'History' reveals vice, virtue of capitalism


Perhaps the main reason communism failed and capitalism didn't, at least to the same extent, is that the latter takes more of human nature into account -- for example, greed. Capitalism, by harnessing this vice, makes it the fuel for prosperity, while communism, for all its allegedly cold analysis of economic realities, builds on the shaky sands of human altruism: from each according to his ability, to each according to his need.

The venerable, if seldom venerated, economist John Kenneth Galbraith shows that capitalism's virtue can revert to vice all too quickly and "contains within itself the seeds of recurring damage" in the form of booms and busts that "must conservatively be described as mass insanity."

What's both reassuring and distressing about this is that it's utterly predictable, yet it continues to happen. One main cause of what Mr. Galbraith calls "the speculative episode" is the financial markets chronically suffer memory lapses, forever reinventing the wheel and forgetting the blowouts.

Starting with the Tulipomania madness in the Netherlands during the 17th century, Mr. Galbraith explores the psychopathology of boom delusion right up to the nose dive of the Japanese stock market in 1990.

The main constituent, apart from memory loss, is the "discovery" of some apparent novelty -- an artifact or financial device that promises quick riches for those who "get in on the ground floor," which is where they inevitably end up.

In the Netherlands of 1636, it was the high prices being paid for the bulbs that produced the beautiful new flower from the Mediterranean, the tulip, and soon the boom was on: Everyone was turning everything into cash to invest in the bulbs, and many were getting rich.

Mr. Galbraith divides the participants in such episodes into those who see only the novelty and those who see both its profitability and its transience, and think they can ride the wave until just the right time.

Both are "programmed for sudden efforts at escape," which is what brings the panic; also, early successes tend to be ascribed to one's own acuity, which then authorizes further plunges, along with the "pressure of public and seemingly superior financial opinion" -- which in turn is based on the false association of wealth with intelligence.

"Speculation buys up, in a very practical way, the intelligence of those involved"; brains evaporate in the presence of large amounts of money partly because, in the words of Walter Bagehot, "all people are more credulous when they are most happy."

Dissenters, as Mr. Galbraith found to his dismay in both 1955 and 1987, are vilified as saboteurs of prosperity. But the most amazing thing about the madness is that even after the fever breaks, it is not acknowledged as the cause of the disaster.

Scapegoats and specious "external" causes are found and measures taken against them; in 1987 these factors turned out to be computer-based sell orders and, "in a breathtaking leap in logic, certain regulatory controls. . . . That speculation and its aftermath are recurrent and inherent, unfortunate characteristics of markets extending over centuries, went mostly unmentioned," because markets, theologically, are a "totem" whose sacred neutrality must not be aspersed.

As a natural companion to Charles Mackay's "Extraordinary Popular Delusions and the Madness of Crowds" (1842), which Mr. Galbraith quotes extensively, "A Short History" is entertaining in its instructiveness.


Title: "A Short History of Financial Euphoria"

Author: John Kenneth Galbraith

Publisher: Viking

Length, price: 113 pages, $16

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