: The Plight of the Economist

CHAPTER I

Introduction: The Plight of the Economist

It’s not easy being an economist. Corporate executives attack them for not calculating costs and benefits with enough precision. Altruists accuse them of being too fussy about costs and benefits. To politicians, economists are party poopers who won’t let them promise prosperity without sacrifice. Some of the wittiest writers have taken time out to insult them, including George Bernard Shaw and Thomas Carlyle. Indeed, it’s been open season on economists ever since Carlyle called economics the “dismal science.”

Economists feel wrongly accused, however, for they are usually not the cause of bad news but simply the messengers. And the message is simple: Human beings must make difficult choices. We are no longer in Eden. The world does not flow with milk and honey. We have to choose among cleaner air and faster cars, bigger houses and bigger parks, more work and more play. Economists do not tell us that any of these is bad. They only tell us that we cannot necessarily have them all—all at once. Economics is the study of choice. It does not tell us what to choose. It only helps us understand the consequences of our choices.

The great economists, of course, were not content to be merely messengers. Though they have been ridiculed with irreverent epithets—Smith the bumbler, Mill the egghead, Keynes the bon vivant, and so on—they cannot be disparaged for their motives. It is ironic that economists themselves receive so much virulent criticism in our day, for as Keynes noted, most of the eminent practitioners started as do-gooders, searching for ways to improve the world. Alfred Marshall in particular saw economics as a profession that should blend shrewd science with a devotion to people. Whereas the medieval world saw three grand professions—medicine aimed at physical health, law aimed at political health, and theology aimed at spiritual health—Marshall hoped to make economics the fourth noble vocation, aimed at better material health not just for the rich but for all. Marshall tried valiantly to mediate between two powerful, regrettable strands: a trend toward arid mathematical economics without practical application and a trend toward sheer emotional radicalism without careful theoretical reflection. The curriculum he fought to establish at Cambridge drew together the most scientific minds with the most passionate. Keynes was, of course, the most stellar result.

The strongest link between economics and the real world has always been politics. Indeed, until this century economics was called “political economy.” Almost all of the stellar economists served at some level of government. Two of them, David Ricardo and John Stuart Mill, won election to the British Parliament. Among the greatest economists we consistently see not just a spark of scientific interest, but a surge of passion. Among the numerous symbols of calculus and statistics we see bold exclamation points.

Throughout the history of economic thought we see confrontations and sometimes cooperation between government and economists. Modern economics received its initial push when Adam Smith denounced the incestuous marriage between the monarchies and the merchants of Europe. One of the few things Adam Smith, Karl Marx, and Thorstein Veblen had in common was their realization that businessmen love to use politics in order to help themselves. In a famous statement, Smith warned that businessmen seldom meet without plotting against the consumer. You can be sure that even today, the orator at the local Chamber of Commerce meeting who exalts the free market would jump at the chance of securing a monopoly, an exclusive government contract, or a regulation that guarantees his profits. Thankfully politicians have not always been obliging. After World War II, Great Britain’s socialist leaders promised prosperity and near paradise through unionism and nationalization, but instead the British economy only got worse and worse. One of Winston Churchill’s biographers tells the story of Churchill meeting the leader of the Labour Party in the men’s room outside the House of Commons. The Labour leader entered first and took up a standing position. Churchill entered a moment later on the same mission and, seeing his opponent, stood all the way at the other end of the row. “Feeling standoffish today, are we, Winston?” the Labour leader asked. “That’s right,” barked Churchill. “Why, every time you see something big, you want to nationalize it!”

Most of our presidents have shown little grasp of economic principles. John F. Kennedy once admitted that the only way he could remember that the Federal Reserve Board controlled monetary policy, not fiscal policy, was that Chairman William McChesny Martin’s name began with the letter “M.” Apparently, Kennedy couldn’t have appointed a Volcker or Greenspan to the post.

Election campaigns are the most trying time for economists. Whenever a politician promises his or her constituents more margarine and more munitions, economists must warn of the calamitous consequences. Any progress that economists make in raising economic literacy can be wiped out in a second by the pie-in-the sky ravings of a candidate. An election-year speech is the political equivalent of prime-time television. When a presidential candidate appears on television, he cannot allow himself to appear any more sophisticated than Jed Clampett of “The Beverly Hillbillies.” Of course, for some politicians, this is not a great challenge.

