THE ECONOMICS OF INNOCENT FRAUD
J.K. GALBRAITH
PENGUIN BOOKS 2004/2005
PART I
Back cover
A lifelong critic of unbridled corporate power and the most widely read economist of the 20th century, the legendary Harvard professor J.K. Galbraith has been published by Penguin for more than 40 years. His latest book, The Economics of Innocent Fraud, published here in paperback for the first time, is a vigorous polemic that reveals the unacknowledged grip of the private sector on public life and considers our increasing tendency to accept blindly legal, legitimate, ‘innocent’ fraud.
Introduction and a Personal Note
For some 70 years my working life has been concerned with economics, along with not infrequent departures to public and political service that had an economic aspect and one tour in journalism. During that time I have learned that to be right and useful, one must accept divergence between approved belief – what I have elsewhere called conventional wisdom – and the reality. And in the end, not surprisingly, it is the reality that counts. This small book is the result of many years of encountering, valuing and using this distinction, and it is my conclusion that reality is more obscured by social or habitual preference and personal or group pecuniary advantage in economics and politics than in any other subject. Nothing has more captured my thought, and what follows is a considered view of this difference.
A lesser point: Central to my argument here is the dominant role in modern economic society of the corporation and of the passage of power in that entity from its owners, the stockholders, now more graciously called investors, to the management. Such is the dynamic of corporate life. Management must prevail.
As I was working on these pages, there came the great breakout in corporate power and theft with the unanticipated support of cooperative and corrupt accounting. Enron I had noticed as an example of my case; there were to be more in the headlines. Perhaps I should have been grateful; there are few times when an author can have such affirmation of what he or she has written. The corporate scandals, as they are now called, dominated the news because of exceptionally competent and detailed reporting. I forgo repetition here. I do, however, make reference to the restraints to which managerial authority must now be subject, but these are a small part of the story. More to be told is of the longer and larger departure from reality of approved and conditioned belief in the economic world.
Dealt with in this essay is how, out of pecuniary and political pressures and fashions of the time, economics and larger economic and political systems cultivate their own version of the truth. This last has no necessary relation to reality. No one is especially at fault; what it is convenient to believe is greatly preferred. This is something of which all who have studied economics, all who are now students and all who have some interest in economic and political life should be aware. It is what serves, or is not adverse to, influential economic, political and social interest.
Most progenitors of what I here intend to identify as innocent fraud are not deliberately in its service. They are unaware of how their views are shaped, how they are had. No clear legal question is involved. Response comes not from violation of law but from personal and social belief. There is no serious sense of guilt; more likely, there is self-approval.
This essay is not a totally solemn exercise. A marked enjoyment can be found in identifying self-serving belief and contrived nonsense. So it has been for the author and so he hopes it will be for the reader.
Chapter 1: The Nature of Innocent Fraud
This treatise must, at the outset, contend with a seeming and severe contradiction: How can fraud be innocent? How can innocence be fraudulent? The answer is of no slight significance, for innocent, lawful fraud has an undoubted role in private life and public discourse. However, by neither those so believing nor those so guiding is there spoken recognition of that fact. There is, to emphasize, no sense of guilt or responsibility.
- Some of this fraud derives from traditional economics and its teaching and some from the ritual views of economic life.
- These can strongly support individual and group interest and can achieve the respectability and authority of everyday knowledge.
- This is not the contrivance of any individual or group but represents the natural, even righteous view of what best serves personal or larger interest.
- What prevails in real life is not the reality but the current fashion and the pecuniary interest.
- When capitalism, the historic reference, ceased to be acceptable, the system was renamed. The new term was benign but without meaning. To this I now turn.
Chapter 2: The Renaming of the System