Galbraith says capitalism will prevail
Yomiuri Shimbun
In the sixth installment in a series of interviews with world leaders and prominent figures, we talk to U.S. economist John Kenneth Galbraith, renowned for his astute analysis of the capitalistic economy that he presented in such books as "The Affluent Society," "The New Industrial State" and "The Age of Uncertainty."
Born in Canada in 1908, Galbraith served as U.S. ambassador to India from 1961 to 1963 during President John F. Kennedy's administration. He is a professor emeritus at Harvard University.
In an interview with Yomiuri Shimbun Washington correspondent Toru Kunimatsu, Galbraith gives his views on capitalism, which he says is the only viable economic system for the next century, but warns it is not perfect.
Yomiuri Shimbun: Capitalism is not perfect. Do we need another theory for the 21st century?
Galbraith: No sensible person ever assumed that the market system was perfect. I notice for example, the references to the market system. That is a subtle way of disguising the role of capital as a commanding force and separating the system a little bit from Marxism. That's why we now call it the market system. It's an innocent form of disguise. But nobody should assume that it has escaped from its past faults, and the most notable one is, of course, the tendency to periods of speculation, foolish optimism, and then the correction, the recession, or the depression. This has been the ancient characteristic of capitalism, the market system, and it is still true. It is still true for Japan and no one should doubt that it could still be true of the U.S.
So basically, capitalism--the market mechanism--should continue and we ought to develop that basic philosophy?
It's quite true that there's no alternative now to the market system--to capitalism. But there is a major need for recognizing the shortcomings of capitalism. One of them--which requires no explanation in Japan--is its previous position to the speculative bubble. In these last years, we have seen that speculative bubble move in a very substantial way to Wall Street. No one should assume that the American system is free from the danger of speculation.
The United States had something like a bubble economy in the late '80s. Are you talking about the current situation?
I've been talking about the last couple of years. We had recognition of that in August and early September, a major flushing out of some of the more speculative funds, a notable case being Long Term Capital Management (LTCM), but also difficulties for some of the banks. While there has been some recovery since, I wouldn't say that the speculative mood here was the same in the past. I repeat again, that is a feature of capitalism. When you hear, whether in Japan or the U.S. that we have entered a new era as regards the economic system, then you should immediately take cover and be worried because that has been the statement over the last 200 years whenever there was a speculative boom.
So you expect speculation in the U.S. economy to continue. And then?
And then the corrective process, that is something which, looking at Japan, has been going on these past years. The corrective process eliminates incompetent bankers. The corrective process eliminates incompetent and reckless industrial managers. And one hopes that the corrective process stirs new government action, including a more effective bureaucratic establishment. All this is what my old colleague Joseph Schumpeter called creative destruction. Looking at Japan in these last years, my optimistic note is that I think that process has been continuing and will have an eventually useful effect on the Japanese economy.
Alan Greenspan tried to moderate the downslide by decreasing the interest rate three times in two months. Is it possible for monetary policy, or financial policy to stop a recession, to force a correction?
One must distinguish here carefully between truth and fashionable belief. Fashionable belief holds that the Federal Reserve system, or any country's central bank, has some magic power and that a small adjustment in interest rates will create a splendid response. This eliminates the whole question of other government policy, it eliminates the question of unemployment. It puts magic in the hands of the Federal Reserve. Those that think that my old friend Alan Greenspan, all by himself, has power to rescue the American economy, are making fools of themselves. It's the substitution of hope for reality. Nothing could be so convenient as to believe that the Federal Reserve or the central bank in any country has all powerful influence. It's a small factor in a much larger situation.
Japan practiced a policy of correction in the late '80s,at that time the Asian way of doing business--Japanese business style--was lauded. However, the U.S. market economy is currently the best. Do you think that the Asian way has failed and that the U.S. market economy has prevailed?
By no means. As anyone who knows Japan will agree, there is still basic strength in the Japanese economic and structural situation. Japan has a literate well-educated population of people who work intelligently, a big cadre of educated people ready for business or for the government, and a world of practical experience. These are all the basic strengths of Japan. And what happened was the classic repeat, the classic speculative bubble and the need to eliminate incompetent executives from the business firms and incompetent bankers from the banking community. That's what happens when a speculative bubble bursts. But that doesn't affect the underlying strengths of the country. That is particularly true in Japan. The basic circumstances, the basic qualifications that made Japan the second largest economy in the world from a very small country, still exist.
