The Story of Economic Genius
By Sylvia Nasar
Simon & Schuster; 576 pp; $35.00
It’s a dubious hour to proclaim the triumph (much less the genius) of the “dismal science.” Western economies are a wreck, the U.S. is suffering 9.1 percent unemployment, and Europe is teetering on the abyss of default. The economics profession bears no small measure of blame—first for inventing or adopting modern risk management, which failed so spectacularly during the financial crisis, and second for believing that central bankers had unlocked the key to managing growth. In the U.S., politicians have been reenacting a tired budget deficit debate from the 1930s. Whatever economics we may have learned, we seem determined to forget.
Yet proclaim a triumph is precisely what Sylvia Nasar, author of the acclaimed A Beautiful Mind, sets out to do. Nasar has written a compelling history of modern economics, a story of the theorists as well as of their theories. Grand Pursuit retraces much of the same ground as Robert L. Heilbroner’s 1953 classic The Worldly Philosophers—which is to say, Nasar gives us Karl and Jenny Marx in their crowded London flat, Joseph Schumpeter, and, of course, John Maynard Keynes. Nasar is more idiosyncratic in her choice of subjects; she omits Adam Smith, almost entirely. On the other hand, she reclaims the lesser-known Beatrice Webb, a richly interesting and path-breaking Victorian who founded the London School of Economics and sold none other than Winston Churchill on the need for a welfare state. Similarly, Nasar glosses over the Great Depression but lingers on the less familiar crisis in post-World War I Vienna because, well, Schumpeter happened to be there and was enlisted by the Socialist government to help stave off mass starvation and communist rebellion, none of which interfered with his conspicuous pursuit of women and Thoroughbred horses.
Nasar’s story is centered in London, and its appeal is enhanced by the inclusion of literary masters such as Charles Dickens, who was, she points out, obsessed by the great Victorian issue of eradicating poverty. Although not quite framed in these terms, Nasar’s narrative encompasses, I think, two motifs. The first is how economists came to decipher that capitalism is, ultimately, an engine of progress rather than despair. To focus on just one sequence within this theme, she starts with the Reverend Thomas Robert Malthus and his dire thesis that the sex drive condemns the masses to live at the edge of starvation.
Marx is similarly pessimistic, if for different reasons. He sees society and the Industrial Revolution, rather than nature, as the agent of human misery. “Poverty was not, of course, new,” Nasar writes, which the would-be revolutionary readily acknowledged. But the juxtaposition of poverty amid rising wealth made poverty seem “manmade, almost gratuitous.” Marx’s explanation was that the competition for profits impels factory owners to steadily reduce wages, leading to a downward spiral in living standards. That the emigré Marx never bothered to visit an actual factory, or even to learn English well, is one of the human failings Nasar engagingly brings to the surface. The great revolutionary was too busy holding forth at cafes, soused in an atmosphere of “wet woolens and warm beer,” to notice that living standards were rising. Marx comes off badly, yet his conclusion that society offered the masses little hope (short of revolution) was widely accepted. Only in a novel such as Great Expectations might the orphan Pip vault to the middle class; for the real-life masses, such advancement was “the stuff of pure fantasy.”
This is Nasar’s setup for Alfred Marshall, who, though trained as a mathematician, was inspired by both Dickens and Marx to study how companies actually operated. “He did not doubt that the chief cause of poverty was low wages, but what caused wages to be low?” Marshall, who began his work in the 1860s, noticed a dynamic that Marx hadn’t: “Competition forced owners and managers to constantly make small changes to improve their products, manufacturing techniques,” and so forth. Over time, the improvements wrought greater productivity and higher wages. The significance of this idea for human progress cannot be overstated. The historian Arnold J. Toynbee later called it “the first great hope which [wage analysis] opens out to the laborer.”
I have lingered on Nasar’s treatment of Marx and Marshall to give a sense of the vividness of her story. Her second motif, though she doesn’t frame it explicitly, concerns the evolution of the role of government: the great upheaval that was the welfare state, the struggle to regulate—with or without gold—the money supply, and the parallel effort to control booms and busts. The latter is especially relevant today; thus, eminences from Keynes to the American Irving Fisher inquire whether panics and slumps are “generated by the economic system” or are “random shocks that originated outside the economy.”
Neither Nasar’s topics nor her characters conform to a neat, linear organization. Economics has no agreed-upon catechism, and Nasar has written the book she chose to write, not a book that a conventional reading of history demands. Curiously, she includes a fine portrait of the young Milton Friedman as a New Deal bureaucrat, but not of the later free-market apostle who achieved influence and fame. And she is too forgiving of the modern academy’s enslavement to the computer. “The fear that using mathematics would cause other languages to wither turned out to be overblown,” she asserts. If anything, they were underblown. Formula-derived economic models, embraced by economists with utter certainty, helped to foster the financial crisis and other modern traumas. Perhaps inevitably in a broad survey, some of Nasar’s transitions are abrupt, but overall Grand Pursuit is artfully rendered and a delight to read.
The question is whether Nasar’s subjects truly deserve her laudatory subtitle, The Story of Economic Genius. To Nasar, economic history is a story of intellectual progress, albeit with some fairly nasty bumps: “Economic calamities”—she specifies the Great Depression—“have always triggered crisis of confidence but they have not come close to wiping out the cumulative gains in average living standards.” Extending her gaze to India, China, and other developing nations, she observes, “Since World War II, history has been dominated by the escape of more and more of the world’s population from abject poverty.” Such arguments seem to conflate economic progress with economic thinking. To put it bluntly, railroads weren’t developed by economists, and it is unclear whether Marshall et al. enabled such progress or merely explained it.
Nasar would have us believe that the present crisis has not even nicked the busts in her economists’ pantheon. It is certainly true, as she notes, that the Great Recession of 2008 and 2009 “did not reverse the prior gains in productivity and income” and that (so far) “there was no second Great Depression.” But this a debate she could have wrestled with more, especially the assertion that “governments achieved some success in managing their economies.” With Europe in disarray, the last word on managing economies has yet to be writ. One suspects that future economics textbooks will warrant some revisions. All the same, their authors would profit from consulting Grand Pursuit.