INTERVIEW Unconventional Wisdom Interview with John Kenneth Galbraith

John Kenneth Galbraith has been writing best- selling books about economics for many years. Those books—of which there are literally dozens—have earned him the reputation as the best-known economist in America, and per- haps even the world. His classics include Amer- ican Capitalism (1952), The Affluent Society (1958) and The New Industrial State (1967). More recently he has written The Culture of Contentment (1992) and The Good Society (1996). But Galbraith’s views, however popular when measured by book sales, are certainly not uncontroversial. He is famous for challenging standard doctrine within the mainstream eco- nomics profession and for challenging the value system implicitly reflected by both public and private decisions. Galbraith is currently an Emeritus Professor in the Department of Eco- nomics at Harvard University. He was inter- viewed by Christopher Ragan, Editor of World Economic Affairs, at his home in Cambridge, Massachusetts.

ORLD ECONOMIC AFFAIRS: WHO the notion that the Great Depression, for WEA: Some people would argue have been your greatest intel- example, was the result of the control of that your main contribution to eco- W lectual influences, and how is prices and output, an aspect of imperfect nomics over the years has been in this influence evident in your competition. I went through a major altering our underlying value system writings and ideas? transformation that year when I read rather than in developing precise, Galbraith: Well, I began with Alfred Keynes’ General Theory. convincing theories of the structure Marshall. He was my great introduction And then there were many others. Alvin of the economy. One example is that to economics. With much of his work I Hansen, who was the voice of Keynes your views may have increased the eventually came to disagree, but you had here at Harvard, was very influential. I attention paid to poverty and to the to know what was wrong before you was, early on, instructed in the connec- appropriate provision of public could know what was right. I was also tion between economics and government goods, whereas your views on “coun- very much influenced, in the 1930s in action by people both at Harvard and in tervailing power” may not have been California, by Thorstein Veblen, and in Washington—by John D Black at Har- well accepted by the economics pro- the latter half of the 1930s, after I came vard and Henry Wallace in Washington. I fession. Would you agree that your to Harvard, by John Maynard Keynes. concluded, from their work, that there contribution has been mainly in He was a great opening of the window in was a natural bridge between economic terms of changing values rather than 1936. Up to that time, I had adhered to theory and practical action. in precise theory-building?

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Galbraith: I would agree. My interest outside of the broad current of eco- absolutely essential. One cannot have a in the minor refinements of economic nomics. I served my term as president general theory covering all situations; theory has been very low. Or, rather, it of the American Economic Association one must have an open mind as to the has not been low, but subject to control. which is not something that is accord- particular situation. In Canada and the On the other hand, countervailing ed to outsiders, and I have had a large United States, some of the greatest power—the notion that the institution- number of close friends in the econom- achievements have been by govern- al structure of the economy works by ics profession, at Harvard and all over ment. We have the best university the creation of opposing systems of the country. So I have systems in the world, power—has been, in my view, surpris- never had the sense of largely the product ingly influential. The book in which it exclusion. I am conducting a of government action. appeared [American Capitalism] is still When my appoint- Canada would not have in print, it’s still discussed. I keep ment as president of one-person and been a country if it had- encountering references to countervail- the American Economic hopeless crusade n’t been for the govern- ing power in my reading and I am, by Association was under ment intervention in the no means, disappointed by the recep- discussion, there were against the word field of transportation, tion of that book. some objections to it on “globalisation”. once of central impor- WEA: If nothing else, you have cer- the grounds that I was tance. So I repeat: this is tainly been a successful producer of not strictly orthodox. a question of application terminology—”the affluent society”, Someone made the terrible mistake in of intelligence to the particular situa- “countervailing power”, and “the the discussion of pointing out that tion and not something to be guided by conventional wisdom” are a few Thorstein Veblen had never been presi- formula, sometimes called ideology. examples. dent of the American Economic Associ- WEA: Let me follow up on that