John Kenneth Galbraith understood capitalism as lived – not as theorized

Economists John Kenneth Galbraith and Milton Friedman believed that ideas mattered. Both were great proponents and great exemplars of debate and discussion. Each was a master of the English language, and it was through words, not mathematics (the language of modern economics), that they exercised enormous influence.

As public intellectuals who didn't shy from taking political stances, they each gave heft to ideological causes – Mr. Friedman to free-market conservative ideology, Mr. Galbraith to the progressive tradition. By articulating their points of view so well, they edified public discourse and stimulated generations of economists and social scientists to validate, or challenge, their claims. We are all wiser as a result.

But the two had a very different reception within the profession. Friedman was a Nobel laureate whose works were taught in every graduate course in the world; Galbraith was never accepted into the "fraternity." Friedman was seen as a scientist; Galbraith as a social commentator. The contrast between their physical and historical stature is ironic and unfair. In many ways, Galbraith was a more critical observer of economic reality.

Galbraith's vivid depictions of the good, bad, and ugly of American capitalism remain a sorely needed reminder that all is not quite as perfect as the perfect market models – with their perfect competition, perfect information, and perfectly rational consumers – upon which so much of Friedman's analysis depended.

Galbraith, who cut his teeth studying agricultural economics, strove to understand the world as it was, with all the problems of unemployment and market power that simplistic models of competitive markets ignore. In those models, unemployment didn't exist. Galbraith knew that made them fatally flawed.

Both lived through the Great Depression, but they gleaned different lessons. Galbraith saw that the labor market did not work as well as the standard model had predicted; he embraced Keynesian economics, and its call for government action, at a time when the US economics establishment rejected these ideas.

In his early research, Galbraith attempted to explain what had brought on the Great Crash of 1929 – including the role of the stock market's speculative greed fed by (what would today be called) irrational exuberance. Friedman ignored speculation and the failure of the labor market as he focused on the failures of the Federal Reserve. To Friedman, government was the problem, not the solution.

What Galbraith understood, and what later researchers (including this author) have proved, is that Adam Smith's "invisible hand" – the notion that the individual pursuit of maximum profit guides capitalist markets to efficiency – is so invisible because, quite often, it's just not there. Unfettered markets often produce too much of some things, such as pollution, and too little of other things, such as basic research. As Bruce Greenwald and I have shown, whenever information is imperfect – that is, always – markets are inefficient; hence the need for government action.

Galbraith reminded us that what made the economy work so well was not an invisible hand but countervailing powers. He had the misfortune of articulating these ideas before the mathematical models of game theory were sufficiently developed to give them expression. The good news is that today, more attention is being devoted to developing models of these bargaining relationships, and to complex, dynamic models of economic fluctuations in which speculation may play a central role.

While Friedman never really appreciated the limitations of the market, he was a forceful critic of government. Yet history shows that in every successful country, the government had played an important role. Yes, governments sometimes fail, but unfettered markets are a certain prescription for failure. Galbraith made this case better than most.

Galbraith knew, too, that people aren't just rational economic actors, but consumers, contending with advertising, political persuasion, and social pressures. It was because of his close touch with reality that he had such influence on economic policymaking, especially during the Kennedy-Johnson years.

Galbraith's penetrating insights into the nature of capitalism – as it is lived, not as it is theorized in simplistic models – has enhanced our understanding of the market economy. He has left an intellectual legacy for generations to come. And he has left a gap in our intellectual life: Who will stand up against the economics establishment to articulate an economic vision that is both in touch with reality and comprehensible to ordinary citizens?

• Joseph E. Stiglitz, a professor of economics at Columbia University, is the author of "Making Globalization Work." He won the Nobel Prize in 2001.