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The Economics of Innocent Fraud: Truth For Our Time

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This book is a 62-page essay on fraudulent aspects of the current economic and political reality in the United States as seen by an illustrious economist and one of the most influential men of our time. Noteworthy is the fact that John Kenneth Galbraith was 95-years old when he wrote this a year ago. Judging from the wisdom and clarity of his expression, I can only say (to recall a line from a Meg Ryan movie, if you will): "I'll have what he's having."

I identified ten "frauds" as I was reading, but I think I may have missed one or two. Before I list them and comment, let me quote the last line in the book because I think it is important: "War remains the decisive failure."

Why Galbraith chose the word "decisive" is something of a puzzle. Decisive for what or for whom? Is he implying some sort of "decision" as regards humankind? Does he think we are going the way of the dodos? For myself it is clear that unless the war system is ended, most human beings will never progress beyond a tribal mentality, and will continue to suffer what Galbraith calls "death and random cruelty, [and the] suspension of civilized values..." (p. 62)

The "innocent" frauds that Galbraith calls to our attention are actually not all that innocent. What he means by "innocent" is that for the perpetrators, there is "no sense of guilt or responsibility" as though the fraudulent were children. Indeed from the perspective of Professor Galbraith's extensive experience and learning, many of the people who run our economies and our political systems are children. At any rate, there is a somewhat lofty and even grandfatherly tone to this treatise.

The first "fraud" is the use of the euphemistic "market economy" instead of the slightly stained "capitalism" to describe the present economic system. (By the way, Galbraith does not number his frauds. I do it for the sake of keeping them straight in my mind.)

The second is the fact that in the modern corporation, ownership--that is, the stockholders--have little to no authority while the professional managers call all the shots including setting their own compensation (fraud #7). Galbraith attributes this to the fact that corporations have become so vast and complex that the relatively unsophisticated ownership cannot really understand how to run the enterprise and so must yield to management.

Fraud number three is one that interests me a lot. Galbraith writes, "Reference to the market system as a benign alternative to capitalism is a bland, meaningless disguise of the deeper corporate reality--of producer power extending to influence over, even control of, consumer demand." (p. 7) This really is one of the most pressing problems of our time because the corporate power, through its ability to influence and control its legions of employees and the media, also has "influence over, even control of" who runs for office and who is elected in national and state governments. Indeed, in fraud #8 Galbraith notes that "A large, vital and expanding part of what is called the public sector is for all practical effect in the private sector." (p. 34) He specifically identifies the "defense" industry as being largely controlled by defense contractors in the private sector. Elsewhere in the essay, Galbraith refers to "the control of consumer choice and sovereignty" indicating that he understands that the control extends to the electorate. (p. 13)

Fraud number four is the way we hypocritically value "work." For some it is toil and for others it is a pleasure and indeed largely the reason for living, and yet how differently we are compensated, with those who need it least often getting the most in financial reward.

Fraud five refers to the corporate bureaucracy. While corporate people sneer at government agencies as being bureaucratic, large corporations have become just as bloated or even more so. (Chapter V: "The Corporation as Bureaucracy.")

Fraud #6 is the phony celebration of small businesses and family farms in the political rhetoric. Galbraith comments, "For the small retailer, Wal-Mart awaits. For the family farm, there are the massive grain and fruit enterprise and the modern large-scale meat producer." (p. 25)

Fraud #9 (I've mentioned numbers 7 and 8 above) is the fraud of economic predictions. Galbraith observes: "The financial world sustains a large, active, well-rewarded community based on compelled but seemingly sophisticated ignorance" (i.e., stockbrokers, stock analysts and other financial prognosticators). He adds, "...those...who tell of the future financial performance of an industry or firm, given the unpredictable but controlling influence of the larger economy, do not know and normally do not know that they do not know." (p. 40)

Finally there is the quaint fraud of the actions of the Federal Reserve Board, which Galbraith claims have no real effect on the economy.

