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The Masters and Mavericks of Modern Economics
Table of Contents
About The Book
Partly a history of controversies in economics, partly an essay on the evolution of the field, Economic Principals offers a glimpse of one of the most important stories of our time: the metamorphosis of a priestly class of moral philosophers into the mathematical mandarins of today, whose ideas are reshaping society even as they reveal its workings in ever more subtle detail.
Warsh first recounts the rise of the economic paradigm, deftly treating the rediscovery of Adam Smith and the centrality of markets. He then turns to the generation of economists for whom the Nobel Prize was created in 1969, the men who forged the modern field in a few years during and after World War II. Some, like Paul Samuelson and Milton Friedman, are well known to the public; others, like Trygvie Haavelmo and George Dantzig, are less quickly recognized. But all have interesting stories which Warsh brings to light.
Tracing the high tech revolution to the current generation, he sketches younger scholars such as Jeffrey Sachs, Martin Feldstein, and others less popularly known, who rule the field today. Marking the most powerful applications of modern economics, Warsh explains how the ingenious "rocket scientists" of Wall Street are creating new markets and the business school wizards and leading corporate executives are reinventing the organization.
Finally, in exploring the implications of modern economics, Warsh introduces us to scholars operating on the boundaries of the field, from Jane Jacobs to Noam Chomsky, and to the critics, like Donald McCloskey and Robert Reich, who have brought a bit of moral philosophy back into the economist's brave new world.
At every step, Warsh maps the field with the journalist's eye for detail. Readers will see why he is considered one of the most consistently stimulating economic journalists in America today.
The Sex Lives of Great Economists
One of the cardinal rules of science is, "Thou shalt not get personal," and scientific etiquette is designed to remove controversy from the sphere of the individual. Hence the impersonal tone and passive voice of technical papers, the complete absence of resort to anecdote and personal experience. Even first names are omitted; initials are enough. "Ad hominem" arguments-those that respond not to the merits of a claim, but rather to the fact that it comes from such-and-such a person -- are strictly out of bounds. This principle is especially important in economics, where arguments can get personal all too easily.
So it is unusual, to say the least, that two major biographies of John Maynard Keynes have appeared recently, and both dwell at some length on his bisexuality. This is partly in reaction to Sir Roy Harrod's lengthy hagiography of his friend, published in 1951, which omitted any mention of it. Dozens of books on Keynes have rolled off the presses since then without so much as hinting at the fact.
But mostly, today's attention to Keynes' sexual makeup represents a determined attempt to come to grips with the man, to finally figure him out, to assign him to his proper place in the intellectual firmament of the century.
To be sure, Keynes is not exactly yesterday's child. He was born 101 years ago, the son of a prominent economist father and a mother who would eventually become mayor of Cambridge, England. It was nearly half a century ago, in 1936, that he launched -- with the publication of his General Theory of Money, Interest and Employment -- the intellectual "revolution" that bears his name. And it was just 10 years after the publication of that difficult book that he died. Yet his claim on our attention has hardly relaxed over the years; if anything, it has grown. All the talk about "needing a new Keynes" notwithstanding, the old one is all we've got.
Charles H. Hession's book -- John Maynard Keynes: A Personal Biography of the Man Who Revolutionized Capitalism and the Way We Live, -- is "addressed to the very question" of his bisexuality, the author says. It is a workmanlike job in which Hession occasionally lays aside the biographer's mantle to speculate on the relationship among homosexuality, androgyny and creativity.
The first volume of Robert Skidelsky's biography, John Maynard Keynes: Hopes Betrayed 1883-1920, is by far the more painstaking effort, though. It was published last year in England, and when the second volume (The Economist as Prince) is completed next year, the two will be published as one in the United States by The Viking Press. The picture it paints of the young Keynes is of a fairly promiscuous, always intense denizen of a hothouse society in which homosexuality was far from shocking or even uncommon.
According to Skidelsky, Keynes loved boys at first from highest principles, then turned during World War I to dating girls (all the young men were away at the front), and eventually married the ballerina Lydia Lopokova -- which led John Vincent to crack in the Sunday London Times that "the Higher Sodomy turned out not to be the ultimate truth but a matter of supply and demand."
Meanwhile, the disagreement over what Keynes really meant continues in full flower. For 15 years, economists have argued about whether his message was fundamentally mistaken by those neoclassical economists who were eager to bend Keynes' insights about government to their more conventional analytic purposes.
Recently, Meier Kohn, a Dartmouth theorist, has made a strong argument that the portion of the General Theory that was quickly assimilated was mostly methodological -- and that a lengthy attempt must be made now to restore his analytic approach to the financial system. Economists are in no danger of agreeing on the real Keynes, at least any time soon.
When making ad hominem judgments about Keynes, the broader context of Cambridge university life may have been far more to the point than his bisexuality, according an essay by the late Harry Johnson, a scholar who went back and forth between England and Chicago with ease. Johnson maintained that it was crucial to understand the influence that English college life had as an economic institution on Keynes' worldview.
For one thing, the sense that the world was somehow like a college colored Keynes' attitude toward the working class, whom he thought of in terms of jolly servants deserving of plenty of fringe benefits, according to Johnson. For another, it meant he viewed entrepreneurs and businessmen as failed undergraduates. "These were people for whom some reputable non-academic, non-governmental employment should be found, but who should not be rewarded on an inordinate scale for success in their second-rate activities," he wrote.
"It would also be natural for such academics [as Keynes] to believe that the messes that the practical world of business and politics got itself into resulted from the defect of inferior intelligence or, alternatively, the lack of a system of corporate decision-taking comparable to that of a college fellowship body and its council."
Is the sex life of great economists ever relevant? Well, yes and no. Certainly not in any everyday sense, but overall, there may be an element of sexual style involved in theory choice. At least Joseph Schumpeter thought so. He never remarked on Keynes' habits, at least not publicly, but in his great history of economic analysis, published posthumously, he observed of Adam Smith, "a fact I cannot help considering relevant, not for his pure economics, of course, but more for his understanding of human nature that no woman, excepting his mother, ever played a role in his existence. In this, as in other respects, the glamors and passions of life were just literature to him." And indeed, there is something about general equilibrium analysis, which Smith can be said to have founded, that is, well, ultimately unconsummated.
