This
surely is the hour of John Kenneth Galbraith, grand old man of American
economics. But those who travel to the leafy suburbs of Boston in the
expectation of a giant and gloating "I told you so" will come away
disappointed.
Amid
the debris of Enron and WorldCom, the lifelong critic of unbridled corporate
power exhibits none of the satisfaction of a prophet whose warnings have come
to pass.
"Those
of us who've concerned themselves with this matter cannot take satisfaction for
discovering that we were at least partly right. That's too much like seeing a
Colorado forest fire and knowing there was inadequate protection." The
size, too, of the problem has astonished him.
Galbraith
is 93 now, close to the end of one of the more remarkable American lives of the
20th century, in which he has been professor, author, ambassador, adviser of
Democratic presidents from Roosevelt to Johnson and perhaps the most famous
left-wing economist of his age.
These
days, frail health forces him to receive visitors in an upstairs room in his
rambling, wood-panelled house on a side street behind the Harvard University
campus. On a sun-dappled summer afternoon, this Cambridge in North America
reminds you irresistibly of north Oxford in England, with its quiet streets and
shady gardens. But if the body is frail, the mind is as sharp has ever. Indeed,
he has just finished a book dealing, among other things, with corporate fraud.
For
his influence and his fame Galbraith never won a Nobel prize – perhaps because
he writes too clearly and too elegantly in a field where impenetrability has a
habit of being confused with genius. Even John Maynard Keynes, at whose knee
Galbraith went to the English Cambridge to study in the 1930s, has not been
spared his pupil's tongue. Galbraith once criticised the "unique
unreadability" of the General Theory, noting acidly that "as
Messiahs go, Keynes was deeply dependent on his prophets". But for all his
historical perspective, Galbraith is reluctant to rank this crisis in
comparison with other watersheds of American capitalism: the depredations of
the robber barons and the ensuing anti-trust legislation, the stock market
crash of 1929 and the excesses of the 1980s (in retrospect a trailer perhaps of
the even greater follies of the 1990s).
"We
can't say how serious this is yet, and anyone who makes such a prediction is
suspect," he says, eschewing the giant soundbite dangling in front of him.
"I can only say I hadn't expected to see this problem on anything like the
magnitude of the last few months – the separation of ownership from management,
the monopolisation of control by irresponsible personal money-makers."
Time and again as we talk, the author of American Capitalism and of The
New Industrial State, the chronicler of The Affluent Society,
returns to the same two points. His first is that the large modern corporation,
as manipulated by what he calls the "financial craftsmen" at Enron
and elsewhere, has grown so complex that it is now almost beyond monitoring.
Second,
and consequently, these new entities "have grown out of effective control
by the owners, the stockholders, into nearly absolute control by the management
and the individuals recruited by management". And in the process, he
insists, this latter group has "set its own compensation, either in the
form of salaries which can get to fantastic levels, or of stock options".
Such
was their power that until they carried their behaviour to extremes and the
companies collapsed, "there was almost no criticism from the shareholders
– the owners". Galbraith detects something of the conspiracy of silence he
recounted so memorably in his book The Great Crash: 1929, first
published in 1955 but as readable today as it was then. "They remained
very quiet," he wrote of the financial luminaries of that era. "The
sense of responsibility in the financial community for the community as a whole
is not small. It is nearly nil. To speak out against madness may be to ruin
those who have succumbed to it. So the wise on Wall Street are nearly always
silent. The foolish have the field to themselves and none rebukes them."
And
so it has been today, just as 73 years ago. "There's still a tradition, a
culture of restraint," he says, "that keeps one from attacking one's
colleagues, one's co-workers, no matter how wrong they seem to be." Amid
the current wreckage, this unrivalled student of American business through the
ages can identify few crumbs of comfort. One perhaps is that 21st-century-style
corporate "larceny" has by and large not infected older established
companies. Another is that if Enron and the rest were bad, the accounting
industry was worse still.
