Judging the system
In 1970, during my apprenticeship as a securities analyst, I studied office equipment stocks for a bank. One day a portfolio manager asked me for the name of the best Wall Street analyst who tracked Xerox. “The one who most agrees with me is so-and-so,” I answered. My point was that the people we think are the smartest usually share our views. When people disagree with us, we tend to write them off as misinformed.
Ten years ago, I read John Kenneth Galbraith’s slim volume, “A Short History of Financial Euphoria.” On page after page he expounded with great clarity and conciseness on some things I believe in most strongly: the inevitability of cycles, their tendency to go to extremes and the roles of complacency and shortness of memory in the reaching of those extremes. I thought, “This guy’s brilliant. His views are right on target. And he states them so elegantly.” In other words, he agreed with me.
Then, within sight of the finish line, he turned critical of “bonds with a high risk and thus carrying a high interest rate. Their novelty, as noted, resided only in their deeply valid name -- junk bonds.” All of a sudden, when pillorying the financial instruments that were the foundation for my money management career, Galbraith was no longer so smart.
That brings me to his latest, even slimmer effort, “The Economics of Innocent Fraud: Truth for Our Time.” In it, he expresses some of the idiosyncratic views produced by his distinctive combination of education, experience and political viewpoint and developed in his 95 years on this planet. And idiosyncratic is the word. Galbraith sees fraud -- some of it innocent and some less so -- when the claims made for our economy and the terms used to describe its workings are less than accurate. Or as he puts it, “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 the truth.”
It is Galbraith’s view that many of the “frauds” of which he writes are the result of conforming description to desire. Certainly it seems reasonable that we see what we want to see in many phenomena, and we describe them in ways that will hew to our theories and help us profit. The result, as he puts it, is “self-serving belief and contrived nonsense.”
Galbraith’s observations will feel like newfound truths to some readers and minor cavils to others, profound observations or purposeless wordplay. Reaction to his ideas will say at least as much about the reader’s views as they will about the author’s.
The starkest distinctions, I think, will relate to the complaints stemming from Galbraith’s social and political views. He quibbles, for example, with the use of the single word “work” to describe both what I do every day and what a factory worker does. I love my work; Galbraith thinks the man on a factory floor hates his. My enjoyment starts when I reach the workplace; the factory worker’s begins when he leaves. The factory worker is celebrated for his physical exertions, Galbraith says, mostly by those who can get through the day without any. “Though often repetitive, exhausting, without any mental challenge, [work] is endured to have the necessities and some of the pleasures of living.” How then, Galbraith asks, can that word apply equally to the nonexertions of the executive class? But I wonder whether these are really two different things, or two versions of the same thing, and whether these questions matter.
After making his distinction -- an obvious but not necessarily productive one -- Galbraith goes on to take exception to the fact that “those who most enjoy work ... are all but universally the best paid.... Low wage scales are for those in repetitive, tedious, painful toil. Those who least need compensation for their effort, could best survive without it, are paid the most.... That the most generous pay should be for those most enjoying their work has been fully accepted.”
Aha! So this isn’t idle wordplay after all, but instead a tendentious expression of social philosophy. Yes, our system doesn’t render “from each according to his abilities, to each according to his needs.” Karl Marx’s line of thought seems to have been left behind. Fair-minded though I think I am, I have no problem with the general workings of a free-market system in which people are able to extract payment for their labor that presumably is proportional to its “worth.”
But do the best paid really earn their compensation through performance? Generally yes, I think. But is the chief executive really worth 1,000 times as much as his rank-and-file employee (a not unheard-of ratio)? Is his pay the result of a smoothly functioning system of laissez faire? Or is it the result of management’s having wrested control of the corporation from its owners (fraud!) and the fiction of directors who supervise management on behalf of those owners (fraud!)?
Clearly, the market doesn’t allocate rewards with great precision or complete fairness. Some of us have benefited from genetics, environment, parenting, education, inherited capital, even luck. The resulting disparities are very much worth noting but need not necessarily be condemned. That’s life in an uncontrolled economy -- certainly no fraud there. But what about having had doors opened by membership in “luckier” classes of race and color? What about having been of the right gender for entry into the business establishment in the 1960s (which I was) and the right religion (which I wasn’t)?
Galbraith raises these questions and many like them, spending little more than a few paragraphs on each. They are not fully formed or fully argued, but rather suggested for the reader’s consideration -- more of a Zen koan or thought-provoking riddle than a full polemic. What you do with them is up to you. Some will say, “Of course I deserve every penny (and option) I get.” Others will praise their good fortune but pause for a minute to reflect on questions of equity. And there may even be a few who shout, “To the barricades!”
Readers may find pet peeves expressed in language that seems a century old but somehow hits its mark with the precision of a 21st century laser. One of my favorites is Galbraith’s discussion of financial forecasting.
It is a recurring theme of mine that the value of most economic and market forecasts is zero (in that they won’t help you make a profit) or less (in that they contribute to error). Common wisdom already is reflected in the prices of most assets and thus consensus forecasts won’t help you in the hunt for bargains. Better-than-consensus forecasts require highly superior insight or unique information (with the latter being scarce at minimum and illegal at the extreme). And certainly none of the forecasts distributed by brokerage firms and the media would be available gratis if they really could make people rich.
“In the economic and especially the financial world,” Galbraith says, “prediction of the unknown and unknowable is a cherished and often well-rewarded occupation. It can be the basis, though often briefly, of a remunerative career.” So forecasts are sound and fury, albeit often signifying nothing. And totally benign? Not necessarily.
Galbraith goes from the general folly of forecasting to suggest that this fraud isn’t always innocuous. With regard to the tech stock boom, for example, “From once highly regarded stockbrokers and investment firms, the financial press and imaginative and mentally vulnerable newcomers came well-believed forecasts of the glowing prospects of Silicon Valley firms. So from others with a personal stake.... Those making the forecasts were well paid; this was not entirely innocent.”
Securities analysts often come across as cheerleaders for their industries and companies. Their views may be colored by the congenital optimism that seems to characterize their profession. Or they may be swayed by self-interest, because it is for the highest-flying industries that stock analysts are in the greatest demand. Or a few may simply be on the take; clearly some tech analysts published reports they didn’t believe in, often so that their firms could win investment banking business or so that companies’ initial public offerings would do well.
Thus do Galbraith’s “frauds” progress from misnomers to social injustices (if that’s how you see them) to crimes and misdemeanors. Galbraith has had almost a century in which to accumulate this list of things worth a few pages each. Clearly some are his personal gripes -- concerning either how “the system” works or how it’s described. And some truly are food for thought, for those of us who are hungry. But they are always described in spare, elegant English.
Readers may agree or disagree, but it’s not likely they’ll fail to react. And that is one of this book’s greatest strengths. It is thoroughly the work of one of our most thought-provoking elder statesmen. *