it Takes to be Needed."

He wrote:

"The function of the Democratic Party, in this century at least, has, in fact, been to embrace its solutions even when it outraged not only Republicans but the Democratic establishment as well. And if the Democratic Party does not render this function, at whatever cost in reputable outrage it has no purpose at all. The play will pass to those who do espouse solutions. The system is not working.The only answer lies in political action to get a system that does work. To this conclusion, if only because there is no alternative conclusion, people will be forced to come."

Ken Galbraith was accurate in observing the decline of the Democratic Party--more accurate than he no doubt wanted to be. What remains is his hope for "political action to get a system that does work."

Maybe Galbraith's thousands of friends, colleagues and admirers could help bring about his desired transformation by establishing the "John Kenneth Galbraith Institute for a Progressive Political Economy." Right wingers do this for their intellectual heroes--to wit the Ludwig von Mises Institute in Alabama. Can progressives do anything less for Canada's gift to America--a man who came from rural Ontario and lived the nexus between knowledge and action as if people mattered?

The Dollar Melts as Iraq Burn
by James K. Galbraith
December 4, 2006 by the Guardian / UK
Commondreams.org


The melting away of the dollar is like global warming: you can't say that any one heat wave proves the trend, and there might be a cold snap next week. Still, over time, evidence builds up. And so, as the greenback approaches two to the pound, old-timers will remember the fall of sterling, under similar conditions of deficits and imperial retreat, a generation back. We have to ask: is the American financial empire on the brink? Let's take stock.

It's clear that Ben Bernanke got buffaloed, early on, by the tripe about his need to "establish credibility with the markets." There never was an inflation threat, apart from an oil-price bubble that popped last summer. Long-term interest rates would have reflected the threat if it existed, but they never did. So the Fed overshot, and raised rates too much. Now long rates are falling; Bernanke faces an inverting yield curve and even bank economists are starting to call his next move. That will be to start cutting rates, after a decent interval, sometime next year.

Once again, all you monetary policy buffs, in unison please:

The grand old Duke of York, he had ten thousand men.
He marched them up to the top of the hill. And marched them down again.

This is not good news for the dollar.

The US economy is going soft faster than the inflation hawks and growth optimists thought. Housing has been in free-fall for months. With the new Congress anxious to display "fiscal responsibility" - cue Robert Rubin who has moved in very fast on Nancy Pelosi - there won't be any help next year from them. If business investment falls off, recession could hit in 2007 or 2008. With that fear in mind, gloomy profit expectations are setting in, and that's not good for the dollar.

The US trade deficit is near all-time records. By itself, this proves nothing: the US supplies reserves to the world system, and it can run any deficit that the world is prepared to finance. But, sooner or later the world may start to get other ideas.

So here's the big question: is the age of the dollar economy lurching toward an end? Are China, Japan, Saudi Arabia and other big holders of T-bonds about to start a rush, or even a stately promenade, toward the exits? Let's hope not, because the world is unprepared to replace the dollar with anything else. The euro is not suited for the job, and a joint dollar-euro system would need better central bankers than either America or Europe has got. An end to the dollar system would therefore be chaotic, inflationary, and very tough on world trade. The best argument for the dollar has always been: it's not in anyone's interest to bring it down.

Could it happen, though? Yes, it could. And it could be connected to that other unfolding disaster. As the "Pax Americana" goes to hell in Iraq - producing a nervous breakdown among the pro-war elites - let's remember that security and finance are linked. Typically, the country that provides global economic security enjoys the use of its financial assets in world trade. And when the security situation changes, that privilege can be revoked. The consequences are unpleasant. Ask the British: after the sterling area folded, it took a generation for the UK to come all the way back.

That is partly why Economists for Peace and Security - a group I chair - opposed the Iraq war from the beginning. As far back as 2002, we understood - as the economically illiterate neo-imperialists did not - that a world system very favourable to America was on the line. And it was not, as they seemed to think, just a matter of military might. We knew that if the war undermined confidence in the power, good faith and common sense of the United States, that could lead toward disastrous changes on the financial front.

Four years in and with no end in sight, that risk may finally be catching up to the almighty dollar.

Guardian Newspapers Limited 2006

What Kind of Economy?
by James K. Galbraith
February 16, 2007
by the Nation
commondreams.org

In a debate over the Democratic future, no one should confuse the Hamilton Project with the Republican past. Robert Rubin and his associates have invited a broad dialogue on economic inequality and strategic investment, and on many specific policy questions--including education, health, taxes and wages--they will define the high-profile, wholly respectable neo-Clintonian position in the season ahead. There's nothing wrong with that.

