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Thursday, May 11, 2006

Robert Frank: Galbraith Was Right for the Wrong Reasons

Robert Frank gives his view of why John Kenneth Galbraith never received a Nobel prize:

Right for the Wrong Reasons: Why Galbraith Never Got the Prize, by Robert H. Frank, Economic Scene, NY Times: The Nobel award in economics is not given posthumously. So John Kenneth Galbraith ... will never receive one. Yet Mr. Galbraith was the most widely read economist of the 20th century and was also considered one of the most influential. There are, of course, many distinguished economists who never receive a Nobel. But the list of winners also includes some whose work has had little lasting impact. So, why did the Nobel committee pass on each of its 36 opportunities to select Mr. Galbraith?

In "The Affluent Society," published in 1958, Mr. Galbraith argued that Americans would lead longer, more fulfilling lives if they spent less on private luxuries and more on their external environments. As he memorably put it: "The family which takes its mauve and cerise, air-conditioned, power-steered, and power-braked automobile out for a tour passes through cities that are badly paved, made hideous by litter, blighted buildings, billboards, and posts for wires that should long since have been put underground."

The standards that define luxury consumption have escalated considerably since he wrote those words. Yet with 40,000-square-foot mansions going up all around us even as our government tells us we cannot afford to inspect most of the cargo containers that enter our ports, his assessment still resonates. Why, then, wasn't his work more warmly received by his fellow economists?

A succinct answer was offered by Milton Friedman, ... both a longtime friend and passionate intellectual adversary ... Interviewed just after Mr. Galbraith's death, he characterized Mr. Galbraith's work as "not so much economics as it is sociology."

Although many economists shared Mr. Galbraith's skepticism about prevailing spending patterns, they were also skeptical of his explanation of the imbalance. According to standard economic models, consumers survey available goods, then select those that best suit their preferences. But in Mr. Galbraith's account, the arrow traveled in reverse: firms first decide which goods are most convenient to produce, and then employ marketing wizardry to persuade consumers to buy them.

Most economists readily conceded that firms would gladly exploit consumers in this fashion if they could, yet most also doubted that firms had the power to do so in the long run. ... His critics argued, for example, that if consumers were paying high prices for goods of little intrinsic value, there would be "cash on the table" ... Rivals could thus earn easy money by offering slightly cheaper and better products, in the process luring exploited customers away. After all, the same marketing prowess that enabled Mr. Galbraith's firms to bamboozle consumers should also enable rivals to attract consumers to better options.

Mr. Galbraith's critics had a point. ... his explanation for society's spending imbalance suffered from the same deficiency that has plagued ... social critics on the left since Karl Marx. Because it implied that greedy capitalists were leaving cash on the table, most economists couldn't accept it. To this day, however, many remain equally skeptical of Milton Friedman's competing claim that unbridled market forces ensure optimal allocation of society's resources.

Mr. Galbraith studied at the University of California, Berkeley in the 1930's. Had he received his training decades later, he would have been better equipped to come up with explanations that might have satisfied his critics. For instance, modern game theory ... shows why bad allocations often occur even in highly competitive markets in which consumers and firms are doing the best they can individually.

The most compelling examples of such inefficiencies entail applications of the familiar stadium metaphor, in which all stand to get a better view, only to discover that none see better than if all had remained seated. Thus, Mr. Galbraith might have argued, consumers buy more luxurious cars in the rational expectation that the cars will deliver more than enough extra satisfaction to justify the cost, only to discover that when others follow suit, the effect is merely to redefine what counts as luxury.  ... Had Mr. Galbraith studied behavioral economics, he might have poked fun at his critics...

Mr. Galbraith's arguments may have failed to win the approval of free market economists. Yet, unlike many of his critics, he recognized a bad allocation of resources when he saw one. Nobel prizes are sometimes awarded to scholars who are wrong for the right reasons, but almost never to those who are right for the wrong reasons.

    Posted by on Thursday, May 11, 2006 at 12:44 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (6)

          

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