Galbraith saw most advertising as wasteful and manipulative. Marginal Revolutions and Brad Delong discuss whether Gary Becker "proved" otherwise, but it's really Lee Benham seminal empirical work that's relevant here. Contrary to the monopoly explanation of Galbraith, advertising often lowers prices. Benham documented that prices of eyeglasses were significantly higher in states banning advertising than in those that did not. Galbraith thought market power allowed firms to set prices and preferences. The outperformance of small stocks relative to large stocks (the small stock effect in the Fama-French 3 factor model), suggests he had it backwards. As he expounded this market power theory in his popular book The New Industrial State in 1967, he top-ticked the large conglomerates with that thesis.
Galbraith argued in The Great Crash that the Great Depression was caused by reckless speculation during the 1920's that led to a financial crash. Friedman and Schwartz, as well as Bernanke and the current Federal Reserve, believe that the Fed needlessly shrank reserves and turned a minor recession into a Great Depression.
Everyone agrees he was a good writer, meaning he used big words, imaginative metaphors, spoke with supreme self-confidence, and wrote best sellers. He often castigated "conventional wisdom", yet by promoting the standard Keynesian diagnoses and remedies of the post WWII era epitomized conventional wisdom, especially as a best-selling economist (you have to admire the chutzpa of a best-seller writer damning popular ideas).
During his life he was considered an intellectual peer and rival to contemporaries such as Friedman, Hayek, Solow, and Stigler. But unlike these latter names whose work is still studied by graduate students, his name doesn't show up in any of the indices for my graduate level micro, macro or finance textbooks, his supposed areas of expertise. He prided himself of writing directly to the public because he could, noting once that he had never had a journal submission rejected because he wrote books and articles for non-refereed magazines. I think nothing is more dangerous to one's ideas than becoming able to work without and editor, or referee, of some type.
He seemed a good man, in that he was honest and well-intentioned, and here I'm sure he has left a fine legacy for his friends and family. But his legacy to economics, is virtually non-existant. Big firms are generally weak, advertizing increases competition, depressions are not caused by excessive speculation, and conventional wisdom has always been for greater government regulation and redistribution.
HedgeFundGuy - am 2006-05-01 03:40
Steve Sailer (guest) meinte am 1. May, 04:44:
JKG might look better in the future
Galbraith was an elegant, witty writer. He came along too late so by the time he reached his maximum popularity, the trends had reversed and were moving in the opposite direction. I just wonder though, whether he might not look better in the future. The marketplace I read about in the works of conventional economists today doesn't look that much like the one I spent 18 years working in. Businessmen are getting better and better at creating highly profitable quasi-cartels.
HedgeFundGuy antwortete am 1. May, 04:54:
Empirical Issue
If big businesse could set prices, you would see greater returns, or profit margins, for big businesses. There would be a correlation between size and profitability. If anything it goes the wrong way (for Galbraith).
jle (guest) antwortete am 2. May, 11:34:
Controls and unintended consequence
That doesn't follow. If it cost you everything you made from price fixing to fix the price you might still do it if it also increased the security of your market share, perhaps by raising the barriers to entry. On the empirics you need to control for product and company type very carefully before drawing the conclusion that it is not. Not only are small companies likely to be in niches that are quite different and the comparison is then not reflecting size effects but different product types.
Also supernormal profitability can support subnormal efficiency too. Look at the very weak investment discipline and "strategic thinking" at Microsoft for example.
Robert Schwartz (guest) meinte am 1. May, 08:05:
It's a pity he couldn't have lived a while longer.
So that GM could have filed its chapter 11 before he died.
dsquared (guest) meinte am 1. May, 22:37:
why is it only leftwing economists who have to be right on everything?
When Milton Friedman dies, will you have a pithy observation about k% monetary targeting? When Hayek died, did you say "and so perishes the man who thought that the European social welfare state would inevitably lead to totalitarianism"? When Bob Solow dies, will you say "aggregate production functions were proven not to exist, but he ploughed on regardless?" I think that this is a very strange and ungenerous way to go through life.