But these advances come at a price, which will be exacted in two areas: the world trading system and domestic fiscal policy. Both of these are far more fundamental to the Hamilton mission than any particular social policy reform. Indeed, one purpose of the Hamilton Project, it seems clear, is to propose just enough creative social advances--such as wage insurance, better teacher pay and healthcare reform--so as to divert discussion from the bedrock commitments to free trade and a balanced budget.

Progressives shouldn't let this happen. And yet we have our own work to do: Our trade position is obsolete, and there is for now no clear progressive fiscal policy. We need to be talking trade and budgets, not simply because they are too important to bargain away, and not just to contest Rubin's worldview, but to build one of our own that is realistic, compelling and also serves larger purposes, including environmental survival and social justice.

On trade, the Hamiltonians favored the North American Free Trade Agreement, while most populists and progressives opposed it. This fight has been replayed endlessly, and it continues to color the arguments over the Central American Free Trade Agreement and the bilateral free-trade agreements now under negotiation. But as some NAFTA opponents, notably Jeff Faux, have recognized, it's time to get over it. Whether NAFTA created or cost jobs initially, the economies of Mexico and the United States are now about as integrated as they are going to get, and the effect is basically finished. As a result, Mexico's economy grew with ours in the late 1990s and went bust when ours did in 2001. Almost all discussion of outsourcing now focuses on China and India, two countries with whom we do not have, and will not get, free-trade agreements.

More broadly, the late 1990s showed two things about trade agreements. First, they don't prevent full employment in the United States: We went smartly to a full employment economy in 1998 and stayed there for three years. Second, they don't do much good either. Compared with the productivity gains engendered by full employment in the boom, those brought on by NAFTA in the mid-1990s were trivial if detectable at all.

So what's the debate these days really about? Why are the Hamilton Projectors so passionate about "free trade"? Perhaps the reason has something to do with the industries they come from. US finance, insurance and the "intellectual property" trades want "free-trade agreements" (and a successful conclusion of the Doha Round of World Trade Organization negotiations) because they want access to other markets and stiff enforcement of trademarks, copyrights and patents. In addition, agribusiness--another sector at the forefront of current trade talks--wants every wheat, corn, rice and cooking-oil consumer it can find.

Trade agreements pushing this agenda don't cost American jobs. The problem is that they are predatory. Thus a main effect of forcing open agricultural markets in Central America will be to displace small corn and bean farmers from the land, increasing migration: As food moves south, people move north. A main effect of the TRIPS regime--the international agreement on intellectual property rights--is that it has obliged poor countries to pay extortionate prices for medicines. A main effect of open financial markets is capital flight and tax avoidance. All of these are well worth opposing, without the crutch of a pretext, and a new agenda might start with this slogan: "Get the fraud out of free trade."

Trade with China is another matter, for here is a fast-growing country that benefits hugely from US trade. China thus poses the question of trade without posing a question of trade agreements. And China has many people very worried.

On China the Hamilton Project--otherwise resolutely against interventions--has harnessed widespread anxieties to its own objectives. The Hamiltonians endorse the idea that China is a challenge. It is a challenge, they say, to be dealt with not via tariffs or quotas but by a massive revaluation of the Chinese currency, the renminbi (RMB), for which liberal senators like Charles Schumer and economists like Tom Palley also forcefully call.

Would a big RMB revaluation solve America's China-trade "problem"? Well, it might hit China's exporters (and also, inevitably, its workers) hard. Multinationals might migrate to other low-wage countries; American importers might seek other sources of supply, in other corners of the Third World. But this much is sure: Not a single low-wage job would return to the United States. So, American consumers could be harmed, while American workers wouldn't be helped. One has to ask: What gives? Why is this an issue for the progressive agenda?

Who really benefits from the pressure that our Treasury Secretary from Goldman Sachs, Henry Paulson, has been putting on Beijing? Well, speculators have flooded Chinese property markets in the past few years, contributing to a massive bubble in Shanghai and elsewhere. (China's trillion-dollar asset reserves come largely from sterilization of those investments--a central bank maneuver to insure that dollars do not circulate in China--and not just from its trade surplus.) If Paulson succeeds, they clearly would make out nicely. It may be that some of those speculators live in New York. That may explain Paulson's call--and Schumer's support--for an RMB revaluation. But it's not a reason for the rest of us to jump on board.

