Raw Thought

by Aaron Swartz

The Predator State: A Summary

James K. Galbraith’s The Predator State is undoubtedly one of the most important books on the economics of our era. Galbraith sets himself the task, not only of exposing the discredited economic orthodoxies of our generation, but also documenting the economy as it really exists, and setting an agenda for the future. It is a book that desperately needs to be listened to. And, even better than all that, it’s a fun read. Go out and buy it immediately.

That said, here is a brief, abbreviated summary of the book, to better pull out its themes and spread its message. It is of necessity less clear and less well-argued than the book itself, which you should actually read if you want to argue, but it should give the gist of things.

1: The Reaganites swept into power on the arguments of economic conservatives: lower taxes, tight money, and an assault on all opponents of market forces (government, regulation, unions). Their views were tried and failed completely. They have no remaining defenders in academia and only slogans and cronies outside of it. There is no longer any vision on the right; the left should leave its defensive crouch and start proposing something new.

2: Friedman and friends said that markets would lead to democracy — that “economic freedom” begets political freedom. But economic freedom isn’t what it sounds like; it’s not freedom from economic want but instead, as Friedman put it, “the freedom to choose” or, in other words, “the freedom to shop”. But control over production is as unfree as in the Soviet Union, with advertising for propaganda, R&D for planning, and Wall Street analysts for government inspectors. “Lines form, under capitalism, every day.”

3: Supply-siders argued that a) saving is a public good because it leads to investment, b) America does not save enough compared to other countries, c) saving would be unleashed by lowering taxes on it, d) the resulting investment would spur an economic boom. Every piece of this is wrong: a) in an efficient market, all the benefits from investment are captured by the investor; thus investment cannot be a public good unless markets are inefficient, in which case the government should step in more, b) the correct amount of saving is a policy decision, there’s no reason to believe other countries have it right (the Soviet Union had a 40% level of saving right up to its collapse), c) rich people save most of their money anyway (it’s impossible to consume that much) and changes in interest rates dwarf changes in tax rates; furthermore, real investment is encouraged by high personal taxes, since this forces people to keep their money in corporations, d) personal saving is less than 1% of GDP; almost all investment comes from corporations or overseas.

4: Milton Friedman claimed that high inflation (it was 10% in the 1970s) was just the result of printing too much money. Reagan’s Fed adopted this belief, sending the US and many foreign countries into deep recession. Eventually, the policy was completely abandoned and high inflation has not been seen since. Serious inflation isn’t caused by printing money, but by wage-price spirals — the price of oil shot up, causing rising prices to cover oil costs, causing workers to demand higher wages to pay those prices, causing prices to rise even higher, and so on. Today, most prices are set by overseas manufacturers and labor unions are so weak that workers can’t demand wage increases. Inflation is dead.

5: Democrats (and some Republicans) repeatedly insist that we need to balance the budget or face fiscal collapse. But the budget is ruled by a simple equation: the total amount the government owes + the total amount the public owes = the total amount we owe to foreign countries. This is simple logic: whatever is not owed within the country must be owed to another country. But the international economy depends on other countries keeping large reserves of dollars (see 14), meaning our trade deficit must be high. As long as this is so, we must either have the government run large deficits or ask people to do so. The budget deficit was closed in the late 1990s because citizens picked up the slack with high credit card spending and home equity loans, inevitably leading to a slump. Balancing the budget is for suckers; Democrats should spend the money on public goods instead, promoting economic growth and thus raising tax revenue.

6: The argument for free trade comes from Ricardo’s “comparative advantage” — a clever textbook exercise, but irrelevant to the real world since it assumes constant costs. In reality, either you produce manufactured goods, in which your costs go down as you make more, or you sell off commodities, in which case your costs go up as you make more. With the former, it takes time for local industry to build up the advantage (requiring protectionism). With the latter, you end up like Mongolia, which opened up its animal husbandry market, swelling herd sizes, turning grass into permanent desert, and killing off the entire market. With no other exports, such a country is in big trouble. Ricardo was wrong: diversification, not specialization, is the way to develop — and how every successful country has. Unfortunately, we’ve forced this broken system on most of the world. (China has escaped, letting state-supported banks fund money-losing new companies until they grow large enough to succeed as exporters. In the mean time, they dump their products on local Chinese, allowing them to have a very high standard of living at very low wages.)

