The Prophet Whose Warnings Over Wall Street Were Ignored

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Published on Monday, July 1, 2002 in the lndependent/UK

Shocked and Angry: The Prophet Whose Warnings Over Wall Street Were Ignored
Interview: Professor JK Galbraith - Economist
by Rupert Cornwell in Cambridge, Massachusetts

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-paneled 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 criticized 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 monopolization 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 behavior 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 favor, two decades after it went out of fashion under Ronald Reagan.

"One of the vocal critics of corporate behavior," 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 realize 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 stabilize 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.

2002 lndependent Digital (UK) Ltd



-- Cherri (whatever@who.cares), July 04, 2002


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