Lord, Thou hast made this world below the shadow of a dream,
An’, taught by time, I tak’ it so – exceptin’ always Steam.
From coupler-flange to spindle-guide I see Thy Hand, O God –
Predestination in the stride o’ yon connectin’-rod.
McAndrew’s Hymn, written by Kipling in 1892 is as pure an expression as one can find of the glory of the industrial revolution. An aging Scottish engineer (the Scots being to engineering what the Jews are to economics) marvels that he has travelled over a million miles of ocean, at speeds unimagined in his youth, propelled by his 7,000 horsepower steam engines. Kipling is writing almost a century after Malthus published his essay “On Population”. One can forgive the Reverend Malthus for not anticipating the industrial revolution, but perhaps not so easily for his pessimistic Protestant outlook which foresaw a never ending cycle of over- population dooming the working class to a Hobbesian life – nasty, brutish and short.
This grim forecast was echoed for the next sixty years as economics developed in Victorian England. David Ricardo proclaimed the Iron Law of wages – that real wages could never rise because demand was fixed and supply was always rising. John Stuart Mill, an otherwise optimistic improver of humanity sadly accepted that Ricardo and Malthus were right, and that the great mass of mankind would live forever in poverty. All three suffered from the same fatal flaw. They viewed life, and economic life, as essentially static. They were locked into a mind-set where the largely rural agrarian economy would continue unchanged, where labour was manual and unskilled, and where hewers of wood and drawers of water would live off the sweat of their brows. In essence, they did not reckon with change.
Ricardo’s labour theory of value is an encapsulation of the early Victorian mindset. All value, be it for goods or services, arises only in proportion to the amount of labour invested. Capital goods – houses, farms and equipment – are only valuable because they are a store of invested labour. As late as the middle 19th century, Mill endorsed Ricardo’s theory as complete and correct, and noted that there was nothing further to be said on the subject.
Economics deals, at its heart with two questions. The first is scarcity. There is never enough to go around. The second question thus naturally arises from the first. Since there is not enough to go around, who will get what there is? In short, the concerns are production and allocation. If all production arises from labour, then not much thought should be wasted on that part of economics. More people meant more labour, but likely at lower wages. Fewer people, less labour, but at higher wages. There was not much more to say.
Accordingly Mill did his seminal work on utilitarian theory. How do we choose how to buy what we buy? Given a fixed amount of output, how should society maximize the utility of its citizens – in the famous formulation, the greatest good for the greatest number. Mill, Ricardo and Malthus were not interested in growing the size of the economic pie, which they saw as essentially immutable; they were fixated on slicing it up it the most optimal way.
How wrong they were, of course. While Mill was writing, steam engines, already over 60 years in use, were revolutionizing industry. It had never occurred to either Ricardo or Mills that technology could increase productivity many fold and essentially divorce output from labour input. So long as a machine could be purchased for less than it would produce over its useful life, the labour involved in building it would not reflect the value it produced. What we now call the pay-back period was often very short, leading to huge extra value. Today in North America, fewer than 4% of the working population is directly involved in agriculture, which produces substantial surpluses of food at lower real costs than at any time in history.
The portrait of Marx in Grand Pursuit is devastating. A bourgeois theorizer, womanizer, wastrel and non –producer who never visited a factory and likely never spoke to a factory worker, Marx is the prototypical “luftmensh”. It is remarkable that he finally produced a book. It is much more remarkable that anyone read it, and it is one of the great tragedies of the history of economic thought that anyone took it seriously. Marx is the ultimate pie-divider, knowing little and caring less about the mechanics of actual production. Fixated on what he saw as fatal flaws in capitalism, he fudged his facts and ignored the progressive wealth and increasing well-being of workers in both Britain and Germany in order to push his untested theories of collectivism. The death of tens of millions of agrarian workers in Russia, Eastern Europe and decades later in China are his legacy. The enslavement of hundreds of millions, even to this day, by the totalitarian regimes which sprung up in tandem with enforced communism bear testament to the power of ideas, even very bad ones.
In great contrast to Marx who was active at the same time, Alfred Marshall was the first of the British economists to recognize that productivity was variable and that economies are dynamic, not static. His work is in a very real way the birth of modern economic thought. It is a pity that Nasar does not spend more time exploring and explaining his ideas. Marshall also was a believer in facts and data, in observation and empiricism. He stood in great contrast to Marx and the early Victorians in this regard. Marshall was also the first to use graphs as the basic methodology for explaining economic concepts, a practice that has been continuous since inception.
Matching Marshall in his appreciation for the dynamic nature of the economy and the ever changing face of capitalism was the enigmatic and troubling figure of Schumpeter. While an Austrian citizen, he was certainly not of the Austrian school of economists; and while a great thinker, his major work was done too early in his career to have a significant impact on the development of economics in its most fertile period in the middle decades of the 20th century. He will likely be best remembered for his evocative phrase “creative destruction”, an idea still not easily embraced by the political class as witnessed in the current Ontario election.