And can it be entirely beside the point that Schumpeter admired the theorizing of the highly transitive Karl Marx, a fine husband and loving father who at a certain point in his trials impregnated the family maid -- and then permitted Friedrich Engels (the "Lieber Fred" of later days) to take the blame?
After all, Schumpeter himself liked to brag enigmatically that he had entertained three great ambitions in his youth -- to be a great horseman, a great lover and a great economist -- and that he had achieved two of them.
Keynes, too, scored on two of the three counts, then -- and since he had no interest in horses, perhaps he can be judged the greater man. The fundamental point about Keynes remains undoubted. It is that he changed, probably forever, the way we think about the government's responsibility for the behavior of the economy.
As Robert Skidelsky has written, he was at first "the only professional economist in Britain and the United States who grasped the point that unemployment could be seen as a technical problem in economic analysis to be solved by economic means." Or as Michael Stewart has put it, he showed that the Great Depression was the result of ignorance too deep to be borne.
May 6, 1984
Adam Smith: The Canniest Scot
When the 250th anniversary of his birth was celebrated quietly in 1973, Adam Smith was, by and large, an afterthought, at least in the public realm of newspapers and magazines. OPEC was in the saddle and rode mankind. Twenty years of extraordinary worldwide growth were abruptly ending, for reasons that are still not well understood today. Economics, at least as Smith had framed it, was widely said to have somehow lost its explanatory snap.
This month the 200th anniversary of Smith's death is being celebrated in Scotland with a good deal more ballyhoo and grandeur. First it was a band of businessmen and politicians who flocked to Edinburgh for a Wealth of Nations 1990 symposium that its organizers, the World Business Forum, billed as "the most important conference to be held anywhere in the world this year." It ended last week, about the same time as the Group of 7 economic summit in Houston.
This week it is the economists' turn to make the pilgrimage to Scotland. No fewer than 11 Nobel laureates are on a two-day program beginning tomorrow to honor the man who put the concepts of the free market and the "invisible hand" at the center of modern technical economics. Not all will come, but all have made a living elaborating the insights of the scholar who wrote: "Where competition is free, the rivalship of competitors...obliges every man to endeavor to execute his work with a certain degree of exactness....Rivalship and emulation render excellency, even in the mean professions, an object of ambition, and frequently occasion the very greatest exertions."
The differing atmospheres surrounding the two meetings are instructive. Led by former British Prime Minister Edward Heath; Salomon Brothers' John Gutfreund; investment banker Lord Roll of Ipsden; Jack Kemp, the U.S. Secretary of Housing and Urban Development; and others, the celebrants of The Wealth of Nations tended to be veterans of the recent battles of the global Turn to the Right, fought during the 1970s and 1980s. Uppermost in the minds of participants seemed to be the sudden tilt toward markets of the Eastern European economies. Within the hearing of Rachel Johnson of the Financial Times, for example, Jack Kemp bubbled: "More people are queuing up to buy hamburgers in Moscow than to view Lenin's tomb."
The invited economists, on the other hand, had made a much longer march to Smith's grave at Canongate Kirk. The most senior among them were men who began their journey in the early days of World War II, when in the heat of general mobilization a whole slew of probabilistic methods became the catalyst that produced a lofty new vision of a thoroughly "scientific" economics, shorn of drama and surprises. They included Paul Samuelson, who as a young man began the encoding of economics in mathematical language as a post-doc hidden away at Lincoln Labs in Cambridge; Laury Klein, the father of econometric modeling, who began his career about the same time as a committed Marxist; and Maurice Allais, who spent his war writing up an impenetrable tract on the price system that went virtually unnoticed outside of France. That is, until he was awarded the Nobel Prize in 1988 for having made simultaneously in isolation many of the same discoveries of the mathematical properties of general equilibrium systems that had occasioned great excitement when made in slightly different form in America during World War II.
These two disparate realms, the highly practical and the deeply theoretical, were emblematic of the enormous complexity of a field in which politicians and philosophers seek both to change the world and to understand it. But with the economies of the Soviet Union and Eastern Europe collapsing at the end of a disastrous 70-year experiment in central planning, a certain unavoidable pride of place now belongs to Smith, the man who identified competition as a natural and desirable state of affairs, who analyzed its ins and outs with dry wit and memorable skepticism.
Who was Adam Smith? The son of a customs inspector, born in 1723, Smith took quickly to university life at 14, traveled widely on the continent, became an admirer of Isaac Newton, a friend of David Hume and, with the publication of The Theory of Moral Sentiments, a principal of the Scottish Enlightenment. As a Fellow of the Royal Society in London and a private tutor in Paris, he spent his evenings with the best minds of his generation, including Samuel Johnson, Edmund Burke, Edward Gibbon and Voltaire. When An Inquiry into the Nature and Causes of the Wealth of Nations was published in 1776, it was at first taken simply to be a massive critique of mercantilism, as the system of close governmental regulation of economic and social affairs was then called.
Knocking mercantilism was one thing. Smith, however, offered something to put in its place, a "system of natural liberty" (his phrase for what we today routinely try to capture in the word "capitalism"). It was built on "the natural effort of every individual to better his own condition," and was capable of "surmounting a hundred impertinent obstructions with which the folly of human law too often encumbers its operations." The miracle of the "invisible hand" of competition, Smith wrote, was such that the competitive struggle among persons seeking the greatest advantage induced both capital and labor to forever move from less profitable to more profitable employment -- and so regulated economic society like some smooth-running machine.
Smith lived 13 years after his masterpiece was published. But his project to analyze the effects of universal competition soon was taken up by others, notably David Ricardo. It was refined and reduced to a series of "iron laws" and dire forecasts of slowing growth and subsistence wages that soon enough earned economics the sobriquet "the dismal science" and touched off two centuries of intellectual struggle.
But competition is only part of the story of The Wealth of Nations. An equally important theme in Smith is the contribution of accumulation, investment and the growth of knowledge -- thus, the significance of entrepreneurs, research and development, wars and systems of property rights. In recent years, interest in these mechanisms have begun to regain center stage in technical economics, as a new generation of economists have come forward to put forth formal models of earlier glimpses of the significance of imperfect competition.
