The Economics of Innocent Fraud

By John Kenneth Galbraith

Book Review

By Richard E. Noble

In the introduction to this book Mr. Galbraith attempts to explain the title Innocent Fraud.
"What prevails in real life is not the reality but the current fashion and the pecuniary interest ..." The innocent fraud is the public acceptance of "conventional wisdom."
"When capitalism, the historic reference, ceased to be acceptable, the system was renamed. The new term was benign but without meaning."
The new phrase to replace the word capitalism was "the Market System." This is the first example of innocent fraud.
Mr. Galbraith explains that the word capitalism had been sullied. The communist and the socialist had given the term a negative implication. By their definition the term capitalism meant "price, cost exploitation." The word had also been defamed by the people who were famous for being capitalist - like Rockefeller, Carnegie, Duke, Morgan, Vanderbilt, Gould, Fisk etc. Then the "Merchants of Death" exposure and scandal after World War I added more insult to the injury. This was followed by the Great Depression which many interpreted as the total failure of capitalism.
The powers-that-be tried to replace the negative term capitalism with "Free Enterprise" and "Social Democracy" but neither filled the bill. Finally, according to Professor Galbraith the meaningless and benign phrase, The Market System, came into vogue. Markets, the author explains, are not peculiar to a capitalist system. Markets have been around since coinage came into existence supposedly in Lydia in the eighth century B.C. and have been integral to every type of economic system since - including communism and socialism.
The fraud with regards to this terminology is the implication that no individual or capitalist or company is possessive of power in the Market System - the amorphous Market System rules.
Mr. Galbraith suggests that "the Corporate System" would be a truer and more accurate explanation of the prevailing economic system in the U.S. today.
The second fraud is the notion that the Market System is governed by consumer demand. "Belief in a market economy in which the consumer is sovereign is one of our most pervasive forms of fraud." Galbraith suggests that consumer demand is more managed and contrived than independent.
Gross Domestic product is the next fraud. "The more than minimal fraud is in measuring social progress all but exclusively by the volume of producer-influenced production, the increase in the GDP ... Good performance is measured by the production of material objects and services. Not education or literature or the arts but the production of automobiles, including SUVs: Here is the modern measure of economic and therewith social achievement."
Work is next on the fraud hit list. "The word work embraces equally those for whom it is exhausting, boring, disagreeable and those for whom it is a clear pleasure with no sense of the obligatory ... Those who most enjoy work - and this should be emphasized - are all but universally the best paid. Those who least need compensation for their effort, could best survive without it, are paid the most ... While idleness is good for the leisure class in the United States and all advanced countries, it is commonly condemned for the poor."
The next fraud challenges the notion that the term bureaucracy applies to government solely and that shareholders and founders or owners are the ultimate authority ruling corporations. "No one should be in doubt: Shareholders - owners - and their alleged directors in any sizable enterprise are fully subordinate to the management. Though the impression of owner authority is offered, it does not, in fact, exist. An accepted fraud ... Reference to corporate management compensation as something set by stockholders or their directors is a bogus article of faith - compensation (is) set by management for itself." And the author points out that management's compensation to itself "can be munificent."
"Corporate power lies with management - a bureaucracy in control of its task and its compensation. Rewards that can verge on larceny. This is wholly evident. On frequent recent occasions, it has been referred to as the corporate scandal."
The public sector vs. the private sector is, in the author's opinion, also in the innocent fraud category. "The accepted distinction between the public and the private sectors has no meaning when seriously viewed. Rhetoric, not reality. A large, vital and expanding part of what is called the public sector is for all practical effect in the private sector ... Close to half of the total of the United States government's discretionary expenditure (outlay not mandated for a particular use, such as Social Security or service of the public debt) was used for military purposes - for defense ... A large part was for weapons procurement or for weapons innovation and development."
"The Military Industrial Complex: Explicit was the takeover of public weapons policy by the defense industry ... The intrusion into what is called the public sector by the ostensibly private sector has become a commonplace."
The author goes on to point out that defense and weapons development are motivating forces in foreign policy. "For some years there has also been recognized corporate control of the Treasury - business firms moving ever closer to actual combat; corporations now provide stand-ins for active soldiers; some firms are helping to conduct training exercise (and) contract as military recruiters and instructors in R.O.T.C.
"So the reality. In war command as in peace, the private becomes the public sector."
The next fraud deals with predicting the future performance of the economy. (Unfortunately there is a rather glaring misprint in this chapter.)
"The fraud begins with a controlling fact, inescapably evident but all but universally ignored. It is that the future economic performance of the economy, the passage from good times to recession or depression and back, cannot be foretold."
The inference of this last statement is that the future of the performance of the economy can be foretold, but the remainder of the text that follows illustrates how charlatans sell their so called predictions to everyone's eventual dismay.
The paragraph continues as follows: "There are more than ample predictions but no firm knowledge. All contend with a diverse combination of uncertain government action, unknown corporate and individual behavior and, in the larger world, with peace or war."
So I think Mr. Galbraith's innocent fraud is the notion that the future performance of the economy can be foretold.
