Galbraith’s Memes

John Kenneth Galbraith has been active in public service, politics, the military, as an author, a diplomat and an influential economist of Keynesian signature. More precisely he was an institutional economist, taking into account the influences of stakeholders on the corporation. This post is a reworking of his 2004 book The Economics of Innocent Fraud. This is not a pamphlet of a young would-be radical economist but the life-experience of a 96 year old!

It is a critique on the divergence of the communis opinio – Galbraith calls it conventional wisdom – between economics and politics on one side and reality on the other. That in itself is a sufficient reason to give this book its proper attention; his soft-voiced yet polemic style is another. But it is of course because of the strong sense of meme-driven systems that I dedicate this post to his book, following the chapters. My interpretation: memes at work (the labeling is mine). Now consider this loop onto itself: is the truth what it is, or what it is said to be, i.e. what people work with?

The Nature of Innocent Fraud

What it is

The central theme of the book is the way in which economic and political systems create their own versions of the truth because of pecuniary (as he calls it) and political pressures. These versions of the truth hold no necessary relation to the truth; hence the fraud. Often nobody is especially to blame, because what is convenient to believe is to be preferred; hence the innocent. The people involved are not deliberately perpetrating. They are, in Galbraith’s words, not aware of ‘how their views are shaped’. No law is violated, no guilt is involved, more likely there is self-approval.

What it is said to be

G1 the truth is singular, knowable and independent of external pressures
G2 people are capable and willing to judge whether something is the truth
G3 however, if many people say it is so, it must be the truth
G4 people remain autonomous; they are not affected by versions of the truth

The Renaming of the System

What it is

With a few exceptions, an economic system is common to all countries, that assigns the economic power to those holding the relevant resources and means. Those used to be owners, now they are management of corporations. For that reason and for its doubtful history of subjugated wokers, monopolistic tendencies, bubbles and crises, the term ‘capitalism’ (as in: owner) went out of fashion. Other names have been tried and failed, the fashionable term is now ‘The Market System’, a new term conveniently without history or connotation. It hints at the controlling power of the consumer to which the capitalist (owner) subordinates. However, through influence of heavily financed marketing, television advertising, advanced salemanship, consumer manipulation this controlling power of the consumer is impaired. By this the price and to a large extent consumer demand are controlled by the producer. This version says that customer control is the essence of The Market System: democratic power exercised by the consumer by means of expenditure and choice via the demand curve. While it is said that no single entity is in charge, this is in reality not the case. This fact is hidden under the phraseology or newspeak ‘The Market System’: this is the fraud, more so, because it is supported and taught in academia. Of course the buyer has a right to opt out and to go ‘off the grid’, but this is generally seen as eccentric, even insane. This fact is a severe blow for the predictive powers of the neo-classical economic school of thought.

What it is said to be

G5 The Market System fairly, perfectly and efficiently equilibrates demand and supply in various markets. It is per-se benign
G6 the consumer is in charge in a democracy-like process of buying goods and services, the corporation is subordinate
G7 it is possible for anyone to opt-out of The Market System

The Economics of Accomodation

What it is

Now that power over innovation, manufacture and sale of goods and services moved from away from the consumer and towards the producer, the aggregate of this production, GDP, is seen as the main indicator of social advance. This is perceived as positive because from GDP comes income, employment and goods and services. However, as said, GDP is not controlled by the public at large, but by the entities that produce these components. The fraud is in the measuring of social success largely by the growth of producer controlled GDP and to a far lesser extent by performance in arts and sciences.

What it is said to be

G8 GDP is a result of a process that is controlled by the public
G9 GDP is the main measure for civilisation

The Specious World of Work

What it is

It is widely accepted that in order to have a livelyhood and enjoyments and protection against discomforts one must work! However boring, repetitive and exhausting, one must work for the (basic) necessities and a sense of community repute. Enjoyment of life is after office hours, when escape from boredom, repetition, lack of mental challenge and from management authority is possible. This is celebrated mainly by those who are above the physical labour, with less obligation and comfortably managing others. Here is the fraud: that the same word, Work, is applied for both those people that suffer from work and those who are allowed to enjoy it. Moreover, those that are most allowed to enoy their work stand a much better chance of being paid more. Income, including bonus and other incentives are more widely available at the top where enjoyment already exists. That the most generous pay should be for those most allowed to enjoy their work is fully accepted. No alternative is criticized as those who escape the burden of work: they are lazy, irresponsible, a burden; this is not good, especially if income comes from public support or welfare. Good are perceived those who enjoy work and those who are wealthy, seize the rewards and do not work at all. While idleness and leisure are seen as good for the rich, it is seen as damaging to the economy for the poor, it costs money.