In a recent paper, "Increasing Returns and New Developments in the Theory of Growth," economist Paul Romer of the University of California at Berkeley traced the history of this second, less-well-known proposition that is at the heart of the Gospel according to Smith -- and that is the basis for something of a revolution among the young in technical economics today.
Romer wrote: "Ultimately...the factor that is most likely to move the profession toward acceptance of models with increasing returns and even departures from price-taking is the incongruity between what economists actually believe and what their models of growth predict. A very large majority of economists believe that private-sector research and development expenditure is an important determinant of long-run potential for growth and that the presence or absence of intellectual property rights is important as well. Discussions of the economics of the firm or industry typically reflect this belief. It is only in formal models of growth for the economy as a whole that these effects have been absent."
Revolution in growth theory or no, economics will go on as before, sorting through Smith's reputation and the consequences of his views. As Paul Samuelson says: "They had thought he was mainly a practical fellow with a lot of wisdom. They found out there was a complete system in there." Andrew Skinner, the University of Glasgow professor who has spent the last 20 years on Smith, editing a comprehensive edition of his works and preparing various celebrations, has said in contemplation of the end of the apparently endless festivities: "Next I'm going to take on James Steuart. He was the Scottish philosopher who wrote down some of these ideas for the first time, even before Smith." And individual researchers will, of course, go on constructing precise mathematical models of mechanisms that Smith captured in single paragraphs here and there of beautiful English prose.
So in the end, then, Adam Smith may be remembered best as a voice who warned, more persuasively than any other, against the impulse of those reformers who seek to do everything at once. "The man of systems seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces of a chess-board; he does not consider that the pieces of a chess-board have no other principle of motion besides that which the hand impresses on them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own different from that which the legislature might seem to impress on it."
That doesn't mean that Smith was a government-basher, though. "No government is quite perfect," he wrote, "but it is better to submit to some inconveniences than to make attempts against it."
July 15, 1990
Redeeming Karl Marx
May day has come and gone. The great old international holiday of labor used to be marked in Moscow by daylong parades of workers, great shows of military might beneath towering banners of Karl Marx hung from the Kremlin walls. This year the authorities rented out Red Square to foreign companies to set up billboards for the day -- "to raise money for the cash-strapped municipal coffers," as Deborah Seward put it in a dispatch from Moscow for the Associated Press.
"The government declared it a day of 'spring and labor,' with an emphasis on spring," she wrote, adding that participants in the celebration planned to observe a minute of silence for the victims of industrial accidents. "The Russian Information Agency said more than 8,000 people died and 12,000 were crippled in Russian industrial facilities in 1991. About 420,000 people were injured and the agency said there have been no improvements in job safety standards."
So much for communism, Russian-style. But what has happened to Karl Marx? In the West, Earth Day has taken over some of the passion and longing once reserved for May Day. "Critical studies" of various sorts have absorbed much of the intellect that once went into Marxism. David Noble's long-awaited study of the history of science, A World Without Women: The Christian Clerical Culture of Western Science, is the new best-seller. You can still find the collected works of Marx and Engels in university book-stores, but it is the standard economics texts that kids are buying. Does that mean that Marx will be consigned to the intellectual scrap heap? Probably not. As a symbol, he'll be around as long as people hunger for justice -- a tarnished but evocative figure, in whose name great crimes have been committed, not unlike other great religious figures, such as Jesus and Mohammed. Within social science, however, he's likely to be remembered for the introduction of the theory of punctuated equilibria.
This seems likely to turn out to be a rather central point. Perhaps the best way to understand it is to work backward from the present.
At the moment the idea of punctuated equilibrium is most familiar to those who follow evolutionary biology. At one level, punctuated equilibrium simply means that once a species evolves, it will usually not undergo great change, says Niles Eldredge of the American Museum of Natural History in New York (he invented the term in a 1972 paper he wrote with Harvard paleontologist Stephen Jay Gould). Such species stability runs counter to the usual expectation going back to Darwin, that there will be mostly gradual and continuous changes in nature, he says.
More largely, the punctuated equilibrium debate is really an argument about the fundamental nature of change. Is it "easy," or is it "hard"? In Eldredge's phrase, punctuated equilibrium offers a picture of "obdurate stability interrupted only rarely by brief spurts of change." The returns are not entirely in; you can still start an argument by bringing up the term with an evolutionary biologist.
A little closer to home, the idea of punctuated equilibrium is to be found embedded in the history of science, where physicist Thomas S. Kuhn firmly placed it when he published his famous book The Structure of Scientific Revolutions in 1962. Kuhn differentiated between occasional sudden breakthroughs in scientific understanding and the long periods between them of consolidation or "mopping up" of the ground that had been won -- between "revolutionary" and "normal" science, as he put it.
The introduction of this idea of sharp shifts and sudden discontinuities interrupting otherwise stately seeming progress was every bit as disquieting when it was introduced to the study of the growth of knowledge in the 1960s as it had been when it was introduced to physics through the study of the quantum jump in the first decade of the century. Classical physicists had suffered the equivalent of a collective nervous breakdown as they wrestled with the "black body radiation problem," retrieving order in their world only when Einstein and others firmly introduced the concept of discontinuity. In each case, punctuated equilibrium seemed to strike at one of the very deepest foundations at our knowledge of the world, namely the conviction that change would always be a matter of smooth little increments at the margin of things.
Marx apparently came to his views about punctuated equilibrium the way many other social scientists form their views; he overheard it in a neigh-boring field, then found it helped explain the pattern of the facts as he understood them. In this case, it was the geologists who were debating the concept: The "uniformitarians," who thought that climate change must have shaped the Earth's surface only gradually, vs. the "catastrophists," who thought that only a long history of change could explain the physical evidence.
In any event, the "punctuated equilibrium" theory of Marx is still well known today to every high school student. It was a historical view of an economic system that is prone to occasional spasms of dramatic change in its underlying principles of organization.
In its most cartoonish version, there had been antiquity; after a long period of stability, it had given way, quickly and completely, to feudalism. Feudalism had reigned in turn for several hundred years until the capitalist revolution brought it to an end. And capitalism would surely be replaced in turn by a great and worldwide paroxysm that would usher in the world of communism. "Society is no solid crystal, but is an organism capable of change, and is constantly changing," Marx wrote.
