Presidential Medal of Ignorance

Forbes , September 17, 2000

The U.S. government's highest civilian award is the Presidential Medal of Freedom. It goes to people the President believes have made "especially meritorious contributions." Why, then, did President Clinton recently give this prestigious award to John Kenneth Galbraith? The official citation says it's because Galbraith "has made complex economic theories and processes comprehensible to a wide audience and highlighted the social and ethical impacts of economic policies."

In fact, Galbraith has spent his career peddling nonsense. His work, long scoffed at by serious economists of all political stripes, has been utterly discredited by the experience of the past several decades.

His influential 1967 book, The New Industrial State, declared that Western corporate managers and Soviet planners were doing basically the same thing: maintaining the economic certainty that large-scale investment requires. Market competition is dead, he said, killed by technology and large-scale development.

"The enemy of the market is not ideology but the engineer," he wrote. "In the Soviet Union and the Soviet-type economies, prices are extensively managed by the state. Production is not in response to market demand but given by the overall plan. In the Western economies, markets are dominated by great firms. These establish prices and seek to insure a demand for what they have to sell.... The modern large corporation and the modern apparatus of socialist planning are variant accommodations to the same need."

It's as though Ronald Reagan had given a Medal of Freedom to his wife's astrologer. But Nancy Reagan presumably trusted her infamous adviser. Even the Clinton Administration does not believe Galbraith's economics.

From its earliest days, for instance, the Administration has been acutely aware of the power of international capital markets. Neither business investment nor government borrowing can escape the pressures of competition. Galbraith, by contrast, saw an easy way out for companies—just rely on retained earnings, which he considered completely under management's control. A firm that "has a secure source of capital from its own earnings" can avoid all sorts of problems, he wrote. "It no longer faces the risks of the market. It has full control over its own rate of expansion, over the nature of that expansion and over decisions between products, plants and processes."

Back in the real world the Clinton Administration takes pride in an entrepreneurial boom. Along with a host of well-funded startups, today's economy is marked by mature enterprises—Microsoft, Intel, Oracle and so forth—that are still closely connected to their owners and founders.

And the quality of individual leaders makes an enormous difference in how companies of all vintages perform. Impossible, declared Galbraith. A bureaucratic "Technostructure" had taken over business. The Technostructure insulated firms from competition and manipulated consumers with ease. And it had no place for entrepreneurs. They might run the corner dry cleaner, but entrepreneurs could not run any business that required capital and planning. "The entrepreneur no longer exists as an individual person in the mature industrial enterprise," he wrote.

Galbraith spoke in a tone of resigned superiority, as though reciting obvious facts that other, less-sophisticated sorts were too romantic to face. "There is no more pleasant fiction than that technical change is the product of the matchless ingenuity of the small man," he wrote in his 1952 book, American Capitalism. "Unhappily, it is a fiction. Technical development has long since become the preserve of the scientist and the engineer. Most of the cheap and simple inventions have, to put it bluntly, been made."

Well, that certainly explains Napster.

More to the point, Galbraith could not conceive of investors spreading risk capital over numerous companies. If an invention couldn't be self-financed in a garage, he supposed, it needed a research lab in a bureaucratic monopoly. In short, the man got pretty much everything wrong. But he told mandarins what they wanted to hear—that "planning" was easy and markets a myth. That was his "meritorious contribution" to American life.