So after the reform, after removing the incompetent managers, will Japan grow again in the 21st century?
I am confident about that. Because the basic strengths as I have just emphasized are still there.
Is there a need to change anything? Should the basic methods remain the same?
There are short-run steps that one urges. I am obviously not in favor of bailing out incompetent banks. I am not in favor of bailing out incompetent industry. But I want to see the depositors in the banks protected. I want to see the workers in industrial firms protected. This is important for the economy, because that is what keeps spending flowing. And any steps that the government takes to expand demand through public projects or through public payments to the unemployed, I strongly favor. I look with approval that that is the direction in which Japan is moving. I have always had very, very severe doubts--not referring specifically to Japan--of the International Monetary Fund. It bails out the wrong people and punishes the people who most need help. It calls for government restraints on welfare payments on the payments of people who are suffering most. I want to see recovery action going to the people who most need help, who will most likely spend their support, and I don't want to see it giving life, I repeat, to the people who cause the trouble.
Do you think the IMF should be abolished? Or reformed?
I would reform the IMF so that when a country is in trouble--as in the case of the Southeast Asian countries--it helps the people who suffer, but it doesn't help the people who are responsible for the trouble, namely the bankers and the corporate executives.
Any opinion on the Federal Reserve's involvement with the LTCM?
We must always be aware in...Tokyo and in New York of the danger of speaking of financial genius. A financial genius, as I have often said, is a rising market. Long Term Capital Management was sensible as long as things were normal on Wall Street. But once the correction started on the past speculation, it was heavily mortgaged and completely vulnerable and therefore a financial disaster. I don't think I would have bailed it out. I would say that anybody that is foolish on that scale, should suffer.
But what about the role of the Federal Reserve?
It was the Federal Reserve that took the action to bail out LTCM. I think this was a questionable action of the Federal Reserve, that it would have been better to have accepted the lesson of that kind of financial foolishness.
The Japanese government is trying to infuse public funds into major banks. Is this a bailout, or a necessary step?
I strongly endorse that. This is in accordance with what I've long been recommending. I would be repeating what I said before. Instead of putting money in the hands of the people responsible for the bubble, this puts money in the hands of the people who are giving support to aggregate demand and giving support to the economy. And that's what I want to do.
Since you are saying that cyclical change is inevitable, you must be skeptical of the term "new economy." Some people are saying the U.S. economy will continue to grow for ever.
This has been said of every economic boom since 1637. Anybody who hears a reference to a "new economy" should immediately take cover. You're in the company of somebody who is susceptible to speculative insanity.
We heard the phrase "new economy" about 20 years ago, right?
As I said, hear the words "new economy" and take cover.
How about the words "virtuous cycle" and the phrase, "fundamentals are good"?
In 1929, which I have studied at some length, after the stock market crash of that autumn, everyone in Washington and everyone in New York rushed to say, "the fundamentals are sound." It became a cliche. Now when you hear somebody say "the fundamentals are sound," you know that you're in the hands of somebody who doesn't know what he or she is talking about. Because it is when you have a speculative crash, when the bubble breaks, that has an adverse effect on the fundamentals immediately. And the fundamentals are affected, the first casualty of the crash.
The computer is supporting the U.S. economy now--the Internet--everybody is using it. I didn't see that coming six or seven years ago. How do you think the computer age will develop in the 21st century?
I don't think we should exaggerate that. If one dropped back to my youth, one might have said the world is going to be totally changed by the automobile, which it was, but we accommodated. The world was changed by the telephone, but we accommodate it. The world will be changed by computers, the Internet, but we'll accommodate. It is a person of simple mind that states that some technological change is decisive in its economic effect. The only technological change that I worry about, and this is something that will not be news in Japan, is atomic energy and the atomic bomb and nuclear destruction. I worry about that as a technological change which could have disastrous effects. But I'm not going to spend any time worrying about the economic and social effects of the computer.
The automobile, the telephone, the computer--if it's just a process of technology development, what will come after the computer?