For Marshall, productivity and efficiency in production were the key drivers of economic growth, which he saw as not only possible, but inevitable. He outlined the key mechanisms determining prices and output levels in a dynamic environment, pioneered concepts of marginal utility and elasticity which are still taught today, and is justly recognized as one of the fathers of macroeconomics. His work, however, is more descriptive than prescriptive. It was the ideas of his younger contemporaries and successors to explore how economics could be used to alter actual outcomes.
The middle section of Grand Pursuit deals with the two world wars, the great depression and its aftermath. There was no greater living laboratory for the testing of ideas than the period from 1918 to 1948. Issues of price stability had been of great concern to economists for centuries, and forecasting and avoidance of the boom and bust business cycle, intimately related to inflation and deflation, was probably the paramount goal of economics in this period.
It is in this part of the book that Nasar hits her stride. The great works of Keynes, Hayek and Irving Fisher which laid the basis for modern macroeconomics were produced in this period, and get a full and extended treatment. While it is often difficult to filter the economics out from the personal, the tension between Hayek and Keynes on basic issues of government intervention in the economy, the proper role of monetary policy and the role of governments as “consumers of last resort” is made accessible and understandable. Less time is given to Fisher and monetarism, and the time devoted to Milton Freedman and the Chicago monetarist school is, like Freedman himself, very short.
Perhaps inevitably in a work of this kind, the nature of the audience determines the emphasis of the writing and the depth of the presentation. For me there is rather too much “lives of the great economists” and too little on their ideas and contributions. Biographical details, personal anecdotes and stories of the amorous proclivities of the central characters do add colour and make them more human and accessible; but for me, rather too much so.
None the less, the ascendancy of Keynes and the neoliberal school of economic thought is the central theme of the second half of the book. The relegation of earlier schools and alternate interpretations, at least in America and Europe, is all but complete. The communist musings of Joan Robinson and her ilk are rightly seen as somewhere between badly misguided and dangerous; and the anti-statist writings of Hayek are seen as something of an off-shoot from Keynesian orthodoxy. In fact it is a peculiarity of the book that Nasar goes to much trouble to demonstrate the mutual personal respect of Hayek and Keynes for each other while downplaying the very real conflict in approach to governmental intervention in the economy. Similarly, she never really fully explores the great tension between Freedman and the Chicago school and the Keynesians in the later part of the 20th century.
The final section of the book was, at least for me, an anticlimax. After the great challenges of the period 1919 to 1948, economists were mostly left in peace to work out the details of the already established Keynesian zeitgeist. Paul Samuelson, (author of my first economics text) is given his due, and there is a brief nod to developmental economics and the world beyond North America and Western Europe.
The all but universal failure of economists to foresee or forestall the financial crisis of 2008/09 raises the question of whether any of this matters. In the book, we can see that the economic advice given at several important times – in the 1919 Paris peace talks, during the onset of the great depression, in the period following World War II – is all but ignored by governments in both America and Europe. If the Paris conference had listened to Keynes would we have had the second World War? If Hoover had listened, would the great depression have been merely a bad, but normal, recession? It is impossible to know.
The old joke goes that economists have forecast eighteen of the last five recessions, and in truth, the ability of economics to tell us what will happen next is little better than chance. Nonetheless, at times of crisis, economics does provide guidance to policy makers. The period from July 2008 to October 2008 could easily have resulted in the destruction of the post-world war II banking and credit system. It was saved by economists. The recovery over the past six years of the North American economies was helped by classic Keynesian measures, and the contrast with Southern Europe, where austerity reminiscent of the Hoover government in the early 1930’s was imposed, is striking. Similarly, the masterful use of monetary policy by Fed Chairman Ben Bernanke has provided a solid base for a slow of steady recovery in North America.
In passing it should be noted that the past four years of Federal Reserve bank policy in the U.S., with low interest rates, the expansion of the balance sheet and measures to lower long term interest rates has been a spectacular real world vindication of Keynesian economics, demonstrating both the real existence of the previously hypothetical liquidity trap and the non-inflationary use of monetary policy at the zero limit bound. The fact that so many commentators and pundits on the right continued (and some still continue) to warn of hyper-inflation and the debasement of the US$ only serves to demonstrate their failure to concede the fundamental soundness of the Keynesian worldview. The actions of the U.S. congress and many states in insisting on cutbacks to spending at a time when continued stimulus was needed only goes to show that bad policy can still trump good theory. There is little doubt that poor fiscal policy has prolonged the American recession, led to much greater unemployment than necessary, and a slower growth in production over the past five years.