books economics politics

The difficulties of deflating a bubble

jkgalbWhat if you discovered that one of your favourite economists was also Gordon Brown’s favourite economist? What would change – your view of Gordon Brown, or your view of the economist?

I have a similar problem with J K Galbraith. I’m an admirer of Galbraith’s work. So is Mr Brown, who had Galbraith as an informal adviser while he was chancellor and led the tributes to him when he died in 2006.

I mainly like Galbraith’s books because they’re full of wit and humour, a rare enough thing in economics. He’s also a man who spotted the absurdities of consumer culture, who understood inequality and wanted to make capitalism work better for the poor. But he was a gently subversive critic of capitalism, rather than a man with visionary ideas to change it.

I couldn’t say what Gordon Brown appreciates about Galbraith, but I’m curious to know. This week I’ve been reading Galbraith’s most famous book, The Great Crash, 1929, and there’s a section that describes Gordon Brown’s tenure as chancellor rather aptly. If he’d read the book as chancellor, he must have recognised himself in it too.

The passage describes the Hoover administration, which came to power in 1929 in the full knowledge that it had a financial bubble on its hands. Gordon Brown spent the whole of his time as chancellor watching a  bubble grow. We know that by the end of it he believed he has transcended the business cycle, but at the beginning he appeared to know the risks and chose not to do anything. Galbraith’s comments seem rather relevant:

“There were also some who saw, however dimly, that a wild speculation was in progress and that something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those that took the action.

A bubble can easily be punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy. Among those who sensed what was happening in early 1929, there was some hope but no confidence that the bubble could be made to subside. The real choice was between an immediate and engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated.”

Given Galbraith’s criticism of those who turned a blind eye to the problems in the markets, one wonders what he might have said to Gordon Brown as an adviser. Perhaps he was just ignored.


  1. I think the problem with Gordon Brown is that the bubble occurred under his tenure as Chancellor. Having let the early success go to his head he couldn’t change course as this would destroy his reputation. A classic example where personal gain outweighed the public loss. Brown also suffered from a condition that is more prevalent on the Left (but not solely), that since they see themselves as good, them being in personally power is for the grater good.

    Gordon Brown is going to go down in history as a tragedy and a failure. Since he had such a high opinion of himself I’d say uncharitably it is what he deserves, but it is terrible that as a nation we have to suffer for his hubris.

    1. What I find most strange is that he genuinely appeared to believe in his own invincibility by the end.

      I think seeing yourself as a force for public good is almost universal once you get to a certain point in your political career. It’s a key part of justifying your actions to yourself in the face of public opposition. See George Osborne bluntly stating this week’s welfare changes as a matter of right and wrong, or the evangelical fervour of Michael Gove. The people don’t know what’s good for them, bless them.

      But I agree that seeing yourself as a force for good is more prevalent on the left once you get lower down the political foodchain, right down to the grassroots. I have Conservative friends who have no pretense whatsoever that they’re interested in the public good. They want what’s good for themselves and aren’t ashamed of it. You wouldn’t really get away with that in other political circles.

      1. I always trust people more who don’t go around saying their political motivation is the public or the greater good. At its extreme end the greater good has been the justification for vast amounts of harm. In the 20th century millions have been killed by those motivated by ‘the greater good’ and most of those doing the killing were on the left rather than the ‘selfish’ right.

        The key difference between Late Brown and Gove et al is that they are intellectually persuaded that what they are doing is right, not that it is right because it is what they are doing and they personify rightness. Brown thought he was the smartest and the most moral person in any room. That ego hasn’t yet taken over Osborne, Gove and IDS. Though given the corrupting influence of power I’m not saying it won’t.

  2. While the economy is driven solely by finance, it will never be stable. The rich will get richer and the poor will get poorer.
    If we could move the economy towards manufacturing saleable goods for home consumption and export, and providing a means of earning a living wage, whilst making provision for those with capital to make long term investments and receive a suitable return on their investment, we would have a more stable economy.
    With an economy based on finding a way to “make a fast buck”, we give up stability in favour of the “bear pit” of the massive and fast profit (and when it goes wrong, massive and fast loss).
    People are buying things they don’t want and will never see, so they can sell them later at a profit. The end result is a higher price for the consumer! It’s called “Futures”, but it doesn’t add anything to the value of goods sold.
    If we work together, capital for those who have it and labour for those who haven’t, we can get rid of the instability. It will not be a quick fix, but we will build a society that can weather the worst storms.
    We expect men and women to be treated equally, and rightly so. Why then can we not expect capital and labour to be treated equally? Each contribute a valuable resource to industry and society. If mill owners in the Industrial Revolution had taken this attitude, I doubt we would have had militant trade unions. Who would have wanted to join one, if mill owners had looked after their workers. There were, of course, exceptions such as Titus Salt and Joseph Rowntree. They cared about their workers. I have no doubt the employees worked hard, but they were cared for. Joseph Rowntree even set up a pension scheme!
    Nowadays, if a business is in trouble, the way to keep it going is to lay employees off. There is no concern for the problems this presents to families and society as a whole.
    Capital and labour must work together to underpin a viable and stable society.
    Am I a communist? No! Am I an idealist? No!
    What I am is an observer of life who knows something about economics, finance and business.
    AND I can recognise greed when I see it.
    The rich get richer and the poor get poorer, and eventually there is strife and possibly violence. At least we haven’t seen riots and looting in our towns and cities have we?
    Whoops! I think we have!