For an interesting book on the corporation as a psychopathic entity (yes, psychopathic) see, The Corporation: The Pathological Pursuit of Profit and Power by Joel Bakan. In fact Galbraith should read this book. It would further part of his thesis.

In part this modest book is a succinct warning about how corporations are becoming more and more powerful as they gain greater and greater control over our lives. Perhaps what Galbraith is saying in his laconic way is that there is a very real danger that bit by bit we are on the way to a nation controlled not by a democratic electorate or even by republican checks and balances, but by an oligarchy of corporate power.

Although professor Galbraith has little proclivity for numbers not all economic ideas are best expressed as such. To reach the masses one must present simple valid arguments with suitable justification for assumptions.

Dr. Galbraith does just this in his essay.

He makes explicit what the masses know implicitly especially in light of Enron, Worldcom, ad infinitum.

Contrary to what some readers have posted ( I sometimes wonder if they actually read the book ) the author does not advocate "socialism, marxism," etc ( as if these terms had an unambiguous meaning ) but simply points out certain beliefs prevalent in society and proceeds to show that they are indeed myths. Some beliefs he clearly states are "innocent" by-products of circumstance.

I thoroughly enjoyed the book unable to put it down until it was read. I can only hope Dr. Galbraith continues to publish and provide us with his unique perspective.

John Kenneth Galbraith says he had fun writing this compact treatise, but it makes for painful reading. The much-honored Harvard professor claims that the gap between common wisdom about national economics and reality has widened alarmingly in recent years.

The center of the book's thesis is that what we once called "capitalism", and now usually call a "Market System", has morphed into a "Corporate System" controlled by management bureaucracy. Here are two short fragments to give the flavor of Galbraith's tract:

Myth: Shareholders own corporations.
"No one should be in any doubt: Shareholders-owners-and their alleged directors in any sizable enterprise are fully subordinate to the management. Though the impression of owner authority is offered, it does not, in fact, exist."

Myth: The public sector is entirely independent of the private sector.
"At this writing, corporate managers are in close alliance with the President, the Vice President and the Secretary of Defense. Major corporate figures are also in senior positions elsewhere in the federal government; one came from the bankrupt and thieving Enron to preside over the Army."

In earlier times, this book would have been burned in the public square. These days, it may simply be pushed off the bookshelves by a blizzard of withering reviews.

There is certainly fraud in economics however I question the innocence. Mr. Galbraith points out a handful of accepted truths about economics that are, quite frankly, false. Perhaps the biggest fraud is the idea the shareholders are part owners of the companies they invest in. This idea has been pushed most recently by internet trading companies who like to give small investors the impression that they literally own a piece of the company. You might as well claim to own part of the moon. Despite being an investor and `part owner' of the company I worked for they still laid me off without my permission or consultation. Even the board of directors is created by and for management. Mr. Galbraith describes the annual shareholder meetings as resembling a "Covenanted Baptist Church service". What further proof do you need of the impotence of the shareholder than the continuing and inexorable rise in management salaries through the early part of the decade as the market tanked. Imagine sports athletes being in charge of setting their own salaries and it becomes clear how CEO's can now earn 470 times the salary of the lowest paid worker in the company they manage.

Another fraud discussed by the author is the idea of public and private policy. These two spheres have become increasingly irrelevant as government officials jump back and forth between corporate management and policy making. How many public appointees have suddenly found themselves with lucrative lobbying careers the moment they leave an administration? Mr. Galbraith points to the military industrial complex as a particularly egregious merging of the two and even argues that the Pentagon is as much in the private sector as the public. As the final chapter closes he expresses sadness that of all the areas of technology that man has pursued developing weapons of war has consistently held priority.

`The Economics of Innocent Fraud' is a very small book (62 tiny pages) and can be read in a single sitting. The book is just a few simple ideas set down with little in the way of argument or persuasion. Although I agree with Mr. Galbraith in his ideas I wish there could have been a lot more substance. One chapter argues that the Federal Reserve is basically a placebo to satisfy investors and voters that the government is doing something. That's a pretty bold assertion (although I have heard this argument before). I just wish the book would have backed it up with more facts. Still, it's nice to see such a legendary figure still producing sharp, topical writings.