7: There is no trade-off between equality and efficiency. Instead, equality leads to efficiency. Denmark is one of the most equal countries in Europe, and as a result one of the wealthiest. The rest are on a continuum down to unequal and inefficient. Full employment and high wages require companies to make the most of the employees they have, increasing efficiency. Raising the minimum wage doesn’t raise unemployment, it lowers it — unemployment and inequality have risen and fallen together since 1920. Higher wages lead to more jobtaking and less quitting. The remaining increase in inequality was caused by stock market giveaways to dot-commers and Bush giveaways to government contractors — which is why it was limited to Silicon Valley and the Potomac, respectively.

8: The US is not a free market. Of GDP, 17% is health care (where experts, not consumers decide how to spend), 16% is housing (subsidized by quasi-public mortgage firms and tax deductions), 15% is federal welfare, 14% is local welfare, 4.5% is military spending, 3% is higher education (paid for mostly by government or conspicuous philanthropy1 and consumed for status and not value). Together, 70% of US GDP is planned; it’s just that our facade of a free market makes us less efficient at planning than other countries (especially in health care).

9: In the 1970s, American industry (particularly steel and cars) was being challenged and weakened by Japan. Reagan’s assault on inflation (see 4) dealt them a death blow, sending their foreign and domestic markets into deep recession, driving up the value of the dollar (making their exports more expensive than their competitors’), and raising interest rates. In the 1980s the technical staff left for Silicon Valley, and 1990s financial fraud killed off what remained. When new startup founders paid themselves exorbitant salaries from VC money other CEOs rushed to keep up, making them all wealthy enough to become a separate class. They used their new power to prey on the corporations that they ran.2

10: Previously, regulation kept the predators in check — unions, NGOs, and progressive businesses pushed government standards to kill regressive competitors. But newly-wealthy predator CEOs had the Republicans take over and gut regulation. The result is the Predator State, where every new law is a corporate giveaway. Prescription drug benefits for Big Pharma; NCLB to defund and deskill schools (building support for vouchers); and Social Security reform to give workers’ paychecks to Wall Street. (Democrats have so far prevented the latter, but corporate-funded think tanks now aim to take them down from inside.) The programs allow further predation; privatizing college loans has led loan companies to bribe student loan officers. It’s not that Republican government fails at tasks like stopping Katrina; it’s that such tasks of governance are not its goal — opening up New Orleans for Halliburton contracts is.

11: The great liberal economic agenda is “making markets work” — small fixes for market failures. The canonical example is job training to fight unemployment. But job training does not create new jobs, economic growth does; the tech boom was the last time we saw a real decrease in unemployment. Similarly, some Dems propose universal preschool since experiments find kids with free preschool grow up to get better-paying jobs. But those preschools did not create jobs, they just gave their students an advantage in getting them. Universal preschool would give everyone that advantage, leaving no net impact. And creating markets in unmarketable goods (health care, energy, the climate) is doomed to failure. In these industries markets will not work; planning is required.

12: Planning is alleged to have been disproven by the Soviet Union’s fall. But it is unavoidable. The market, even when it does work, fails to take into account the wishes of the poor and the needs of the future, since neither can buy things today. New Orleans fell not because of a lack of foresight (it was predicted by the local paper) or technology (the Army knew how to build strong levees) but because we lacked a plan — nobody in power bothered to do anything about it. Similarly, climate change will melt Antarctica and drown New York, Boston, South Florida, Houston, the Bay Area, London, the Netherlands, Bangladesh, and Shanghai. Stopping it requires a plan; an enormous one ranging from elementary school classes to government-funded research centers to a WWII-level restructuring of the economy.

13: Deregulation can have three effects: 1) increasing competition and lowering wages and prices, 2) speeding technological change and increasing quality, 3) creating monopolies and raising prices. Trucking deregulation did 1, airline deregulation did 1 and 2, but telecom, banking, and energy deregulation did 3. Charles Keating donated to the government, leading VP George H. W. Bush’s task force to deregulate his industry and allow the Savings and Loan Scandal. Ken Lay was Bush’s largest contributor, leading VP Dick Cheney’s task force to deregulate his industry and allow the Enron energy scandal.

