Corporate takeover of a blinkered nation

The Economics of Innocent Fraud
January 21, 2005

This short book, published in John Kenneth Galbraith's 97th year, is an essay on the divergence between so-called conventional wisdom and reality, particularly in the fields of economics and politics. The result of this divergence is that people are deceived. This represents a kind of fraud, but no one is especially at fault. In this sense, it is innocent fraud. The perpetrators feel no guilt because they do not set out deliberately to defraud others. They are as blinded by the conventional wisdom as their victims.

In the economic sphere, labels obscure reality. The Western economic system was once called capitalism, but that term, with all its past associations of exploitation, has fallen into disuse. It has been replaced by the "market system", which carries the implication that the consumer is sovereign and that such things as the level of demand and prices are set by impersonal market forces. In reality, Galbraith argues, they are set by large corporations exercising oligopolistic power. A more accurate descriptor of the modern economy would be the "corporate system".

Galbraith's comments on belief and substance in the world of big business are, as he readily admits, far from original. He addresses first the myth of the heroic chief executive who, with charismatic leadership, runs a giant corporation. This, he says, is nonsense. Big companies are bureaucracies, just like government departments. Because an executive's importance is judged by how many people are being managed, these bureaucracies tend to grow fat until corrective action in the form of downsizing is necessary (echoes here of Parkinson's Law - work expands so as to fill the time available for its completion).

He then launches into a withering attack on the myth of shareholder capitalism and the role of the board of directors. "It includes men and the necessary presence of one or two women who need only a passing knowledge of the enterprise; with rare exceptions, they are reliably acquiescent." Enron is inevitably quoted as an example of system failure. The occasion when shareholders have their say - the annual general meeting - is dismissed as a religious rite. Infidels who urge action are set aside; the management position is routinely approved.

Galbraith also disposes of the myth of the two sectors - public and private. He argues that the accepted distinction between the two has no meaning in reality. This is not simply because so many functions previously part of the public services have been privatised, it is also a function of the symbiotic relationship between industry and government, particularly in the arms industry. The government provides contracts and profits; the companies provide employment and pay taxes. In the US, companies also contribute significantly to political funds. Galbraith mentions that it was President Eisenhower who first pointed out the dangers of a powerful military-industrial complex.

He then turns to the world of finance and investment - a well-recognised area of both innocent and not-so-innocent fraud. The starting point is the inescapable but widely ignored fact that the future performance of the economy cannot be foretold. Nevertheless, predicting the future of an economy or of a single stock can be the basis of a very profitable career when supported by past accidental success or a confusing array of charts and equations. The technology boom of the late Nineties is quoted as a conspicuous example of the kind of fraud that results.

Galbraith's final blast is directed at the US Federal Reserve and its use of interest rates as a means of controlling the US economy. Its actions are thought to be the best means of preventing or at least limiting recession and inflation. "They are also manifestly ineffective. Recession and unemployment or boom and inflation continue. Here is our most cherished and, on examination, most evident form of fraud."

I described this work as an essay. Its author is without doubt one of the most distinguished economists and commentators on public affairs of the age. He is attempting to treat some of the most profound issues facing Western society within the compass of 60 pages.

The result is greatly disappointing in that not only is it inevitably superficial, given its brevity, it manages to be both repetitive and rambling at the same time. Galbraith is an advocate of looking at the truth behind the myth. The sad truth here is that his reputation has been the justification for the book's publication, not the quality of the analysis itself.

Philip Sadler is vice-president, Ashridge Business School.

The Economics of Innocent Fraud: Truth for Our Time

Author - John Kenneth Galbraith
Publisher - Allen Lane The Penguin Press
Pages - 62
Price - £10.00
ISBN - 0 7139 9820 2

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