Galbraith remains the best 20th century economist because he understood that Economics isn't real science. Economists occupy a role that the Catholic Church occupied in Medieval Europe. Most clergy are corrupt or useless or filling some office of prestigious busy work with high qualifications and little talent. But there are a few good ones. Galbraith was one of the good ones.

Many science fiction books have put forth the notion that one day computers will take over the earth and run our lives. Many laugh at the notion of technology surpassing the grip of human control and yet on a lesser scale we are already constructing economic structures that barely touch the fingertips of the general public. Since these assumptive constructions are designed without conscience, they have no ethical boundaries and can only react as programmed. The result is a society striving towards whatever means produce the largest GDP. Whether it be the strengthening of an American War Machine, street tanks of high value and prestige or the amassing of wealth that is never intended for any social good. In the Economics of Innocent Fraud, John Kenneth Galbraith explains how our current configurations have resulted in a management controlled market driven towards greed as the ultimate measure of success. His warning is timely as it came a mere two years before the market crash of 2008.

I am a fan of Mr. Galbraith. I find him to be very thoughtful and very practical. I have as one of my goals to read all of his books. I don't always agree with everything that he says but his point of view is always thought provoking, practical, logical and hard to defeat. This book is very brief but for every word written on each page there are a thousand more implied. It is a very good book.

In the introduction to this book Mr. Galbraith attempts to explain the title Innocent Fraud.
"What prevails in real life is not the reality but the current fashion and the pecuniary interest ..." The innocent fraud is the public acceptance of conventional wisdom.

"When capitalism, the historic reference, ceased to be acceptable, the system was renamed. The new term was benign but without meaning." The new phrase to replace the word capitalism was "the Market System." This is the first example of innocent fraud.

Mr. Galbraith explains that the word capitalism had been sullied. The communist and the socialist had given the term a negative implication. By their definition the term capitalism meant "price, cost exploitation." The word had also been defamed by the people who were famous for being capitalist - like Rockefeller, Carnegie, Duke, Morgan, Vanderbilt, Gould, Fisk etc. Then the "Merchants of Death" exposure and scandal after World War I added more insult to the injury. This was followed by the Great Depression which many interpreted as the total failure of capitalism.

The powers-that-be tried to replace the negative term capitalism with "Free Enterprise" and "Social Democracy" but neither filled the bill. Finally, according to Professor Galbraith the meaningless and benign phrase, "The Market System", came into vogue. Markets, the author explains, are not peculiar to a capitalist system. Markets have been around since coinage came into existence supposedly in Lydia in the eighth century B.C. and have been integral to every type of economic system since - including communism and socialism.

The fraud with regards to this terminology is the implication that no individual or capitalist or company is possessive of power in the Market System - the amorphous Market System rules.

Mr. Galbraith suggests that "the Corporate System" would be a truer and more accurate explanation of the prevailing economic system in the U.S. today.

The second fraud is the notion that the Market System is governed by consumer demand. "Belief in a market economy in which the consumer is sovereign is one of our most pervasive forms of fraud." Galbraith suggests that consumer demand is more managed and contrived than independent.

Gross Domestic product is the next fraud. "The more than minimal fraud is in measuring social progress all but exclusively by the volume of producer-influenced production, the increase in the GDP ... Good performance is measured by the production of material objects and services. Not education or literature or the arts but the production of automobiles, including SUVs: Here is the modern measure of economic and therewith social achievement."

Work is next on the fraud hit list. "The word work embraces equally those for whom it is exhausting, boring, disagreeable and those for whom it is a clear pleasure with no sense of the obligatory ... Those who most enjoy work - and this should be emphasized - are all but universally the best paid. Those who least need compensation for their effort, could best survive without it, are paid the most ... While idleness is good for the leisure class in the United States and all advanced countries, it is commonly condemned for the poor."

