The Economics of Innocent Fraud: Truth For Our Time


John Kenneth Galbraith has long been at the center of American economics, in key positions of responsibility during the New Deal, World War II, and since, guiding policy and debate. His trenchant new book distills this lifetime of experience in the public and private sectors; it is a scathing critique of matters as they stand today.
Sounding the alarm about the increasing gap between reality and "conventional wisdom"—a phrase he coined—Galbraith tells, along with much else, how ...

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The Economics of Innocent Fraud: Truth For Our Time

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John Kenneth Galbraith has long been at the center of American economics, in key positions of responsibility during the New Deal, World War II, and since, guiding policy and debate. His trenchant new book distills this lifetime of experience in the public and private sectors; it is a scathing critique of matters as they stand today.
Sounding the alarm about the increasing gap between reality and "conventional wisdom"—a phrase he coined—Galbraith tells, along with much else, how we have reached a point where the private sector has unprecedented control over the public sector. We have given ourselves over to self-serving belief and "contrived nonsense" or, more simply, fraud. This has come at the expense of the economy, effective government, and the business world.
Particularly noted is the central power of the corporation and the shift in authority from shareholders and board members to management. In an intense exercise of fraud, the pretense of shareholder power is still maintained, even with the immediate participants. In fact, because of the scale and complexity of the modern corporation, decisive power must go to management. From management and its own inevitable self-interest, power extends deeply into government—the so-called public sector. This is particularly and dangerously the case in such matters as military policy, the environment, and, needless to say, taxation. Nevertheless, there remains the firm reference to the public sector.
How can fraud be innocent? In his inimitable style, Galbraith offers the answer. His taut, wry, and severe comment is essential reading for everyone who cares about America's future. This book is especially relevant in an election year, but it deeply concerns the much longer future.

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Editorial Reviews

From the Publisher
"This brief treatise is a well-written, logical argument about the state of the economy." Publishers Weekly
Publishers Weekly
In this thin volume, Galbraith, the noted economist and presidential adviser, serves up a pessimistic view of today's U.S. economy. Drawing on the omnipresent headlines of corporate scandal and greed, Galbraith explains that as the economy suffers, the overall state of American society declines as well. He points to a number of cases of "innocent fraud," or the gap between reality and conventional wisdom. The author bemoans the emphasis on gross domestic production, or GDP, rather than cultural or artistic advances. Companies, not the public, decide what products to make. Galbraith believes that decisions in various corporate arenas are made based on profits, rather than sound business strategies. Furthermore, he says that shareholder meetings, with a few rare exceptions, are pointless because "Shareholders-owners-and their alleged directors in any sizeable enterprise are fully subordinate to the management.... An accepted fraud." He also calls the rapid Internet growth and subsequent bubble another example of fraud as millions of analysts predicted rapid growth for so many companies, but ultimately many employees were laid off. Even more dismaying to Galbraith is the power of the Federal Reserve, which is credited with prompting economic resurgence when, in his view, the institution has limited real power. This brief treatise is a well-written, logical argument about the state of the economy. However, readers may be disappointed because the short concluding chapter offers few realistic solutions. (Apr.) Forecast: Given Galbraith's reputation and the ongoing criminal trials of CEOs, this book should get review attention and early sales could be strong. Copyright 2004 Reed Business Information.
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Product Details

  • ISBN-13: 9780618013241
  • Publisher: Houghton Mifflin Harcourt
  • Publication date: 4/28/2004
  • Edition description: None
  • Pages: 80
  • Product dimensions: 5.50 (w) x 8.25 (h) x 0.19 (d)

Meet the Author

John Kenneth Galbraith (1908-2006) was a critically acclaimed author and one of America's foremost economists. His most famous works include The Affluent Society, The Good Society, and The Great Crash. Galbraith was the receipient of the Order of Canada and the Robert F. Kennedy Book Award for Lifetime Achievement, and he was twice awarded the Presidential Medal of Freedom.