Marx's opponents recognized immediately the challenge that his views posed to their science not only in the streets, but at the deepest intellectual levels. The marginalists -- Jevons, Menger, Walras -- answered almost immediately with the easily mathematized concepts of marginal utility and equilibrium analysis, in which all elements are kept in place by mutual counterpoise and interaction, that inform our view of economics down to the present day. Alfred Marshall put on the frontispiece of his great textbook Principles of Economics a line penned by Raoul Fornier in 1627 to the effect that Natura non facit saltum, meaning nature does not proceed by leaps. From his Cambridge pulpit, Marshall's star pupil, John Maynard Keynes, also preached against the very concept of revolution, citing the same pieties about the impossibility of discontinuous change that had comforted Darwin 75 years before.
Looking back, it seems queer how great was the fuss about the deeper aspects of Marx's view of change -- except, that whole classes of people were occasionally "liquidated" in its name. Not Max Planck, not Thomas Kuhn, not Niles Eldredge and Stephen Jay Gould would have dreamt of citing Marx as an established authority in their tradition; it would have slowed immeasurably the reception of their work if they had. Punctuated equilibrium is becoming part of the everyday vocabulary of social science through the back door, not the front.
Indeed, this view of the centrality of Marx's great insight is not widely shared in economics, even today. Take, for example, the latest edition of ,Paul Samuelson's famous introductory textbook (now co-authored by William Nordhaus and nearly as old and as influential as the Marshall Principles text that ran through 8 editions.) Here Marx is represented in the familiar "family tree" of the history of economic thought only as a break-away strut from David Ricardo, leading off to the failed experiments of the command economies, having no influence whatsoever on mainstream modem economics. Economics scholars are only now bringing discontinuities into a central place in their field, mainly through the study of increasing returns to scale. Economics is finally moving slowly toward becoming a history of technology and institutions, as Marx had wanted.
But you don't need even a smattering of recondite economics to understand Marx's enduring place in the modern world. His memorial is the word "revolution," meaning not so much the bullet in the eye of an Eisenstein movie, as the relatively sudden development, generally unanticipated but quick to spread until people "accept the new as unthinkingly as they once opposed it," as Cyril Stanley Smith once put it.
We talk without controversy about the automotive, computer, the birth control revolutions, and so on. This first great glimpse into our understanding of punctuated equilibrium is Marx's legacy to the world. It is this that will never go away.
May 3, 1992
Keynes: Yes, He Was a Genius, but Was He Right:?
On New Year's Day in 1935, John Maynard Keynes confided in a letter to his friend George Bernard Shaw, "I believe myself to be writing a book on economic theory which will largely revolutionize -- not, I suppose, all at once but in the course of the next 10 years -- the way the world thinks about economic problems."
It was like Babe Ruth pointing to the wall in Chicago's Wrigley Field just before he hit The Homer. The next year Keynes published his General Theory of Money, Interest and Employment, and sure enough, within 10 years, the world had come round to him. Keynes' name became synonymous with government "pump-priming" -- heavy spending designed to get a stalled economy moving again -- and economics hasn't been the same since.
Born 100 years ago this summer, John Maynard Keynes died nearly 40 years ago. Can we see him clearly yet?
Certainly he was a genius -- that much was clear in his lifetime. A thoroughly practical man, he was at the elbow of statesmen from the 1919 Peace Conference at Versailles, after which he wrote a famous protest, to the 1944 Monetary Conference at Bretton Woods, where he designed the International Monetary Fund and the World Bank.
A disciple from college days of the philosopher G.E. Moore, he was a card-carrying member of the Bloomsbury literary set, which included Virginia and Leonard Woolf, Clive and Vanessa Bell, Lytton Strachey and Duncan Grant. His skill as a speculator was legendary -- though he is said to have once filled the chapel at Kings College with sacks of grain for three days when he was forced to take delivery on a futures contract.
He amassed a famous collection of Isaac Newton's manuscripts. He employed a great tailor. He married a beautiful Russian ballerina (a pundit wrote, "Was there ever such a union of beauty and brains/as when Lydia Lopokova married John Maynard Keynes?"). And he had a long string of male lovers, too.
But how good an economist was he?
This week, a couple dozen of the world's most prominent economists are meeting in Cambridge, England, to assay the man's significance in a meeting marking the centenary of his birth. Axel Leijonhuvud, James Tobin, Paul Samuelson, Luigi Pastinetti, Nicholas Kaldor, Allan Mehzer, Frank Hahn, Edmond Malinvaud, Donald Flemming and Rudiger Dornbusch are among those who will present papers and critiques.
Nicholas Kaldor, a Hungarian who received his degree from the London School of Economics in 1930, was one of the brightest pupils involved in the spread of Keynesian economics -- and he is perhaps the oldest to be still deeply involved in the field. In a telephone interview from his home in Cambridge, England, last week, Kaldor recalled happily the early 1930s, when Friedrich Hayek and Keynes were dueling over the role of monetary policy, and the word began to spread slowly that Keynes was onto something.
"People were ready for it, they were tired of waiting," Kaldor said. "The General Theory had such a big effect because it appeared in 1936, which was seven years after the Great Depression began.
"By that time, people were thoroughly fed up with both the Depression and with all the remedies which people were passing around, saying you must tighten your belt, you must consume less. All this made things worse instead of better."
Keynes' message, rendered in almost impenetrable technical argument spiked with his lucid prose, was that the Depression had been caused by too much saving, not too little. The answer, therefore, was to pump up demand by government spending, even if it meant big deficits.
In America, of course, President Franklin Roosevelt was already engaged in such "pump-priming," on the basis of instinct and public pressure. And in any event, the government's policy didn't seem to do much good until World War II came along with its mega-stimulus.
But after the war, governments in all the industrial nations retained a good part of the economic role that they had acquired during it. The long, broad and deep postwar boom was thus laid, at least by many Keynesian economists, to the good sense of governments in following Keynesian policies. Lord Kaldor, a man still much given to laughing, retains much of the sense of boundless efficacy that, as much as any particular doctrine, is the mark of a "Keynesian."
"I'm really furious about Mrs. Thatcher. We've got this wonderful oil discovery here. We saved ourselves any number of billions of pounds in imports, and started exporting. At that moment, you see, she should have pursued an expansionary policy. She needed to suck in additional imports in order to enable our foreign customers to pay for the oil which they bought from us.
