John Kenneth Galbraith is arguably the United States’ most famous economist and his talent has been to make economics relevant to the crises of the day. This witty commentator on America's political follies was the author of bestselling books that warned prophetically of the dangers of deregulated markets, corporate greed, and inattention to the cost of American military power.
Born in 1908 and raised on a small Canadian farm, Galbraith began to teach at Harvard in his 20s. In 1938 the new American took up a role in New Deal Washington, eventually rising to become FDR's "price czar" during the war. Following his years as a writer at Fortune, where he did much to introduce the work of John Maynard Keynes to a wide audience, he returned to Harvard in 1949 and began writing the books that would make him famous. Over the years, Galbraith developed a distinctive way of "doing economics", and it made him a critic both of conservatives and of many liberal economists. I wrote the first authorised Galbraith biography, John Kenneth Galbraith : His Life, His Politics, His Economics, which reinterprets both public policy and of how economics is practiced.
In the spring of 1935 John Kenneth Galbraith, a newly fledged PhD at 26, was given the job of analysing the New Deal reforms in the field of agricultural finance. His job was to examine the rural mortgage market in the United States. For a theoretical economist, this was a practical problem of significant scale and of serious controversial implications.
Out of that work Galbraith published a flurry of articles. Up until this time, his published work had been confined to narrowly agrarian topics, such as the optimal marketing strategies for honey bee producers and the status of marginal land in California's central valley. But now his name appeared in prominent journals - the American Economic Review, the Journal of Political Economy, the Harvard Business Review - all on the situation of agricultural finance in the United States.
This may have seemed an obscure topic, but it was one that allowed him to examine the American economy in great detail and wide scope.
At the time that Galbraith took on the study of farm lending, or public lending to farms, half of all farm mortgages were not being collected. And 40 per cent of all farm mortgages were held by the federal government. It was a situation in which wide scale crises were ever present and in which, in dramatic new ways, the American government was entering the market to try to right what had gone wrong with the functioning of the free market in agriculture.
This problem was immensely practical because almost half the population of the US in those days was rural and depended on farming for a living. Millions of farmers had seen their incomes collapse and had no where to turn, save to the federal government.
Galbraith found that the millions of farmers’ bankruptcies could all be attributed in profound ways not to the failures of the market, but to the functioning of the market.
What he noticed was that, in the Depression, farm prices had collapsed by 40 per cent or more, while manufacturing prices had collapsed by only about 4 or 5 per cent. In other words, in the disequilibrium situation of the Depression, markets had worked in some peculiar way in the farm economy, but not in manufacturing.
This was a profound and important insight to Galbraith. But it could not on its own, be used as the model through which all economic transactions and economic outcomes were determined.
What he also realised was that this model was a subject of authentic controversy, just as much about the New Deal was a subject of authentic controversy. At the time Galbraith undertook his New Deal study, the country was still hotly debating the question of public intervention in the market economy, whether in agriculture or manufacturing or any other sector. Herbert Hoover's Secretary of Treasury, the multimillionaire Andrew Mellon, had famously been asked shortly before Roosevelt took office how to solve the Depression and how to get the markets working again. He had said, quite simply, liquidate the farms, liquidate business, liquidate labour.
There's an unfortunate tenor to the term "liquidate" today, but Mellon was absolutely technically correct from a neoclassical point of view. And it wasn't just Andrew Mellon who held such views. The Harvard Economics department Ken Galbraith had joined held quite similar views, at least among the senior men. Shortly before Ken started working on his project, Joseph Schumpeter and other senior members of the department had published a book called the Economics of the Recovery Program suggesting the only thing standing in the way of the natural purgative effect of the Depression was the insolent and misplaced idealism of the Roosevelt Administration.
Extracted from a speech to a Brookings - New America Foundation briefing entitled The Legacy of John Kenneth Galbraith at the Brookings Institute, Washington DC on April 4, 2005. The full transcript can be found here.