Free Market Fraud
by John Kenneth Galbraith
The Progressive magazine, January 1999
The excellent month I'm called upon for two celebrations-one
for the distinguished career of Robert Heilbroner, the most interesting,
innovative, and influential of liberal economists, and the other
for The Progressive magazine, now ninety years young. I here venture
the same theme for both. It is this: Most economists commit what
I, in a professionally cautious way, call innocent fraud. It is
innocent because most who employ it are without conscious guilt.
It is fraud because it is quietly in the service of special interest.
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.
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.
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
What we must seek in these matters is reasonably evident.
It is the use of plain language to express the clear truth. We
can then take pleasure from the discomfort the truth so often