Farming out economics with J.K.Galbraith

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.

This led to a very important split in Harvard's Economics Department. It broadly followed generational lines, with Galbraith and a dozen or so young instructors and graduate students on the opposite side of the argument to their senior colleagues.

Shortly after Galbraith’s book was published several of those young instructors had the courage to write a letter directly to Franklin Roosevelt praising Roosevelt's economic program and calling into question the economic reasoning of their elders. Three years later, all but one of these junior instructors were gone from Harvard. The lesson was not lost on Galbraith, who in his analysis of economics has always returned to the themes of power and conventional wisdom.

It's important to understand that Galbraith takes a very particular view of liberalism and liberal economics. He is the essence of a liberal pragmatist. He recognised that the federal financing of farm mortgages was not a theory optimal concept in neoclassical terms. But he maintained that it carried a higher value in the reduction of authentic economic and social pain that was being inflicted on a majority of those in the farm community.

Galbraith wasn't simply acting out of compassion, but out of an intellectual desire - a pragmatic desire - to accommodate those stresses in an actual functioning modern economy, where, he believed, the ideals of the market, semi-markets, and non-market forces operate simultaneously.

Galbraith argued against the adoption of pure market-based solutions in this kind of mixed or messy economy. It’s important to highlight the young Galbraith’s liberal pragmatic inventiveness. This is not the caricature provided by conservatives of the liberal who simply gives handouts to farmers. The mortgages were meant to be repaid. But the inventiveness came in finding the boundary conditions between the implications of the market and the market's reasoning (which was for efficiency) and the ideals of equity, which are so important in a healthy and functioning economy. That was Galbraith’s view then: it remains his view today.

So, for example, he proposed that when loans are repaid, the payment terms be geared to the essential business cycle of the farm community, going upward in dollar amounts when times are good, going downward when times are bad: and that simultaneously a business cycle approach towards the use of land sales - of land taken over by the government - be modulated by the conditions that are found in a particular moment of the business cycle as it exists in the real world.

Now, the policy implications for this were that he wanted to see a sectoral market; that is, he wanted agriculture to be helped to better function in a larger macro economy governed by the permanent messy rules and outcomes that he saw everywhere else. He thought the particular social Darwinism of the very sector of the US economy which operated closest to neoclassical tenets - agriculture - should be moved away from, because both the social logic and the moral logic of the outcomes of that market were unsupportable in an affluent democracy.

Galbraith is also someone who sees pragmatic benefit in a manufacturing sector that does not adhere to standard neoclassical models. Importantly, here again, as a pragmatic liberal, he doesn't endorse earlier notions of simply breaking up large concentrations of power. He looks to find ways to use concentrated power in the manufacturing and business sectors in general to create an optimised combination of outputs that can't simply be measured by in terms of allocative efficiency.

We can see now that in his rural mortgage study he was taking up - and would later take up much more clearly in American Capitalism - Schumpeter's idea of innovative efficiency. This postulates that the large corporations by virtue of their size, their ability to invest down a long road to finance research and development and the like, have advantages over the hurly burly of the smaller entities - the world of millions of small producers and small consumers.

But he also is laying the grounds for a claim to distributive efficiency. Distributive efficiency, I believe, lies at the heart of what is most significant about John Maynard Keynes' adaptation of neoclassical economics. It is, ultimately, the ability to put money into the hands of consumers across a failed distribution of income structure that accounts for Keynes' model of how one grows an economy out of recession or depression.

Linking the young economist’s observations are his attentiveness to power and his attentiveness to the conventional wisdom. Galbraith has long faulted economics for concealing the element of power embedded in economic relations, structures, and decision making, and he has hectored all and sundry for too often embracing what he calls the conventional wisdom. We can sheet these abiding concerns home to the lessons he learned in a forthright way in this early period.

One of these lessons came from a study of farm finance for the Agricultural Adjustment Administration. This was an agency established as one of the many “alphabet agencies” of the 1930s, and among other things it was charged with overseeing operation of the various domestic allotment programs of agriculture.

The system put in place in 1933 initially worked very well for corn and wheat, where farmers themselves were the primary operators of the farms producing the output. But when the system was put in place for cotton - with the Federal Government paying for the number of acres planted in cotton to be reduced - a profound social and moral dilemma arose. A few white men owned a lot of plantations. But a large number of African Americans and the poorest-of-poor whites worked as the sharecroppers on tenant farms. They were the ones who actually raised and harvested the cotton. And the question for the federal government was a simple one: who should be paid? The owners of those great plantations? Or should some or all of that money to go to the men and women who were most clearly impoverished by the collapse of farm prices and in particular by the price of cotton?

And as Galbraith remembers it, one young lawyer went over to see Cotton "Ed" Smith, senior Senator from the State of South Carolina, and the chairman of the Senate Agriculture Committee. And Senator Smith made it very clear what the appropriate decision was supposed to be. Succinctly, he said, "You take care of the payments. We'll take care of the niggers".

It was an example of the ways in which power operated because ultimately Roosevelt gave in. The money was paid to the planters and not to the sharecroppers. And it was a lesson that was seared in Galbraith's mind. This remained throughout the rest of his stellar career as a moment in which he understood as baldly and as clearly as possible that market forces are never simply market forces in the abstract. They always contain elements of ideology, of bigotry, of presumption, and most importantly, elements of the power which regenerates and reinforces those assumptions.

In Galbraith’s own words: “In making politics a non-political subject, neo-classical theory destroys the relation of economics to the real world. In that world, power is decisive in what happens. And the problems of that world are increasing both in number and in the depth of their social affliction.”

I believe Galbraith's career and the individual decisions and the overall vision that he has held to throughout his life are the best of American liberal tradition - tough, pragmatic, generous and compassionate all at once. And I believe that today we are on the cusp of being able to re-examine and, I hope, reignite those values in American political life.