The next fraud challenges the notion that the term bureaucracy applies to government solely and that shareholders and founders or owners are the ultimate authority ruling corporations. "No one should be in doubt: Shareholders - owners - and their alleged directors in any sizable enterprise are fully subordinate to the management. Though the impression of owner authority is offered, it does not, in fact, exist. An accepted fraud ... Reference to corporate management compensation as something set by stockholders or their directors is a bogus article of faith - compensation (is) set by management for itself." And the author points out that management's compensation to itself "can be munificent."

"Corporate power lies with management - a bureaucracy in control of its task and its compensation. Rewards that can verge on larceny. This is wholly evident. On frequent recent occasions, it has been referred to as the corporate scandal."

The public sector vs. the private sector is, in the author's opinion, also in the innocent fraud category. "The accepted distinction between the public and the private sectors has no meaning when seriously viewed. Rhetoric, not reality. A large, vital and expanding part of what is called the public sector is for all practical effect in the private sector ... Close to half of the total of the United States government's discretionary expenditure (outlay not mandated for a particular use, such as Social Security or service of the public debt) was used for military purposes - for defense ... A large part was for weapons procurement or for weapons innovation and development."

"The Military Industrial Complex: Explicit was the takeover of public weapons policy by the defense industry ... The intrusion into what is called the public sector by the ostensibly private sector has become a commonplace."

The author goes on to point out that defense and weapons development are motivating forces in foreign policy. "For some years there has also been recognized corporate control of the Treasury - business firms moving ever closer to actual combat; corporations now provide stand-ins for active soldiers; some firms are helping to conduct training exercise (and) contract as military recruiters and instructors in R.O.T.C.

"So the reality. In war command as in peace, the private becomes the public sector."

The next fraud deals with predicting the future performance of the economy. (Unfortunately there is a rather glaring misprint in this chapter.

"The fraud begins with a controlling fact, inescapably evident but all but universally ignored. It is that the future economic performance of the economy, the passage from good times to recession or depression and back, cannot be foretold."

The inference of this last statement is that the future of the performance of the economy can be foretold, but the remainder of the text that follows illustrates how charlatans sell their so called predictions to everyone's eventual dismay.

The paragraph continues as follows: "There are more than ample predictions but no firm knowledge. All contend with a diverse combination of uncertain government action, unknown corporate and individual behavior and, in the larger world, with peace or war."

So I think Mr. Galbraith's innocent fraud is the notion that the future performance of the economy can be foretold.

And the following chapter begins with, "I come now to our most prestigious form of fraud, our most elegant escape from reality. As sufficiently noted, the modern economic system is unpredictable in its movement from good times to bad and then eventually from bad to good ... here is our most cherished and, on examination, most evident form of fraud ... The false and favorable reputation of the Federal Reserve has a strong foundation."

Mr. Galbraith explains that the notion that the Federal Reserve can control the economy by manipulating the interest rate is not true and has been confirmed historically. "Business firms borrow when they can make money and not because interest rates are low ... Recovery comes, but not in any way, from Federal Reserve Action. Housing improves as mortgage rates decline. Interest rates are a detail when sales are bad. Firms do not borrow and expand output that cannot be sold ... Since 1913, when the Federal Reserve came fully into existence, it has had a record against inflation and notably against recession of deep and unrelieved inconsequence ... The fact will remain: When times are good, higher interest rates do not slow business investment. They do not much matter; the larger prospect for profit is what counts. And in recession or depression, the controlling factor is the poor earnings prospect ... the defining forces will be the consumer spending and industry investment ... the belief that anything as complex, as diverse and by its nature personally as important as money can be guided by well-discussed but painless decisions emanating from a pleasant, unobtrusive building in the nation's capital belongs not to the real world but to that of hope and imagination."

