How Monopoly-Finance Capital Leads to Economic Stagnation

John Kenneth Galbraith, in The Economics of Innocent Fraud, provided a still stronger condemnation of prevailing economic and social science, arguing that in recent decades the system itself had been fraudulently “renamed” from capitalism to “the market system.” The advantage of the latter term from an establishment perspective was: “There was no adverse history here, in fact no history at all. It would have been hard, indeed, to find a more meaningless designation — this is a reason for the choice…. So it is of the market system we teach the young…. No individual or firm is thus dominant. No economic power is evoked. There is nothing here from Marx or Engels. There is only the impersonal market, a not wholly innocent fraud.” Along with this, “the phrase ‘monopoly capitalism,’ once in common use,” Galbraith charged, “has been dropped from the academic and political lexicon.” Perhaps worst of all, the growing likelihood of a severe crisis and a long-term slowdown in the economy was systematically hidden from view by this fraudulent displacement of the very idea of capitalism (and even of the corporate system).

The continuing influence of Galbraith’s “economics of innocent fraud” and the absurd results it generates can be seen in a 2010 speech by Bernanke at Princeton entitled “Implications of the Financial Crisis for Economics.” The primary reason the “standard [macroeconomic] models” had failed to see the Great Financial Crisis coming, Bernanke admitted, was that these models “were designed for…non-crisis periods” only. In other words, the conventional models employed by orthodox economists were constructed (intentionally or unintentionally) so as to exclude the very possibility of a major crisis or a long-term period of deepening economic stagnation. As long as economic growth appeared robust, Bernanke told his listeners, the models proved “quite useful.” The problem, then, he insisted, was not so much that the models on which economic analysis and policy were based were “irrelevant or at least significantly flawed.” Rather the bursting of the financial bubble and the subsequent crisis represented events that were not supposed to happen, and that the models were never meant to explain. This is similar to a meteorologist who has constructed a model that predicts perpetual sunny days interrupted by the occasional minor shower and when the big storm comes claims in the model’s defense that it was never intended to account for the possibility of such unlikely and unforeseen events.

All of this points to the lack within mainstream economics and social science of a reasoned historical interpretation. “Most of the fundamental errors committed in economic analysis,” Joseph Schumpeter wrote in his History of Economic Analysis, “are due to lack of historical experience” or historical understanding. For Schumpeter, this contrasts sharply with the approach of Marx, who “was the first economist of top rank to see and to teach systematically how economic theory may be turned into historical analysis and how the historical narrative may be turned into histoire raisonnée.” Today conventional social scientists have all too often become narrow specialists or technicians concerned with one little corner of reality —  or worse still, developers of models that in their extreme abstraction fall prey to Whitehead’s fallacy of misplaced concreteness. They seldom recognize the importance of the old Hegelian adage that “the truth is the whole” — and hence can only be understood genetically in its process of becoming.