John Kenneth Galbraith would probably include Alan Greenspan among men of wisdom that missed the point.

Sir, Robert Gordon, reviewing Alan Greenspan’s and Adrian Wooldridge’s “Capitalism in America: A history” writes: “Three themes are highlighted — productivity as the measure of economic progress; the “Siamese twins of creation and destruction” as the sources of productivity growth; and the political reaction to the consequences of creative destruction.”, “After the gold rush”, October 20.

I have not read that book yet, I will; creative destruction plays absolutely an important role in the acceleration and sustainability of growth.

I do not know Adrian Woodridge, but, when it comes to the former Fed Chairman Alan Greenspan, I have an inkling that if John Kenneth Galbraith was still around, he would suggest Greenspan does not have all what it takes to write that book.

Let me explain that by quoting from Galbraith’s “Money: Whence it came where it went” 1975: “For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.”

Alan Greenspan clearly fits in with those “Men of economic wisdom” (of the East) who are distasted by unstable banking. To make banks stable, he supported risk-adverse risk weighted capital requirements, much lower for what’s perceived safe (the present) than for what’s perceived risky (the future). 

Sir, and if one is to tellthe real “full, epic story of America's evolution from a small patchwork of threadbare colonies to the most powerful engine of wealth and innovation the world has ever seen”; which is how this book is being promoted, one would need to begin with the willingness of its people to take risks.

What would have happened to America if banks with risk-weighted capital requirements had met its immigrants? Probably that imagined 1620 meeting in Davos about the future world, in which “one region goes unmentioned: North America. The region is nothing more than an empty space on the map” would not have found its way into this book.

The saddest part of all this is that our current generation of central bankers and regulators, like Alan Greenspan, those who prioritized bank stability over growth, as if these two aspects could be separated, anyhow did it totally wrong. With their risk weighted capital requirements, they only guarantee that banks will end up with especially big exposures, against what’s perceived as especially safe, against especially little capital; something which can only cause especially big crises, like that of 2007-08.

PS. Galbraith’s book also explained that, de-facto, regulators had also decreed inequality

PS. Gordon writes about “millions of immigrants being drawn in from Europe as the ever-expanding railroads, enjoying massive government subsidies in the form of free land, in turn subsidised the new arrivals so that they would populate the west.”.  I am not sure that amounted to “massive government subsidies”. If not zero, most of it must have been extremely low valued land. It was those migrants who with their sweat, inventiveness and willingness to take risks built up the value of that land.

PS. Gordon complains the book has “only a page or two reckons the human cost of underpaid labourers, including the consequences of malnutrition [and on] labour unrest”. That reads just like political correctness’ flag waving; and belief in that if only the task of development was assigned to the right kind of central planners, his kind, it would be achieved in a nice and fair way, with no sufferings and no inequality.

PS. In Venezuela, during a conference, 1978, forty years ago, John Kenneth Galbraith autographed “Money” for me. Mine was the only one he signed explaining he did so because it was a pocket book and much underlined  J His book inspired the first Op-Ed that I wrote, more than twenty years ago.

@PerKurowski