"But instead, she embarked on austerity. The pound was driven up so high that our manufacturing nearly collaped. We had three million unemployed in manufacturing, and the sector shrank by 20 percent. That shrinkage destroyed the same amount of wealth as the oil created, but it was worse than that, for oil doesn't create as many jobs.
"We could have done wonderful investments, modernized British industry. It would be quite a different country now," Kaldor said.
Mrs. Thatcher, of course, has just been re-elected by a landslide.
The conventional wisdom these days is that while Keynes was great for the 1930s, he is irrelevant -- and worse -- today. As expressed by, say, Martin Feldstein, the Harvard professor now serving as chief economic adviser to Ronald Reagan, the thinking goes like this:
"A major revolution in economic thinking is underway -- a retreat from Keynesian ideas," Feldstein wrote a couple of years ago. "Although scholars will continue to debate whether Keynes' ideas and prescriptions were actually correct for the 1930s, it has become very clear that those ideas were not appropriate for the U.S. economy of the 1960s and 1970s when they achieved their greatest acceptance and influence."
Feldstein singled out three broad areas where he thought Keynes' opinions had been reversed by the modern tide. Keynes' view had been that unemployment was due to inadequate demand for labor, Feldstein said. But the present-day consensus was that the ranks of the jobless were full of people entering and leaving the labor force, who were waiting to be called back or waiting until their unemployment benefits ran out to seek work. "It is a picture that stands in sharp contrast to the image of a stagnant pool of job losers who must remain out of work until there is a general increase in the demand for goods and services."
Moreover, Keynes had been almost afraid of saving, Feldstein wrote, since he wrote in the middle of a Depression, when people should have been spending their money instead of locking it away in banks. The result was Keynes paid no attention to the significance of capital accumulation -- and designed policies to discourage savings. The result of following Keynesian policies, Feldstein said, has been a dangerously low level of savings and investment.
Finally, according to Feldstein, Keynes placed unwarranted faith in the ability of government to meliorate social problems through spending, and the business cycle through taxing. Excessive fine tuning and the expensive programs of the Great Society were the result of rampant Keynesian economics, wrote Feldstein, eyes all but rolling in disgust.
It would be the work of a generation to put things straight, he concluded.
Thus the economists meeting in Cambridge this week find themselves at the end of a tradition, that has been, if not discredited, at least rebuffed. They are waiting, as they say, for a new Keynes.
July 12, 1983
Marx, Keynes and...Who?
He was born just 100 years ago, but while he cut a fairly wide swath in his lifetime, he was quickly forgotten by the public after he died in 1950.
Joseph Schumpeter was finance minister of the Austrian Republic in 1919, lost a fortune five years later in banking, then emigrated and as a world-famous scholar at Harvard became the first foreign-born American to be elected president of the American Economic Association.
He wrote a monumental study of business cycles. And he schooled a generation of Harvard students in continental style. (He boasted that he had wanted to be a great horseman, a great lover and a great economist, but that he had managed only two of the three.)
And finally, he wrote a prescient book called Capitalism, Socialism and Democracy. In it, he argued that modern capitalism was producing the very agents of its eventual destruction in the form of risk-averse managers and hostile intellectuals. But today he is remembered mostly for a history of economic thought pulled together by his widow from boxes full of notes after his death.
Yet there is a persistent tendency on the part of some modern economists to claim Schumpeter's mantle. He was soft on Kondratieff waves, for one thing. He praised Marx lavishly, for another. He was interested in entrepreneurs and technology as engines of economic change, for a third.
So last week, MIT's Paul Samuelson took to the lectern in Boston to restore some lost glory to Schumpeter, his teacher -- but to observe that the scholar was sometimes oversold, too. Samuelson, the first American to win the Nobel Prize for economics, told the annual convention of the Eastern Economic Assn. that Schumpeter's claim on modern attention had little to do with Kondratieff waves, those 50-year cycles that are supposed to contain the technologically driven rhythm of capitalism. That was "folderol" and "moonshine," he said.
In a paper called "Marx, Keynes and Schumpeter," Samuelson noted that both Keynes and Schumpeter had been born in 1883, the year Karl Marx died. "The cloth of history is written with an endless seam. I myself knew a man who knew a man who had known Napoleon," he said.
"Which of the three was the greatest economist? That is a naive question. But if you insist on asking it, my considered response would have to be that John Maynard Keynes was scientifically the greatest economist of this century. Only Adam Smith and Leon Walras can be mentioned in the same breath with him.
"Karl Marx can be measured in the same breath with Mohammed and Jesus, but it is with scientific scholarship that we are concerned here tonight and not with political movements and ideology.
"Without Joseph Schumpeter, valuable insights into the laws of motion of political change would be lost to us, and perhaps one strand of business cycle theorizing. Without Schumpeter, we would know less about economic history. Still, the 1983 corpus of economic science would not be qualitatively different from what it is now" had Schumpeter not lived, Samuelson said. It was Keynes who changed the way economists think.
Instead, "the very greatest contribution" that Schumpeter had made was in the melancholy formulation of the problems facing unfettered capitalism. Capitalism would end in stagnation, Schumpeter wrote in Capitalism, Socialism and Democracy, a victim of its own contradictory forces.
According to Samuelson, "the book reads better 40 years after its publication than it did in 1942 or 1950. It is a great book," he said, "and this despite the fact that its main thesis does not quite convince."
Schumpeter defined capitalism too narrowly, Samuelson said; he had defined socialism too broadly. He had failed to forsee the staying power of the modern mixed economy.
Yet the book anticipated the most imposing work on the subject that has been done since. Mancur Olson, a Harvard-trained economist of unusual depth, has for 20 years emphasized the way groups seeking their own self-interest will collude with government to foul up laissez-faire equilibrium.
"Although Mancur Olson came to Harvard years after Schumpeter died," Samuelson said, "Olson's recent The Rise and Decline of Nations is very much in the Schumpeter vein." Everybody knows Keynes. And everybody knows Marx. But what about Schumpeter?
Joseph Alois Schumpeter (pronounced Chum-pate'-er) was born in Moravia in February 1883. His father, a textile manufacturer, died when he was 4. His mother, then only 26, married a lieutenant-general in the Austro-Hungarian army. Ever after, Schumpeter was given to military metaphors in his writing.
