THE ECONOMICS OF INNOCENT FRAUD

J.K. GALBRAITH

PENGUIN BOOKS              2004/2005

PART II

 

Chapter 2: The Renaming of the System

The economic system that is common to all the economically advanced countries of the world and in more diffuse form to others – the exceptions being North Korea, Cuba and, in reference but not in reality, China – accords ultimate economic authority to those in control of the relevant plant, equipment, land and supporting financial resources. Once owners were in charge; now firms above a certain size and with tasks of a high level of complexity have management. Managers, as will be later emphasized, not the owners of capital, are the effective power in the modern enterprise. For this reason and because the term ‘capitalism’ evokes a sometimes sour history, the name is in decline. In the reputable expression of economists, business spokesmen, careful political orators and some journalists, it is now ‘the Market System.’ The word ‘capitalism’ is still heard but not often from acute and articulate defenders of the system.

There is no serious doubt as to what brought the change. Capitalism emerged in Europe from the merchant era with the manufacture, buying, selling and transport of goods along with the rendering of services. Then came the industrialists, with power and prestige given by ownership, direct or indirect, and workers who suffered from their undoubted bargaining weakness – life as the alternative to often painful toil – and the resulting oppression. Marx and Engels, in some of history’s most influential prose, outlined the prospect and the promise of revolution. At the end of World War I, in Russia and on its borders, the threat became the reality. Especially in Europe, the word ‘capitalism’ affirmed too stridently this power of ownership and the magnitude of worker and larger subjugation. So came the more than plausible possibility of revolution.

• In the United States, in the late 19^th century, capitalism had a different but also negative connotation. Here it was not in the workers alone that it cultivated an adverse reaction.
• It also, in important measure, affected the public at large. It meant price, cost exploitation.
• Such was the response to the monopoly by John D. Rockefeller of the supply of oil, of steel by Carnegie and tobacco by Duke.
• There was also the diverse power of the railroad magnates and of J.P. Morgan and his counterparts in banking and finance.
• In 1907, the seeming danger of widespread bankruptcy in Wall Street led to the belief that capitalism was not only exploitative but, with larger effect, self-destructive.
• Beginning in the early years of the 20^th century came the American reaction in a broad thrust of legislation. The Sherman Antitrust Act sought to prevent and to punish monopolistic abuse.
• The Federal Reserve System was established in 1913 as a restraining force on the financial community. The Federal Trade Commission was introduced with an impressive regulatory role.

So negative had become the reputation of capitalism that Republicans joined and sometimes led Democrats in attempts to correct its abuses. In Europe the word ‘capitalism’ had evoked revolution; in the United States it brought legislation, adverse judicial decisions and regulation.

During World War I, sophisticated thought, extending to belief, held that the source of the conflict and its mass death and destruction had been the rivalry between great arms and steel combines of France and Germany. In back of the slaughter were those who, for profit, made the guns.

• More destructive to the reputation of capitalism in the United States, was the visibly insane Florida real estate speculation, the rising corporate and industrial voice and, most important, the stock market explosion of the late 1920s.
• Then came the world-resonating crash of 1929 and, for 10 long years, the Great Depression.
• Capitalism all too obviously did not work. So denoted, it was unacceptable.
• There followed a determined search for a benign alternative name – Free Enterprise, Social Democracy, the New Deal.
• So in reasonably learned expression there came ‘the market system.’ There was no adverse history here, in fact no history at all.
• It would have been hard to find a more meaningless designation – this a reason for the choice.

Product innovation and modification is a major economic function, and no significant manufacturer introduces a new product without cultivating the consumer demand for it. Or foregoes efforts to influence and sustain the demand for an existing product. Here enters the world of advertising and salesmanship, of television, of consumer manipulation. Thus an impairment of consumer and market sovereignty.

• In the real world, the producing firm and the industry go far to set the prices and establish the demand, employing to this end monopoly, oligopoly, product design ad differentiation, advertising, other sales and trade promotion.
• Reference to the market system as a benign alternative to capitalism is a bland, meaningless disguise of the deeper corporate reality – of producer power extending to influence over, even control of, consumer demand.
• This, however, cannot be said. It is without emphasis in contemporary economic discussion and instruction.
• There is only the impersonal market, a not wholly innocent fraud.
• No one can doubt that the renaming of the system, the escape from the unacceptable term ‘capitalism,’ has been somewhat successful.
• Reference to a market system is without meaning, erroneous, bland, benign. It emerged from the desire for protection from the unsavory experience of capitalist power.
• That the market is subject to skilled and comprehensive management is unmentioned even in most economic teaching. Here the fraud.

Another name for the system does come persuasively to the eye and ear: ‘the Corporate System.’ None can doubt that the modern corporation is a dominant force in the present-day economy, and certainly so in the United States. Nonetheless, allusions to it are used with caution or not at all. Sensitive friends and beneficiaries of the system do not wish to assign definitive authority to the corporation. Better the benign reference to the market.

Chapter 3: The Economics of Accommodation