The next fraud is that corporations are innocent, blameless and amorphous. Corporations are powerful and need to be regulated. "There is no question but that corporate influence extends to the regulators ... Needed is independent, honest, professionally competent regulation - again, a difficult thing to achieve in a world of corporate dominance. This last must be recognized and countered. There is no alternative to effective supervision. Management behavior can also be improved by thoughtful contemplation of the wholly real possibility of less than agreeable incarceration."

Next the author points out the connection between the military industrial complex, its merging of the private sector and the public sector and its influence on foreign policy and consequently our war efforts.

"The greatest military misadventure in American History until Iraq was the war in Vietnam."

During the Vietnam War, which the author did not support, he points out: "During all this time the military establishment in Washington was in support of the war. This indeed, was assumed. It was occupationally appropriate that both the armed services and the weapons industries should accept and endorse hostilities."

The author also points out the failure of bombing during World War II and that it was ineffective in halting German War production. "In Germany the strategic bombing, that of industry, transportation and cities was gravely disappointing ... fighter aircraft production actually increased in early 1944 after major bombing. In the cities the random cruelty and death inflicted from the sky had no appreciable effect on the war production of the war.

"These findings were vigorously resisted by the Allied armed services, especially, needless to say, the air command, even though they were the work of the most capable and relevant scholars of the United States and Britain and were supported by German industry officials and impeccable German statistics ... All our conclusions were cast aside - this, as said, the response of the air command and its public and academic allies. The latter united to arrest my appointment to a Harvard professorship and succeeded in doing so for a year."

The final chapter is entitled "The Last Word".

"One thing, I trust, has emerged in this book: That is the now dominant role of the corporation and the corporate management in the modern economy." The author then points out that the corporation along with its merging with the Military Industrial Complex and the dissolving of the distinction between public and private sector has led to "adverse social flaws."

"One, as just observed, is the way the corporate power has shaped the public purpose to its own ability and need. It ordains that social success is more automobiles, more television sets, more diverse apparel, a greater volume of all other consumer goods. Also more and more weaponry ... Wars are, one can not doubt, a major modern threat to civilized existence, and corporate commitment to weapons procurement and use nurtures and supports this threat. It accords legitimacy and even heroic virtue to devastation and death."

The author goes on to admonish tax relief to the wealthy and corporate management as without economic merit. "A recession calls for a reliable flow of purchasing power, especially for the needful, who will spend. Here there is assured effect, but it is resisted as unserviceable compassion ... There can be pecuniary reward, most often tax relief, for the socially influential. In the absence of need, it may not be spent. The needful are denied the money they will surely spend; the affluent are accorded the income they will almost certainly save."

The author's final word is on the Iraq war. "As I write the United States and Britain are in the bitter aftermath of a war in Iraq. We are accepting programmed death for the young and random slaughter for men and women of all ages ... Civilized life, as it is called, is a great white tower celebrating human achievements, but at the top there is permanently a large black cloud. Human progress dominated by unimaginable cruelty and death.

"I leave the reader with the sadly relevant fact: Civilization has made great strides over the centuries in science, health care, the arts and most, if not all, economic well-being. But also it has given a privileged position to the development of weapons and the threat and reality of war. Mass slaughter has become the ultimate civilized achievement.

"The facts of war are inescapable - death and random cruelty, suspension of civilized values, a disordered aftermath. Thus the human condition and prospect as now supremely evident. The economic and social problems here described, as also mass poverty and starvation, can, with thought and action, be addressed. So they have already been. War remains the decisive human failure."


Richard Edward Noble - The Hobo Philosopher - Author of:

"Hobo-ing America: A Workingman's Tour of the U.S.A.."

JKG is brilliant! I just wish we would all listen better - and try to change our current path. Ken Galbraith doesn't suggest fancy things which won't work. It would be possible to achieve and well worth it! I recommend it to everyone to read it! And if you have a free minute read "The good Society" too!

