The Economics of Innocent Fraud: Truth For Our Time

By John Kenneth Galbraith

John Kenneth Galbraith has long been at the center of American economics, in key positions of responsibility during the New Deal, World War II, and since, guiding policy and debate. His trenchant new book distills this lifetime of experience in the public and private sectors; it is a scathing critique of matters as they stand today.
Sounding the alarm about the increasing gap between reality and "conventional wisdom" -- a phrase he coined -- Galbraith tells, along with much else, how we have reached a point where the private sector has unprecedented control over the public sector. We have given ourselves over to self-serving belief and "contrived nonsense" or, more simply, fraud. This has come at the expense of the economy, effective government, and the business world.
Particularly noted is the central power of the corporation and the shift in authority from shareholders and board members to management. In an intense exercise of fraud, the pretense of shareholder power is still maintained, even with the immediate participants. In fact, because of the scale and complexity of the modern corporation, decisive power must go to management. From management and its own inevitable self-interest, power extends deeply into government -- the so-called public sector. This is particularly and dangerously the case in such matters as military policy, the environment, and, needless to say, taxation. Nevertheless, there remains the firm reference to the public sector.
How can fraud be innocent? In his inimitable style, Galbraith offers the answer. His taut, wry, and severe comment is essential reading for everyone who cares about America's future. This book is especially relevant in an election year, but it deeply concerns the much longer future.

• Language: English
• Publisher: Open Road Integrated Media
• Release date: Apr 26, 2004
• ISBN: 9780547343983

John Kenneth Galbraith

John Kenneth Galbraith (1908-2006) was a critically acclaimed author and one of America's foremost economists. His most famous works include The Affluent Society, The Good Society, and The Great Crash. Galbraith was the recipient of the Order of Canada and the Robert F. Kennedy Book Award for Lifetime Achievement, and he was twice awarded the Presidential Medal of Freedom.

Book preview

The Economics Of Innocent Fraud

Truth for Our Time

John Kenneth Galbraith

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HOUGHTON MIFFLIN COMPANY

BOSTON • NEW YORK

2004

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Copyright © 2004 by John Kenneth Galbraith

ALL RIGHTS RESERVED

For information about permission to reproduce selections

from this book, write to Permissions, Houghton Mifflin Company,

215 Park Avenue South, New York, New York 10003.

Visit our Web site: www.houghtonmifflinbooks.com.

Library of Congress Cataloging-in-Publication Data

Galbraith, John Kenneth, date.

The economics of innocent fraud / John Kenneth Galbraith.

p. cm.

ISBN 0-618-01324-5

1. Corporations—Corrupt practices. 2. Fraud. 3. Political

corruption. 4. Truth. 5. Social values. I. Title.

HV6768G36 2004

364.16'8—dc22 2004040542

Printed in the United States of America

Book design by Robert Overholtzer

QWF 10 9 8 7 6 5 4 3 2

The quotation from John Maynard Keynes on page 21 is drawn

from Economic Possibilities for Our Grandchildren, in Essays

in Persuasion (New York: St. Martin's Press, 1972), p. 321.

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FOR SYLVIA BALDWIN

charming and greatly competent

bridge between author

and book

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CONTENTS

Introduction and a Personal Note ix

I. The Nature of Innocent Fraud 1

II. The Renaming of the System 3

III. The Economics of Accommodation 11

IV. The Specious World of Work 17

V. The Corporation as Bureaucracy 23

VI. The Corporate Power 29

VII. The Myth of the Two Sectors 33

VIII. The World of Finance 39

IX. The Elegant Escape from Reality 43

X. The End to Corporate Innocence 49

XI. Foreign and Military Policy 53

XII. The Last Word 57

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INTRODUCTION AND A PERSONAL NOTE

FOR SOME SEVENTY YEARS my working life has been concerned with economics, along with not infrequent departures to public and political service that had an economic aspect and one tour in journalism. During that time I have learned that to be right and useful, one must accept a continuing divergence between approved belief—what I have elsewhere called conventional wisdom—and the reality. And in the end, not surprisingly, it is the reality that counts. This small book is the result of many years of encountering, valuing and using this distinction, and it is my conclusion that reality is more obscured by social or habitual preference and personal or group pecuniary advantage in economics and politics than in any other subject. Nothing has more captured my thought, and what follows is a considered view of this difference.

A lesser point: Central to my argument here is the dominant role in the modern economic society of the corporation and of the passage of power in that entity from its owners, the stockholders, now more graciously called investors, to the management. Such is the dynamic of corporate life. Management must prevail.

As I was working on these pages, there came the great breakout in corporate power and theft with the unanticipated support of cooperative and corrupt accounting. Enron I had noticed as an example of my case; there were to be more in the headlines. Perhaps I should have been grateful; there are few times when an author can have such affirmation of what he or she has written. The corporate scandals, as they are now called, dominated the news because of exceptionally competent and detailed reporting. I forgo repetition here. I do, however, make reference to the restraints to which managerial authority must now be subject, but these are a small part of the story. More to be told is of the longer and larger departure from reality of approved and conditioned belief in the economic world.

Dealt with in this essay is how, out of the pecuniary and political pressures and fashions of the time, economics and larger