Thursday, July 22, 2004

The Economics of Innocent Fraud: Truth for Corporate power is the driving force behind US foreign policy - and the slaughter in Iraq

Mass slaughter has become the ultimate civilized achievement

Book review by Mufti A. Hasan

Prof Galbraith’s latest work -  The Economics of Innocent Fraud: Truth for our time - is a must read for anyone having a few nagging doubts about what the American public is being told every day by financial publications and politicians. He clarifies the meaning of terms which have been thoroughly garbled by propagandists during the last few decades. Garbling, or "spinning" as it is now known, is a fancy kind of lying "misdirection" or "misinformation" intended to convince people of something that is false, or to gain acceptance for what people would otherwise reject.
The central premise of the book is that a series of false beliefs ("frauds") have long been perpetuated among the American people about how our society operates. These beliefs have nothing to do with reality, yet they persist because they benefit the most advantaged members of society. But Galbraith doesn't believe this deception is entirely by malice. He reasons that most of those who benefit from these frauds are "innocent." They have merely adopted a version of the truth that is most convenient for them, which he maintains is simply human nature. He also points out that Corporations are managed by gigantic bureaucracies, which are little different from government bureaucracies. He tells us that capitalists are still capitalists, no matter how disguised by words and image-makers:
“Let's begin with capitalism, a word that has gone largely out of fashion. The approved reference now is to the market system. This shift minimizes-indeed, deletes-the role of wealth in the economic and social system. And it sheds the adverse connotation going back to Marx. Instead of the owners of capital or their attendants in control, we have the admirably impersonal role of market forces. It would be hard to think of a change in terminology more in the interest of those to whom money accords power. They have now a functional anonymity.
“But most of the people who use the new designation-economists, in particular- are innocent as to the effect. They see nothing wrong with their bland, descriptive terminology. They pay no attention to the important question: Whether money- wealth-accords a special power. (It does.) Thus the term innocent fraud.
“The fraud also conceals a major change in the role of money in the modern economy. Money, we once agreed, gave the owner, the capitalist, the controlling power in the enterprise. So it still does in small businesses. But in all large firms the decisive power now lies with a bureaucracy that controls, but does not own, the requisite capital. This bureaucracy is what the business schools teach their students to navigate, and it is where their graduates go. But bureaucratic motivation and power are outside the central subject of economics. We have corporate management, but we do not study its internal dynamics or explain why certain behaviors are rewarded with money and power. These omissions are another manifestation of fraud. Perhaps it is not entirely innocent. It evades the often unpleasant facts of bureaucratic structure, internal competition, personal advancement, and much else.
“This innocent or not-so-innocent fraud masks an important factor in the distribution of income: At the highest levels of the corporate bureaucracy, compensation is set by those who receive it. This inescapable fact fits badly into accepted economic theory, so it is put aside. In the textbooks, there is no bureaucratic aspiration, no reward for bureaucratic achievement, no bureaucratic enhancement by merger and acquisition, and no personally established compensation. Bypassing all of this is not a wholly innocent fraud.”
Galbraith notes that there is damn little difference between "public" and "private" enterprise in the United States. This is not because of the overweening and unwelcome encroachments of the government; rather, it is the private sphere which has moved into the White House:
“A more comprehensive fraud dominates scholarly economic and political thought. That is the presumption of a market economy separate from the state. Most economists concede a stabilizing role to the state, even those who urgently seek an escape from reality by assigning a masterful and benign role to Alan Greenspan and the central bank. And all but the most doctrinaire accept the need for regulation and legal restraint by the state. But few economists take note of the co-optation by private enterprise of what are commonly deemed to be functions of the state. This is hidden by the everyday reference to the public and private sectors, one of our clearest examples of innocent fraud.
“Take the common outcry about corporate welfare. Here the private firm, as it is called, receives a public subsidy for its product or service. But what is called corporate welfare is a minor detail. Far more important is the full-fledged takeover by private industry of public decision-making and government spending.
“The clearest case is the weapons industry. Given the industry's command of the Congress and the Pentagon, the defense firms create the demand for weaponry prescribe the technological development of our defense system, and supply the needed funds-the defense budget. There is no novelty here. This is the military-industrial complex, a characterization that goes safely back to Dwight D. Eisenhower.
“Any notion of a separation between the public and a private sector-between industry and government-is here plainly ludicrous. Nonetheless, the absorption of public functions by the arms industry is ignored in all everyday and most scholarly economic and political _expression. And what is so ignored is in some measure sanctioned. I hesitate here to speak of innocent fraud; it is far from being socially benign.”
The most disturbing assertion Galbraith makes in this book concerns the influence that corporations have on Pentagon decisions. The fundamental fact of American life in the 21st century, according to Galbraith, is that we live in a corporate system whose deepest foundations lie in corporate executives' lust for unrestrained power and self-enrichment.Most citizens, he writes, think that U.S. weapons purchases are logically debated and analyzed before decisions are made. This is utterly untrue, because the arms industry itself controls military spending, Galbraith asserts. Corporations have invaded the Pentagon and have become its "primary influence" on "foreign policy, military commitment, and ultimately, military action. War." Galbraith contends that the weapons industries actually endorse international hostilities because of the enormous profits they stand to gain, and that they "accord legitimacy and even heroic virtue to devastation and death" simply because it's good business.
“In 2003, close to half the total US government discretionary expenditure was used for military purposes. A large part was for weapons procurement or development. Nuclear-powered submarines run to billions of dollars, individual planes to tens of millions each. Such expenditure is not the result of detached analysis. From the relevant industrial firms come proposed designs for new weapons, and to them are awarded production and profit. In an impressive flow of influence and command, the weapons industry accords valued employment, management pay and profit in its political constituency, and indirectly it is a treasured source of political funds. The gratitude and the promise of political help go to Washington and to the defence budget. And to foreign policy or, as in Vietnam and Iraq, to war. That the private sector moves to a dominant public-sector role is apparent….. Defense and weapons development are motivating forces in foreign policy. For some years, there has also been recognized corporate control of the Treasury. And of environmental policy.”
“Civilization has made great strides over the centuries in science, healthcare, the arts and most, if not all, economic well-being. But it has also given a privileged position to the development of weapons and the threat and reality of war. Mass slaughter has become the ultimate civilized achievement,” Galbraith emphasizes.
Another fraud, Galbraith says, is that the word "work" is used to describe two very different things. First there is the enjoyable, prestigious, well-paying work of the favored classes. And then there is the disagreeable, boring, tiring work performed by those at the bottom of our economy. The most enjoyable jobs have the best pay, yet they are usually performed by people who don't really need the money. By contrast, he writes, those with the most unpleasant jobs receive the smallest rewards, even though they have greater need.The Economics of Innocent Fraud is an important book at an important time. If there was ever a moment when we needed calm wisdom and insight, it's now. With the nation facing war, economic recession and corporate scandals of mind-boggling proportions -- while multi-million dollar public relation campaigns blur the line between truth and falsity -- Americans could surely use someone with integrity to step in and tell us what the hell is going on.

The Economics of Innocent Fraud: Truth for Our Time, by JK Galbraith, published by Allen Lane.
July 19, 2004 



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