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Read an Excerpt

Introduction and a Personal Note

For some seventy years my working life has been concerned with economics, along with not infrequent departures to public and political service that had an economic aspect and one tour in journalism. During that time I have learned that to be right and useful, one must accept a continuing divergence between approved belief—what I have elsewhere called conventional wisdom—and the reality. And in the end, not surprisingly, it is the reality that counts. This small book is the result of many years of encountering, valuing and using this distinction, and it is my conclusion that reality is more obscured by social or habitual preference and personal or group pecuniary advantage in economics and politics than in any other subject. Nothing has more captured my thought, and what follows is a considered view of this difference.
A lesser point: Central to my argument here is the dominant role in the modern economic society of the corporation and of the passage of power in that entity from its owners, the stockholders, now more graciously called investors, to the management. Such is the dynamic of corporate life. Management must prevail.
As I was working on these pages, there came the great breakout in corporate power and theft with the unanticipated support of cooperative and corrupt accounting. Enron I had noticed as an example of my case; there were to be more in the headlines. Perhaps I should have been grateful; there are few times when an author can have such affirmation of what he or she has written. The corporate scandals, as they are now called, dominated the news because of exceptionally competent and detailed reporting. I forgo repetition here. I do, however, make reference to the restraints to which managerial authority must now be subject, but these are a small part of the story. More to be told is of the longer and larger departure from reality of approved and conditioned belief in the economic world.
Dealt with in this essay is how, out of the pecuniary and political pressures and fashions of the time, economics and larger economic and political systems cultivate their own version of truth. This last has no necessary relation to reality. No one is especially at fault; what it is convenient to believe is greatly preferred. This is something of which all who have studied economics, all who are now students and all who have some interest in economic and political life should be aware. It is what serves, or is not adverse to, influential economic, political and social interest.
Most progenitors of what I here intend to identify as innocent fraud are not deliberately in its service. They are unaware of how their views are shaped, how they are had. No clear legal question is involved. Response comes not from violation of law but from personal and social belief. There is no serious sense of guilt; more likely, there is self-approval.
This essay is not a totally solemn exercise. A marked enjoyment can be found in identifying self-serving belief and contrived nonsense. So it has been for the author and so he hopes it will be for the reader.

Copyright © 2004 by John Kenneth Galbraith. Reprinted by permission of Houghton Mifflin Company.

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Table of Contents

c o n t e n t s Introduction and a Personal Note ix i. The Nature of Innocent Fraud 1 ii. The Renaming of the System 3 iii. The Economics of Accommodation 11 iv. The Specious World of Work 17 v. The Corporation as Bureaucracy 23 vi. The Corporate Power 29 vii. The Myth of the Two Sectors 33 viii. The World of Finance 39 ix. The Elegant Escape from Reality 43 x. The End to Corporate Innocence 49 xi. Foreign and Military Policy 53 xii. The Last Word 57

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Sort by: Showing all of 5 Customer Reviews
  • Posted May 15, 2009

    more from this reviewer

    I Also Recommend:

    Scathing critique of capitalist society

    This book by the great American economist John Kenneth Galbraith is a scathing critique of modern society. In it, he wittily demolishes the myths that the market and big business are benign, that minimal intervention, inequality and greed are best for the economy, and that there can be accurate economic forecasts.

    He writes, "What prevails in real life is not reality but the current fashion and the pecuniary interest." But in the longer run, reality defeats conventional wisdom.

    He describes "the effort to accord the owners, stockholders, shareholders, investors as variously denoted, a seeming role in the enterprise" (and now 'stakeholders'). Yet, "the myths of investor authority, of the serving stockholder, the ritual meetings of directors and the annual stockholder meeting persist, but . corporate power lies with management - a bureaucracy in control of its task and its compensation. Rewards that can verge on larceny." So stock markets and corporate sales fall, yet bonuses soar.

    He denounces the folly of relying on cuts in interest rates to bring recovery. As he notes, "Business firms borrow when they can make money and not because interest rates are low." The Federal Reserve Bank's actions were irrelevant, through World War One, the depression, World War Two, and since.

    He writes, "The one wholly reliable remedy for recession is a solid flow of consumer demand. Failure in such a flow is a recession. In the United States, especially with stagnation and recession, the lower-income citizen has an acute need for education, health care, a basic family income in one form or another. State and local governments, under the pressure of enhanced demand, cut social outlays. ... The overall effect has been reduced personal and family income and well-being - recession without effective curative action."

    Galbraith points out that private firms, massively subsidised by the public, dominate 'defence'. He observes, "As the corporate interest moves to power in what was the public sector, it serves, predictably, the corporate interest. That is its purpose. It is most important and most clearly evident in the largest such movement, that of nominally private firms into the defense establishment, the Pentagon. From this comes a primary influence on the military budget. Also, and much more than marginally, on foreign policy, military commitment and, ultimately, military action. War."

    Of the attack on Vietnam, Galbraith writes, "During all this time the military establishment in Washington was in support of the war. This, indeed, was assumed. It was occupationally appropriate that both the armed services and the weapons industries should accept and endorse hostilities." So also of the attack on Iraq.

    1 out of 1 people found this review helpful.

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  • Anonymous

    Posted June 22, 2006

    Must Read

    Honest, right-to-the-point, troubling. Galbraith´s at his best.

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  • Anonymous

    Posted April 21, 2004

    Mr. Galbraith on target -- again.

    A book for our time. Informative, honest, at times humorous in JKB's uniquely sardonic verbiage. A fitting and accurate commentary on the real 'state of the union' and modern commerce.

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  • Anonymous

    Posted August 4, 2011

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  • Anonymous

    Posted April 29, 2009

    No text was provided for this review.

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