What it is said to be

G10 to work, i.e. to have a job, is good and to not have a job is bad
G11 to receive public support is very bad
G12 work is work, a job is a job
G13 to enjoy work, i.e. a job, is good
G14 to be wealthy is good
G15 to enjoy living off one’s wealth, including idling and leasure, is good

The Corporation as a Bureaucracy

What it is

The CEO is a product of a successful passage through the corporate world. This passage requires the appropriate education, experience, mental acuity, bureaucratic agility, all of this in career competition. However, the command of a large corporate enterprise is beyond the energy, expertise, experience and assured commitment of any individual. Group effort, intelligence, specialization: success comes from the collective: a bureaucracy is needed. The importance of group effort is recognized by all major MBA institutions. The fact that this requires a bureaucracy and that success therein is required also, is almost never mentioned. Corporate management can be said to show behaviour of any kind but not bureaucratic, that is reserved for government. The modern economic world hinges on corporate organisation, where authority is retained by managers, not owners, and so, let it be clear, on bureaucracy. The fraud is that bueaucracy is unmentioned in connection with the corporate world and solely in government circles.

The corporate bureaucracy, as any bureacracy, is inclined to self-enlargement. Pay is detemined by the number of subordinates. Life is more pleasant and more effective when thought and action are delegated to lesser ranks: an escape from specialized knowledge and tedious effort. Distinction above is determined by the numbers below. This results in some periodic redundancy of staff which in turn calls for a surgical act of downsizing to increase efficiency and better earnings.

Small enterprise, in which the owner is active in the business, remains to exist, but corporations await to take their place in economic life. The celebration of small business in the economic and political discours is a small fraud, because this is more about folklore than about reality. The same goes for start-ups: creation without the necessary skills for organisation is not enough and over time the power passes to corporations or there is failure or oblivion.

What it is said to be

G16 bureaucracy exists in public services only, not in corporations
G17 managers are per definition not bureaucrats
G18 downsizing is a necessary natural activity that is benign to all involved
G19 personal brilliance of an individual manager is supremely relevant for corporate performance
G20 small enterprise, the owner being in charge, is to be celebrated as the core of economic life
G21 start-ups are to be celebrated as initiators of long term economic change, future economic life

The Corporate Power

What it is

Capitalism has given way to management-cum-bureaucracy and an appearance of relevance of owners is contrived: the shareholder or investor is accorded a seeming role in the enterprise. This fraud has accepted ceremonial aspects: one is a board of directors selected by management, fully subordinate to shareholders, but heard as the voice of the shareholder. They only need a passing knowledge of the enterprise and are reliably acquiescent. Galbraith somewhat shockingly formulates it as follows: ‘Given a fee and some food, they are routinely informed on what is already known or has been decided. Approval is assumed, included approval on compensation the management has set for itself.’ And so it goes. The fraud continues in that shareholders are anually invited to a ritual shareholders’ meeting resembling a church service, during which critique is, with some rare exception (Galbraith explicitly mentions Warren Buffett’s Berkshire Hathaway as a positive exception), not welcomed. This is altogether not an entirely innocent fraud. On a more positive note, the modern corporation is also very serviceable, much more so than its predecessors of 50 years ago.

What it is said to be

G22 shareholders have a relevant role in the enterprise; in fact they are the king
G23 the board of directors is independent of management and represent the shareholder
G24 the shareholder (or the board) ultimately decides on the rewards of management

The Myth of the Two Sectors (and Foreign and Military Policy)

What it is

In most developed countries the common reference is to two sectors: the public sector and the private sector. In the US it is more specifically to the private sector and the necessary public sector. The debate is now about specifics: should this or that be publicly or privately financed and whether this or that is a cost to personal freedom? The divide, however, is rhetoric only and meaningless, because an ever increasing part of public service is entering the private realm. An example is the US arms industry: about 50% of the US non-discretionary expense (outlay not mandated for a particular use) was used for military purposes. These expenditures proceed from influence of those involved and rewarded.Arms expenditure does not occur after detached analysis by the ‘public sector’: much is at the initiative and authority of the arms industry and its political voice, the private sector, as jobs, management pay, profit and political funding are generated. And these in turn are rewarded with decisions about need, including war, and corresponding budgets by political decisionmakers. As the corporate interest moves into the public sphere, it serves, predictably, the corporate interest, because that is its purpose. From this comes a primary influence on the military budget, on military policy, military commitment, action including war. This leads to subordination of international policies to military policy.

