PAUL SOLMAN, NewsHour Economics Correspondent: John Kenneth Galbraith, perhaps 20th-century America's most famous economist, was adviser to Presidents Franklin Delano Roosevelt, Lyndon Johnson, Harry Truman and John F. Kennedy, the most famous figures in the Democratic Party for more than seven decades.
Galbraith always advised them that markets need an active government to help make them work. Galbraith biographer Richard Parker.
RICHARD PARKER, Galbraith Biographer: He broke with American conservatism over this idea in the 1930s that free markets could solve their own problems.
The American economy in the 1930s was in a mess. We were in the middle of the Great Depression. A quarter of the population was out of work; 90 percent of the stock market had disappeared. But conservatives were saying, "Leave it alone. The economy will come back."
Galbraith was quite worried. He saw Stalin in Moscow; he saw Hitler in Germany; and he wanted to save capitalism from its failure.
PAUL SOLMAN: So what does he do?
RICHARD PARKER: So what he does is he is influenced by an English economist named Keynes and devises an idea of how to use government to smooth out the cycles that business normally goes through, the ups and downs of the so-called business cycle. By using government spending at the bottom of these cycles, you can stimulate the economy from the drop, and you can also use government tax policy to clip off the high excesses that would lead to irrational exuberance.
PAUL SOLMAN: In other words, you'd tax people, take money out of their pocket, and therefore they wouldn't be able to spend. That would dampen the economy.
RICHARD PARKER: Exactly, at the height. And then what you'd is you pump money in at the bottom using deficit spending by government.
PAUL SOLMAN: And that was the prescription for the '30s?
RICHARD PARKER: He's writing about it. He's teaching at Harvard University, but he's also serving as an adviser to the New Deal. And by the start of the Second World War, Roosevelt trusts him enough that, as a 32-year-old, Galbraith is put in charge of the American domestic economy.
He's the price czar in World War II, the man who's in charge of making sure that the economy can grow quickly to accommodate all the military needs of the Second World War, but that inflation doesn't break out and disrupt the economy and disrupt America's war-making capacities.
PAUL SOLMAN: Because the idea is that, if you suddenly have lots of orders at certain factories and you have to have lots of people work at those factories, that's going to drive up the prices and the wages?
RICHARD PARKER: Right, it creates scarcity, it creates extraordinary demand, and just prices will soar if you don't manage the economy.
PAUL SOLMAN: So during the war, Galbraith set prices, instituted rationing. Post-war, however, he agrees with the consensus: Time to unleash the market. But he still wants a strong government role.
RICHARD PARKER: He does want to continue this process after the war of cutting off the top of business cycles and cutting off the bottom by using government. And, in fact, America adopts those policies and, for the next 30 years, goes through an extraordinary boom that creates this enormous American middle-class.
PAUL SOLMAN: So that's when he's really riding high?
RICHARD PARKER: He's riding at the top of his game at that point. He is the most famous economist in the country. He's listened to by politicians, by journalists, by the general public. His words are hung on by just an amazing number of people from across the spectrum.
PAUL SOLMAN: In the late '50s, Galbraith wrote "The Affluent Society," still in print, arguing that the private sector was too much in control.
RICHARD PARKER: We were producing big Cadillacs with the tail fins. We were constructing gigantic suburbs, but we weren't paying for the things that America really needed: the great quality education systems; the hospitals; the roads; the parks; the sort of things that make for a really first-class quality of life.
PAUL SOLMAN: So before he's trying to save capitalism from itself; now he's trying to save capitalism from its excesses?
RICHARD PARKER: Well, in the '30s, he was worried about its failures. Now, he's worried about its excesses. And it's quite appropriate, because he's an economist who adapts his prescriptions to the times.
PAUL SOLMAN: In 1960, with John F. Kennedy's election as president, Galbraith got another shot at government. A campaign speechwriter, he becomes ambassador to India, and secretly a key so-called "back-channel adviser."
And what's he telling President Kennedy in these back-channel communications?
RICHARD PARKER: Well, he's telling President Kennedy economically that we have an opportunity now in the 1960s to right this balance between public-sector starvation and private-sector excess. And, in fact, he convinces Kennedy to become this activist Keynesian, this activist manager of the economy.
PAUL SOLMAN: Along with government activism in the '60s came great prosperity, and the notions of John Maynard Keynes to moderate the swings in the economy became the conventional wisdom, a phrase that Galbraith actually coined.
But the big government projects of that era, the wars against poverty and Vietnam, helped fuel inflation, at the same time that the oil crises of the '70s helped lead to both inflation and recession.
RICHARD PARKER: We get high unemployment. We get high inflation at the same time, and it ends up de-legitimizing the Democrats. It de-legitimizes liberalism, and it de-legitimizes the kind of economics that Galbraith has been pressing for, for the last 30 years.
PAUL SOLMAN: This era of so-called "stagflation" also set the stage for Ronald Reagan and his promises of smaller government, a greater reliance on free markets.
RICHARD PARKER: Galbraith by now is in his 70s but remains a ferocious critic of Reagan and this new conservatism.
He says, first of all, you don't end up making government smaller. Government didn't get smaller under Ronald Reagan. It didn't get smaller under either George Bush I or the present government.
Second, he said the Republicans didn't, in fact, bring fiscal responsibility they promised. They've run deficits continuously for the last 30 years, so they haven't met their own promise.
But what they have done is gotten the imbalance between the public and private even worse. And he says this is absolutely the wrong way to lead an economy for a democratic people, small "d."
PAUL SOLMAN: After spending years on the biography, Richard Parker got to know his subject pretty well. Galbraith, when still alive, expected today's economic paradigm to change.
RICHARD PARKER: He thinks that we're in a period of Republican overreach. And he thinks that, yes, America is ready to look in different directions in the years ahead.
PAUL SOLMAN: I'd asked Richard Parker one last question: Did he think Galbraith himself might be up for a short visit? An hour later at the Cambridge House the Galbraiths have occupied for the past half-century, Parker and I climbed to the bedroom.
Wife Kitty, herself 92, and a nurse were watching over him. Galbraith was, well, matter of fact.
JOHN KENNETH GALBRAITH, Economist, Author and Presidential Adviser: Come on, sit down.
PAUL SOLMAN: We'd been invited, but wanted to be brief, if blunt. Hadn't Galbraith's economic vision been eclipsed from Reagan to the present?
JOHN KENNETH GALBRAITH: No question it has been eclipsed by the people who have the money. There's no question that this is a time when corporations have taken over the basic process of governing.
PAUL SOLMAN: Will the pendulum swing back, do you suppose?
JOHN KENNETH GALBRAITH: Whether in my lifetime or not -- which could require an exceedingly optimistic answer -- but there is a certain alert concern on these matters running through the whole structure of the United States and the other democracies. It is something that has operated up until now, and I strongly expect it to operate in the future.
PAUL SOLMAN: John Kenneth Galbraith died in Cambridge on Saturday at age 97 of complications from pneumonia. According to Parker, Galbraith's last words to his doctor before slipping into a coma were, "I've had enough now."