It is not hard to see why politicians misunderstand their economic advisers. Economists speak a different language to each other than they do to the public. They speak the language of models. In their attempt to explain a complex world, they must first simplify out those few factors at any given time that are most important, for every economic phenomenon may be affected by thousands of events. For example, the level of a consumer’s spending in the United States may depend on some of the following: weather, musical tastes, weight, income, inflation, political campaigns, and the performance of U.S. Olympic teams. To isolate and rank which are most important, economists must design models that exempt some of the infinite number of possible causes. The best economists are those who design the most durable, robust models.

Of course, all scientists must construct models. For years physics rested on a Newtonian model of gravity. Astronomers still use a Copernican paradigm. Thomas Kuhn’s classic and controversial The Structure of Scientific Revolutions traces the development of these models. So why is economics more difficult than these “hard” sciences? An example may help here. Imagine a surgeon operating on a kidney. After inspecting an X-ray report, the surgeon knows that the patient’s right kidney lies one inch below the colon. Imagine, however, that as the surgeon makes an incision, the kidney changes position. In just this way, as an economist isolates causes and estimates their influence, the degree of influence changes. As human relationships and social institutions change, so does the subject of our scientific inquiry. Economics may not be a “hard” science. But that does not mean it is an easy science. Because it is so fluid, it is hard to hold in place and to study.  No wonder Lord Keynes insisted that the master economist fulfill a set of attributes more extraordinary than those needed for knighthood or even sainthood.

He must be mathematician, historian, statesman, philosopher. . . . He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.

The Genesis of Economics

Where shall we start in studying the history of economic thought? We could start with the Bible, which contains many statements on land, labor, and capital. But the Bible presents more commandments than careful analyses.  Although Adam Smith got his name and his moral posture from the Bible, it provided little inspiration for his economic theorizing.  

We could also explore Aristotle’s articulate remarks praising private property and denouncing the accumulation of wealth for wealth’s sake. But Aristotle knew just enough about economics to know that time was a scarce resource. Therefore, he devoted more of his time to philosophy and to educating Alexander the Great than he did to economic theory. It shows. Aristotle remains one of the giants of philosophy, but at the risk of insulting ardent fans of college courses on Western civilization, we must admit that Aristotle left few marks in the annals of economic discipline.

In the Middle Ages theologians debated economic issues. The Catholic Schoolmen struggled over questions of justice and morality in the marketplace. In particular, they devised the doctrine of the “just price” and refined the Church view of usury. Whereas the Old Testament specifically forbade lending at interest to members of the same community, medieval theologians tried to separate the different components of interest such as risk, opportunity cost, inflation, and inconvenience in order to perforate the solid prohibition and permit loopholes. The theologians faced excruciating choices. If they continued to deliver orthodox Biblical interpretations that challenged commercial activities, the Schoolmen would lose their relevance, because many people were willing to take their chances with divine retribution. On the other hand, if the theologians simply condoned commercialism in all its forms, they would lose credibility as Church leaders. They devised most of their economic theories while straddling the secular and the sacred. This is neither a comfortable position nor one terribly conducive to studying economics. They spoke on economics because it was a duty to their flock. But the duty was to guide the flock to Heaven, not to a higher standard of living. When Protestants split the flock, the task grew even less manageable.

We cannot sprint so swiftly past the mercantilists. Generally speaking, they were a group of writers and courtly advisers to European monarchs during the sixteenth through the eighteenth centuries. They did not share a common “good book,” and they certainly had different interests. As royal families of England, France, Spain, Portugal, and Holland consolidated their boundaries and battled for colonies across the seas, lawyers and merchants began advising kings and queens on how to manage their economies.

In retrospect, we can list several tenets often found in their recommendations: First, a nation should keep its house in order by awarding monopolies, patents, subsidies, and privileges to loyal subjects of the crown. Second, a nation should pursue colonies for the purpose of extracting precious metals and raw materials, which were good measures of national wealth, for they could pay for wars of conquest. Third, a nation should restrict its foreign trade so that it exported more finished goods than it imported. A consistently positive balance of trade would bring in gold (wealth) from debtor nations.