The solution is to lower CEO pay, raise the minimum wage, and set wage standards in between. Some liberals claim trade is the problem and the solution is to set environmental and labor standards on other countries. These are unenforceable and will be ineffective (companies moving overseas already build clean factories since that’s most efficient and no significant exports are made using child or prison labor). Instead, we should set wage standards at home, like Scandinavia, forcing companies to increase productivity and pay fair wages. Wage standards should also apply to undocumented workers; illegal immigration is caused by employers who send recruiters to Mexico for compliant and low-paid workers. Applying wage standards to all will end these abusive practices.

14: Any country that can pay for its imports entirely with exports can organize its internal economy (its people and resources) however it likes. Countries that do not balance their trade depend instead on global capital markets and must play by their rules. But the US is a special case: after World War II (1944) it set up the Bretton Woods system of international exchange, pegging all currencies to the dollar and backing the dollar with gold reserves. But during Vietnam’s deficits (1971), Nixon broke the system, devaluing US currency and wreaking havoc on the rest of the world. Reagan’s tight money policies (1981) caused so much instability that other countries were forced to build up reserves of US Treasury Bonds in exchange for military, economic, and export security. US bubbles and the Soviet Union’s fall make this system less secure than before, but as long as it remains the US can do whatever it likes economically. And it might as well, since economic success will strengthen the system and the policies proposed here will lead to economic success.

  1. Conspicuous philanthropy is like conspicuous consumption, a way for the rich to flaunt their wealth, only far more effective — you can outdo your neighbors simply by adding another zero to the check, the buildings with your name on them live on after you die, and the government gives you a tax deduction. 

  2. See the classic Thorstein Veblen, Theory of the Leisure Class for more on predation. 

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August 19, 2008


Sounds like a great book. I’ll definitely add it to my “to read” list. Thanks for sharing.

posted by Callum on August 19, 2008 #

Can you point me to anybody who used to live in the USSR or an eastern bloc state under communism who would agree with you that control over production is as unfree as in the Soviet Union?

posted by Mark on August 19, 2008 #

Mostly good points, but you’d have a hard time convincing anyone today that point four - the death of inflation - is correct. In nominal terms I’m making the same amount as I did eight years ago, and that money goes a hell of a lot less far than it used to.

posted by Aaron Weber on August 19, 2008 #

Aaron, the argument is not that inflation will always be zero; obviously there will always be some inflation. It’s that the severe (e.g. 10%) inflation we saw isn’t going to return.

posted by Aaron Swartz on August 19, 2008 #

[I wrote this after scanning through the rest of your post:]

If it wasn’t for some other recent posts on your blog, Aaron, I would think that what you write here is satire. It’s so laughably naive it’s loony. And this is from a European who would be classified on the left of the US’s political spectrum. I wish I had more time to comment, because I could have some fun pointing out some of the other gaping holes in the economic illiteracy presented.

[This, the main body of my comment, I wrote after reading the chunk of text that I quote:]

You lost me pretty quickly:

“1: The Reaganites swept into power on the arguments of economic conservatives: […] tight money […] Their views were tried and failed completely. They have no remaining defenders in academia”

This is factually inaccurate; since the book was written recently (i.e. sooner than the early 80s), it is outright lying.

After Paul Volker was appointed to the Fed and instituted a policy of restricting the growth of the money supply (aka “tight money”), inflation was indeed beaten back. You can read about it on Wikipedia:


“Paul Volcker, a Democrat[3], was appointed Chairman of the Federal Reserve in August 1979 by President Jimmy Carter and reappointed in 1983 by President Ronald Reagan.[4] Volcker’s Fed is widely credited with ending the United States’ stagflation crisis of the 1970s by limiting the growth of the money supply, abandoning the previous policy of targeting interest rates. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983. [1]”

Here’s the raw inflation data, you can see the decrease for yourself:


Today, the best-run central banks all use inflation targeting with a lesser or greater degree of flexibility - the Fed, the ECB (explicitly in its charter), the Bank of England (also in its charter).

By “inflation targeting”, I mean that they tend to raise interest rates when inflation rises, and lower them when it falls. Central banks implement interest rates by buying and selling government treasury bills to make the market match the target interest rate. Raising the interest rate means selling bills; lowering means buying bills. The bank buys & sells with money; this is the money that they are adding and removing from the system. The Fed interest rate that everyone talks about is just monetary policy, i.e. what money it’s going to print.