Galbraith: The conventional wisdom ation, had never been similarly recog- point because you discuss it thor- has been my best. nised. And that, I have always been told, oughly in your latest book, The Good WEA: Lester Thurow described you was the reason that I was immediately Society. You argue there that, too in The New Palgrave’s Dictionary of appointed. often, both liberals and conservatives Economics as “an economist out of are prone to escaping into ideology the mainstream of economic thought Markets Versus Planning from thought. You argue instead that but in the mainstream of economic WEA: Let me now turn to the topic policies ought to be evaluated on a events”. Do you agree? of markets versus planning. One of case-by-case basis. Do you think there Galbraith: I would broadly accept the central themes in your writing is much hope that the liberal/conser- that observation. Lester Thurow is a very has been that government has a role vative “jump to ideology” will be close friend of mine and was once my to play in economic planning, and reformed? student. His judgement on such matters that economic planning has a role to Galbraith: Oh, the escape into the for- is pretty good. play in successful economies. The mula, the escape into the ideology and WEA: You once described your past half-century has seen significant the pride that is involved in that is very approach to economics as “the lower changes in this regard, the most dra- strong. I would have hoped for a prag- economics” with an emphasis on matic of which was the collapse of matic revolution, but my expectations big ideas and prose rather than on the Soviet Union—an event viewed by are not too high. technical details and mathematics. Do some as proof that market economies WEA: Some people would argue you lament the fact that your writings are superior to planned economies. that much of the success of the East have not been adopted What do you take as Asian economies comes from a judi- by the mainstream of the important lessons cious use of government planning the academic econom- If I had been regarding markets ver- rather than complete laissez-faire. Do ics profession, or do sus planning from the you agree? What important lessons do you think that your rigidly orthodox, fall of the Soviet you draw from the rise of the Asian ideas have spread fur- I think by now Union? Tigers? ther precisely because Galbraith: I have no Galbraith: I draw the conclusion that, of your “lower econom- I would be well doubt on that point. This on the whole, the Asians—Japan, Korea, ics” approach? forgotten. is not a matter of ideolo- Singapore—have been less governed by Galbraith: If I had gy. Ideology here is a theory, less governed by doctrine than been rigidly orthodox, I blanket over thought. the United States, Canada, and the West, think by now I would be well forgotten. The question is one of the pragmatic and that three important things have Only as you emerge to influence the mix. There are some areas where the happened as a result. First, a substantial course of economics, to see flaws in its market system—the word capitalism investment—let’s take Japan as the lead- development and correct them, do you has now gone out of fashion—is ing case—in needed infrastructure. Sec- have any hope of continuing recogni- absolutely indispensable; and there are ond, a strong sense that the bureaucra- tion. Though I do not want to exagger- others where the role of the state or the cy is allied with business and in its ate the point, I have never felt all that restraints imposed by the state are support. And third, a government regu-

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latory structure that is governed—going American economy is that our income ical power of the middle class, is back to our earlier point—by practical distribution is so much worse than that there any reason to expect this to be utility rather than by theory. of the other countries. reversed and, what sort of policies WEA: I once saw reference to the that are politically acceptable to the fact that your books have sold even Income Distribution middle class can bring about such a better in Japan than they have in the in America reversal? United States. Your answer to the last WEA: Let me go right on to discuss Galbraith: I’m not widely optimistic. question suggests that your ideas income distribution. In the past two The notion that an economist should may simply be more in tune with the decades, there appears to have been a always see an improved goal is some- way people think in Japan. What do clear widening of the thing which I have reluc- you think? income gap in America; tantly denied. On the Galbraith: My books have always certainly the share of The essential other hand, here in the been very well received in Japan, but I national income going United States the situa- just attribute that to general Japanese to the bottom 40% of for improvement tion is made worse by intelligence. the population seems to is bringing the what can only be called WEA: Do you think the increasing be declining. Are you