The Legacy of John Kenneth Galbraith

STEVEN PRESSMAN

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781317982036
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

When John Kenneth Galbraith passed away on April 29, 2006, the economics profession lost one of its true giants. And this is not just because Galbraith was an imposing figure at 6 feet, 9 inches tall. Throughout his life, Galbraith advised Presidents, made important professional contributions to the discipline of economics, and also tried to explain economic ideas to the general public. This volume pays tribute to Galbraith's life and career by explaining some of his major contributions to the canon of economic ideas. The papers describe the series of unique contributions that Galbraith made in many different areas. He was a founder of the Post Keynesian view of money, and a proponent of the Post Keynesian view that price controls were necessary to deal with the problem of inflation in a modern economy where large firms already control prices and prices are not determined by the market. He promulgated the view that firms manipulate individual preferences and tastes, through advertising and other means of persuasion, and he drew out the economic implications of this view. He was a student of financial frauds and euphoria, and a forerunner of the Post Keynesian/Minskean view of finance and how financial markets really work. This book was published as a special issue of the Review of Political Economy.

John Kenneth Galbraith and the Post Keynesian Tradition in Economics

STEVEN PRESSMAN

Department of Economics and Finance, Monmouth University, West Long Branch, NJ, USA

ABSTRACT This paper discusses some of the key contributions of John Kenneth Galbraith to economics and puts them into an historical context. It argues that the work of Galbraith should be recognized as making major contributions to the Post Keynesian paradigm. His work expands on the contributions made by John Maynard Keynes and is consistent with the main ideas of Post Keynesian thought. Much of his work can be thought of as a Post Keynesian microeconomics that needs to be added on to the Post Keynesian macroeconomics begun by Keynes. This work encompasses an understanding of how people behave and how firms behave, a recognition of the importance of uncertainty in the real world, and an emphasis on income effects being more important than substitution effects. The paper then points out how Galbraith has provided a Post Keynesian approach to key macroeconomic issues. The paper concludes with a brief summary of the other articles that make up this special issue to honor John Kenneth Galbraith on the hundredth anniversary of his birth.

1. Introduction

Most people have their favorite anecdote or story about ‘Ken’ Galbraith. My favorite is one of the least known, mainly because it does not appear in any work on economics or about Galbraith. Rather, the story comes from John Barlow Martin’s (1976, 1977) masterful two-volume biography of Adlai Stevenson. Stevenson twice ran for President of the United States against Dwight Eisenhower in the 1950s, and twice lost by large margins.

Galbraith was one of the founders of the Americans for Democratic Action (ADA) in 1947, along with Hubert Humphrey, Eleanor Roosevelt and other Roosevelt Democrats. The ADA is a progressive political organization with ties to the liberal wing of the Democratic Party. It has strongly advocated greater civil rights, opposed the wars in Vietnam and Iraq, and supported the Kennedys and George McGovern in their Presidential bids. Galbraith wanted the Democratic Party to move along the political spectrum in the direction of the ADA. Otherwise, he feared, Democrats would just be a carbon copy of the Republicans, and voters would choose the real item over the imposter (Galbraith, 1970).

Galbraith saw Stevenson as a potential heir to the Roosevelt legacy. He thought that Stevenson would use the power of the government actively to intervene when the economy was not working well and would use the power of the presidency to counterbalance the rising power of large corporate interests. Stevenson, though, was skeptical about the wisdom of running budget deficits and thought that Keynes was some sort of subversive. But Galbraith had faith in the decency of Stevenson and believed him capable of understanding the message of Keynes and the wisdom of his approach to macroeconomic problems.

It is for these reasons that Galbraith became an advisor to Stevenson in 1952 when he ran for President. Initially, Ken helped with agricultural issues, but soon he began advising on economic policy. Once the campaign found out that Galbraith was a skilled and eloquent writer, he began working as a speechwriter for Stevenson. He also tutored Stevenson in Keynesian economics, and impressed upon him the importance of an activist economic policy (Galbraith, 1981, p. 296f.).

My favorite Galbraith anecdote took place one afternoon in during fall of 1952 in Springfield, Illinois, where campaign headquarters were located. The campaign itself was going badly, Stevenson was far behind in the polls, and the senior speechwriters were in a foul mood. They went for lunch at an obscure saloon off the beaten path, in order to avoid the press. It was a small watering hole, with only one large table, which was located next to the jukebox. As Martin (1976, p. 636) reports, ‘when somebody started to put a nickel into the jukebox, Galbraith said to him, “I’ll give you a dime if you don’t play it.”’