The facts are clear: NAFTA is a done deal, and China is a success story we have to live with. Progressives need a trade narrative that moves past these two issues. Broadly, this means accepting manufactured imports and dropping the idea that we can control--or that it matters much--who assembles television sets or stitches shirts. Standards to guard against flagrant abuses such as child and prison labor are fine, but it's an illusion to think they will, or should, dent the flow of goods from China. A progressive trade agenda should focus, instead, on building stronger world markets for our exports, and in ways that do not trample on the needs and rights of poor people in poor countries. That should provide plenty of room for future fights with free-trade absolutists.

At home, we have better things to do. We should specifically focus on creating new jobs, in sectors (including high tech, education, healthcare and energy conservation) that meet national needs and build world markets for our goods. We should rebuild our cities and transport systems, protect our vulnerable Gulf Coast and otherwise get on with meeting the challenge of climate change. And that raises the second big problem of the Hamilton agenda, which is its insistence on balancing the budget.

Today, many Democrats are converts to balanced budgets and pay-as-you-go budget procedures, and many accept that when Democrats return to power, deficits must be cut before anything else is done. But the world has changed, and while this formula appeared to work for Bill Clinton, it probably won't work for Hillary if she gets that far. Clinton was able to preside over a largely private-sector boom--the information-technology bubble--that can't be repeated, in a time when we weren't yet aware of the wolves at our door. But, just as Alexander Hamilton proposed to build America with public works, today we require major public investment for the vast challenges we face. Of these, as Al Gore warns, the largest is to transform our patterns of energy use and defend against climate change.

If we fail here, then in a century or so some of our coastal cities and many others elsewhere will flood--as New Orleans did--suffering irreparable damage. Around the world, food supplies will fail and populations will move--massively, uncontrollably, miserably. If future generations mean anything, the benefits from preventing this are clear. The necessary scale is huge. The work must start soon. It makes sense to borrow to do this job, especially given the prevailing low long-term interest rates. If we insist on paying from current revenue, it won't happen. And that is what is at stake, just to begin with, in the argument over balancing the budget. There are other important issues, but this one is quite sufficient to make the point.

Thus, even if running budget deficits has important economic costs, we ought to pay them in order to meet our most pressing objectives, on climate change and other priorities. But in fact running moderate fiscal deficits has no discernible costs. In particular, the claim that current deficits are raising interest rates can't be backed up even by the best efforts of those who believe it. In a paper last year, I examined the detailed work on this topic of two leading Hamiltonian economists, Bill Gale and Peter Orszag, and showed that their own econometrics found no such effect. When I pointed this out, Gale and Orszag reacted with silence.

Deficit-fetishism also bolsters the perennial campaign to cut the Social Security system, now taken up by the alarmist David Walker, head of the Government Accountability Office, and by Ben Bernanke, chair of the Federal Reserve System. Here the Hamilton Project strategy document is extremely reticent--it barely mentions Social Security by name. But it is riddled with code words about the long-term "entitlement problem," which, it avers, can be solved only by a "bipartisan commission" acting on well-known options, behind closed doors. This is not reassuring.

In fact, Social Security is in better financial shape than ever, holding vast stocks of Treasury bonds on which interest can and will be paid. No economic or budget imperative requires that Social Security be cut, now or later. In private discussion Hamilton leaders let on that they understand this. But they are prepared, nevertheless, to include Social Security cuts--pension cuts for America's elderly, many of whom would otherwise be poor--in some sort of grand deficit bargain. Progressives must be absolutely categorical in rejecting any such deal.

Healthcare costs are a big problem. But they are a problem affecting both public and private healthcare, not Medicare and Medicaid alone. And it's highly unlikely that the problem of rising healthcare costs will extend to the point projected by Bernanke and Walker, who imply that healthcare will absorb one-third of the GDP within a generation--two or three times as much as in any other country. If that happens, as Dean Baker, co-director of the Center for Economic and Policy Research, has pointed out, we could cost-effectively contract out medical care to the Canadians and the French.

Is there anything really wrong with fiscal policy right now? Present deficits are small, and it's obvious from low long-term interest rates that financial markets do not take the exploding-deficit stories seriously. The greater risk is that a continued fall in home-building and prices could bring on recession, requiring a more active fiscal policy and bigger deficits than we have now. Sure, Congress should let the Bush tax cuts mostly expire, and if one wants to raise future tax rates just to make the long-term projections look better--well, fine. But that's a cosmetic gesture, with no current impact, and easily changed if need be by any later Congress. Our main task is to deliver on the real needs of the country. If we do that, fiscal transgressions will be forgiven. If we fail, fiscal probity will neither excuse nor save us.

Finally, progressives should turn their energies to a challenge that the Hamiltonians never discuss and seem determined to ignore, and that is to devise effective new rules for the global financial system. For the world is changing in ways that will not permit a return to the go-go Wild West of international finance of the 1990s, even if Robert Rubin and his colleagues do return to power in 2009.

The 1997 Asian crisis and the 1998 Russian crisis marked--it is now clear--the last days of an illusion: that unfettered global credit markets can govern themselves. Russia has since retreated into itself, Asia is developing a sophisticated substitute for the Asian Monetary Fund we denied them a decade ago and most of Latin America has rejected neoliberal globalization at the polls, while new structures of mutual assistance for development are gradually being built. The chaos of a financial system run by bankers alone is therefore gradually yielding to new systems of control.

We should welcome this development. We should oppose efforts to introduce new instabilities--which is basically the issue today between Wall Street and China. The challenge before us is not to restore the global dominance of American banks. We should not play junior partners in that game but instead should help plan for a smooth transition to something better--protecting as far as possible not symbols of power but the broad benefits of our standard of life.

As part of this, a progressive economics needs to break with the polite traditions of our subject in one other way. We cannot avert our eyes, as many economists habitually do, from the disaster of Bush's foreign policy. The calamity in Iraq is plainly causing the world to rethink how much it can rely on American leadership, and this has consequences already visible in the decline of the dollar. If there is a war with Iran, the rethinking will accelerate, and what we've seen so far could be only a harbinger of greater difficulties still to come.

Although a collapse of the dollar reserve system probably isn't imminent, this issue will not disappear, even if Bush's policies are decisively rejected in 2008. Left unattended, it could lead to a repeat of the 1970s, when progressive hopes were knee-capped by international financial instability, a declining dollar and externally inspired inflation.

This problem defies easy solutions, but we who are progressives, who are populists, who are concerned about the economic security of working Americans, of the country as a whole and of the world system, should be thinking about them. We should be working, with international partners, on blueprints for a new system combining mutual and collective security with economic stabilization. For only this can foster sustainable development worldwide, while at the same time permitting us to attend to social justice and the environment at home.

This is not a job that private banks want to turn over to us. It is therefore not going to be found on the agenda of the Hamilton Project. That is a powerful reason that it should be on ours.

James K. Galbraith's Unbearable Cost: Bush, Greenspan and the Economics of Empire has just been published by Palgrave-MacMillan.

“…Dennison already had a firm idea as to what was wrong with the economy. And so had I. My view derived from the hitherto described classical orthodoxy of Alfred Marshall as modified by the recently published work of two economists, Edward H. Chamberlin of Harvard and…Joan Robinson of the University of Cambridge…

Economists had log conceded that monopoly was a flawing exception to the benign role of the market. The monopolist’s output was smaller, his prices higher, that the competitive ideal. But a monopoly, one firm with the entire output of a recognizably distinct product, was hard to find. Apart from those supplying electricity, gas and telephone service and thus subject to government regulation, the Aluminum Company of America, ALCOA, singled itself out in those days as the major example. Accordingly, on recurred to it in instruction ad nauseam. Monopoly, if bad, was very rare.

Chamberlin and Robinson showed that a few firms, an oligopoly, could produce the same (or a similar) result as monopoly-prices too high, production to small….

Both monopolistic competition and oligopoly established themselves with astonishing speed in the economic orthodoxy. And unlike monopoly, oligopoly and monopolistic competition were not exceptional. One only to look about to see them almost everywhere—in automobiles, steel, oil, chemicals, rubber, copper, toothpaste, even the monopoly that the neighborhood pharmacy exercised over its shopping area. Oligopolistic and monopolistic competition dominated modern markets.

…Addressing Dennison’s need to know what was wrong with the economy, I told him free competition had given way to oligopoly and monopolistic competition, and because of the latter too many resources were being wasted on advertising and salesmanship. The shortfall in production from these defects caused the depression from which the United State and the world then suffered. The remedy was more competition. I wrote a lengthy paper explaining the affirming this revelation.”