HedgeFundGuy antwortete am 2. May, 00:56:
Because his most prominent assertions were all wrong
That matters when evaluating a man's legacy to science. In the words of Richard Feynman, "It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong. "
Friedman was right on his main assertions: inflation is a monetary phenomenon, and free markets are better for growth. The monetary rule was a blunder, but his successes were large and compensatory. Hayek was also right on his big ideas: economic rights are more important than political rights, in socialist economies the bad rise to the top, and a free market is more efficient because it decentralizes the information problem. Solow, highlighted that capital and labor are insufficient to explain growth: the residual is where the action is (productivity from institutions, etc.). Stigler was also a very good writer, the funniest economist of all time in my opinion, and his models on search were seminal.
Mahalanobis antwortete am 2. May, 01:11:
Galbraith wasn't an economist.
If you'd like to listen to a real economist go and read Hayek's attack on Galbraith (The Non Sequitur of the "Dependence Effect", 3 pages)AFAIK k% monetary targeting could have worked (and later on somehow worked) quite well in Germany and Austria (the Austrian Schilling was pegged to the D-Mark in the early 80s, real GDP growth rates were quite correlated) since the velocity of money remained rather constant. (BTW, the rule is still part of ECB's monetary policy strategy.) Maybe the rule just served as a marketing tool (it emphasises the long-run and price stability); who knows what central bankers really do. Though the rule is obsolete these days, I wouldn't call it a blunder.
What's your problem with Solow? He has written quite a couple of left-leaning articles.
dsquared (guest) antwortete am 2. May, 09:56:
I don't agree with your characterisation of his "Big Ideas"
Galbraith's big idea was that analysis of the economy had to take into account the actual price-setting and demand management behaviour of actual companies. He was dead right on this. He was also dead right on "private affluence, public squalor" in the 1950s and if you now assert that the "conventional wisdom" is in favour of public provision, you need to think about who it was who *created* that consensus. He largely invented the field of development economics and wrote some of the most interesting things I've ever read in that field (interestingly, he was profoundly inegalitarian in his prescriptions for third world economics).[The monetary rule was a blunder, but his successes were large and compensatory]
Think about this. You're talking about the man who was instrumental in establishing the Keynesian consensus in the USA, who wrote the Strategic Bombing Survey, who came within an ace of keeping the USA out of Vietnam. And your obituary for him is some bullshit about spectacle frames?
dsquared (guest) antwortete am 2. May, 10:03:
an on a technical note
[Galbraith saw most advertising as wasteful and manipulative]This isn't right. JKG did not see advertising as "wasteful"; he saw it as a vital part of the planning process of large firms, and he was consistent through his whole career in regarding the prevalence of big firms as being the key advantage of the US economy. Matching up consumption with production isn't a waste of time at all, even if Galbraith happened to regard the actual production and advertising decisions of large companies as meretricious.
[AFAIK k% monetary targeting could have worked ...]
in about as many cases as those in which prices and incomes policies could have worked. Leave it man, it's dead.
[What's your problem with Solow? He has written quite a couple of left-leaning articles. ]
I have no problem with Solow as a man, but aggregate production functions *don't* exist and the economics profession has IMO continued on with them well past the point of embarrassment. Would that we could al win the highest prizes by giving a name to our residuals. I don't make comments about economics dependent on finding their authors politically congenial, though.
Mahalanobis antwortete am 2. May, 15:00:
Re:
in about as many cases as those in which prices and incomes policies could have worked.The only reason why countries with a planned price system didn't break down immediately in the past was that they used Western prices as a benchmark. (With regard to the centrally planned economies in Europe it is known that about 70% of trade was intra-COMECON, i.e. an additional benefit was that they were insulated from short-term fluctuations on the world market). A k%-rule is merely inefficient.
but aggregate production functions *don't* existSo the emphasis is on aggregate or do you think production functions do not exist at all, i.e. (partially disaggregated) output isn't a (somehow stable) function of anything? I think the Solow model is an absolutely esstential contribution to our learning process. It has paved the way for further investigations. It's not his fault that some economists still re-estimate Cobb-Douglas production functions ANOVA ANOVA again just because they lack the skills to do interesting stuff.
dsquared (guest) antwortete am 3. May, 08:25:
what?
Michael, what "further investigations" do you mean? We know pretty much all there is to know on the subject of the conditions under which economic aggregates are meaningful. Franklin Fisher more or less nailed this one, about twenty years ago. Aggregate production functions have *no* theoretical basis and it is not at all clear that they are "close enough". This has nothing to do with the specific Cobb-Douglas functional form; it's to do with the fact that there is no natural unit of capital.
srinivas (guest) antwortete am 3. May, 19:51:
Insofar as inflation is defined as the rise in money price of a good or a basket of goods, inflation cannot be anything but a monetary phenomenon. One cannot be called profound for making such a banal statement. For the assertion to be something more than a tauatology, money growth or some measurable monetary aggregate has to be shown to "cause" inflation. Last time I checked, there has been no empirical work that shows it.As two Friedman's other assertion. Permanent income. Again in a broad sense it is banal. Coming to specific empirics, there are just too many deviations from permanent income hypothesis.