This is my favorite Galbraith anecdote because it contains so many aspects of Galbraith that I have come to admire over the years. At the surface, there is great political commitment – a recognition that the only way to make the world better is to get involved in politics and help elect someone who is going to be progressive in their outlook (right thinking and left leaning), someone who would put into effect economic and social policies to make the world a better place and the economy function better. In addition, it contains the famous Galbraith wit and cleverness. There is also a certain pragmatism – Galbraith wanted quiet, quiet was important for the speechwriters, and he was able to figure out how it might be possible to have peace and quiet. But the story also has a lesson about economics and the problems with standard economic theory. Standard economic theory requires free markets, rational individuals, perfect information, and an absence of externalities. It is about individual preferences being determined solely by the individual, independent of any outside forces. It is also about believing that whenever individuals pursue their desires it leads to the best possible outcomes for all. In contrast, Galbraith recognized that at times, when individuals pursue their own ends, the result is sub-optimal and requires a larger power and some common sense (or, at least, a very large economist and ten cents).

It is this vision of free market economies leading to the best possible results that Galbraith opposed throughout most of his life. Galbraith identified many problems with the doctrine of laissez-faire economics. He knew that people were not rational in the sense defined by economists. Rather, advertising manipulated consumer preferences and consumers acted on the basis of habits and conventions. He knew that the markets existing in the real world were not the markets that existed in economics textbooks and economic theories. Rather, the real world was dominated by large corporations that made it their business to acquire some degree of control over the market. They were also run, not by owners, as standard economic theory holds, but by managers, who have a very different set of incentives and goals than the firm owners. And people did not understand that these firms acquired power, including the power to manipulate consumer behavior. Finally, Galbraith understood that externalities were prevalent in the real world. He bemoaned the pollution created by production, he brought to our attention the financial follies and social imbalance that result from letting the market run amuck, and he understood that education and government spending had many positive externalities. This vision of the workings of a developed capitalist economy, the problems that arise from unfettered capitalism, and the possibilities of using intelligent economic policy to make the world a better place, make Galbraith a key figure in Post Keynesian thought.

2. Galbraith as a Post Keynesian Economist

Like all Post Keynesians, John Maynard Keynes was a major influence on Galbraith. Galbraith himself reported many times how he was influenced by Keynes (see, for example, Galbraith, 1971, Ch. 3) and this relationship has been remarked upon in the many commentaries on Galbraith’s work (Dunn & Pressman, 2005, 2006–07; Parker, 2005; Sharpe, 1973; Stanfield, 1996). In his autobiography Galbraith (1981, Ch. 3) provides a wonderful description of how Keynesian economics came to America via Harvard, how it hit Harvard with a ‘tidal force,’ and how he was taken in by the simple yet logical solutions of Keynes to the problems of the Great Depression.

The economics of Keynes, of course, was mainly about ending unemployment and ensuring adequate macroeconomic performance through active fiscal and monetary policies. This meant sufficient levels of GDP and economic growth so that there would be enough jobs with incomes growing faster than the rate of inflation. Galbraith accepted the message and the activist policy lessons of Keynes, and he was highly influenced by them. In many ways, however, Galbraith moved beyond Keynes. These are all consistent with the main principles of Post Keynesian thought (see Holt & Pressman, 2001; Lavoie, 1992, 2006), making Galbraith a true Post Keynesian economist. Some of the key aspects of Post Keynesian thought advanced by Galbraith include the following: a focus on social forces as determinants of individual behavior, understanding that we make decisions in a world moving through historical time and plagued by uncertainty, and an emphasis on income effects rather than substitution effects. But perhaps most important of all, the work of Galbraith provides the missing Post Keynesian microeconomics to complement Keynes’s macroeconomic analysis.

