mnot’s blog

Design depends largely on constraints.” — Charles Eames

Thursday, 2 September 2004

Economics Standards

Innocent Fraud

…I have learned that to be right and useful, one must accept a continuing 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.

John Kenneth Galbraith, “ The Economics of Innocent Fraud

This is exceptionally good advice in a thought-provoking (and slim, at 62 pages) book about “how, out of the pecuniary and political pressures and fashions of the time, economics and larger economic and political systems cultivate their own version of truth [that] has no necessary relation to reality.” He stresses that “No one is especially at fault; what it is convenient to believe is greatly preferred.”*

Can we say Laffer curve?

Galbraith, however, focuses on more current phenomenon; e.g., the innocent fraud that owners/investors (i.e., those who used to be called “capitalists”) have control over an enterprise, when in reality, as we’ve seen in recent years, management — the hired help — has undiluted power. He also takes a swipe at the artificial delineation between “public sector” and “private sector,” and the effects upon American society.

In doing so, he does not intend to revolutionise; only to inform and limit the more egregious abuses.

The corporation… is an essential feature of modern economic life. We must have it. It must conform, however to accepted standards and requisite public restraints. Freedom for beneficial action is necessary; freedom should not be a cover for either legal or illegal misappropriation of income or wealth. Corporate management must have authority for action but not for seemingly innocent theft.

I do find the writing style somewhat difficult ( Eats, Shoots and Leaves comes to mind), but it’s well worth the effort. Note that this is a largely rhetorical book; if you’re looking for carefully-supported arguments and statistical footnotes, you’ll be disappointed. For example, Galbriath claims that close to half of the discretionary spending (i.e., non-Social Security) spending in the 2003 U.S. budget was military; can anyone give a reference for that?

I only hope that more writing in a similar vein — by Galbraith and others — will develop this theme.