an imperfect democra- trend toward globalisation— surprised to see this, poor into the cy—one in which those increased capital mobility, freer trade and what do you think political system. who are contented and and instantaneous communications— are the primary reasons rich vote and the poor do places limits on the role of govern- for this deterioration of not. If we had 100% ment in the economy? the US income distribution? turnout in our elections, we would have Galbraith: Well, let me begin by say- Galbraith: This is something I cer- many more politicians cultivating the ing that I am conducting a one-person tainly didn’t predict. But the causes, I welfare vote, the vote of the big cities, and hopeless crusade against the word think, are reasonably clear. First, we’ve and the situation would be much better. “globalisation”. It’s an awkward and had this war against the poor, the gener- I’ve argued very strongly that the essen- inaccurate term; let’s talk instead about al attack on the welfare system, which tial for improvement is bringing the poor internationalisation. I don’t think it sets has been particularly damaging for the into the political system. The problem is any limits on public action but it does lowest income groups. This goes back in not democracy but imperfect democra- shape public action. It means that there turn to what I discussed in The Culture of cy. We see that also, in a spectacular way, must be co-operative steps of a much Contentment: the rise of a large commu- in the case of the allocation of govern- more comprehensive sort than would nity of people whose income is reason- ment expenditures, particularly to the otherwise be the case. Internationalisa- ably satisfactory, and who, for better or military. The military in the United tion I regard as inevitable. It is a force for worse, are very much opposed to pub- States has developed an independent growing out of interna- lic policy on behalf of the power in the executive as well as an inde- tional trade, growing out poor. Second, we have a pendent power in the Congress and of the international cor- We have had this strong source of inequali- establishes its own share of the income poration, and particular- war against the ty of income in the mod- that goes for its purposes. So we come to ly growing out of intel- ern corporate structure. the end of the Cold War, but the military lectual life—sciences, poor, the general The large managerial expenditure goes on just the same. arts, and travel. This is attack on the class has extensive power WEA: You argued in The Good Soci- going to continue. I want over its own income. The ety that even the middle-and upper- to see this continue with welfare system, corporate executives who income people, even people that con- protection, particularly which has been appoint the people who sider themselves conservatives, ought the welfare system of the set their income are a to be in favour of improving the individual states, and, of particularly very important factor income distribution if for no other course, one has to expect damaging for the in the distribution of reason than that it buys social peace that it will involve some income, coupled with the and tranquillity. Why don’t people co-ordination of fiscal lowest income continuing importance of appear to buy that argument? and monetary policies. groups. the structure of finance Galbraith: My statement on that is WEA: Do you see which conveys very large somewhat optimistic. My obvious answer internationalisation as rewards. is they haven’t read my book. I would putting any constraints on the WEA: Let me take you back to your hope that, as the society matures and amount of income redistribution that mention of The Culture of Content- becomes more sophisticated, it will be the government is able to effect? ment because in that book you argued seen that greater equality in income dis- Galbraith: This is not a central point, that many and perhaps most policies tribution is a source of social tranquillity but there will be—inevitably and useful- are designed to benefit the middle- and that such tranquillity is important for ly—comparisons as to the state of and upper-income households implic- the rich as well as for the poor. income distribution. One of the factors itly at the expense of the low-income WEA: There has been a revival of that is affecting the discussion of the households. Given the size and polit- interest, both among policy-makers

