The Culture of Contentment

THE CULTURE OF CONTENTMENT

THE CULTURE OF CONTENTMENT

JOHN KENNETH GALBRAITH

With a new foreword by JEFF MADRICK

PRINCETON UNIVERSITY PRESS

PRINCETON AND OXFORD

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To Kitty once more with love

CONTENTS

FOREWORD

Jeff Madrick

John Kenneth Galbraith’s influence among economists had been falling for a couple of decades when he published The Culture of Contentment in 1992. This book, though economically written, is a comprehensive criticism of the economic thinking that came to ascendance in the 1970s and 1980s and would continue to dominate policy for the most part in the decades that followed. Galbraith, fortunately, wasn’t giving up, and he was getting back. The reissue of this book is a testament to how right he was.

Galbraith knew better than most economists—and maybe, most important, didn’t forget—how government had saved capitalism time and again. The New Deal in the United States was the indelible example, with its creation of Social Security, unemployment insurance, financial regulation, union protection, jobs programs, and a belief in Keynesian budget deficits to end recessions. Aside from Keynesian economics, Britain under Prime Minister Lloyd George had undergone a similar transformation with the adoption of myriad social welfare programs before World War I. Galbraith was a champion of social democracy, as it came to be called, but he was not an enemy of capitalism. Like John Maynard Keynes, he believed government could make its best features work well.

Galbraith’s central views, which he had articulated in best seller after best seller since the 1950s, had influenced the social policies of his day. Indeed, in 1972, he had been elected president of the American Economics Association, a body of august self-importance, which nevertheless believed it appropriate to so honor Galbraith.

In The Culture of Contentment, published thirty-five years after his magnum opus, The Age of Affluence, Galbraith felt obliged to defend once again the view that government measures were not merely critical to social good and political stability, but to prosperity as well. Once he was among the most cited economists in the world, but as he continued to defend a robust welfare state, the evolving mainstream profession moved in the other direction. He knew this all too well, and one supposes his frustration was difficult to constrain. But Galbraith was right, and the mainstream was wrong. To today’s readers, this book provides a history and also a guide to social justice and economic prosperity that the United States has failed to follow—to its detriment.

The Culture of Contentment may well be the most important testament to the correctness of Galbraith’s thinking, because it stood courageously in direct contrast to the antigovernment, allegedly scientific consensus that by 1992 leaned decidedly toward laissez-faire governance. How wrong that consensus has been is most evident in the financial disaster of 2008, but when its advocacy of deregulation, singular attention to inflation, and neglect of fiscal policy not only spawned the crisis but also contributed significantly to slow wage growth, inequality, high poverty levels, and a lack of adequate public investment, leaving its mark vividly in the disturbingly slow rate of productivity growth over the last decade.

The inflationary crisis in the 1970s opened the sluices for the economic consensus’s turn to the Right. The foundational idea of this shift was that private markets were self-correcting, and moreover created an ideal path to prosperity, because of the power of the invisible hand. An ideal (equilibrium) price for a product would be found through the interaction of buyers and sellers, which would benefit all throughout the economy of thousands of individual marketplaces. This was known as general equilibrium theory, which we discuss later. Government regulation of prices, quantities, or borrowing would simply muck up the works. Government social programs, in turn, were typically thought of as dead weight, and thus as losses to the nation’s income. Worse, any resulting federal deficit for social policy expenditures was seen as inflationary, especially if it was financed by money creation from the Federal Reserve. With high inflation and simultaneously high unemployment in the 1970s, it was then easy, if unjustified, to proclaim that Keynesianism was failing and that government was the problem.

At its most basic, The Culture of Contentment is an indictment of economic policies under Presidents Ronald Reagan and George H. W. Bush, which followed along the lines of this new economic consensus, but the book also stands as a criticism of the policies to come under Presidents Bill Clinton, George W. Bush, and, to some degree, Barack Obama. In the era when Galbraith published the book, the oversimplified theory that minimal government was the best government was considered almost incontestable. Between 1990 and 1997, basically every economist who won the Nobel Prize, most of whom were either graduates of or associated with the University of Chicago, had just such a utopian faith that unregulated markets in pursuit of price equilibrium would optimize outcomes for everybody. Some of these economic claims were extreme, in particular the notion among rational expectationists that government policy had no influence on prices at all. In fact, the more unconventional the theory, the better, because then it ironically served as proof that such thinking was scientific. And as in science, great hypotheses, such as those of Galileo, Copernicus, and Einstein, often defied common sense and were scorned.

Even corruption could not exist in this laissez-faire utopia. The 1992 winner of the Nobel Prize in Economics, University of Chicago professor Gary Becker, wrote in a Newsweek column that if we abolished government, we would abolish corruption. And in practice, Federal Reserve Chairman Alan Greenspan did not pursue fraud allegations in the early 2000s against the subprime mortgage writers the FBI had warned him about, because he believed markets would minimize fraud on their own. If someone was charging too high or too low a price, he or she would be undercut by a competitor or take a loss on a bad risk and surely not repeat the mistake. Businesspeople couldn’t possibly be so unintelligent as to continue to make irrationally risky decisions!

