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The Guardian: Corporate battle lines

The Guardian: Corporate battle lines

“stories of corporate fraud, unbridled greed and negligent auditing, have given much support to the Galbraithian thesis”: “How different are the skills required to succeed in, say, Shell, from those needed in the Treasury? (Apart, of course, from the need in the former case to cultivate a blind eye.)”

JK Galbraith returns to the fray with The Economics of Innocent Fraud. He still has the power to inform and provoke, writes Howard Davies

Saturday August 7, 2004

It is some time since we have heard from JK Galbraith, which is not entirely surprising. At 95 he may be excused some gaps in what has, for 75 years, been a regular flow of stimulating political and economic writing.

The general assumption, I think, was that he had finally retired from the fray. The Economics of Innocent Fraud shows that is far from the case. He has re-emerged with a pungent, if short, essay on economics, corporate politics and the terminology of public discourse.

Galbraith has long argued that major corporations, whether in the US or elsewhere, are run by their management, largely for their own benefit, and without effective public control or oversight. The collapse of Enron, and the related and unrelated stories of corporate fraud, unbridled greed and negligent auditing, have given much support to the Galbraithian thesis. As a result, although the words themselves do not appear, there is a strong “I told you so” theme running through the book. We may take it that Galbraith was not among those who sympathised with the plight of “Kenny boy” Lay, photographed in handcuffs on the way to the Houston courtroom. And I doubt whether Galbraith will be contributing to the Denis Kozlowski legal support fund. Indeed, he is an unashamed fan of Elliott Spitzer, New York attorney-general and the scourge of Wall Street.

But his ambitions in this rather curious essay are more lofty: this is not just an exercise in well-deserved gloating. It is a broader critique of the way we talk and write about economic and business life. At least I think it is, since it has to be said that not all the points he makes are wholly clear. The editors have allowed a somewhat staccato style of writing. Sentences without verbs. And sometimes sentences without apparent meaning: “Let no one try to sell without consumer management, control” is not easy to parse.

But there is a powerful thesis, if at times it struggles to emerge. He argues that much conventional discourse about political, economic and corporate life is based on what he mischievously characterises as “innocent fraud”. Much of this fraud is, in a sense, semantic. We describe phenomena in misleading ways. Perhaps the most misleading term, according to Galbraith, is the phrase “the market system”. In his view, this is a meaningless construct, coined primarily to avoid use of the term “capitalism”, widely seen as a weak brand in the political market.

He complains, too, and with some justification, about the blurring of the line between the public and private sectors. If he were writing about the UK, I am sure he would express deep anxiety about the private finance initiative, and about the now fashionable notion of the social market. In the US context his prime target is the relationship between the Pentagon and the defence industry. He argues that both the US Treasury and the Department of Defence have been under “corporate control” for some years, and notes the increasingly confused roles of the US army and private security firms in combat zones, particularly Iraq.

And the businesses concerned are, in Galbraith’s view, simple manifestations of the interests of their top management. He rejects the notion that stockholders or investors own corporations. He pays no attention whatsoever to what some see as a significant consequence of the Enron debacle: the growing power and influence of institutional investor groupings, which have been flexing their muscles on both sides of the Atlantic. None of this, in his analysis, has altered the fundamentals of corporate power. The technocracy remains in the ascendant.

That, he thinks, goes some way to explaining the explosion in senior executive pay. Furthermore, he attacks the notion that CEOs are worthy of the extravagant sums they are paid, by virtue of their entrepreneurial skills and willingness to take wealth-creating risks. He argues that in most large corporations the essential skill required to reach the top is the ability to work effectively within a complex and stifling bureaucracy.

He sees management education itself as part of a conspiracy to delude the public into believing in the myth of corporate entrepreneurship: “The vital role of bureaucracy, even though almost never so designated, and success therein is unmentioned. In common discourse, bureaucracy and bureaucratic achievement exist in government, not in the corporate world.” Were CEOs to be correctly portrayed as super-bureaucrats, their “compensation” packages might be materially reduced.

Many public servants in this country will find this argument strikes a chord. How different are the skills required to succeed in, say, Shell, from those needed in the Treasury? (Apart, of course, from the need in the former case to cultivate a blind eye.)

Were this the principal thrust of The Economics of Innocent Fraud, one would have little difficulty in commending it to any student of public policy and corporate regulation on either side of the Atlantic. But Galbraith indulges himself further than this, and has the Federal Reserve in his sights, too.

It is not so much that he wishes to criticise particular decisions made by the Fed in the last few years. Though he sneers, rather, at chairman Alan Greenspan, he does not take issue with the decisions of the Federal Open Market Committee under his chairmanship – contestable though those may have been in the past year, at least. Galbraith is above such banal issues. His off-centre view is that, since it was founded in 1913, the Fed “has had a record against inflation and notably against recession of deep and unrelieved inconsequence”.

He argues that the favourable reputation the Fed currently enjoys is entirely false, and that the impact of central bank actions is minimal: “Only in innocence does it control general consumer and business spending.” The FOMC may be filled with men and women of good intention, so he would not wish to deny them “their largely innocent enjoyment of what in economic effect is a well-established fraud. Perhaps we should let their ineffective role be accepted and forgiven.”

If his point is that central banks should see their role as leaning into or away from the prevailing economic winds, there may be some in Washington, or Threadneedle Street, who would have some sympathy with the argument. But that, I think, is a long way from saying their actions are wholly ineffective. Small interest-rate changes are magnified many-fold in their impact on bond and sometimes equity markets. So to characterise the Monetary Policy Committee’s role as entirely fraudulent economic policy-making is hardly a serious analytical point. But then, just as he is generously inclined to give the FOMC members the benefit of the doubt as to their personal motives, perhaps we should reciprocate.

Galbraith has been an agent provocateur all his life. No point in stopping now. After all, as Yeats asked, why should not old men be mad?

· Sir Howard Davies is director of the London School of Economics,,1277213,00.html

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