“Dennison’s view was very different. He saw incom moving out from the production of goods in two broad streams. On stream went to people of modest income and was likely to be spent. The other went to the more affluent or the business enterprise, and this was likely to be saved. There was a spending stream and a savings stream, and these terms, used without cluttering verbs or predicates, were Dennison’s own. Depression, he believed, was caused by the nonspending of the income in the savings stream. The remedy or partial remedy was to shift taxation from income that was being spent or was on its way to be spent to income that was on its way to be saved—from a sales tax, as one example, to the corporate or personal income tax. ”

To anyone properly learned in economics, it would be hard to imagine a more horrifying idea. Well over a century earlier Jean Baptiste Say, the great French economist, had formulated Say’s Law of Markets, which established that all production created the purchasing power by which it could be bought. All of the income from the sale of a product accrued to someone, somewhere, in wages, payments for raw materials, interest or profits. And in doing so, it provided the purchasing power to buy what was produced. Were some of these receipts saved, it made no difference: someone else would borrow and spend the savings, and if they didn’t, the price of the product would automatically adjust itself downward so the reduced expenditure would still be sufficient to clear the market. In 1936, it was not only wrong but professionally unwise to reject Say’s Law. It was a litmus by which the reputable economist was separated from the crackpot. The crackpot failed to pursue income from the sale of a product on to its use; thus his simplistic conclusion that there could be a shortage of purchasing power in the economy. Since I took seriously my reputation as well as my commitment to economic truth, my dilemma, given Dennison’s heretical vision, was a difficult one.”

“…Earlier that year “The General Theory of Employment Interest and Money” by John Maynard Keynes had been published in the United States. In the very same weeks that I was writing my brief for my views on competition and thus refuting the error of Dennison, I was reading “The General Theory.” As I did, I discovered that Keynes was with Dennison and not with me. His explanation of oversaving was much more sophisticated that Dennison’s but in practice consequences precisely the same. There could be unspent savings; when they appeared, prices did not adjust smoothly down to ensure that the same volume of goods would be bought by the reduced (after-saving) purchasing power. Instead output and employment fell until reduced profits, increased losses and need to spend from past savings ensured that all income from current production or its equivalent was spent. A new economic equilibrium was thus established, one with a lot of people out of work-the underemployment equilibrium. I was shaken. This was not the primitive instinct of a businessman: this was the sophisticated case of a greatly renowned economist.”
“A Life In Our Times” Galbraith pp. 63 to 66.”

Chávez: 'Galbraithiano'
by GREG GRANDIN The Nation
October 15, 2007

Last year, the New York Times reported that Hugo Chávez, in his
speech before the United Nations--the one in which he called George
W. Bush the Devil and urged Americans to read Noam Chomsky--expressed
regret that he hadn't had a chance to meet the linguist before he
died. A call to Mr. Chomsky's house, the Times writer quipped, found
him very much alive. The Times, though, had to issue a quick
correction when, upon review of the original Spanish, it became clear
that Chávez was referring not to Chomsky but rather to John Kenneth
Galbraith, who had indeed passed away a few months before.

There is something more than a little ironic about this incident,
where the press, in a rush to ridicule the controversial Hugo Chávez,
lost John Kenneth Galbraith in translation, for it is exactly the
Harvard economist's brand of New Deal social democracy, itself long
expunged from public discussion, that would allow for a more honest
consideration not just of Chavismo but the broader Latin American
left of which it is a vital part.

Chávez has described himself as a "Galbraithiano" and says he started
reading the economist, whose books have been available in Spanish in
Latin America since the 1950s, as a teenager. Long before he began
referring to Chomsky and other currently better-known political
thinkers, he cited Galbraith to explain his economic policies; at the
beginning of his presidency, in 1999, for example, he urged a
gathering of Venezuelan industrialists to support his mild reform
program, quoting Galbraith to warn that if they didn't, the "toxins"
generated by "extreme economic liberalism" could "turn against the
system and destroy it."

