John Kenneth Galbraith is the most stylish writer on economics of the past half-century. His elegant dissection of the boom and bust of the 1920s in The Great Crash is a gem of economic history. The Economics of Innocent Fraud – a slight book containing barely 10,000 words – will disappoint those who hoped that he might offer a similar analysis of the speculative bubble of the late 1990s. But it will nevertheless please those who appreciate Galbraith’s dry wit and laconic iconoclasm.
Galbraith gave to the English language the phrase “the conventional wisdom” to describe opinions that, while not necessarily well founded, are so widely held among the rich and influential that only the rash and foolish will endanger their careers by dissenting from them.
Each chapter of this book is devoted to a modern example of conventional wisdom, such as the belief that power in a modern capitalist economy is held by the owners of capital and that the deliberations of the Federal Reserve Board matter to the functioning of the economy.
To many of these misconceptions, Galbraith attaches the label of innocent fraud: deception for which no one can be held responsible.
Legally, there can be no such thing as innocent fraud: fraud requires a dishonest mind.
Either the people who puffed dotcom stocks genuinely believed that they were valuable, in which case they were guilty only of professional incompetence, or they did not, in which case they were sophisticated fraudsters. That is why the e-mails obtained by Eliot Spitzer, the New York State attorney-general, which showed private opinions very different from the content of published research, were crucial to his case against Wall Street investment banks.
But in a world dominated by conventional wisdom, this distinction between states of mind, which plays a central role in determining legal liability, is rarely clear-cut. Often there is no state of mind, only a miasma of confusion.
The conventional wisdom is the product of the repeated expression of views that it is in the interests of those professing them to hold and that gain strength and validity from the frequency with which they are expressed.
It is meaningless to ask whether the individuals involved really believed what they said: they were merely repeating expressions they did not wish to submit to critical scrutiny. Did bankers and analysts genuinely think that grass would soon be growing on the pavement of Oxford Street, that shopping malls would decay like abandoned temples as pensioners rushed to buy their pet food online? Business people mostly did not pose that question: it was easier, and certainly more profitable, to reiterate the conventional wisdom. And that is why, of all the innocent frauds that Galbraith lists, the deception that practitioners in financial markets possess expertise that will be valuable to their customers is the most widespread. The commonsense definition of fraud is a transaction for which the foreseeable consequence is that the more knowledgeable party will make money and the less knowledgeable lose it. Such activities have recently been widespread.
The uninquiring mind is necessary for the development of the conventional wisdom. And that uninquiring mind is more common than ever today in business, in finance, in politics: in individuals who gain comfort from every cliché about the universality of globalisation, the transforming influence of information technology and the historic inevitability of liberal and active capital markets.
But the academic or the lawyer is bound to ask questions such as “what does he actually think?” or even “what is true?” And he or she is puzzled that the uninquiring mind will pay to receive advice or hear lectures from other uninquiring minds.
It is hard for these observers of the conventional wisdom to understand that the people concerned might not be thinking anything at all, and have no concept of truth other than what is generally believed to be true. Maturity is the enemy of iconoclasm.
I have frequently been told “we would really like you to challenge our ideas”, but bitter experience has shown that this statement should be treated in the same spirit as “tell me honestly what you think of my new dress”. Time has taught me to treat the conventional wisdom with greater respect and to appreciate why my attempts to probe it cause so much irritation. How fortunate we are that, even in his 10th decade, Galbraith still cannot resist the opportunity to poke fun at every piece of conventional wisdom and to expose every innocent fraud.