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and academic economists, surround- beneath our feet. One solution, here about the costs associated with ing the minimum wage. Do you favour greater spending on public goods, moderate inflation, say 8% or 10% per raising the minimum wage as a means seems obvious. But what is the key to year. of improving the distribution of bringing about this solution? Is there Galbraith: First, we have to talk a bit income? something fundamental about the US about the extent of the inflation of which Galbraith: Absolutely. And I don’t buy political system that precludes such a we are speaking. I have spent quite a large the notion that the question turns on solution? part of my life in the less developed unemployment. It could be that an Galbraith: Well, I’ve no easy cure. I world, where the problem of hyperinfla- increase in the minimum wage enlarges have hoped that by a better understand- tion can be devastating. I have had no the flow of aggregate ing of the situation one tendency to minimise that problem. Sec- demand and has an affir- would do something ond, there is no doubt that you have an mative role in the econo- What is needed about it. And to that end, equanimity in the economy if you have my. I don’t push that is strong political I invented the phrase reasonably stable prices. And to that end, point very strongly, but “private affluence and I have argued, for example, for the Euro- it’s at least as good as the assertiveness public squalor”, which pean model of wage-price stabilisation, argument that the mini- by the poor. perhaps had some influ- which takes account of the microeco- mum wage increases ence in the right direc- nomic thrust of price increases. On the unemployment. tion. But I see no alterna- other hand, I see no decisive danger in the WEA: You generally seem to be an tive to popular understanding coupled kind of inflation which we have had over advocate of letting markets allocate with much larger political assertiveness the last 30 or 40 years. A modest increase resources; on the other hand, you by those who most need the public in prices every year and some imperiling want to temper the use of markets by goods. It is the poor who suffer from the of the position of the rentier class seems redistributing income and having gov- poor public housing. It is the poor who to me to be quite satisfactory. I don’t ernment involved in some regulation. suffer from the crumbling schools. It is argue for absolutely stable prices. As a means of improving the distribu- the poor who need libraries. So I come WEA: I’m sure that many people tion of income, do you see any advan- back to my basic point—what is needed would understand you arguing that tage in using minimum wages rather is strong political assertiveness by the today’s inflation rate of about 3% is no than just more direct income trans- poor. particular problem. But you go fur- fers? WEA: If the lion’s share of the solu- ther. You just said that the inflation Galbraith: Oh, I would use both. I tion is to get the poor, or even lower- America experienced over the past 20 don’t see them as alternatives. The min- middle income groups, more actively years has been no particular problem. imum wage has its own particular role involved in the political process, how Galbraith: That’s right. We survived it for its own particular clientele, but that do you do that? and there was no particular invasion of doesn’t exclude the progressive income Galbraith: My only answer is the one economic well-being. tax, for example, as a very central instru- that I have pursued myself: develop the WEA: Many years ago you wrote The ment for income redistribution. point, talk about it, urge it, and hope that Theory of Price Control, a detailed dis- WEA: How do you feel about an somebody is listening. It cussion and defence of idea that Milton Friedman, among is unduly optimistic, but it wage and price con- others, has advocated for many is the only answer that I The notion that trols. And until at least years—the negative income tax? have. the 1970s, you were a Galbraith: When Milton Friedman we can have fairly strong advocate makes a step into liberal policy, I natu- Inflation and people suffer of the active use of rally applaud. The negative income tax, Unemployment wage and price controls however, runs into major political diffi- WEA: I’d like to steer unemployment as a means of reducing culties. The notion that you remit money you now toward the in the interest inflation. In particular, to people who don’t need it, which was topics of inflation and you saw this way of part of that idea, is perhaps politically unemployment. Much of price stability inflation fighting as unsaleable. While I was once attracted to of your writing over the is definitely cruel superior to the “main- it, I have been repelled by the political years has contained stream” method of difficulties. concerns about infla- and uncivilised. using a monetary con- WEA: Many years ago in The Afflu- tion. Indeed, Milton traction to induce a ent Society you discussed the tenden- Friedman, who has recession. Have your cy of market economies to underpro- been nothing if not one of your views changed about wage and price duce public goods such as museums, fiercest intellectual opponents, has controls? parks, and clean rivers. And it is cer- credited you with viewing inflation as Galbraith: Well, I have to explain a lit- tainly easy to see in America and in a serious problem, a concern that is tle bit. The Theory of Price Control was in other countries, especially in large often not shared by other so-called some sense a retrospective justification cities, that some of the public infra- liberals. What do you think are the of the policies for which I was responsi- structure is literally crumbling main costs of inflation? I am thinking ble during the Second World War—I was