In Vienna at the turn of the century, he proved to be a brilliant student in a brilliant circle. He assimilated the fervent admiration of mathematical precision that was in the air then.
He spent crucial months in England in 1906 and 1907, according to Arthur Smithies, the Harvard professor from whose account of Schumpeter's life most of these details are drawn. Smithies thought the "upstairs-downstairs" life of the time had a lasting impact on Schumpeter, and that Edwardian age seemed to him "the apotheosis of the civilization of capitalism."
Schumpeter married (a woman 12 years older than he) and went to Egypt in 1907, where, according to Smithies, he practiced law and managed the financial affairs of an Egyptian princess. "He performed the financial miracle of cutting rents on the princess' estates by half and doubling her income," Smithies wrote, a feat that has so far escaped the notice of modern-day Laffer curve enthusiasts. He left Egypt two years later and took up teaching in Austria. His marriage ended in divorce.
By 1912, he had become famous. In The Theory of Economic Development, he argued that rate of interest in a stationary state would be zero, a conjectural exercise that is the source of vast significance to economists and of almost no interest to everyone else. In short order he wrote another book, a history of economic theory, and got himself an honorary degree from Columbia University in New York, at the age of 30.
World War I was a hard time for Schumpeter, according to Smithies, and 1918 saw him publish a pessimistic book called The Crisis Of The Tax State. It led to a fiasco. He was named finance minister of Austria under a coalition government in 1919, then quickly had to quit. Inflation took over. Schumpeter refused to talk about the episode in later days.
For a time, he was president of a private bank. It went bust in 1924, costing Schumpeter a substantial personal fortune. He went back to scholarship. In 1932, he left Europe permanently for Harvard.
In the 1920s, Schumpeter regarded himself in a race with Keynes to publish a theory of money. He shelved the project after Keynes published his Treatise on Money in 1931. "And the reception of Keynes' General Theory [in 1936] put his nose permanently out of joint," MIT's Samuelson said last week.
So Schumpeter went to work on the business cycle, and here it is that he is most tantalizing to modern readers. He was looking for an explanation of development. Why did capitalism continue to grow, rather than settle down in a nice stable equilibrium? The answer had to do with the drive of entrepreneurs, and "the will to conquer, the impulse to fight, to prove oneself superior to others, to succeed for the sake not of the fruits of success, but of success itself."
But in Schumpeter's system, the innovations on which these entrepreneurs depended came not continuously, but in "swarms." The pattern of innovation and investment set up not one but three separate "waves" in the process of capitalist development -- the longest being the 50-year cycle named for the Russian economist D. Kondratieff. And the Great Depression, which Keynes had blamed simply on too little spending, owed to all three waves slamming down at once.
To most modern economists, this is so much nonsense. Said Samuelson last week: "Among us professionals, the recent revival of Kondratieff moonshine -- in its disparate Rostow, Forrester, Shonihara, and David Freedman reincarnations -- does not make us look back more kindly on Schumpeter's Ptolemaic epicycles."
Yet in the end, Samuelson said, it was in the field of economic development that Schumpeter had made his mark. The process might not be as neat and simple as he had thought, but there was something to what he had said. The idea of growth as a process of periodic development, "driven by oscillatory impulses from the side of innovation" should be the criterion by which we know a modern Schumpeterian.
March 15, 1983
Emerson: The Philosopher of the Business Class
Ralph Waldo Emerson was the philosopher par excellence of American business, and when he died, 100 years ago this month, The New York Times ran the news across three columns of its front page. For 50 years thereafter, bosses quoted him, workers read him, economics teachers cited him and his books made a small fortune for Boston publishers. The author of "Compensation" and "Self-reliance" was as much a part of the folklore of American commerce as Henry Ford, Thomas Edison and Andrew Carnegie, who a couple of generations later would quote his words.
Emerson was invoked to teach that sorrows were superficial, that short-term sacrifice was necessary to achieve long-time gain. He was consulted as a pastoral psychologist, his work a kind of American Thoughts of Chairman Mao. And the sort of doctrines likely to be quoted would explain an assault at Anzio as much as the determination to recapitalize a failing venture: "Nothing great was ever accomplished without enthusiasm"; "An institution is the lengthened shadow of one man"; "A foolish consistency is the hobgoblin of little minds"; "Insist on yourself; never imitate"; "Trust thyself; every heart vibrates to that iron string"; "In all my lectures I have taught but one doctrine, namely the infinitude of the private man."
Then, seemingly suddenly, the bottom dropped out of the Emerson market. Although the shrewd had seen it coming, a wave of revision of Emerson's reputation in the popular press hit broadside, starting in 1930 with a famous essay in the Atlantic Monthly by James Truslow Adams.
Adams wrote: "As the ordinary unimportant man, such as most of us are, reads Emerson, his self-esteem begins to glow and grow." He wasn't entitled to feel good, wrote Adams; reading Emerson just made men "drunk and drivelling." The Concord sage made life too easy.
Today, instead of Emerson, the "ordinary unimportant man" depends on United Technologies advertisements and books like Winning Through Intimidation, Vince Lombardi videos and songs like "The Impossible Dream" to make him feel good. Emerson is on the shelf. Yale president A. Bartlett Giamatti, in a speech to undergraduates last year, described his writing as "about as appealing as a piece of barbed wire." Meanwhile, at Harvard's Fogg Museum, the statue of Emerson by Daniel Chester French is in dead storage.
The story of what happened to Emerson is a saga that casts some light on the changing ethical environment of American capitalism. Businessmen who wonder whatever happened to good old American stick-to-it-iveness would be well advised to read not Emerson but the volumes of criticism that have been collected in his wake.
The simple facts are that Waldo Emerson was born in Boston in 1803, came to influence in Boston as pastor of the Unitarian Second Church in 1829. The two high-caste religions of the day had been described by Oliver Wendell Holmes as "white-handed Unitarianism and ruffled-shirt Episcopalianism," and Emerson belonged in neither tradition.