Galbraith is celebrated not just by Chávez but by a wide range of
reformers, including Ecuador's new president, Rafael Correa, himself
an economist. This popularity reflects a growing enthusiasm for the
state regulation of the economy that Galbraith prescribed. As Latin
America struggles to remedy the damage caused by two decades of
failed free-market orthodoxy--which has produced dismal growth rates
and widespread social turmoil and misery--politicians are
rehabilitating key macroeconomic principles unthinkable a decade ago.
Argentina, for example, has generated the region's most impressive
growth by lowering interest rates, maintaining a competitive currency
exchange rate, enacting price controls to stem inflation and driving
a hard bargain with international creditors, thus wiping out
two-thirds of the country's external debt and freeing up state
revenue for social spending and investment.

Galbraith has attracted admirers in Latin America not just for his
macroeconomics but for his critique of corporate monopolies. His
belief that corporations are political instruments with the incentive
and ability to corrupt democracy resonates today in a region where
much of the economy is controlled by foreign firms and where
corporate TV (which Galbraith believed had little to do with free
speech and everything to do with manufacturing consumer demand) has
become a bulwark of elite privilege. Galbraith's solution was to use
the state to set up a system of what he called "countervailing
power," enacting aggressive union protection, unemployment insurance,
subsidies, welfare and minimum wage guarantees to counter monopolies
and force a more just distribution of national wealth.

In Latin America, a similar version of democratic developmentalism
held sway in the early 1940s. Reformers from across the political
spectrum believed the region's oligarchy to be an obstacle to
modernization and thought the best way to weaken its deadening grip
was to empower those in its thrall. But the cold war cut short this
democratic experiment, as Washington threw its support behind
reactionary allies in order to insure continental stability.

Developmentalism continued into the 1970s but under the auspices of
either authoritarian or military regimes, which responded to demands
for a more equitable share of power and wealth with increasing
repression, culminating in the wave of terror that swept the region,
from Chile to Guatemala, in the 1970s and '80s. This violence, which
in many countries decimated the left, made possible the radical
free-market economics that reigned throughout Latin America during
the last two decades of the twentieth century.

The re-emergence of the Latin American left signals a revival of
democratic developmentalism, but with a key difference. While in the
1940s reformers sought to extend political power through unions and
peasant associations vertically linked to parties or leaders, today
they rely on a diverse, horizontal array of "new social movements" to
counter their countries' extreme concentration of wealth and
political power--Brazil's Movimento dos Trabalhadores Rurais Sem
Terra, for example, or Bolivia's Movimiento al Socialismo, less a
political party than a coalition of social movements, or Ecuador's
powerful indigenous groups.

But it is Venezuela that has the most advanced partnership between a
state reclaiming the right to regulate the economy and a diverse
array of antineoliberal social movements. What sets Chavismo apart
from past populist experiments in Latin America is its heterogeneity.
It is impossible to spend any time in urban barrios, among co-op
members, community media and other cultural activists, or in the
countryside with peasant organizers and not be impressed with their
diversity of interests, civic investment and commitment to building a
more humane society.

The countervailing power of left civil society organizations--many
existed before Chávez's ascendance; some were founded afterward--has
turned Venezuela into a vibrant democracy and is key to understanding
not just the government's survival in the face of a series of
formidable antidemocratic assaults but its evolving program, as many
of its initiatives come not top-down but from the grassroots. Last
December a respected Chilean polling firm found that in Latin America
only Uruguayans held a more favorable view of their democracy than
Venezuelans.

The question Venezuela faces is how to institutionalize this
relationship between a fortified executive and an empowered citizenry
while protecting individual rights and limiting corruption. Debates
are under way over a series of constitutional reforms, to be voted on
in a national referendum in December, that attempt to do just that.
While the international media have focused on a proposal to remove
presidential term limits, other initiatives would greatly strengthen
community councils, created two years ago as the building blocks of
Venezuela's "participatory democracy," in charge of a range of local
issues, from education and healthcare to sanitation and road repair.
While critics see the councils as another mechanism for Chávez to
strengthen his power, the Washington Post writes that in "the
neighborhoods, it's hard to find anything but bubbling enthusiasm."

Could Chavismo devolve into old-style authoritarianism? Of course.
But the record so far indicates otherwise. For all his rhetorical
excess, Chávez has presided over an unprecedented peaceful social
revolution, doubling his electoral support in the process. Save for
Chile's Popular Unity government--which never received nearly as much
approval at the polls as Chávez's Bolivarian experiment has--it is
hard to think of another instance where such a profound reordering of
political and economic relations has been ratified so many times at
the ballot box. This is a remarkable accomplishment, for revolutions,
by their nature, tend to generate crises that drain away much of
their initial support, producing cycles of violence and repression.