And the following chapter begins with, "I come now to our most prestigious form of fraud, our most elegant escape from reality. As sufficiently noted, the modern economic system is unpredictable in its movement from good times to bad and then eventually from bad to good ... here is our most cherished and, on examination, most evident form of fraud ... The false and favorable reputation of the Federal Reserve has a strong foundation."
Mr. Galbraith explains that the notion that the Federal Reserve can control the economy by manipulating the interest rate is not true and has been confirmed historically. "Business firms borrow when they can make money and not because interest rates are low ... Recovery comes, but not in any way, from Federal Reserve Action. Housing improves as mortgage rates decline. Interest rates are a detail when sales are bad. Firms do not borrow and expand output that cannot be sold ... Since 1913, when the Federal Reserve came fully into existence, it has had a record against inflation and notably against recession of deep and unrelieved inconsequence ... The fact will remain: When times are good, higher interest rates do not slow business investment. They do not much matter; the larger prospect for profit is what counts. And in recession or depression, the controlling factor is the poor earnings prospect ... the defining forces will be the consumer spending and industry investment ... the belief that anything as complex, as diverse and by its nature personally as important as money can be guided by well-discussed but painless decisions emanating from a pleasant, unobtrusive building in the nation's capital belongs not to the real world but to that of hope and imagination."
The next fraud is that corporations are innocent, blameless and amorphous. Corporations are powerful and need to be regulated. "There is no question but that corporate influence extends to the regulators ... Needed is independent, honest, professionally competent regulation - again, a difficult thing to achieve in a world of corporate dominance. This last must be recognized and countered. There is no alternative to effective supervision. Management behavior can also be improved by thoughtful contemplation of the wholly real possibility of less than agreeable incarceration."
Next the author points out the connection between the military industrial complex, its merging of the private sector and the public sector and its influence on foreign policy and consequently our war efforts.
"The greatest military misadventure in American History until Iraq was the war in Vietnam."
During the Vietnam War, which the author did not support, he points out: "During all this time the military establishment in Washington was in support of the war. This indeed, was assumed. It was occupationally appropriate that both the armed services and the weapons industries should accept and endorse hostilities."
The author also points out the failure of bombing during World War II and that it was ineffective in halting German War production. "In Germany the strategic bombing, that of industry, transportation and cities was gravely disappointing ... fighter aircraft production actually increased in early 1944 after major bombing. In the cities the random cruelty and death inflicted from the sky had no appreciable effect on the war production of the war.
"These findings were vigorously resisted by the Allied armed services, especially, needless to say, the air command, even though they were the work of the most capable and relevant scholars of the United States and Britain and were supported by German industry officials and impeccable German statistics ... All our conclusions were cast aside - this, as said, the response of the air command and its public and academic allies. The latter united to arrest my appointment to a Harvard professorship and succeeded in doing so for a year."
The final chapter is entitled "The Last Word".
"One thing, I trust, has emerged in this book: That is the now dominant role of the corporation and the corporate management in the modern economy." The author then points out that the corporation along with its merging with the Military Industrial Complex and the dissolving of the distinction between public and private sector has led to "adverse social flaws".
"One, as just observed, is the way the corporate power has shaped the public purpose to its own ability and need. It ordains that social success is more automobiles, more television sets, more diverse apparel, a greater volume of all other consumer goods. Also more and more weaponry ... Wars are, one can not doubt, a major modern threat to civilized existence, and corporate commitment to weapons procurement and use nurtures and supports this threat. It accords legitimacy and even heroic virtue to devastation and death."
The author goes on to admonish tax relief to the wealthy and corporate management as without economic merit. "A recession calls for a reliable flow of purchasing power, especially for the needful, who will spend. Here there is assured effect, but it is resisted as unserviceable compassion ... There can be pecuniary reward, most often tax relief, for the socially influential. In the absence of need, it may not be spent. The needful are denied the money they will surely spend; the affluent are accorded the income they will almost certainly save."
The author's final word is on the Iraq war. "As I write the United States and Britain are in the bitter aftermath of a war in Iraq. We are accepting programmed death for the young and random slaughter for men and women of all ages ... Civilized life, as it is called, is a great white tower celebrating human achievements, but at the top there is permanently a large black cloud. Human progress dominated by unimaginable cruelty and death.
"I leave the reader with the sadly relevant fact: Civilization has made great strides over the centuries in science, health care, the arts and most, if not all, economic well-being. But also it has given a privileged position to the development of weapons and the threat and reality of war. Mass slaughter has become the ultimate civilized achievement.
"The facts of war are inescapable - death and random cruelty, suspension of civilized values, a disordered aftermath. Thus the human condition and prospect as now supremely evident. The economic and social problems here described, as also mass poverty and starvation, can, with thought and action, be addressed. So they have already been. War remains the decisive human failure."