He quit the Second Church in 1832 and moved to Concord. His book Nature appeared in 1836, and in 1838 he blasted the Unitarian clergy in an address at the Harvard Divinity School. His break with the church was complete, and within a few years he was known across the nation as the sage of Concord, the Transcendentalist philosopher who exhorted the common man to disintermediate, to think for himself. Though he fulminated gently against Boston, the city made him its sage, too, and for 30 years he lived gracefully in the glory that the intellectual labors of his middle years had won him.
The corpus he left behind was relatively thin: Nature, two volumes of Essays, Representative Men, his Poems. The message is almost impossible to sum up; it was sturdy, hopeful, gracious, intensely interested and open to life -- a constellation of virtues that businessmen and, indeed, leaders ever since have valued highly. No wonder Emerson was a philosopher for the quarterdeck.
Yet, above all, there was a psychology: "A man is a method, a progressive arrangement; a selecting principle, gathering his like to him wherever he goes. He takes only his own out of the multiplicity that sweeps and swirls around him." Matthew Arnold called him "the friend and aider of those who would live in the spirit."
The problem of Emerson, it was thought, was that he didn't look on the dark side of life. The spirit wasn't enough. He had missed something. James Truslow Adams: "Concord in 1840 was an idyllic moment in the history of the race. That moment came and passed, like a baby's smile. Emerson lived in it." That Emerson could be incautiously optimistic was a discovery that didn't escape his contemporaries. For example, Charles Eliot Norton confided to his journal in 1874, "But such an inveterate and persistent optimism...is a dangerous doctrine for a people. It degenerates into fatalistic indifference to moral considerations, and to personal responsibilities; it is at the root of much of the irrational sentimentalism in our American politics, of our national disregard of honor in our public men, of our unwillingness to accept hard truths, and of much of the common tendency to disregard the distinctions between right and wrong, and to excuse guilt on the plea of good intentions or good nature."
Perhaps not surprisingly, in the wake of World War I, there was hell to pay. D.H. Lawrence in particular turned on the Transcendentalist. Emerson had written, "Shall I not treat all men as gods?" and D.H. Lawrence replied, "If you like, Waldo, but we've got to pay for it when you've made them feel that they're gods. A hundred million American godlets is rather much for the world to deal with."
There remains something astonishingly modern about the way Lawrence tore into Emerson. Emerson was merely of "museum-interest," he wrote; he was beside the point. Things had changed. "We've got to have a different sort of sardonic courage. And the sort of credentials we are due to receive from the god in the shadow would have been real bones out of hell-broth to Ralph Waldo."
After Lawrence, the criticism came in torrents. Yvor Winters called Emerson "a fraud and a sentimentalist." Another writer labeled him "a monument to an insufficient way of life." Still another said he had been a fool, incapable of coherent thought.
By the 1960s, the diminished Emerson had become the established version, and by the 1970s, he had become a convenient villain. Columbia professor Quentin Anderson described Emerson as the inventor of the "imperial self," the over-extender of the claims of the individual against society, the hippie, the American soldier in Vietnam. "We are stuck with the parents we've got, the children we get, the cultural moment in which we find ourselves," Anderson wrote -- and the trouble was that Emerson denied it. The closer the nation came to Civil War, the more Emerson exhalted the primacy of the individual.
Even so, says Anderson, the Sage of Concord was too clever not to see the fundamental problem. He describes Emerson's "terrible clairvoyance"; the awful truth was that "the idea of community was dying in him and his fellows."
Nowadays, there is something of an Emerson revival. Harvard University Press, which has been publishing a new volume of Emerson's journals every couple of years since 1960, is now turning out his collected works. A couple of new titles on Emerson appear every year from university presses around the country. Gay Wilson Allen has a new biography out (Viking Press, $25). In the amorphous, but widespread, "new thought" religious movement, Emerson is a powerful prophet. Even some forms of "supply-side economics" owe a debt to Emerson -- author George Gilder is a direct (intellectual) descendent of the sage.
"I find he is gradually reacquiring the stature and influence he had 100 years ago," said Milton R. Konvitz, a professor of law and of labor and industrial relations at Cornell University, who edited an anthology of Emerson criticism a few years ago. "He influenced me while still in high school...I read a few pages of Nature and I was hooked. I think this is not unusual. It happens to lots of people, even today."
April 20, 1982
Aldo Leopold: The Common Vision of Economics and Ecology
In preparation for the avalanche of reports that we must read about the "conference of the century" next month in Rio de Janeiro, I have been making my way slowly through a pair of absorbing biographies of Aldo Leopold (Aldo Leopold by Curt Meine, a University of Wisconsin paperback; and Thinking Like a Mountain by Susan Flader, University of Missouri Press). This gentle man, who was born in 1887 and died in 1948, had much to do with putting scientific ecology on the map of 20th-century American consciousness, both in the popular mind and in the universities. Leopold's story is important to understanding ecology's insistent claim on our attention. In a way, Leopold's story also tells something about the rise of the other science that rose in the 20th century as a key to the 21st, economics -- and even something about the relationship between ecology and economics.
Leopold was a well-born Iowa youth, a Lawrenceville School preppie, a Yale Forest School graduate who joined the U.S. Forest Service in 1909. By age 25, he was managing a million acres of national forest in Colorado on the heavily lumbered upper reaches of the Rio Grande River. In 1933 he became professor of game management in the department of agricultural economics at the University of Wisconsin. Through his writings on the delicate and surprising interrelationships between animals and plants in their habitats, Leopold became known as the man who turned "game" into "wildlife" in the United States -- a man of vast influence on the conservation movement, on a par with Henry David Thoreau and John Muir.
The crucial experiences of Leopold's life had to do with with his early attempts as a forest ranger to maintain stable deer populations in the wild for hunting purposes. To the young Leopold, the problem seemed simple: Get rid of the mountain lions and wolves that preyed on the deer. These hunters were "vermin," "varmints" deserving only to be hunted and killed -- or preserved in zoos as tokens of biological diversity.
But experience on Michigan's Huron Mountain and Arizona's Kaibab Plateau with the odd phenomenon known as deer irruptions convinced Leopold otherwise. Irruptions were episodes in which deer populations suddenly overbred, overgrazed, then suffered drastic reductions in their numbers as thousands starved to death.