Thus under mercantilism, we see nations expanding their borders. At the same time, however, we see a tightened control over the internal economy, as guilds, monopolies, and tariffs distribute economic power to political favorites. In some nations the control extended further than in others. Finance Minister Jean-Baptiste Colbert thoroughly regulated the manufacture of many goods during the reign of Louis XIV and bestowed great authority to the guilds. In a stunning display of imperial power, he once announced that fabric from Dijon would contain 1,408 threads!

The mercantilists provided the perfect target for Adam Smith, with whom it seems reasonable to start our study of modern economic thought. He excoriated their theories on several levels. First, they measured wealth on the basis of coin and precious metals, while Smith believed that real wealth should be gauged by the standard of living of households. Bags of gold do not necessarily translate into bags of food. Second, he said that wealth must be measured from the viewpoint of a nation’s consumers. Tactics that placed money in the hands of prime ministers or sycophantic merchants did not necessarily help the citizens of a nation. Third, Smith knew that individual motivation, invention, and innovation inspire an economy to greater prosperity. By bestowing gifts of monopoly and protection, mercantilist policies paralyzed the body politic. Thus began modern economics.

Should We Ignore the Economist?

Since the days of Adam Smith, we have produced few master economists. Mainstream economic theory does not explain everything. In particular, economists today have a difficult time explaining the labor market and the drop in productivity growth from the early 1970s through the early 1990s. Yet economists agree on enough to say that countries and individuals take foolish risks in ignoring the basic tenets of economic theory. The nation that raises trade barriers in an atavistic yearning for stable, mercantile times hurts its own consumers. The nation that keeps farm prices high hurts its own consumers and finds itself with a surplus of grain rotting in silos. On these two points few economists would disagree. Yet too few politicians in the world will listen.

Even if governments do not always take the advice of economists, we can look to economists to tell us where our standard of living has been and where it may be going. Ever since the Industrial Revolution sparked England, Americans have always looked forward to getting bigger and better. We see the present as the minimum. Yet history provides no precedent for continual progress. Every year that the industrialized nations avoid a new dark age, we set a record for humankind. Listen to the words of Georges Duby as he describes Europe in the eleventh century. It is frightening to think that these horrible decades came after and not before the relative affluence of ancient Greece, Rome, Babylon, and Egypt:

. . . the Western world in the year 1000. A wild world, ringed round by hunger. Its meager population is in fact too large. The people struggle almost bare-handed, slaves to intractable nature and to a soil that is unproductive because it is poorly worked. No peasant, when he sows one grain of wheat, expects to harvest more than three—if it is not too bad a year; that means bread to eat until Easter time. Then he will have to manage on herbs, roots, the makeshift food that can be gleaned from forest and riverbank and, on an empty belly, he will do the heavy summer tasks and wither with fatigue while he awaits the harvest . . . Sometimes, when too heavy rains have soaked into the ground and hampered the autumn ploughing, when storms have pummeled and spoiled the crops, the customary food shortage becomes a famine, a great death-dealing wave of starvation. The chroniclers of the times all described such famines, not without a certain satisfaction. “People pursued one another in order to eat each other up, and many cut the throats of their fellow men so as to feed on human flesh, just like wolves.”

Will the developed world ever know such horrors? Will it ever slip back into the frightening state of some of its Third World neighbors? Not even the master economist of Keynes’ most fantastic dreams would know. We do know that the goal of the great economists was to teach us to avoid such a dark abyss.

It is striking that so many of the lessons of the great economists still speak to us. Each of their wisest theories has a practical point or analogy today. This book seeks their wisdom by looking at mainstream economics and asking, Who first had these insights and built these durable models? We can learn from the masters. Some of the contemporary examples in this book are meant to be humorous. David Ricardo did not have access to the cast of “Gilligan’s Island” to explain the Theory of Comparative Advantage. But to do so, I hope, does no disrespect and provides some help in understanding the difficult paradigm. Economics need not be dull. Why not have the last laugh on Carlyle by using the dead economists themselves to reverse their bad reputations and to teach the lessons they left to us? Better the ghosts of economists past roll over in their graves in laughter than toss and turn, disappointed that we forgot their work and fearful that we will drive ourselves back to the eleventh century.