Most of the mainstream believed they had now solved the problem of maximizing economic growth in the United States. After the inflationary ravages of the 1970s, the government’s main economic objective was seen as subduing inflation, and Greenspan made this his priority. His successor a decade and a half later, Professor Ben Bernanke of Princeton, was one of the key theorists behind inflation-targeting policy. If only inflation were low, he believed, the magical workings of the free market would maximize productivity and prosperity—not to mention ensure a fair distribution of economic gains. Reducing the federal budget deficit, which had been sharply inflated by Ronald Reagan’s tax cuts, was also a central element of this thinking. Big deficits were seen to stimulate inflation by creating too much demand and pushing up interest rates, which crowded out private investment.

These policies accorded well with what Galbraith termed the culture of contentment. A large proportion of Americans now lived comfortably, he noted, and did not want their contentment disturbed by inflation, government deficits, or higher taxes to support overly generous social programs. The new economic consensus was a handmaiden to contentment.

As Galbraith wrote in this book, Many who vote Democratic, perhaps a majority, are, in fact, strongly committed to the politics of contentment (113). The theories contrived to fight inflation resulted in absurd prescriptions, but it was Galbraith who was ostracized. To many mainstream economists in the 1980s, for example, if government policy pushed the unemployment rate to as low as 6 percent, dreaded inflation would be stoked and rise ever higher—a tenet of Milton Friedman’s natural rate theory. As we know, in less than a decade the unemployment rate fell below 4 percent and inflation was quiescent.

Another component of the laissez-faire policies that damagingly washed over the economics profession was efficient markets theory. To boil it down, markets were so efficient that the value they assigned to a stock, a bond, or almost any derivative not only reflected the true risk of owning that product (the probability of partial or total loss) but also correctly forecast the future. Thus, most of the time, stocks reflected the true future value of corporations and bonds the true future value of interest payoffs over time, which meant investors could correctly anticipate future inflation. High inflation would eat into the value of interest payments. The bond traders were completely wrong, however, as inflation fell sharply and hovered below 2 percent a year by the 2000s.

The mainstream largely if not completely supported the historically odd notion—all the more proof of its scientific validity—that overspeculation in financial instruments was rare and, when it did occur, manageable with little regulation. Again, the point was that markets were self-correcting. Almost no one thought the crash of 2008 could come. To Galbraith, however, the financial mind was distinctive and inevitably bound to error. This rather remarkable manifestation of human intelligence is characterized by a very short memory span. In consequence, the recollection of the economic effects of past disaster that has occurred because of past errors of optimism eventually dissolves (127). Until recently, mainstream economics has allowed little place for even simple human psychology in its proclamations.

A predecessor to the 2008 crash was the wave of bankruptcies of savings and loan institutions that erupted in 1989 and the early 1990s in response to an outbreak of inexplicable congressional deregulatory activity. The S&Ls, which were basically savings institutions, retained the federal guarantee on their deposits but were now allowed to invest that money in almost anything they cared to, including fancy resorts, golf courses, and Michael Milken’s junk bonds, as well as other risky S&Ls. Bad investments brought the biggest of them down, and the federal government bailed the industry out at great cost in order to pay off savers.

There were other damaging pillars of the economic theoretical consensus. Not least was the mainstream claim that workers were largely paid their value to the economy, an idea Galbraith rejected entirely. He was fully conversant in the uses of power by the powerful—usually big business and banks—and believed that federal protection of the right to organize labor unions was critical to ensuring a fair wage. This was a principle he called countervailing power and had developed in the 1950s in his book American Capitalism. Markets, he argued, were easily corrupted by the power of big business and could only be offset by the power of the sellers of their labor through unionization. Thus, government should enable unions to organize. By the same token, big business was valuable if so held in check because it was critical to economic stability, investment in research and development, and the exploitation of economies of scale. This, however, was an idea that much of the new mainstream refused to accept. Minimum wages were certainly required. But to much of the mainstream, labor markets functioned, like all markets functioned, in near-utopian ways. As Richard Parker summarizes in his excellent biography of Galbraith, a triumvirate of government, labor, and big business would stabilize and optimize the economy, not the market alone.

To Galbraith, most importantly, the culture of contentment defined and controlled economic thinking, not the other way around. This was key to his thinking. He had little use for the so-called objective science of economics if the result was utter support of pure general equilibrium thinking—that is, the perfect working of laissez-faire policy. It was to a large degree, in Galbraith’s view, a giant rationalization. He believed that the politics and public opinion of the day influenced prevailing economic theory as much as new theories influenced public opinion, and probably more so.

It was, I think, really a class of the contented that he was talking about. At the time, as noted, it seemed a majority of Americans were making comfortable incomes, and the economy, though it clearly had its ups and downs, was working for them once the ravaging inflation of the early 1980s had been brought under control. The unemployment rate was about 5.5 percent in 1990, though it had started to rise under George H. W. Bush as a moderate recession got under way.

The class of the contented bequeathed to the nation Galbraith’s culture of contentment, which he argued emphasized short-term comfort over sacrifices for a prosperous and socially just future. It was only natural that the contented would prefer tax cuts to tax hikes, modest distribution of taxes over aid to the poor, only modest investment in infrastructure or education if it came out of their pocket in new taxes, low capital gains taxes on investment, and less regulation of finance to enable them to profit from new investment vehicles.

The one exception to restrained spending, of course, was the military. When