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in charge of price control. I did not carry Galbraith: No, I say that some modest ness already in the stock market. The day that recommendation over into peace increase in prices may be inevitable. before yesterday [March 13], the Dow time. I go back to what I said before. In That’s a little different. went down by 100 points or more, so this a society of strong trade unions and WEA: Do you think there is some- is a situation of inherent instability. strong corporations, I’m in favour of thing special about zero inflation? Do WEA: Why can’t we view mutual microeconomic negotiations to limit the you think it is possible for America to funds simply as a low-cost way for wage-price spiral. But I would not urge have full employment and 2% infla- ordinary people to have well-diversi- universal wage and price controls. That tion but not full employment and zero fied portfolios? goes farther than, as a purely practical inflation? Galbraith: Oh, I wouldn’t exclude matter, as a purely theoretical mutual funds, but I would say that matter, I would go. there has been an explosion of WEA: By microeconomic mutual funds far beyond any nec- negotiations do you mean an essary outlet for middle-class attempt to “talk down” wage investment. demands? WEA: But what is the actual Galbraith: Negotiate wages source of the concern? Is it that within the existing structure of there is too much capital going prices. This has been common- into equity investment or that place in Europe, and I have always there is too much capital going thought it was a good thing. into equity investment from WEA: There is some contro- unsophisticated investors? versy these days, among both Galbraith: Both. The danger we academic economists and poli- face is that there will be a crack-up cy-makers, about the useful- on the market. It’s been going up ness of the concept of NAIRU or partly because people think it’s the “natural” rate of unemploy- going up and so act, and that push- ment. Do you think this concept es it up even further. It has a self- is—or ever was—useful? propelling aspect which we have Galbraith: No. I’ve never had seen in history many times, going any support for that. The notion back to the Tulip-mania of the 17th that we can have people suffer century. And when the balloon is unemployment in the interest of punctured—and balloons that are price stability is definitely cruel punctured don’t subside gradual- and uncivilised, and therefore I ly—there will be a restraint on con- want to see full employment as the sumer expenditure by people who basic goal. And if it is necessary to have had the sense of wealth from have wage-price restraints of the increasing stock prices, and there sort that I’ve talked about as you will be some depressing effect on approach full employment, I am the economy. I don’t think it will be in favour of that. I do not think, in as serious as anything after 1929, a civilised country, that one can ask for Galbraith: We will always have some but one should not imagine that one can price stability at the expense of a sub- price increases, there is no question. I have a major stock-market correction, as stantial body of unemployed men and am prepared to accept it. To have zero it is called, without some damage to the women. inflation at the price of substantial economy. WEA: What do you think of the pro- unemployment is unacceptable. WEA: I want to come back to that posed policy of achieving price stabil- point in a few minutes. You wrote ity in the United States? Do you see The Great Crash of 1997? about the causes of the Great Depres- any particular reason why the drive WEA: I would like to turn now to sion in The Great Crash. Do you see for price stability ought to increase discuss the stock market. You have similarities between the current long- unemployment? expressed some concerns about the lived bull market and the one in the Galbraith: Speaking as a purely prac- huge financial flows into mutual 1920s? tical matter at the present moment, I funds. Can you explain the problems Galbraith: I wouldn’t stress the simi- would leave the situation alone. I would that might result from the enormous larities, but there is a common factor not, out of the fear of inflation, go for popularity of mutual funds? which has extended over hundreds of tighter monetary policy. Galbraith: I think the explosion of years. This is the euphoria that causes WEA: In your latest book, The Good mutual funds has exceeded the intelli- people to invest and, in turn, shoves up Society, you argued that full employ- gence available to manage them. There is the market and justifies the expectations. ment and price stability are incom- a hubris there, from which we may one So you have an automatic incentive to patible. day suffer. One sees a certain nervous- err here, which is part of economic life.