It was Galbraith who recognized that Keynesian macroeconomics means the end of an economics that is based on the notion of scarcity. In The Affluent Society, Galbraith (1958, p. 242) notes that Keynes saw how rapid improvements in the ability to produce goods would lead to a post-scarcity world. However, Keynes’s ([1930] 1963, p. 366) essay ‘Economic Possibilities for Our Grandchildren’ recognized this as a possibility for the distant future of our grandchildren. Scarcity was a problem that might be solved in 100 years. Galbraith argued in 1958 that Keynes was far too pessimistic and that the problem of scarcity had been solved by the 1950s with the help of full employment and rapid productivity growth stemming from large oligopolistic firms (Galbraith, 1952b).

Galbraith then proceeded to draw out the policy implications of this. In a world without scarcity we can produce more than enough to meet our basic needs. Or, as Vivian Walsh (1961) noted, a world without scarcity is a world with less evil in it. It is a world where people are able to do good in an ethical sense, and where there is no battle between our moral sentiments and our human inclinations to do what is necessary for survival.

But there are still problems in an affluent society. First, there is the problem of poverty or the problem of income distribution. Just because there is enough for everyone on average does not mean that everyone will get enough to survive. Second, there is the problem of public squalor and private affluence. As Galbraith pointed out to us 50 years ago, the developed world is rich when it comes to private goods but impoverished when it comes to public goods. Perhaps the best description of this dichotomy is the much-quoted passage from The Affluent Society (Galbraith, 1958, p. 98f.):

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 menace to public health and morals. Just before dozing off on an air mattress, beneath a nylon tent, amid the stench of decaying refuse, they may reflect vaguely on the curious unevenness of their blessings.

This opens the door for government policies to redistribute income to those at the bottom of the distribution. We do need to worry very much about the substitution effects of government programs to aid the poor and near-poor because, as Galbraith (1958, p. 229) argues, the goods we lose are not that important if our wants for them have to be manufactured. Government spending is also necessary to provide the public goods that are much needed, but in short supply.

The existence of an affluent society thus leads to an argument for the sorts of policies that Keynes ([1936] 1964, p. 378) called for under the rubric ‘a socialization of investment,’ or to use a better and more descriptive term, ‘government investment.’ Keynes favored government investments in schools, hospitals, roads and bridges whenever economies stagnated. Like Galbraith, Keynes wanted the state to do what private enterprise could not do and would not do. Besides having good short-run benefits, these policies would also lead to improved productivity growth in the long run. As the work of David Aschauer (1989a, 1989b, 1990), Alicia Munnell (1990) and my own work (Pressman, 1994) show, there is a great deal of empirical support for this position. It called for greater education, anticipating the human capital movement that began shortly thereafter (see Dunn & Pressman, 2005, p. 189). It was a plea for more money spent on mass transit for environmental reasons, long before the beginning of the environmental movement in the US and the world. It also meant that the government needed to spend more money for things such as health care, research and development, the arts, and ending discrimination (Galbraith, 1973). But unlike Keynes, for Galbraith, government investment did not need to wait for there to be a recession. Rather, these were all things that were needed now, and these were things that the government could and should do now because the cost of doing so was small in a world of general affluence, and the gain in terms of general well-being were enormous.

Second, Keynes was ‘strongly imbued’ with what Harrod (1951, p. 192) called ‘the presuppositions of Harvey Road.’ This is the assumption that everyone was like Keynes (independently wealthy and altruistic to a fault), and that everyone would act like Keynes if elected to run the government or put in positions of administrative authority when it came to implementing public policy. But, as Harrod noted, it was surely folly to believe that everyone would act like Keynes in positions of power and would only implement policies that promoted the public good.

This chink in the Keynesian armor was quickly exploited by the public choice school (Buchanan & Wagner, 1977; Buchanan et al., 1978), which went to the opposite extreme. It argued that all politicians and all bureaucrats would only be interested in themselves. Rather than putting into effect policies to benefit the general populace, they would put into effect policies to benef...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• 1. John Kenneth Galbraith and Post Keynesian Tradition in Economics
• 2. The Abiding Economics of John Kenneth Galbraith
• 3. J.K. Galbraith and the Nature of Modern Money
• 4. The Dependence Effect, Consumption and Happiness: Galbraith Revisited
• 5. John Kenneth Galbraith's Contributions to the Theory and Analysis of Speculative Financial Markets
• 6. The Theory of Price Controls: John Kenneth Galbraith's Contribution
• 7. Galbraith on Advertising, Credit and Consumption: A Retrospective and Empirical Investigation with Policy Implications
• 8. The Economic Contributions of John Kenneth Galbraith
• Index