Here is a brief excerpt from the first chapter of James K. Galbraith’s most recent book, The End of Normal: The Great Crisis and the Future of Growth, published by Simon and Schuster (September 2014). Whereas Henry Kissinger focuses on world order in his latest eponymous book, Galbraith focuses on the frame-of-reference, the context, within which discourse about economics is — or should be — conducted now.
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To begin to understand why the Great Financial Crisis broke over an astonished world, one needs to venture into the mentality of the guardians of expectation—the leadership of the academic economics profession—in the years before the crisis. Most of today’s leading economists received their formation from the late 1960s through the 1980s. But theirs is a mentality that goes back further: to the dawn of the postwar era and the Cold War in the United States, largely as seen from the cockpits of Cambridge, Massachusetts, and Chicago, Illinois. It was then, and from there, that the modern and still-dominant doctrines of American economics emerged.
To put it most briefly, these doctrines introduced the concept of economic growth and succeeded, over several decades, to condition most Americans to the belief that growth was not only desirable but also normal, perpetual, and expected. Growth became the solution to most (if not quite all) of the ordinary economic problems, especially poverty and unemployment. We lived in a culture of growth; to question it was, well, countercultural. The role of government was to facilitate and promote growth, and perhaps to moderate the cycles that might, from time to time, be superimposed over the underlying trend. A failure of growth became unimaginable. Occasional downturns would occur—they would now be called recessions—but recessions would be followed by recovery and an eventual return to the long-term trend. That trend was defined as the potential output, the long-term trend at high employment, which thus became the standard.
To see what was new about this, it’s useful to distinguish this period both from the nineteenth-century Victorian mentality described by Karl Marx in Capital or John Maynard Keynes in The Economic Consequences of the Peace, and from the common experience in the first half of the twentieth century.
To the Victorians, the ultimate goal of society was not economic growth as we understand it. It was, rather, investment or capital accumulation. Marx put it in a phrase: “Accumulate, accumulate! That is Moses and the Prophets!” Keynes wrote: “Europe was so organized socially and economically as to secure the maximum accumulation of capital . . . Here, in fact, lay the main justification of the capitalist system. If the rich had spent their new wealth on their own enjoyments, the world would have long ago found such a régime intolerable. But like bees they saved and accumulated” (Keynes 1920, 11).
But accumulate for what? In principle, accumulation was for profits and for power, even for survival. It was what capitalists felt obliged to do by their economic and social positions. The purpose of accumulation was not to serve the larger interest of the national community. It was not to secure a general improvement in living standards. The economists of the nineteenth century did not hold out great hopes for the progress of living standards. The Malthusian trap (population outrunning resources) and the iron law of wages were dominant themes. These held that in the nature of things, wages could not exceed subsistence for very long. And even as resources became increasingly abundant, the Marxian dynamic—the extraction of surplus value by the owners of capital—reinforced the message that workers should expect no sustained gains. Competition between capitalists, including the introduction of machinery, would keep the demand for labor and the value of wages down. Marx again:
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Then came the two great wars of the twentieth century, along with the Russian Revolution and the Great Depression. Human and technical capabilities surged, and (thanks to the arrival of the age of oil) resource constraints fell away. But while these transformations were under way, and apart from the brief boom of the 1920s, material conditions of civilian life in most of the industrial countries declined, or were stagnant, or were constrained by the exigencies of wartime. The Great Depression, starting in the mid-1920s in the United Kingdom and after 1929 in the United States, appeared to signal the collapse of the Victorian accumulation regime—and with it, the end of the uneasy truce and symbiotic relationship between labor and capital that had graced the prewar years. Now the system itself was in peril.
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James K. Galbraith holds the Lloyd M. Bentsen Jr. Chair in Government/Business Relations and a professorship of Government at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin. He holds degrees from Harvard and Yale (Ph.D. in economics, 1981).
He studied as a Marshall Scholar at King’s College, Cambridge in 1974-1975, and then served in several positions on the staff of the U.S. Congress, including executive director of the Joint Economic Committee. He directed the LBJ School’s Ph.D. Program in Public Policy from 1995 to 1997. He directs the University of Texas Inequality Project, an informal research group based at the LBJ School. Inequality and Instability: A Study of the World Economy Just Before the Great Crisis is a recent book, published by Oxford University Press (2012). Previous books include The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (Free Press, 2008), Created Unequal: The Crisis in American Pay (Free Press, 1998) and Balancing Acts: Technology, Finance and the American Future (Basic Books, 1989). Also, Inequality and Industrial Change: A Global View (Cambridge University Press, 2001), co-edited with Maureen Berner. He has co-authored two textbooks, The Economic Problem with the late Robert L. Heilbroner, and Macroeconomics with William Darity, Jr. He is a managing editor of Structural Change and Economic Dynamics. To learn more about him, please click here.
To learn more about Galbraith and his brilliant work, please click here.