This achievement is rarely reported on in the US media. Chávez often
repeats an observation by one of his favorite economists to bring
home the point. "Never before," the Venezuelan president quotes
Galbraith as saying, "has the distance between reality and
'conventional wisdom' been as great as it is today."

Greg Grandin is the author of Empire's Workshop: Latin America, the
United States, and the Rise of the New Imperialism (Metropolitan). He
teaches history at NYU.

“But if the producer reached out to influence or shape consumer wants, this socially admirable concept was in peril….This could not be”. The New Industrial State.(1976)p. xxiii.”

Big business rarely supports the free market. That's why they support regulations. It keeps the little guy, the upstart out of the market. We are not lacking in regulation. Fascism is a form of big-government.

“The two parts of the economy—the world of the technically dynamic, massively capitalized and highly organized corporations on the one hand and the hundreds of thousands of small and traditional proprietors on the other—are very different. It is not a difference of degree but a difference, which invades every aspect of economic organization and behavior, including the motivation to effort itself. It will be convenient, even in advance of more formulation, to have a name for the part of the economy, which is characterized by the large corporations. One is readily at hand; I shall refer to is as the ‘Planning System.’ The planning system, in turn is the dominant feature of the New Industrial State.”
The New Industrial State.(1976) p. 9

The GOP's December Surprise
Is the GOP cooking the books to avoid recession till after Election Day?
By James K. Galbraith
July/August 2008 Issue

Is the worst over? Are we on the road to recovery? Will the next president take office against a backdrop of economic improvement, as Bill Clinton did in 1993? Or has something deeper and more intractable gone wrong?

Early this year, the optimists, including Citigroup chairman Bob Rubin and Treasury secretary Hank Paulson, argued that the slowdown was short-term and that a "stimulus" package should be "targeted and temporary." This with rare haste the Democratic Congress enacted. As a result, most taxpayers got one-time $600 checks in May, prefigured by bubbly messages touting "Good News!" if you filed your taxes electronically.

The rebate isn't the only little Dutch boy thrown headlong at the dike this election year. Government spending, especially for defense, will be up: Military spending as a share of gdp is expected to grow by $75 billion in fiscal 2008, enough to neutralize a 0.3 percent decline in gdp. Dick Cheney was secretary of defense for Bush 41; just before the 1992 election he engineered a big run-up in outlays, as the military restocked following the first Gulf War. (It was exposed in the first Clinton "Economic Report.") Is the Pentagon up to that trick again? I'd be astonished if it were not.

Under intense pressure from panicky bankers, Ben Bernanke cut interest rates relentlessly from August 2007 through the spring of 2008. I don't accuse Bernanke of playing politics. But it's worth noting that this is what usually happens. In presidential election years when Republicans are in office, the Fed regularly and predictably pursues a more expansionary policy than when Democrats rule—after controlling for differences in the rates of inflation and unemployment. (I made these calculations myself; see the chart.) Maybe they just can't help themselves.

But much of the ordinary effect of interest cuts on new lending—like a rebound in construction and automobile sales—didn't happen this time. That's because the fall in home prices (and therefore the value of collateral) overwhelmed the benefit of cheaper money to the banks. And the banks barely cut mortgage rates, so consumers saw no benefits at all. Lower interest rates did cut the value of the dollar, however, and that promotes exports and foreign investment. (These days New York Times real estate listings come with a currency converter.) It also boosts the stock market, since multinational firms can report their (unchanged) foreign income as higher dollar earnings.

Possibly all this stimulus will ward off the two-quarter decline that has historically defined a recession. Don't be surprised: Republicans haven't had an election-year slump since 1960. On the other hand, the National Bureau of Economic Research, which has the official call, may describe the early spring as a recession anyway. Republicans will welcome that, too, so long as they can plausibly call the summer a "recovery." Even if they can't stop a recession, they may be able to make it short and shallow enough, this year, to put John McCain in the White House. But all this brings up an important question—what of next year?
You get what you pay for

How Fed's election-year rates varied from nonelection years when the incumbent was:
Rates by Party

1984-2004. Source: Galbraith et al report, page 20.

No matter how effective the stimulus, two enormous clouds remain for whoever becomes president: the housing slump and the banking crisis. Both are far from being finished yet.