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And I would say that is certainly hap- Galbraith: John Maynard Keynes and Galbraith: No. There is a long tradi- pening now. his emphasis on aggregate demand. I tion which, in some substantial mea- WEA: Alan Greenspan, the Chair- would have no doubt about that. sure, excludes this subject—and I regret man of the US Federal Reserve, WEA: Do you think there have been it. We all have a tendency to escape the raised the market’s eyebrows earlier any similarly influential develop- unfortunate and what, at first glance, this year when he spoke about the ments in microeconomics? may seem the unsolvable. The refine- market’s “irrational exuberance”. Do Galbraith: The micro- ment of mathematical you think his efforts to carefully economics that I taught models is something any- prick the stock-market bubble were when I first came to Har- The refinement one can do with skill and sensible? vard and joined the com- of mathematical grace. The argument Galbraith: I rather welcomed that munity of Frank Taussig about what you do to comment of Alan Greenspan’s—the first and that which now models is reduce poverty in the of his comments in some years that I appears in the modern something anyone South Bronx is by no thought was in order. I think such a pub- textbooks, which I look means so pleasant. lic warning of excess optimism and insti- at from time to time, are can do with skill WEA: John Cassidy, tutional exuberance in the stock market not all that different. The and grace.The in his recent article in was well-taken. competitive theory of The New Yorker, chas- WEA: Let me take you back to your supply and demand, to argument about tised the economics concerns about a possible crash and an extraordinary extent, what you do to profession for failing the implications for the economy. resembles that of 50 to produce many new Suppose a crash occurs tomorrow. years ago. reduce poverty in ideas. Do you agree Given the Fed’s response to the 1987 WEA: Do you think the South Bronx is with his assessment? crash and the subsequent solid per- the academic econom- Galbraith: No, I don’t formance of the US economy, why ics profession is cur- by no means so agree with that. The should we worry about these crashes? rently addressing the pleasant. ideas are there, the basic Galbraith: We have had a longer, more right issues? Are structures of ideas are exuberant increase this time than we had there some important present. It is the problem prior to 1987. No question about that. We neglected problems? of what we have just been talking have a consumer economy that is based Galbraith: Yes, I think there are about—an emphasis on theoretical heavily on credit cards and credit, and is neglected topics. There is still the refinement and precision is much more sustained by the feeling that people have enthusiasm for the technical precision attractive, and maybe professionally of increasing mutual fund returns, associated with mathematical models. I more rewarding, than the microeco- increasing stock-market do not deplore that—I nomic problems of the poor or the returns. All of this would think there is a certain macroeconomic problems of the public- have a depressing effect I think the discipline that is private relationships. That would be my on consumer expendi- explosion of involved there. And if all criticism rather than his. ture—we shouldn’t doubt economists talked about WEA: So you don’t see the profes- it. mutual funds has the problems that I’m sion as having declined in its ability to WEA: But why didn’t exceeded the interested in, I wouldn’t produce new, good ideas? it follow in 1987? Sim- intelligence be heard. But I would Galbraith: I think it may be as good ply because it wasn’t like to see a much larger now as it ever was. the same size of drop in available to concern about income WEA: What do you see as the role of the stock market? manage them. distribution, the prob- academic economists in the policy- Galbraith: There was- lems of the poor, the making process? n’t then the same depth institutional structure of Galbraith: I have already made that of pessimism that would happen now. our great cities and the poverty there. clear. I want to see much more concern WEA: Because of the size of the And I would like, not surprisingly, much about the public well-being and much drop? more discussion of the unequal role of more emphasis on what brings political Galbraith: Yes. our public services as compared with and social tranquillity. our private goods. WEA: Let me finish by asking about The State of the Economics WEA: Can you offer an explanation the title of your most recent book, The Profession as to why the academic economics Good Society. Do you think we are get- WEA: You arrived at Harvard in profession doesn’t seem to worry ting there? How optimistic are you 1934. In the 60 years that followed, about poverty or income distribution that you’ll see The Good Society? you have witnessed significant as much as the importance of the Galbraith: Well, I suppose if we changes in economic doctrine. In problems suggest they should? Is it were getting there, I wouldn’t be writing your view, what have been the most simply because they don’t lend them- about it. powerful and influential ideas in eco- selves well to technical sophistica- WEA: Thank you very much for tak- nomics in the past half-century? tion? ing the time to meet with me today.ࡗ

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