    1. Good points, and it would be great to see a re-emergence of the socially aware capitalism of people like Rowntree, Cadbury and Colman.

      On the other hand, the bubble of 97-2007 was more complicated than just finance. Ordinary people participated through the property market, straining their budgets to get the biggest mortgage they could, hoping to get a huge payoff when they sold up. The whole idea of the ‘property ladder’ is a culture of ‘making a fast buck’, hyped by property TV shows and magazines. Obviously finance and property are closely linked, but the banks and finance companies weren’t alone in creating and inflating the bubble

      1. Jeremy,
        Perhaps “finance” is too narrow a term for the problem. Finance is like any other man made “thing”. It can be used for good and for bad.
        Maybe if we look at greed, the “I” that is not in team, and similar matters.
        What I was attempting to say is that greed-driven profit, based on the “bear pit” attitude, is ultimately destructive to society, and sometimes to the individual involved.
        Together we can achieve great things. On our own, we are limited to what the individual can achieve.
        Co-operation is what made the Co-op great. Capital and labour working together is what makes John Lewis continue to be a viable organisation.
        All I want to see is people working together, and not being blind to the problems they create when their blinkers are too tight.

        1. I wish people would not talk about greed. If perverse and harmful behaviour is rewarded by the financial system, then people will act in harmful ways. Of course greedy people will do their best to ensure that the system that rewards them will continue unchanged but then it is up to everyone else to make sure that it is changed in the right way so that the greedy behaviour is not rewarded.

          There have been enough opportunities to get rid of the rotten system.

          1. Henry1941
            If we don’t keep talking about greed, it will just hide away in the financial system.
            As you say, the greedy people will do their best to ensure the greed machine continues! If we stop talking about greed, they’ve won!
            I want to keep talking about greed because I don’t want it hidden. I want to use its true name and not cloud it over with pseudonyms that hide the true facts.
            There have been multitudinous opportunities to change the system. And there will be more! Let us keep calling greed by its true name until we shame it into defeat or until we manage to start the massive change to the system.,

          2. The world often seems to be greed verses envy. Many who talk a lot about greed are in the envy camp.

          3. Yes, but they’re two sides of the same coin, so they’re not actually in opposition to each other. Envy is just greed without the means to satisfy it. Perhaps that’s why the ten commandments prohibit envy rather than greed.

            The real competition is between envy/greed and contentment. Nothing would wreck the economy like a mass outbreak of contentment.

          4. Luckily humans are restless and are rarely content for long. I don’t think we ever will be. There is always something new we want to have, do or go to.

  3. The time for Brown to deal with the bubble was in 1995, which is about the same stage in the 18-year land price cycle as were are now, in 2013. But the right policies were never put in the election manifesto. There would still have been an opportunity to act, any time before about 2003. After that it was too late. Events had to run their course.

    When the crash came in 2007 it might have been better to have gone cold turkey and let the private sector take the consequences of its actions. The result would have been short-term pain.The bail-out is prolonging the agony and is going to end with a 1970’s style inflation, with present government policies propelling the economy onto the path of the next boom/bust which will start to go bad around 2025.

    1. While I don’t like Gordon Brown, even I can’t blame him for decisions made two years before he was made Chancellor.

      That said, in previous recessions we did take the short term pain. This time the government tried to ward off the pain, businesses held on to staff and staff took pay cuts rather than see colleagues made redundant. We shared the pain and in doing so have prolonged the agony. A Thatcherite approach might well have been better – Lamont was right, ‘if it isn’t hurting it isn’t working’.

      1. Brown’s policy decisions were made as soon as he became shadow chancellor, about two years before the 1997 election. This was with Ed Balls as his chief adviser. Why not blame him for decisions taken then? It is not as if the boom-bust appeared out of nowhere. The policy makers were aware of the causes of the 1992 bust and should have done what was needed to prevent ar re-run.

        Now the government is doing the same thing. The bust will come around 2026 but the preceding boom will start now within the next couple of years.

  4. When we talk about greed we are talking about fallen human nature. Greed is one of the seven deadly sins. The official list is pride, avarice, lust, anger, gluttony, envy and sloth. People are not going to stop committing them any time soon. So it is best to try to minimise their impact.

    1. Henry1941,
      Hear hear. They all form a package know as “I, me, my rights, etc”. I think we should still fight against them in whatever form they take.
      The big problem is that I find myself in one or more of those camps all the time. As soon as I get out of one I fall into another. It’s a constant fight, but I do have someone to help!

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