Lastly, the much ballyhooed natural rate hypothesis. Again, useless insofar as there is hysteresis.
In sum, Friedman's contribtuions can be summed up as banal observations that are practically useless.
Dsqaured, dont start about aggregate production functions and the old capital contoversy. Modern economics doesnt acknowledge those problems. People have got Nobel prizes for using aggregate production and consumption (which is perhaps even more egregious) functions to come up with ridiculous theories.
Just so that there is no misunderstanding, I am no left wing liberal. I happen to be a great fan of Friedman's Capitalism and Liberty book. I also happen to be a libertarian in the Hayek sense. However, Friedman and the new/neo classicals are wrong in their economic models even if they are right in their prescription for government policy. Keynes,Minsky were right in their analysis of the workings of the economy, but wrong in their prescriptions and hopelessly naive in their expectations of government behavior.
Mahalanobis antwortete am 3. May, 21:37:
I have
heard of the aggregation problem but never read any of Fisher's articles.If anyone else cares:
Free:
The Existence of Aggregate Production Functions, Econometrica, 1969
Aggregation in Production Functions: What Applied Economists Should Know, 2001
JSTOR:
Aggregate Production Functions Revisited: The Mobility of Capital and the Rigidity of Thought, The Review of Economic Studies, 1982
Currently I'm as busy as a one-legged man in an arse-kicking contest but I'll definitely take a closer look at them.
dsquared (guest) antwortete am 4. May, 08:07:
I think I disagree on Friedman
I don't have much time for inflation as a monetary phenomenon, but MF has basically given up on this (or at the very least, endorsed Greenspan-era monetary policy) and that was intellectually the mark of a big man (JKG also more or less gave up on the New Industrial State).I don't agree that PIH was banal; it seems that way today only because its success was so complete. Historically and factually, next to nobody was thinking about consumption in these terms pre Friedman.
And the natural rate is a restatement in classical terms of Karl Marx's theory of the reserve army of unemployed labour; perhaps not wholly original for that reason, but economics badly needed it. Hysteresis is important, but something like a NAIRU is at the heart of every practical monetary policy mechanism.
I'm working on an essay for Crooked Timber about how Galbraith and Hayek had a lot more in common with each other than either had with the main stream of economics, which I confidently expect will offend more or less everybody.
PK (guest) antwortete am 4. May, 11:03:
Totalitarianism
"the European social welfare state would inevitably lead to totalitarianism"I'm afraid that this dire prediction may indeed come true. Take almost any EU country, and what you'll see: whichever mainstream party you vote for, it's a big-government, welfare-statist, Euro-federalist juggernaut. You may vote but you have very little choice.
You have political corectness instead of freedom of expression. No censorship is necessary since people control themselves so as to avoid being labelled "extremists", "xenophobes", "asocials", you name it. You may only mention that you think the government is too big and, presto, you're officially certified asocial egoist, right-wing nut, fascist or all of the above. If you still show no fear they will call your boss to remind him that the company you work with is vitally interested in maintaining good relationship with the government.
They won't arrest or deport you. They don't spy on you, it's no longer necessary in the age of electronic communications. They just ignore what you say. They let you alive provided that you pay the ransom, pardon, income and payroll tax. You can buy food, shelter and even some modest luxury for the rest of the money they allow you to keep, so what. Shut up and march further.
In my country, the government confiscates some 60% of my income (no, I'm not talking about marginal tax rates, but effective rate of taxation), not to mention VAT and sales taxes. It's much better that a Gulag, yes, but still, isn't it pretty near totalitarianism? And what happens if the EU-wide income tax harmonization measures were introduced?
dsquared (guest) antwortete am 4. May, 17:57:
I think it was Robert Conquest
who noted the category (he noted it in Communists in the 1960s but it is of much more general application) of "rhetorical questions to which the obvious answer is no". I suspect "(the modern European state is) much better that a Gulag, yes, but still, isn't it pretty near totalitarianism?" fits in this category pretty well.
