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Initial post: Aug 2, 2008 12:45:51 PM PDT
Here is the lead review for August 3 in the Austin American Statesman:

James Galbraith's 'Predator State': damning, incisive

The UT professor and son of a famous economist denounces the 'free market' that has created a vulture-like capitalist culture

By Roger Gathman

Sunday, August 03, 2008

Since John Stuart Mill wrote "The Principles of Political Economy" in 1848, economists have generally believed that free trade and free markets arise universally from the principle that supply and demand eventually meet in an equilibrium, which is why markets are self-correcting, and government action is self-defeating.

But there have been brilliant dissenters. For instance, Thorstein Veblen, in "The Theory of the Leisure Class" (1899), observed the robber barons of his time, who flaunted their art collections and stripped their workers and their companies of wealth, and was reminded of the warriors, kings and priests of the "barbaric" ages who spent their time competing for prestige and preying on the artisans and peasants who made up the productive classes.

Decades later, there was John Kenneth Galbraith, who, in his 1952 book "American Capitalism," coined the term "countervailing power," which he defined as a concentration of power that allows an agent to influence prices over and above the "market." Wal-Mart, for instance, has countervailing power over its suppliers.

Galbraith passed away in 2006. Before he died, he challenged his son James, himself a prominent economist and a professor at the University of Texas, to write a book on "predatory" capitalism. The word "predatory" is taken here from Veblen's classic book. It was long thought that Veblen's predatory capitalists and the system of laissez faire that made them possible disappeared after the New Deal was created in the 1930s. But the predatory capitalist culture emerged, again, at the end of the 1980s. The narrative Galbraith lays out in "The Predator State" is an explanation of why it resurfaced and how it has mutated.

Galbraith makes the most of his material in the first section of the book, which criticizes the many shibboleths of economics, including the slipperiness of the concept of the "market." The reader might, however, find it difficult to see these self-contained chapters in terms of the larger narrative, which comes into focus only in the second section. That narrative takes its bearing not just from Veblen, but from Galbraith's father's 1969 best-seller "The New Industrial State," which argued that the postwar era was defined by a three-way alliance between big business, the government and labor. During that era, the Fortune 500 corporations accepted and exploited government regulation and tax rates that supported a growing social net. The government passed back and forth between Democrats and Republicans, but both parties shared a modestly progressive agenda and a sense of good governance. Unions, the wild card, had settled down, demanding better wages and benefits, rather than the public takeover of major industries.

As James Galbraith makes clear, this pretty picture was shattered by the inflation and high interest rates of the late 1970s and early '80s. Profit margins were slack, and the creative types who powered so many companies left the buttoned-down world of the Organization Man for places such as Redmond, Wash., and San Jose, Calif. The unions, upping their wage demands to keep up with inflation, watched as companies began cutting labor costs by offshoring factories. The government turned from Rockefeller Republicanism to Reagan Republicanism, with slashing tax cuts and small-government rhetoric. And the great corporations were besieged by the leveraged-buyout crowd. Finally, compensation for the leaders of the tech companies went through the roof, leading to similar pay for CEOs who managed much less dynamic companies.

A public bonanza

This brings us to the final act of Galbraith's scenario. Although free market rhetoric has ruled American political discourse since the early '80s, in reality, the old New Deal/Great Society programs have been plugging away all along. Galbraith points out that federal and state government programs still "account for nearly 40 percent of total consumption of goods and services in America." From the libertarian point of view, that's a disgrace. But from a more opportunistic perspective, it's a bonanza, a vast, subsidized market for everything from pills to school tests to weapons that parcels out governmental responsibilities to the highest bidder. (In the case of no-bid contracts, not even that standard is held to.)

Thus came the rise of the predator state, as Washington lobbyists, politicos and highly placed bureaucrats colluded with predatory capitalists to privatize government functions on the public dime. "It is a coalition, in other words, that seeks to control the state partly in order to prevent the assertion of public purpose and partly to poach on the lines of activity that past public purpose has established," Galbraith writes.

The result is a world turned upside down, in which capitalism is discouraged where it can do good and encouraged where it will cause harm. For instance, in 2003, after voting for the most expensive medical drug program in history, Congress forbade the government from using its countervailing power, as a large buyer, to negotiate pill prices down ? thus blocking efficiencies and price cuts similar to those that Wal-Mart is able to get out of its suppliers. At the same time, the Pentagon leased out security for the State Department, which used to be done by the Marines, to private security companies such as Blackwater. The cost of the bad feeling that has resulted from Blackwater's lack of accountability to the public ? both the American and Iraqi publics ? is measured not only in money, but in blood.

Here Galbraith shows some misleading partisanship ? he concentrates on the Bush administration, even though the privatizing of government services was one of Al Gore's priorities in the Clinton White House. These problematic relationships go deep.

A time for bold moves

After having shown the systematic problems we face, Galbraith lays out his own solutions in the third section of the book, and fulfills the second promise in his subtitle by criticizing liberals for being addicted to Clintonian baby steps. Now, he claims, is the time for bold initiatives. Some of his are probably nonstarters ? Galbraith, like his father, is an enthusiast for wage and price controls, but it's hard to see even a moderate form of that getting any traction, even under an Obama presidency and a Democrat-controlled Congress.

But other moves to revive government's planning role are more attractive. Galbraith sees the problems of the moment ? the crash of the mortgage market, the rise in the price of oil and the all-enveloping environmental crisis ? as an opportunity for government activism to direct private initiative. When the United States first began cutting back tariffs and domestic price supports in favor of global trade in the late 1970s, the move was justified not on the basis that consumers could thereby get cheaper plastic toys made in China. The idea was that as developing nations took on relatively unskilled lines of production, the developed nations would be free to create new technologies and services.

That worked in the '90s ? a man magically transported from 1990 to 2000 would find that the world had changed considerably with the explosion of PCs. But today, not so much. It's hard to see what is materially different about life in 2000 and life in 2008. We've stagnated.

Galbraith notes that the U.S. has the deepest research sources ? we spend twice what the Europeans spend on higher education ? and the most open economy in the world. We should have a head start on the sorts of green technologies that will, sooner or later, be a matter of life or death. Yet it's Japan that is trying to design the cars of tomorrow, while our best and brightest hire on with hedge funds. The adaptivity of American capitalism, which has been its great virtue, seems to have been perverted.

Although "The Predator State" is, in some ways, a book that paints a gloomy picture, Galbraith never loses sight of the fact that America is, after all, a very rich and fortunate country, which has taken on entrenched problems before. As he says at the end, for all our current problems, "The rest of the world, in other words, will invest in America if they are given a reason to do so.

"Why not give them that reason?"
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