John Kenneth Galbraith is one of the most popular writers on Economics the world has ever known. It is close to half a century ago that he first warned us about 'the affluent society' and the dangers of being too addicted to ' the conventional wisdom' Now at the heroic age of ninety - five he has written this present little work which also aims to wake us up, to stir us to new awareness. And to make us understand that our ordinary present , common- sense understanding of the Economic world is not realistic and true. Instead we live in a world in which we are taken up by a whole list of ' innocent frauds'. The gadfly Galbraith, the truthteller who sees what no one else does is now going to rip the mask off once again. And he is going to lay bare the naked truth of our economic life and reality.
However much of the new naked truth corresponds with old truths. As Galbraith himself says the fact that the stockholders and Board of Directors do not really run companies has been known for a long time through the researches of Alfred Berle Jr. in the thirties. The tremendous power of Management is an old story which takes on new aspects in the Global Age.
Another old complaint of Galbraith recycled here is the mistake of looking at GNP alone as economic indicator in regard to the quality of life of our society . One of Galbraith's central themes has been the misallocation of public monies for purposes of private consumption instead of for the overall social and cultural good.
This work has then as I understand it much old wine in a new bottle. But Galbraith is still a master vintner, though I sense a bit less irony, humor and happy hatcheting than in the older work.
One more point is that the book ends with a bit of an anti- war diatribe. It is hard to argue with the truth that War is Cruel and Evil and is something Mankind would do better to be entirely free of.
But it is another to argue that the wars of this century and even the war on Terror that the West is now in simply come out of commercial greed, and the needs of large- scale weapons manufacturers. There are after all geopolitical dimensions to reality which have meaning of their own. Ideological elements ( whether Nazism,Stalinist Marxism or Islamic Fundamentalism) do compel societies which do not wish to live under their rule, to resist them.
Even the wise and experienced have no right to foist on us simplistic formulas for the reading, or misreading of complex realities.

Galbraith's last book reviews the economic landscape of several years ago...before the meltdown. He's quite open about the failure of liberalism...i.e. the "countervailing power" of the state....to be a balancing force for the public interest against the overwhelming reality of the corporate dominance of the US and world economy. That the corporation spends all of its waking hours, insuring that competition is eliminated, he reminds, is reflected in the fact that Paul Samelson, the Nobel dean of free market analysts, comments that neo-classical economics no longer is able to describe the economics of our times...and hasn't for a generation, so extensive has been the continuing consolidation of economic power.

It is this old American mythology of "free" markets that leads to the compliance of the electorate. Galbraith posits this as THE enduring illusion of American politics...that has yielded the weakest "social contract" of any advanced nation.

I had read this book when it first was published, and it has proven to be prescient. It's very short and to the point book...an easy read...and intended as a review of his major observations, at life's end,...while "sitting in the peanut gallery". Galbraith's point was not to predict, it was to underline that the corporate state...which ensues when the interests of the corporation and that of the state are deemed to be identical...is the dominant economic reality of our times. It's easy to propose that this is an exaggeration...and that what we really have is a hybrid system...and I can accept some of these arguments...for there are many good people in government doing their jobs as intended...and as allowed under law. However my take is that, Galbraith's perspective provides the best explanation for what happens every day, when Americans get up in the morning and go to work.

He also stresses that the power of the mega-corporation to politically influence outcomes is potentially enormous. As is its power to get its way...through the power of mass advertising. Just today, the Supreme Court is reviewing an important case regarding corporate money in politics. Today the Supreme Court with its bevy of "country club" justices, has fully enunciated its clear empathy towards corporate money in campaigns...as a matter of "free speech". It even countervails a century of settled law on the subject. This only further proves Galbraith's point, that the "countervailing power" of the state is not at all seen as a check and balance on the mega-corporation...but as "big brother", dictating outcomes inimical to the corporations "who know what's best"...according to Justice Scalia. To these "conservative" justices, the state is to be tamed to the purposes of the mega-corporations.

All of this supports Galbraith's realistic conclusion that the Corporate State is not likely to be significantly altered in our epoch of world economic history. We can fight for a better social contract...and make some reforms, but the structure of economic reality will remain the same.