How Conservatives Abandoned the Free Market and Why Liberals Should Too

Book Review: 'The Predator State'

By Roger Lowenstein

The Predator State How Conservatives Abandoned the Free Market and Why Liberals Should Too By James K. Galbraith 221 pages. $25; £16.99. Free Press.

As markets tumble and prices soar, and especially as the wages of ordinary workers lag inflation, the free-market dogmas that have governed the United States over the last generation are increasingly under fire. If markets are so good, how come we're paying almost $4 for gas? If private enterprise does the work of the angels, what happened to all the good jobs?

Comes now James K. Galbraith, an economist at the University of Texas, to denounce and, he hopes, to refute just about everything many people thought was true about the virtues of private markets. In "The Predator State" Galbraith argues that the Reagan revolution and all that followed was essentially a fraud. What remains of it? Nothing. Who still believes in it? Outside academia: no one.

Galbraith says that Reaganism was founded on three policies: deregulation, monetarism and low taxes. He declares that the first was an artifice so that lobbyists could extract "more money from those who can afford to pay - and sometimes from those who cannot."

Monetarism (the tactic used, successfully, by the Federal Reserve in the 1980s to nip inflation) he depicts as a tool to kill off labor unions and elevate the power of Wall Street. And low taxes failed to achieve their supposed purpose - encouraging saving. They were merely a sop to the wealthy.

The author, whose prose is reminiscent of that of his famous father, John Kenneth Galbraith, is as wickedly biting as he is over the top. He writes, "It is fair to say that there will never again be any U.S. government for which a truly principled conservative might work." Fair to say? How about biased, vengeful and short-sighted to say?

I have a sneaky feeling Galbraith would take those fighting words as a compliment. He admits this is a "personal" work, since the conservative tide "devalued my Keynesian education, obstructed my career and deprived me and my few comrades on Capitol Hill of purchase on the levers of power." He mourns the assault on his father's legacy. (Milton Friedman, the Nobel Prize-winning monetarist most responsible for toppling Galbraith from a revered place in the economist's pantheon, is likened to George Wallace.)

Touching as his filial devotion is, Galbraith seems to believe we are still living in an economic ecosystem dominated by industrial behemoths - which is to say, the world described in the elder Galbraith's 1967 masterpiece, "The New Industrial State." When he observes of CEOs, citing Veblen, that their "wives and servants are therefore fed and decorated to reflect the stature of their masters," he is dialing back to the 1950s, or maybe to the '20s.

Still, the gusto with which he repeatedly challenges tired conventions is refreshing. Did inflation really go up in the '70s because the Fed printed too much money - or as Galbraith says, did big companies, big unions and OPEC simply have too much pricing power? Does too much employment really lead to inflation, as conservatives tell us - or is the very notion absurd? And if low taxes haven't promoted savings, Galbraith asks, why not raise them?

Galbraith delights in tweaking conservatives, but some of his surest arrows are aimed at liberals, whom he charges with cowering in a "protective crouch." As a Keynesian, Galbraith does honor to deficit spending; he harpoons liberals for adopting the ideal of balanced budgets just when the right has abandoned it. Budget balancers are "not merely parroting conservatives," he says; "they are parroting dead conservatives." And he debunks the liberal approach to trade protection, which is often to insist that developing nations agree to reforms in their home economies. "You cannot impose a wage standard on China or Vietnam," Galbraith points out. But you can do it at home.

Aiming, he says, "to free up the liberal mind," he fearlessly endorses long since abandoned, and now generally discredited, liberal policies, from price controls to state planning. "You want higher wages?" he asks. "Raise them. You want more and better jobs? Create them."

There is much in this book that strikes me as wrong. Most CEOs are neither "functionaries" nor are they "idle." It is not true that the market never ferrets out scandal; Enron was spotted by hedge funds and undone by short-sellers. Hurricane Katrina exposed a failure not of markets but of government. And contrary to Galbraith, economic freedom as interpreted by market proponents is more than just "the freedom to shop."

He writes so well, you have to pinch yourself to remember that, yes, the free market has produced robust growth and central planning has usually failed. Galbraith acknowledges that the United States has mostly enjoyed prosperity in recent years; his glib explanation is that hold-over New Deal institutions (government mortgage agencies, subsidized health care, student loans) have come to the rescue of misguided conservative policies. In other words, if it works, it's the residue of Franklin Roosevelt and Galbraith's dad; if it fails, it's the market's fault. That seemed preposterous when I first read it; but in the wake of the collapse of Fannie Mae and Freddie Mac, when all of Wall Street could be headed for a bailout, one wonders.

Galbraith admits neither ambiguity nor doubt; indeed, his prose is absolutist in proportion to the extent to which his assertions are unprovable. For Galbraith, the market as its apostles describe it does not really exist. It is a "vaporous" idea, a "cosmic and ethereal space," a "negation," a "nonstate." Finally, it is "another god that failed." This is brilliant rhetoric. It is not brilliant economics, but give him his due: He has raised trenchant questions about a system in crisis.

What remains of the Reagan revolution? Galbraith asks. Nothing, he answers.

Roger Lowenstein is a contributor to The New York Times Magazine. His latest book is "While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis."