I bought this 2020 book by Callum Williams after I heard this podcast with him.
I like reading history of economic thought books because it’s interesting to see how economics has evolved over the centuries and useful to compare cumulative misunderstandings with what long-dead thinkers actually said. (That’s why I am reading and blogging on Alfred Marshall’s 1920 Principles of Economics.)
Adam Smith’s 1776 Wealth of Nations (WoN) is widely considered to mark the start of economics, although it was then called “moral philosophy” before changing to “political-economy” in the 1800s and “economics” in the 1900s (roughly).
Overall, I found this book to be interesting, but not nearly as inspiring as the classic Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers, which has been in print since Heilbroner published it in 1953. Williams has a tough act to follow.
In this review (as usual), I offer thoughts based on highlights and notes I made while reading.
- Economics — the study of markets, choices, prices, etc. — became a useful topic when capitalism started to displace feudalism. Double-entry bookkeeping was invented during the Renaissance and used by merchants in Italian city-states. The Dutch East India Company was founded in 1602. Economists brought the supply to meet these demands 😉
- One early school of economics was mercantilist, which believes that it’s best to trade goods for gold rather than other goods. Colbert (1619-1683) imposed this win-lose trade policy on France in the 17th century and made the country much poorer. (Trump has a mercantilist obsession with trade balances.)
- Mercantilists are right to focus on employment, but they used wasteful and ineffective tools (high tariffs on imported goods and subsidies to domestic producers) to protect jobs. (Better to boost domestic employment by helping start-ups identify comparative advantages and grow.)
- 18th century calculations of economic activity (GDP was not invented until the 1930s) were biased in favor of labor over land. The landed classes supported this bias as a way shifting taxes from land onto labor; see my post of property taxes.
- Theory and data are often at odds. Data can be useful or biased (anecdata, missing variables, bad measurement). Theory can persist long after it has been empirically falsified.
- Bernard de Mandeville (1670-1733) wrote that the rich created jobs by consuming luxuries in the Fable of the Bees (1705). He also worried that an ultra-capitalist society would have weak morals. He was right.
- Richard Cantillion (1670-1734) focussed on cause and effect, ceteris paribus (“all other things held equal”) and trade-offs, i.e., opportunity costs. He also raised an important question (“it is better to have a great multitude of Inhabitants, poor and badly provided, than a smaller number, much more at their ease”?) that Jeremy Bentham (“the greatest good for the greatest number“) later flubbed, as there are always tradeoffs [page 38].
- Cities grow on the productivity that specialization, innovation and competition bring to deeper, broader markets. They fail when the commons (public health, crime, etc.) are weak. Economics did not pay attention to these failures until the 20th century, with the work of Jane Jacobs and Elinor Ostrom, among others.
- `The Scottish universities were superior to the English ones, where [Adam] Smith complained that “the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching”‘ [page 58].
- Adam Smith (1723-1790) built the foundation for WoN with his Theory of Moral Sentiments (1759), which focussed on our social (non-market) selves: `“We endeavour”, Smith says, “to examine our own conduct as we imagine any other fair and impartial spectator would examine it.” In invoking this ghostly projection, Smith presents people as fundamentally social beings’ [page 59]. Smith, a member of the Scottish Enlightenment, was implicitly attacking God-given morality, which was not easy back then.
- `The Wealth of Nations achieves something that no other work had quite done before. It clearly brings out the idea of an “economy” –- a self-regulating system of exchange, which is subject to its own natural laws” (page 66). I say the same of Bitcoin, which I consider a new species.
- The debate over value vs cost in determining price was not resolved for decades. Marx was not alone in proposing the labor theory of value (a good’s value depended on the embedded labor needed to produce it). The joint-determination of price (as the two blades of scissors) via the interaction of cost (supply) and value (demand) was a real achievement for economics, even if many people today still don’t understand it.
- Inflation makes it hard to see prices as an indicator of value or cost.
- Who creates value? Workers, capitalists, landowners? Economists who backed one group (cynically or thoughtfully) would be attacked by the others, since political support went to those seen to be creating value.
- Poverty is both absolute (are you hungry?) and relative (does your neighbor have better food?). Stop arguing for one definition.
- Nicolas de Condorcet (1743-1794) wanted people to respect each others’ views and advocated reading novels for this. I agree that people need constant reminders that their subjectivity is not reality.
- David Ricardo (1772-1823) is credited with defining “rents” as the excess (or unearned) profits derived from possession of a productive resource. He used land as an example, but rents also arise with fossil fuels, minerals, intellectual property, and so on. Monopoly profits are often called “rents” by economists, but Alfred Marshall did not use that term for profits derived from market power that will disappear with deregulation, competition or entry. He reserved “rents” for profits arising from natural scarcity.
- The first 50-100 years of the Industrial Revolution lowered prices for consumers but most of the profits went to capital, not labor. Under those circumstances, Ricardo wanted to repeal the Corn Laws that protected English farmers from competition and raised bread prices, to help the working classes. (They were repealed in 1846.)
- Jean-Baptiste Say (1767-1832) is known for “supply creates its own demand” by which he meant that economic imbalances (unsold inventory, unemployed workers) would correct over time. He was wrong, but it took 100+ years before Keynes explained failures in aggregate demand.
- Thomas Robert Malthus (1766-1834) worried about over-population, but he — like the neo-Malthusian Garrett Hardin — favored self-control over birth control. Failure #1. Malthus also underestimated potential increases in agricultural productivity, which was just taking off. Failure #2.
- I had never heard of Simonde de Sismondi (1773-1842), but I like his ideas, i.e., that human nature (and thus society) is not universal, but different among places and eras. Capitalism was not inevitable. Workers were not doomed to suffer poverty. Although his nostalgia for (pre-capitalist) feudalism and guilds would not help the masses, Sismondi was right to want to reduce inequality by redistributing profits from capital to labor. Efficiency and fairness are complements, not substitutes.
- John Stewart Mill (1806-1873) argued that the value of a good depended on how useful it was (demand), not just scarcity (supply) — a perspective that (correctly) undermined those who argued the labor theory of value.
- Mill argued for a stationary state of the economy and population over endless growth, in what seems (to me) to be the earliest call for a steady-state economy or degrowth. This perspective evokes the pre-industrial era of a century earlier, but Mill “advocates a stationary state in which a stable population maintains itself at some reasonable average level of material comfort, yet most persons also attach more importance to certain ‘higher pursuits’ than to further labour, investment, and exploitation of natural resources” [p 140]. From this, I see a strong claim for quality over quantity. Indeed, Mill worried about inequality and the working classes. He was right to advocate steep inheritance taxes.
- Mill was raised in books and developed some idiosyncratic ideas, but that didn’t keep him from important insights and opinions (p 140):
The real reason Mill loved free trade was not because it made the economy more efficient but because it encouraged people of different backgrounds to talk to one another. “It is hardly possible to overrate the value, for the improvement of human beings, of things which bring them into contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar.” Mill continued: “There is no nation which does not need to borrow from others.”
- Karl Marx (1818-1883) “either did not know about the clear improvements in living standards that were happening all around him or chose to ignore them: From 1849, when Marx moved to London, to 1883, when he died, the average working week fell from 64 hours to 58 hours. Over the same period the average wage did not stay at subsistence level, as Marx predicted. In fact it rose by fully 35% in real terms” p 170.
- My favorite footnote: “Marxist economists have developed a whole new set of economic terms, none of which is used by mainstream economists. This makes it almost impossible for Marxist and non-Marxist economists to discuss the use of empirical data” (p 278).
- Friedrich Engels (1820-1895) came from a rich industrial family, so he knew that technology would help produce the food that Malthus thought impossible, but he (and Marx) took Hegelian dialectics too seriously. That’s why the duo predicted an inevitable triumph of communism, why Lenin et al. stubbornly ignored failures, and why millions died needlessly.
- William Stanley Jevons (1835–1882) preferred “economics” to “political economy,” which differed:
It is often said that political economy has more sociological and historical elements than dry old economics. The examples of Ricardo and Say, two of the archetypal political economists, undermine that idea. In my view the clearest distinction between political economy and economics is in the use of mathematics. Jevons argued passionately in favour of the systematic incorporation of maths into economic inquiry. (Note that today the term “political economy” tends to refer either to economic analysis with a bit of politics thrown in, or to a more left-leaning sort of economic analysis. Only economists really use this term.) p278.
A few years ago, I started to call myself a political economist to emphasize my interest in history, institutions and the distribution of surplus. I see too many examples of “economics” depending on mathematical theories and predictions that deviate too far from reality.
- The “Jeavons Paradox” states that a gain in efficiency in providing a good (e.g., lighting) will lead to more, not less, use of that good. I don’t see much of a paradox when an outward shift in the supply curve (making lighting more affordable) results in higher quantity demanded (the demand curve doesn’t move).
- Jeavons said if economics “is to be a science at all, then it must be a mathematical science” (p 186). This aspiration is admirable but autistic, since humans do not behave in mathematical (predictable) ways, which means that math-centric models often fail to work. Williams’s summary of this discussion (pp 186-7) is worth quoting:
Why did the political economists not use much maths [despite having math skills]? … In 1803, [Jean Baptiste] Say referred to “our always being misled in political economy, whenever we have subjected its phenomena to mathematical calculation”. The thinking goes that people are too unpredictable and unreliable for their actions to be reduced to simple equations. Political economy, in Say’s words, is “subject to the influence of the faculties, the wants and the desires of mankind” and therefore is “not susceptible of any rigorous appreciation, and cannot, therefore, furnish any data for absolute calculations”. The question, of course, is how representative were Say’s views. John Elliott Cairnes, a contemporary of Jevons who was a paid-up political economist, rather than an economist, reckoned that many of the data necessary to the mathematical solution of economic problems were too unreliable. Cairnes also worried that mathematics could not be applied to the development of economic truth, “unless it can be shown, either that mental feelings admit of being expressed in precise quantitative forms, or, on the other hand, that economic phenomena do not depend upon mental feelings”. In other words, you cannot quantify feelings like hunger, desire or love. But Jevons came to economics with a different philosophical background. For one thing he was a science nerd.
… and many science nerds, physicists and engineers have tried — and failed — to reproduce economic dynamics in mathematical, statistical, game theoretic, or mass-balance models. (Today, they are pursuing big data, machine learning and agent-based simulations.) They have failed, in ways large and small, due to an inability to capture chaotic, complex human interactions. Maybe they are not wasting their time, but I worry that misleading advice and predictions can lead to mistaken actions and policies. I prefer humble assumptions and robust (anti-fragile) policies that work with a range of potential behaviors.
- Jeavons thought the labor theory of value was misleading: Something that costs £10 to make may only be worth £8 (to the marginal consumer) in the market.
- Jeavons (and other marginalists) resolved the “diamond-water paradox” thus:
Adam Smith was exercised by the question of why water is so much cheaper than diamonds, despite the fact that it is so much more useful. Smith reckoned that the paradox showed how useless questions of utility were in determining value. Jevons has another answer. He accepts that water is more useful than diamonds. But then the marginal stuff comes back in. The Jevons theory says that the marginal utility of water is far lower than the marginal utility of diamonds. As Ellen Frankel Paul says, “[w]hile water has great utility, it is so abundant that final increments of it, which is all that one is concerned about in the normal market situation, are worth little or nothing to people already in possession of all they need.” An extra diamond, by contrast, offers massive extra utility to someone. But imagine if there was a drought. Then, the marginal utility of water would be very high–people would be willing to trade diamonds for a glass of water, since it would stave off death for a few more hours (p 191).
- Dadabhai Naoroji (1825-1917) is another new name to me. This Indian economist called attention to — and calculated — the loss and extraction from colonial India to Britain, from poor to rich. I first appreciated this “drain theory” when I read Era of Darkness two years ago, and it’s still upsetting to me how many Brits claim that Empire helped India when the opposite was true. The damages from those 300+ years of exploitation are still visible; the dysfunction of inherited weak institutions still harms.
- Rosa Luxemburg (1871-1919) claimed that capitalism could only grow with colonialism, since the metropole needed others to exploit. While I agree that colonialism is about exploitation, I don’t see how capitalists need it, since they can also thrive with voluntary trade in free markets.
- The book ends with Alfred Marshall (1842-1924), the subject of my Marshall 2020 project. Marshall departed from Malthus and Ricardo’s pessimism over the Industrial Revolution because he had more data. At the beginning of the 19th century, wages, productivity and quality of life were rising very slowly but real-wage growth was much faster in Marshall’s time, which meant that workers were gaining relative to capital. We must note that these gains were not automatic, but the result of fights in the press, the streets and legislatures.
- Marshall also developed Smith’s ideas (diversification increases with the size of the market) into theories of innovation-intensive industrial clusters.
- Most important, Marshall found a middle way between scientistic plodding (paradoxical proofs promoting pessimistic predictions) and grand but groundless claims of inevitability. Marshall was skeptical and pragmatic. His facts were limited, his caveats numerous. I prefer this humble perspective, as did others. Marshall was influential in his time; contemporary economists should follow his example in humility over “stylized facts.”
- I became an instant fan of Marshall (even if it took me 15 years to get ’round to reading his work!) while in graduate school:
I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules. (1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics (p219).
And with those 2,500+ words, I come to this one-handed conclusion: (Political) economists, from undergraduate to PhD, should read this book (and books like it) to understand where we came from, where we made mistakes, and how individuals and personalities affected our thinking. It is only with knowledge and humility that we can offer good advice on the everyday business of life. For others, I am not sure if this will be quite the page-turner as Heilbroner’s classic. FOUR STARS.