The World According to Galbraith


Few economists have had a more diverse or distinguished career than John Kenneth Galbraith. In addition to teaching at Harvard and writing prolifically, Galbraith also organized and ran the price-control system during World War II, and served as Ambassador to India during the Kennedy Administration.

Today, at age 95, Galbraith is still railing against conventional wisdom. In his new book, published on Apr. 26 -- The Economics of Innocent Fraud -- Galbraith argues that many of the terms and ideas that permeate discussion of economics are in fact terribly misleading. He contends, for instance, that the distinction between the "public" and "private" sectors is more rhetoric than reality; that the idea that shareholders and directors play major roles in modern corporations is equally specious; and that the role of the Federal Reserve Board has been greatly exaggerated. He's also sharply critical of many current polices, including the war in Iraq and the Bush tax cuts.

On a recent April afternoon, Galbraith talked about his new book with BusinessWeek Boston Bureau Chief William C. Symonds. They met at Galbraith's Cambridge home, which is where Eugene McCarthy announced that he would run for President in 1968 as a candidate opposed to the war in Vietnam. Edited excerpts of their conversation follow:

Q: You were one of the leading opponents of the war in Vietnam. What's your view of the war in Iraq?

A: I was very much opposed to U.S. intervention there on the grounds that it would cause more suffering than a stand-off policy.

Q: Based on your experience as Ambassador to India in the early 1960s -- when the Indian economy was still in the early stages of development -- how do you assess the chances of rebuilding Iraq?

A: The job will be far more difficult and more time-consuming than we have allowed ourselves to believe. It will be a much slower operation than it was in India.

Q: Why?

A: Because India had an enormous reserve of eager, affordable talent and a fairly stable government. Neither of those conditions exists in Iraq. Also, the Indians can put aside religious beliefs [and differences] when they need to [for the good of the economy]. In Iraq, they may not be able to do that.

Q: How do you think the situation in Iraq will end?

A: The U.S. is a very poor imperial power. We don't have an aptitude for dealing with deep-seated racial and religious differences. And we are subject to the doubts associated with anything like the invasion of Iraq. So my hope is that we turn this back to the Iraqis, recognizing that things will not be good, but that they could hardly be worse than they are with us [there].

Q: So you favor a U.S. withdrawal?

A: There is no choice. We are becoming a greater source of conflict by remaining there.

Q: In your new book, you argue that the power and influence of the Federal Reserve Board has been greatly exaggerated. Why are you so skeptical?

A: During World War II, we realized that the Fed did not have the power or will to stabilize prices, given the enormous pressure on markets that the war was generating. Yet we got through World War II with no inflation, despite enormous increases in public expenditures. I was very involved. [At the Office of Price Administration], I started with a staff of seven, and ended with 12,000 to 13,000.

Q: O.K., but hasn't the Fed had a much bigger impact before and since then?

A: If you look back over its record from 1913, there has been an extraordinary succession of failures. We've had a succession of booms and busts, neither of which has been effectively resisted by the Fed.

Q: So why is the Fed held in such high regard?

A: Its prestige has been boosted by one of the most competent figures of this century -- present Chairman [Alan Greenspan]. It would be impossible to have anyone who could collect more support than he does. He never talks too much, and he has a manner one would expect in a really great banker.

Q: But surely the Fed has played a major role in the current recovery, by keeping the Fed funds rate at just 1%?

A: [That's appealing] to people who want a simple solution. But now, as before, corporations and enterprises -- both large and small -- borrow and invest when there is an opportunity to make money. And except for the housing industry, they don't pay any attention [to interest rates], except when they read about it in the paper.

Q: What's your view of the Bush tax cuts?

A: I want to see a stable, progressive economy that minimizes the worst features -- economic instability [and recession]. The best solution is not to extend economic support to the corporate greats and the rich, whose spending can be very uncertain. A far stronger approach is to extend economic benefits to the poor. We shy away from that because it seems like a social step, rather than an economic step.

Q: What will be the consequences of extending the tax cuts?

A: I'm not against the wealthy. But giving them tax cuts is solidly against the most effective way of helping the economy. The most important thing we can do when there is a fear of recession is to make sure that remedial action improves demand, spending, and employment.

We react against that, because it seems like a liberal, radical idea -- a sort of misguided humanitarianism. But it is also the surest support for the economy.

Q: Another issue you discuss in your book is the growing influence that Corporate America -- and CEOs -- have in Washington. What impact has that had on policy?

A: At present, what we're seeing is the identification of corporate need as good policy. One of the adverse effects of that is the support the arms industry gets. The other is in environmental policy.

Q: So this results in bad policy, in your opinion?

A: It results in a skewed policy. Some things are handled well. But when it comes to a wise expenditure of public funds, the interests of the corporate elite take precedence -- which is not necessarily good for the economy. The tax cuts are one of the strongest manifestations. The tax cuts were sold [as a means of hastening] a recovery, but the real purpose was to give more money to those who wanted it.

Q: When you were in India, many of the brightest young Indians were coming to the U.S. to study and work. Now, we are outsourcing many jobs to India. Do you see that as a threat?

A: No, I do not. I see it as a major step toward closer, peaceful international relations.

Q: During your career, the power of the U.S. has increased enormously. Do you expect that to continue?

A: In some ways, I think the great days of the U.S. may be past. In Iraq, we have seen a great diminution of our international position. If we continue to give support to military operations around the world, and intervene in nations, our influence will weaken. But if we can be genuinely humane -- with a large interest in the economic well-being of other countries -- there is no doubt our prestige will be enhanced.


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