The Economics of Innocent Fraud: Truth for Our Time.

Author:Mosler, Warren
Position:Book Review

The Economics of Innocent Fraud: Truth for Our Time, by John Kenneth Galbraith. Boston & New York: Houghton Mifflin Company. 2004. ISBN 0618013245, $15.00. xi + 62 pages.

This is a most notable little book. As with "conventional wisdom," Professor Galbraith's term "innocent fraud" will be a powerful addition to the lexicon of critical thinking. This review first addresses a few of the innocent frauds exposed by Professor Galbraith and then continues with a discussion of other innocent frauds currently influencing public policy. Unlike Professor Galbraith's previous writings, in this book the case is deliberately understated, thereby encouraging the reader to take the analysis further.

On page 4 Galbraith writes of "workers who suffered from their undoubted bargaining weakness." What is called the "labor market" is clearly not a "fair game," as any student of "game theory" will immediately confirm. When employees must "work to eat" and employers need employ only if returns on equity are acceptable, the theoretical results are obvious, as well as confirmed by sound empirical research. The game can only be made somewhat fairer by allowing universal labor organizing, which for all practical purposes can only come from the public sector. Yet somehow the innocent fraud that "increasing labor flexibility" is the answer prevails unquestioned in the public debate.

Likewise, the idea that GDP measures well being is without merit, and another example of an innocent fraud. What I'd add is the innocent fraud of "capacity utilization." Today, industries such as software have zero marginal costs of production--the user simply downloads what he or she wants and is charged a fee. This shows up as GDP. Clearly there is no limit to this kind of GDP growth, nor are there any ill effects of such "growth"; GDP could grow 15 percent per year as software, music, and videos are downloaded, without driving up prices via competition for real resources, including labor. Yet the government (the Fed in particular) and mainstream economists proudly point to 5 percent GDP growth as "the best in 20 years" and worry about the economy hitting the "speed limit" even as the output gap continues to grow. Remarkably, they display innocent surprise when "productivity" grows by leaps and bounds as GDP rises without much increase of employment.

A third innocent fraud is that the highest pay goes to those who enjoy their work the most. This particular innocent fraud is tied to the...

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