Galbraith Pokes Fun At '80s' Reaganomics

JOHN KENNETH GALBRAITH, a liberal, professor of economics emeritus at Harvard University, has written more than two dozen books, several quite influential in their day. This book probably won't rank in importance with "American Capitalism: The Concept of Countervailing Power," or "The Affluent Society," or "The New Industrial State." Yet, as always with Galbraith, this book is clear, well-written, entertaining, and thoughtful. The author is more of a political-economic philosopher than a modern economist

who uses mathematical analysis of the statistics to back up his theories and theses.

In one sense, "A Short History of Financial Euphoria" is a poke at Reaganomics. He equates the merger mania of the 1980s, the related boom in junk bonds, the savings and loan scandal, the real estate bust, and the stock market crash of 1987 with the great speculative episodes of the last three centuries. These include Holland's "Tulipomania" of 1636-37, Britain's South Sea Bubble, the 18th-century fascination with the joint-stock company, and the 1929 stock market crash that began the Great Depression.

Galbraith also finds a common theme and lesson. "Individuals and institutions are captured by the wondrous satisfaction from accruing wealth," he writes. "The associated illusion of insight is protected, in turn, by the oft-noted public impression that intelligence, one's own and that of others, marches in close step with the possession of money. Out of that belief, thus instilled, then comes action - the bidding up of values, whether in land, securities, or, as recently, art. The upward movement confirm s the commitment to personal and group wisdom. And so on to the moment of mass disillusion and the crash. This last ... never comes gently. It is always accompanied by a desperate and largely unsuccessful effort to get out."

Galbraith, in effect, blames the market mechanism for these episodes. This has aroused some criticism of the book. Market orthodoxy, he notes sarcastically, says: "The market can reflect contrived or frivolous wants; it can be subject to monopoly, imperfect competition, or errors of information, but, apart from these, it is intrinsically perfect."

Galbraith may not have described all the episodes of market euphoria entirely correctly. Certainly the Federal Reserve's failure to prevent a 30-percent decline in the money supply accounts for the severity of the Great Depression after the stock market bubble was burst. But his explanation of the important role in speculative excesses of greed, vanity, and the false automatic equation of wealth with wisdom does ring true.

The author does not see much in the way of remedy for these speculative tendencies other than a recognition of the process and an enhanced skepticism among investors. "Let the following be one of the unfailing rules by which the individual investor and, needless to say, the pension and other institutional-fund manager are guided: there is the possibility, even the likelihood, of self-approving and extravagantly error-prone behavior on the part of those closely associated with money."