The problem with a housing slump is inventory. Unlike factories and Internet startups, shuttered houses don't go away. No one declares them obsolete. They aren't boxed up and sent to China. They remain, a drag on the market, decaying and pulling down property values for years. Here in Texas, housing values slumped with the S&L crisis and the oil bust of 1985 and did not recover until around 1993. That slump clobbered the oil patch but was barely felt anywhere else. This slump is the reverse—it's driving down housing prices just about everywhere except Texas, where the scars of the last bubble helped keep the recent one under control.

Nationally, the subprime debacle is blowing away the homeownership gains of the last few years. Those abusive mortgages were deliberately targeted at vulnerable, even desperate, people who could be steered into financial death traps. Lenders didn't care, because with the help of fraudulent appraisals, the loans could be off-loaded quickly in packages bought by greedy or gullible investors, including your pension fund. Poor people got hit on the front end; 1.5 million homes entered foreclosure last year. Middle-class people got it on the return volley.

And middle-class homeowners are now getting hit a second way: in the declining value of their homes. You don't have to be holding a subprime to find yourself underwater. That means that home-equity loans will dry up. (As of April, California homeowners in default were already a median of eight months behind on those loans.) Many people will be tempted to walk on their houses and mail the keys to the bank. Incidents of the foreclosed expressing themselves to their lenders by yanking the plumbing and the wires on the way out the door are on the rise, as is arson by desperate homeowners, according to the Los Angeles Times. Will students, small businesses, and other borrowers still be able to get credit when this is over? God only knows.

The mechanisms of mortgage finance and home-equity drawdown haven't simply been damaged. That well has been poisoned. Having largely outsourced mortgage originations to companies like Countrywide who didn't care whether the borrowers had good credit, the banking system cannot easily go back to its old method of making loans to creditworthy people and contenting itself with the interest paid back over many years. And who would trust them, anyway, if that's what they claimed they wanted to do?

Then there's another problem: The banks no longer trust each other. Last August, as mortgage-backed securities unraveled, finances froze up worldwide. Why? Because banks knew how much undisclosed junk they had on their own books. Who could say what the next fellow had? Overnight lending between banks—the process that ensures that every bank has funds when it needs them—fell apart. This is a very big deal. If banks will not lend money to each other, why (except for the blessings of federal insurance) should anyone else leave their money to them? Economists like me wait entire careers to study events such as these—which should provide no comfort to anyone else.

Since August, America's big banks have been wards of the Fed, and those in Europe equally so of the Bank of England and the European Central Bank. The system survives because central banks keep the lending windows open, and the result is that—except for one instance in Britain—the public has not pulled out of the banks. Let's be clear. The private financial markets did actually fail. It's only the fact that the public trusts government that keeps the system from dissolving in panic. But even if the Fed and its counterparts can hold the line, the problem of mistrust among the big bankers won't go away soon. And that means we're at the end of the age of credit expansions, for now.

As for next year, good luck. No matter who becomes president, there probably won't be another tax cut. Instead, cries for "fiscal responsibility" will be heard. States and localities, hit in 2008 on their property taxes, will cut their spending. Consumers, hit hard on their home equity, will cut back on new borrowing (which they probably couldn't get anyway) and pinch pennies however they can. Businesses won't even think about new investments.

In this situation, more cuts to interest rates—the only applicable tool the Fed has—don't work well. And they weaken the dollar, which raises inflation. What is gained by cheaper money will be lost in higher gas and food prices. But if the Fed reverses field and defends the dollar, exports will slump and the housing crisis will get worse. There's no easy way out.

Thus far the dollar has fallen, but it hasn't collapsed. Will it? There are two big threats. The first is the financial crisis itself, which is a problem of trust not only in the ordinary borrower, and not only in the banks, but in the American dollar. Why is the rest of the world nervous? Because the fundamental trust that they have always had—that the United States was a safe place to put your money—has come into question.

The second threat, not often mentioned, is our reckless foreign policy, including the invasion of Iraq, bellicosity toward Iran, and the ongoing subtext of hostility toward China. Since the Middle East has the oil and China holds our debts, all this is spitting in the soup, big time. It may not by itself wreck the financial system. But it doesn't exactly build up the reserve of good will that we may need when the financial going gets tough.

For half a century much of the world believed that we provided security under which they too could prosper; many no longer think so. Today, our country, like our banks, has a problem of global trust. Unlike the banks, we have no higher power to keep things going if we screw up.

James K. Galbraith is a contributing writer for Mother Jones. His new book, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, comes out in August.