The Economics of Innocent Fraud

The Economics of Innocent Fraud
John Kenneth Galbraith
Pocket Penguin 26


This book reveals the unacknowledged grip of the private sector on public life and considers our increasing tendency to accept blindly legal, legitimate, ‘innocent’ fraud.

I have put down some excerpts which I think have immense relevance in today’s world.

Some of the innocent frauds are
1) “Consumer choice shapes to the demand curve.” “Belief in a market economy in which the consumer is sovereign is one of the most pervasive forms of fraud.”

Galbraith talked about how consumers were lured into believing that they are the king. I remember being taught in school that in today’s market, the consumer is the king and that he is the price maker, etc. He compares the tactics employed by corporations in affecting the choices of the consumer to that of political parties’ propaganda during the time of elections. There is so much monies being pumped into advertising, brand image, etc that very often it is these multinational companies which we lovingly call as MNC’s, who determine our purchasing patterns.

And because all these managers and CEO’s in the top are from good business schools, he has rightly written “Economics as taught and believed lags well behind the reality in all but the business schools”. The present day teaching and understanding of economics contrasts widely vis-à-vis the reality.

2) “The composition of the GDP is determined not by the public at large but by those who produce its components.” “Good performance is measured by the production of material objects and services. Not education or literature or the arts but the production of automobiles, including SUVs.”

Presently, the major concern by the planning institutions and committees are how to increase their respective economy’s GDP growth. Though India is growing with close to 8% GDP, large numbers of people are dying due to lack of health and food, and more sadly some are killing themselves because of the unfavourable situations they face.

3) “Here is the paradox. The word ‘work’ embraces equally those for whom it is a clear pleasure with no sense of the obligatory.” “Also those who, having wealth and well-being, seize the rewards of leisure, personal friendship, public concern and expression and do not work at all.” “Just because leisure is an acceptable alternative for the affluent, it can still be morally damaging for the poor….Therefore, while idleness is good for a leisure class in the United States and all advanced countries, it is commonly condemned for the poor.”

In India too, scholars have pointed out that it is owing to the indolence of the workers that they remain poor.

4) “The corporate management illusion is our most sophisticated and in recent times one of our most evident forms of fraud.” “Ownership, the stockholder, is routinely recognised, even celebrated, but all too evidently is without any managerial role.” “Capitalism having given way to management cum bureaucracy, an appearance of relevance for owners is contrived. Here the fraud.” “An accepted fraud.”

Textbooks and other media of teaching refer to the shareholders as owners of a company and who are entitled to suggest changes in policies. Reality shows that all what is happening is a huge puppet show, wherein the strings are being pulled by the management.
Moreover, in Galbraith’s words “It is also not surprising in an economic system where those favoured have freedom to fix their own reward.” What motivates the present generation to become managers is mainly the fact that, fat chunks of salary paid to the CEO’s and the CFO’s.

5) He talks about the entrenched corpratocracy within the public sector and especially its influence on major policy decisions in the foreign affairs and battlefield decisions.

In India, much of the public expenditure is innocently siphoned off to the defence sectors. Where as priority areas like education and health are conveniently put off for later on the premises that the government lacks funds!

6) “It is that the future economic performance of the economy, the passage from good times to recession or depression and back, cannot be foretold.” “The men and women so engaged believe and are believed by others to have knowledge of the unknown; research is thought to create such knowledge.” “The financial world sustains a large, active, well-rewarded community based on compelled but seemingly sophisticated ignorance.”

“On Wall Street, economists had not confined themselves to passive, unfavored reward. Instead they chose to forecast what most rewarded those requesting the research. Also they indulged in well-publicized prediction that was favourable to their personal holdings-prediction molded to serve personal gain or to protect against personal loss. A blight on professional economics; a fraud close to home.”

Some people involved at the lower and middle layers may be innocently harming the populace but the managers know.

Thus this book serves as an eye opener to those in the corporate world, to those planning to enter these MNC’s and to those questioning minds. Try to read this book to get more insights into this ‘real’ dismal world. Please post your views on this aspect of fraud that is innocent.

5 thoughts on “The Economics of Innocent Fraud”

  1. Alex,
    I see you are going through the books fast :-)

    Quick followup on your comment, over at my blog, on the Pharma industry. You mentioned a book by Marcia Angell. Interestingly, I found this detailed article by the same author. Definitely worth a read.

    She makes the point that the drug industry should be seen as a public utility, raising concerns about its lack of regulation. She also mentions how patents encourage the industry to work on ‘me-too’ drugs, rather than on innovative ones.

  2. Interesting Post.
    The Book and your post assumes that the reality of consumer behavior is vastly different than what is taught or even believed by the consumer.
    In Item 1, you assume that people don’t have the choice. If that is the case then it sounds like a market failure. If you are assuming perfect competition and multiple producers then people have the choice to choose between different goods. If gov’t changes the structure of the market, then consumer choice is not at fault but its a regulation issue.
    Item 2. I agree with the issue. However calculating education and social development is assumed to be reflected in overall Production. If people are living longer, are healthier and more educated their production would increase. However the issue here is how long of a lag do we consider before production actually reflects the development. Another issue that falls under this point is how to separate the impacts of social policy on production.
    Item 3- Cant comment
    Item 4- True, the power of the average shareholder is much less than is expressed by text books.
    Item 5- The public sector is tough. Public officials are asked to represent a community, while also maximizing their own benefits. The two are substitutes and can not equally coexist at equilibrium. The only way to “check” is to have the people vote on if their welfare is represented well.
    Item 6- no comment.

  3. You are doing a great work here Alex. Every article you write comes across as very well researched and organised. You obviously put in a lot of time and effort and it is much appreciated. Your articles give me a lot of insight and information. Thank you

  4. Advertisement is indeed legalized lying and companies even pay the media to create a favorable impression of themselves. Baiscally, vested interest rules the world.

  5. hi alex,
    found your article on “innocent fraud” very compelling…just a few views…

    economics assumes that economic agents are rational agents and make choices that are best suited to their interests….

    but i cant find anything more irrational than buying a product/service for its “brand” instead of its intrinsic value…well i would like to believe that most of us act thus because of convinience or mental laziness (or to use a more eco term “assymetric information” where the seller knows more about the product than the buyer)….

    is assymetric information also be a function of choice…some agents may choose to remain uninformed…

    some of us (your truly included) are a bit too lazy to do some cost benefit before a purchase ….so we are price takers than makers then…but then yes we are happy to apy a higher price for entertainment than we would for development (eg. an insurance premium being passed on to the poor farmer as opposed to the cost of advertisement for a celebrity passed on)

    are we still rational…i have serious doubts….

    great write alex…sets one thinking

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