You can read more about the Fed’s perspective on inflation targeting here:


Finally, you can read more about the quantity theory of money here - in no way disproven or similarly abandoned by academics:


The truth of the thing plainly obvious; if everybody’s money quantity doubled in numerical terms tomorrow, prices (and wages) would also double. Hey presto, 100% inflation!

And now, the remainder of that quote:

“and only slogans and cronies outside of it.”

This is mere polemic; any argument using such name-calling is, by its nature, so weak that it is its own refutation.

I’m disappointed in you, Aaron; once upon a time, I found in your writing an interestingly original view on many commonly-accepted points. You asked questions before you believed.

But now, it seems, you have come under the spell of a different ideology - rather than distrusting the truth in accepted wisdom, you have come too adhered to an alternative set of beliefs. You have become just as gullible as those you would once have enlightened.

It’s like an object lesson in how easy it is for smart people to get caught up in cults…

posted by Barry Kelly on August 19, 2008 #

Barry: monetary policy was only the tip of the Reaganite iceberg. Accompanying “tight money” came aggressive tax cutting, deregulation, privatization, union busting, &c., based on a set of theoretical claims which have now been thoroughly discredited (not to mention massive increases in military spending, gigantic trade and budget deficits, etc.).

Sure, stagflation was cured in the early part of Reagan’s administration, through lowered oil prices, and aggressive monetary policy. But Reagan’s economic policies in general were a disaster for workers, for the government, for the society.

posted by Jacob Rus on August 19, 2008 #

Barry, you should read more carefully. 1) I was summarizing a book. 2) I said you should actually read what the book says before criticizing it. It explains carefully why you’re wrong, in a way more detailed then I had time to in a short blog post.

But briefly: yes, Volcker thru the economy into a recession and that ended inflation for a while. But increases in the money supply after that didn’t cause inflation. The Fed doesn’t even measure the money supply like they used to. Even if they did, the increase in quasi-money (like credit card debt) is completely out of their control and very difficult to measure. The mathematical connection between inflation and the money supply that used to exist doesn’t any more. And Greenspan let unemployment fall so low that everyone’s given up on NAIRU.

posted by Aaron Swartz on August 19, 2008 #

What a shallow, dumb argument. Galbraith apparently isn’t much smarter than his father. First it admits that 70% of GDP is planned - it’s good news, actually, that the Left starts to agree with what the Austrian Economists always screamed that it’s not a free market, don’t blame the markets for current failures. And this scream always fallen on deaf ears and they kept blaming the market for the costs of healthcare for example (where what drives the cost up is that frivolous lawsuits are allowed, not costs and profits).

Then he says let’s do MORE planning, without even examining a bit how things could be made better by making things LESS planned.

He says “The market, even when it does work, fails to take into account the wishes of the poor and the needs of the future, since neither can buy things today.” - but how can he KNOW it if the market does only that 30%? When was the market allowed to work? (BTW I think f.e. Wal-Mart takes the wishes of the poor into account as it sells them the cheap stuff they want to buy, and the needs of the future are clearly seen in the current investment (bubble?) in clean energy and the large number of startups researching into clean energy etc.)

Really this argument is like saying, see, dude, up to now your diet was only 30% fresh vegs and 70% processed meat, and that’s why you have health problems, and then freakin’ turning around on a dime and saying well, actually you don’t need more fresh vegs, you need a 90% processed meat diet, just a BETTER kind of processed meat.

Really, is that it? It’s pitiful.

Why do great programmers have to be such shallow ideologues is beyond my comprehension. Go read Applied Economics from Thomas Sowell if you want a lot of empirical facts, or this PDF from Rothbard if you want clear deductive logic: http://mises.org/rothbard/mespm.PDF

Homework: look into how Indian economy performed under the Permit Raj and what did they do to launch it into an impressive growth.

posted by Miklos Hollender on August 20, 2008 #

BTW Aaron, don’t you feel like a bit of hypocrite when you write “challenging the prevailing orthodoxy”? Why, Progressive-Egalitarian thinking IS the orthodoxy in the intelligentsia and in the academia, it would be hard to find more than 2-3 professors in the humanities dept of Harvard who don’t subscribe to it. Or even amongst students, except for the crazy Fundies, pretty much everybody agrees with this kind of thinking, from feminists to enviromentalists. I’d bet good money on that you could not find ten people who have read one book from John Kekes, Michael Oakeshott or Thomas Sowell on an average campus.