If we have peace in the world, to which I attribute great importance, we will continue to have economic well-being in the rich countries and a terrible problem of poverty in the poor countries. But we will not have any economic problem that we cannot contain. In his book, "Economics for Our Grandchildren," John Maynard Keynes said that the economic problem, he was talking about the rich countries, would, he said, one day be solved. And economists will be considered interesting people, useful in the same way as dentists. That, I think, is a little optimistic, but I do not see for Japan, the U.S., Europe, the fortunate countries, any insuperable economic problems. I am much more concerned with political problems, keeping the peace and, of course, the terrible problems of the poor countries. I have spent a good certain part of my life in India, and I am much more concerned with the poverty there than I am with the problems of economics in the U.S., although we still have a very serious poverty problem in our great cities.
Why can't we solve the problem of poverty? The World Bank and developed countries have spent a lot of money.
I have long been an advocate, and I have recently been writing again about the obvious solution. The fact of poverty is the absence of money, and I would provide a certain amount of money to every family to bring every family to a minimum level of well-being. As a rich country, that is something we can afford, something Japan can afford. This, I believe, is going to be the most essential step to be taken in the next century. The guarantee of minimum living standards for the countries that can afford it and a guarantee of help to the poor countries that cannot afford it.
How? Through official development assistance? The World Bank? NGOs?
I would keep the World Bank in on this, but this is going to take many steps beyond anything we have done now. We must recognize that human beings are human beings and suffer disease and hunger whether they're in Africa or in Japan or in the U.S.
Will poverty be one of the major problems in the 21st century?
I'm very much afraid so. It has a stubborn quality about it that causes poverty to continue, even in a rich city like New York.
In some of your books you've written about the environment.
I am much more concerned about the environment because that has a sweeping effect that nobody can control. So when it comes to global warming or atmospheric pollution or the loss of scenic quality, I do worry. I was first in Japan in 1945 and traveled over some part of Japan at that time, and it was a beautiful rural country. A great spread of grassland, rice, rural beauty. In modern times, I have gone to Japan, traveled between Tokyo and other cities, and it is much less beautiful than it was 50 years ago. And I regret that. The last time I went to Japan, I made a trip to the other side of the country, which is still rural, and it was a great relief to get away from the ugly pressures of suburban and urban environmental effect.
Facing the Sea of Japan?
Yes, much more beautiful. And I am strongly in favor of preserving the countryside, preventing commercial advertising, commercial activity, keeping the countryside as it should be.
Yes, we have sacrificed some of our environment.
No question about it, Japan is not nearly as beautiful a country as it was 50 years ago.
Do you think it's possible to have economic growth, especially in developing countries such as China and Southeast Asian countries, while at the same time preserving the environment and preventing pollution?
Oh, sure. There's already indication that that's possible. I had part of my education in England, and my family came ultimately from Scotland, and these are countries--this is a part of the world--where the environmental beauty has been preserved. It has taken rigorous zoning, rigorous protection, but on the whole, the British have done it. It shows it can be done.
But in some respects, England has had prolonged gradual growth, whereas Southeast Asian countries have experienced rapid growth in which protecting the environment comes at a great cost to economic development.
Absolutely, and I am prepared to pay that cost. I hope Japan will too.
How will poorer countries bear the cost?
The techniques are well established. Zoning, control of land use, prevention of advertising and billboards, all that is possible...I served on a commission in the state of Vermont which abolished all roadside advertising and I consider it one of the most important things with which I was ever involved. It hurts my feelings to go to Japan now and see that beautiful country given over to mindless urbanization. We should pay the cost.
Karl Marx wanted an equal society and you have suggested a progressive tax system. Some Scandinavian countries tried to be welfare societies, but haven't managed it 100 percent. What's the solution?
I would not agree with that, I have been closely in touch with the Scandinavian countries all my life. I had part of my education in Sweden, I have been close to the Swedish economists, and the Scandinavian countries including Finland are to this day, the most successful example showing that an intelligent and civilized solution is possible. I regard that as one of the optimistic aspects of the current situation. So I wouldn't dismiss that part of the world as a failure. I consider it to be a major success.
So you suggest the United States and Japan should do the same?
Absolutely. When I talk about a basic income for everybody, I'm talking about the Scandinavian model. When I talk about a larger, better role for our public services, our schools, our environment, I'm to some extent talking about the Scandinavian model.
Is that the model economy for the 21st century?
I wouldn't reduce it to figures. This is a social and not a statistical problem.
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