Galbraith
still produces aphorisms to die for, including what may become the epitaph of
this age of feckless book-keeping: "Recessions catch what the auditors
miss." But behind the quip lie genuine shock and anger. "I've been
tracking this matter for a lifetime, and my greatest surprise was the sheer
scale of the inadequacy of the accounting profession and some of its most
prominent members. I've been looking at auditors' signatures all my life, but I
will never again do so without some doubts as to their validity. There must be
the strongest public and legal pressure to get honest competent
accounting." However belatedly, Galbraith believes that may happen.
Indeed, the whole philosophy with which he is identified, of corporate
regulation and greater public control of the private sector, may be edging back
in favour, two decades after it went out of fashion under Ronald Reagan.
"One
of the vocal critics of corporate behaviour," he notes with a wry smile,
"has been none other than George Bush. There's no doubt these scandals
have altered the mood of the country, and altered the notion that there can be
no interference with the free enterprise system. There'll be a search for ways
in which the management can be made more responsible, both to
shareholders/owners and to the community at large." Steps must be taken,
says Galbraith, so that boards of directors, supine and silent for so long,
"are clearly the representatives of stockholders' interests, and are
competent to exercise that responsibility". Much of this will feature in
his new book entitled, rather bafflingly, The Economics of Innocent Fraud,
due to be published next year.
Talking
to Galbraith, you realise that the "innocent fraud" embraces the
entire economic system, no less – a system in which, in many respects,
"belief has no necessary relation to reality". Almost everyone,
economists included, is unwittingly accomplice to the fraud. One comforting
delusion, says Galbraith, Keynesian to the core, is that the central bank can
control the economy simply by tweaking interest rates.
"Nothing
is more agreeable and reassuring than that the Federal Reserve System and the
excellent Alan Greenspan can guide and stabilise the economy by small changes
in interest rates. We've hoped and dreamt of this since 1913 [the year the Fed
was set up up by President Woodrow Wilson], but it hasn't worked in any
predictable way." Instead Galbraith cites the Second World War and the
years when he was at the heart of policy-making, running the Office of Price
Administration, surely the most interventionist agency in the history of US
economic policy-making. The Fed was to all intents and purposes set aside for
the duration of the war as the government, not the market, set price levels.
Business loathed the OPA, but it worked.
"We
came through that period of great expenditure and disaster with no memory of
inflation." If the Fed's role is one false assumption, another – now so
shockingly exposed – is that corporations always tell the truth. Even the name
of the game is a deception, Galbraith argues. "It's no longer called
'capitalism'. That has an inconvenient history. Now it's known as 'the market
system', supposedly controlled by consumers – but in a world where the greatest
intellectual and artistic talent goes into the management of consumers."
Recent events have forced some rewriting of the book, but Galbraith is now
confident he has the emphasis right.
Capitalism,
though, is nothing if not adaptable. It has to be, with so much riding on the
system for almost everyone. In the course of his life, Galbraith has seen America
go full circle, from the harsh neglect of the Depression to the New Deal and
now back – to some extent at least – to the ruthless ways of the past.
"The national mood is less fair today," he says. "We are far
more tolerant of a large takeover of revenue by the rich." On the other
hand, "the conscience of the community has improved greatly.
"That
was the achievement of Roosevelt and the New Deal. Public attitudes were never
quite the same again." But then Galbraith leapfrogs 70 years and a dozen
presidencies to the massive Bush tax cuts of 2001 to reinforce his point that
nothing very much has changed. "It is still politically safe to be very
rich," he says, citing what he calls the "imaginative
developments" of the Bush administration as a prime example.
"Assuming
they will not be in power indefinitely, they are taking the interesting step of
enacting tax legislation not for the immediate future but for all of a decade
hence. We not only legislate for the affluent, we do it for their permanent
advantage." And suddenly, once more, the impish delight of the phrasemaker
bursts through. "How's that?" he asks with the sly chuckle of an
iconoclast 93 years young.