Of course it’s not the orthodoxy in politics, at least not in American one as here in Europe sadly it is, but would you pit intellectuals against politicians, do you think that’s fair and fruitful debate? Pitting the two Galbraiths, Veblen, Rawls, Dworkin, Chomsky, and the other Progressive-Egalitarian thinkers against the actual policies of Reagan or others is exactly what Julien Benda called the treason of the intellectuals, when an intellectual flees out from fair debate with peers and instead becomes and ideologue of the masses who really don’t know what’s going on. Pit the Galbraith or Rawls or Chomsky against Thomas Sowell, John Kekes, or Michael Oakeshott, and then you have a debate that’s fair and fruitful, because it’s between people who do know what they are talking about.

And in that debate, the Progressive-Egalitarians ARE the orthodoxy.

posted by Miklos Hollender on August 20, 2008 #

I don’t have the time to refute everything in it, but just one piece of fallacy to single out: “in an efficient market, all the benefits from investment are captured by the investor”.

Investment, by definition, is using some part of the productive capacity for the creation of capital goods instead of consumer goods. Capital goods are the goods that raise the marginal productivity of labour - make the creation of consumer goods more efficient: either the same amount with less labour or more quantity or better quality with the same amount of labour. All in all, it means one hour of labour creates more value with more investment. An entrepreneur who has a lot of investment and thus every hour of labour produces $500 worth of value for him can offer higher wages to labourers than the one who has less investment and thus an hour produces only $100 for him. Thus, an efficient market the competition for labourers slowly raises the wages if the growth of investment outpaces the growth of the workforce.

(Of course, immigration, many childbirths or outsourcing to the Third World grows the workforce so quickly that it does not actually happens, it’s rather the workers who compete with each other for lower wages. But this is not a problem of investment, this is a problem of demography, immigration laws, and the poverty of the Third World. Simply the pie is shared amongs more people. I think it’s fair.)

Second, by lowering the marginal cost of production, in an efficient market competition always brings down the prices close to the costs, so prices are lower. It both means the price of already known goods are lower, and that there are new goods that fulfill needs previously not fulfilled. And this is the more important public benefit, as wages will keep going down in the West and up in the East until there won’t be much difference between the living standards of the West and say Vietnam or India, this is normal and I think fair, but the everything from cars to MP3 players is both more affordable and is getting better. And that’s why investment is a public benefit in an efficient market.

posted by Miklos Hollender on August 20, 2008 #

What are you on about? The point is that 70% of GDP is planned but since we pretend it’s a market, it’s planned poorly. Health care’s high price and low quality in this country is because it’s run by businesses (sometimes inaccurately called “the market”) instead of government. (See the studies done by Himmelfarb and Woolhandler.) I don’t see how lawsuits are relevant.

Then he says let’s do MORE planning, without even examining a bit how things could be made better by making things LESS planned.

I’d love to hear how.

He says “The market, even when it does work, fails to take into account the wishes of the poor and the needs of the future, since neither can buy things today.” - but how can he KNOW it if the market does only that 30%?

That’s a logical, not an empirical argument.

If you think “Progressive-Egalitarian” thinking dominates economics departments, you’ve obviously never talked to any. Maybe you should read beyond the far-right-wing.

posted by Aaron Swartz on August 20, 2008 #

Aaron, my question was the simplest and most straightforward one posed. Are you going to answer it?

posted by Mark on August 21, 2008 #

Thanks for the synopsis, Aaron! I’ve ordered a copy. I’m amazed by the level of vitriol that discussions of economic literature seem to produce. Perhaps it’s just a favoured food of trolls…

posted by Ren Bucholz on August 23, 2008 #

I don’t get #5 at all, though I have come across the argument before.

First of all, money spent on interest is money that isn’t spent on anything else. If you borrow enough eventually you have no money to spend on anything else. You can only survive because other countries are willing to loan you the cash. Yes, if you’re in a symbiotic relationship they may need to loan it to you if you’re going to buy from them, but the lender has a lot more power than the borrower.

Second, the last sentence is an argument towards supply-side economics, which I thought was argued to be discredited…

posted by Eric on August 25, 2008 #

Supply-side economics says that giving money to rich people will stimulate demand; investing in public goods is classic demand-side economics.

posted by Aaron Swartz on September 19, 2008 #

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