Many public figures build their career in part in the private sector and vice versa. Similar scenarios exist for the financial industry and the environment and so on. The myth of the two sectors is an innocent fraud and a major corporate role exists in economic policy.

What it is said to be

G25 a public sector and a private sector exist; it is possible to separate the two sectors in a meaningful way
G26 the two sectors are independent of each other
G27 decisions regarding public concerns, e.g. military, financial, environmental, are at the discretion of the public

The World of Finance

What it is

The world of finance consists of banking, corporate finance, securities markets, mutual funds, organised financial advice and so on. The controlling fact of this fraud is that the future performance of the economy cannot be foretold, i.e. known. There are, of course ample predictions, but no knowledge as the combination of many unknowns cannot be known. This holds true for the economy as a whole as well as for individual industries and firms. In the financial industry, however, predicion of the unknown and unknowable is cherished and well-rewarded. From it comes judgement regarding the performance of this economic sector and that specific enterprise. This is believed to be established through research.

Seeing into the future is impossible and the predictions large and by are what others wish to hear. This is a fundamental error that is well-protected and welcomed because shared in the financial world. Because of this common mechanism, people active in this industry do not know and they do not know that they do not know. There is however no easy denial of an expert’s foresight. This is fraud, unmasked every once in a while, e.g. the IT bubble, multiple real-estate crises, large corporate crises (Enron etc). Less innocent is the fraud if those active in the financial world, make predictions so designed that the outcome favours their personal benefits.

What it is said to be

G28 the future can be known
G29 more research results in predictions that hold true
G30 those involved in economic predictions know what is knowable
G31 those involved in economic predictions are independent from incentives of their principles

The Elegant Escape from Reality

What it is

As said the future is unknowable to us, including the future of the economy. And yet it is at the discretion of Central Banks to ensure that inflation (and in some countries unemployment) remains within safe boundaries. Quiet and knowledgeable action from the greatly respected Central Banks are believed to be the best approved and accepted of economic actions. They are also manifestly ineffective as they bear no relation whatsoever with any change in the ways of the economy. This is a much cherished and yet evident fraud. It is kept alive by powerful bankers and the banking industry, who are members of the Central Bank.Say that in a recession the interest rate is lowered, and this is passed on by banks to their customers and as a result, assets become available, production increases and access to credit becomes available so consumption increases. The economy will respond and the recession will disappear. Conversely, if there is a boom and inflation threatens the economy, interest rates are heightened, production and consumption diminish, the economy responds and the situation improves.

This mechanism is a belief only, it is a myth and not reality. Firms will borrow because they see an opportunity to make money and they can get a loan to do that, not because the interest rate is low and likewise for families’ mortgages. Interest rates are a detail, firms will not expand capacity for output that can not be sold. This is the fraud: the apparently wholesome mechanism, learned, free from politics, carried by all and in the hands of respectable professionals has no noticeable economic effect, it never has had and it will never have. The Central Bank is irrelevant. Galbraith goes on to suggest that the central bankers are left in place, because they perform such an artful play.

What it is said to be

G32 incremental changes in interest rates have an effect on decisions of economic agents
G33 actions by Central Banks have an impact on the economy

The End to Corporate Innocence

What it is

Large scale larceny as in the cases of Enron, WorldCom and Tyco have only been possible because of negligence on the part of accountants and regulators. Corporate influence is likely extending to them and it is not easy to be a good, reliable and honest regulator in a world dominated by large corporations. Good corporate behaviour, however is in the public interest, while managerial misappropriation is not. Sound regulation by shareholders and directors as it now stands is a myth and it needs the force of law. Corporations are an important part of modern economic life and we must have it, but it must conform to accepted standards and public restraints, while safeguarding the required freedoms.

What it is said to be

G34 accountants act independently of corporations
G35 regulators act independently of corporations
G36 corporations when unguided, are capable of serving the public interest

The Last Word

What it is

Income accrued to the relatively affluent has a positive effect on the economy. However, a tax reduction increasing the income for those whose income is already ample does not increase spending. Additional income is not reliably spent and so it can remain without effect as spending by less affluent people would not. So under current economic policy in the US, money is accrued by people who will not spend it and money is needed by people who will spend it resulting in no effective action against the recession. Ensuring that the income and purchasing power of the less affluent is increased so as to turn the effects of the recession around is seen as mere unserviceable compassion. The same argument is not accepted for an additional pecuniary reward, like tax relief, for managers.

What it is said to be

G37 it is equally or more economically useful to increase income (through lower taxes) for affluent people than to raise the income of less affluent people

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PhD Candidate The Firm as an Emergent Phenomenon