Leopold found that while there might be no simple "cause" of deer irruptions (changes in the use of land, protection from human hunters played a role), the predators he had been blithely killing played a crucial part in maintaining balance in wild populations. As Leopold put it, describing the death of a wolf he had shot, "I was young then, and full of trigger-itch; I thought that because fewer wolves meant more deer, that no wolves would mean a hunters' paradise....
"Since then I have lived to see state after state extirpate its wolves. I have watched the face of many a newly wolfless mountain, and seen the south-facing slopes wrinkle with a new maze of deer trails. I have seen every edible bush and seedling browsed, first to anemic desuetude, and then to death. I have seen every edible tree defoliated to the heighth of a saddlehorn....In the end, the starved bones of the hoped-for deer herd bleach with the bones of dead sage, or moulder under the high-lined junipers."
The moral of the story was that man ought to leave complex natural systems alone as much as possible. He began writing passionately about the need for a "new ethic," an ethic of conservation. This was genuinely hard to fathom when Leopold began; today it seems simple common sense.
Leopold thereby contributed to a profound change in the image we have of humankind's relationship to nature (as noted nearly 20 years ago by the philosopher John Passmore), supplanting the image of humankind as a free-floating despot, who could do pretty much as he or she pleased, with the image of humankind as a steward, who serves best when cooperating with nature.
In the 1930s Aldo Leopold was a little-known figure working in an unproven field. Even today his greatest fame rests on the posthumous publication of A Sand County Almanac in 1949. (He died of a heart attack after helping a Wisconsin neighbor extinguish a grass fire.) The book quickly became a classic on the responsible use of land -- a prescient warning that prepared the way for our present-day preoccupations with pollution, climate change, resource depletion and species destruction.
But all the while, ecology was maturing in departments of biology, botany and zoology, moving beyond the sermons and homilies of the early days, beyond the relatively simple discoveries like those of Leopold, to real science. A survey of the origins of the field -- Foundations of Ecology, for example, a collection of classic papers published by the University of Chicago Press for the American Ecological Association -- discloses an increasingly arcane field built by specialists of whom you have never heard.
Then came the explosion. As recently as the 1950s humorist Stephen Potter (Gamesmanship) could still joke that a nice long boring discussion of "oikology" was a perfect strategy for terminating a romantic relationship. By the late 1960s it was not a bad strategy for starting one -- at a rock concert or in a bar, even. Since then the field has acquired its own abstruse mathematical models.
But what to do with economics? Well, aside from the obvious fact that the words are cognates -- from the Greek, meaning household -- both concern behavior of intricate, interdependent systems of enormous diversity, natural and man-made. Both rely on a toolbox of nearly interchangeable concepts, including equilibrium, competition and optimization. True, ecology has a healthy concern with levels of organization that is lacking in economics; the stubborn facts of the natural world impose a robust empiricism on ecologists, while economists continue to operate cheerfully with their mathematical axioms. But their new-found proximity surely will bring the fields closer together. Promising work on organizational ecology has begun to appear.
Moreover, just as the dependability of ecological knowledge was borne in upon us by a series of "natural experiments," so too the overwhelming significance to our lives of economics has been established in a similar way. The collapse of the planned economies is, in its way, rather like the deer irruptions -- unmistakable evidence of good intentions gone awry. The bursts of inflation and collapsing productivity that followed the breakdown of the international monetary system in the early 1970s may yet turn out to be seen as having been a little like the eutrophication of Lake Erie -- a near-disaster reversed by stringent, well-conceived policies. Governments' responsibility for regulating markets are coming to be seen as resembling the responsibility of ecologists for overseeing biota: a matter of letting natural processes have their way as much as possible, with sophisticated and light-handed intervention as a last resort, not the first response. As the mainspring of the system, the concept of "profits" may not have taken on quite the rosy glow of "wildlife," but at least it no longer shares the connotation of "vermin," that is, of being a category whose eradication devoutly is to be desired.
Wildlife management is relatively easy, Leopold liked to say; human management is the problem. In this, the ecologists have more to learn from the economists than vice versa. Development and the Environment, the World Bank's annual World Development Report, timed to anticipate the circus-like meeting next month in Rio, lays out the economics of development and the environment with admirable restraint and clarity.
But even here, the influence between economics and ecology works both ways. Recently the World Bank has been circulating an important new paper by a Berkeley professor of energy and resources named Richard Norgaard. Norgaard argues that economists should abandon their cherished practice of discounting the cost of current developments over the life of the investment, because such thinking tacitly assumes that all the rights to the riches of the earth belong to the present generation.
Not so, argues the author of "Sustainability and the Economics of Assuring Assets for Future Generations." Norgaard believes that distribution of resources between generations should be equal, as a matter of course. It is a point worth pondering from an evolutionary standpoint -- something like what Leopold meant when he wrote in 1944, "Only the mountain has lived long enough to listen objectively to the howl of the wolf."
May 24, 1992
Frederic Bastiat: For the Provisioning of Moscow
A standard cocktail party remark today goes like this: To better understand the problems facing the world of 1992, read The Federalist Papers. These 85 short essays in defense of the Constitution, written by Alexander Hamilton, James Madison and John Jay, were published in New York City newspapers in the two years leading up to the agreement's ratification by the 13 colonies. They are indeed great essays, and Madison's argument that it is more difficult to maintain liberty in a small territory than a large one is relevant to the former Soviet Union.
But with a Big Bang of price decontrol ushering in 1992, you might just as well counsel puzzled Muscovites to read Frederick Bastiat instead. To the extent that there is any protection against the backlash accompanying the end of 74 years of price controls, it lies in the better understanding of what economists like to call "the price system." And Bastiat, according to Joseph Schumpeter, was "the most brilliant economic journalist who ever lived."
Not that you'll be likely to know him. (Where to get the original Bastiat? Robert Heilbroner devotes a few well-considered pages to him in The Worldly Philosophers, his still-indispensable introduction to the lives of the great economists. Otherwise, the French sage has been kept in print by libertarian economists. Several titles are available at bargain prices from the Foundation for Economic Education in Irvington-on-Hudson, New York 10533.)
Born in 1801, Bastiat died in 1850. He was unsuccessful in following his father and his uncle as merchants and instead became a gentleman farmer. But as R.F. Hebert says in The New Palgrave Dictionary of Economics, Bastiat "showed no more aptitude for agriculture than he had for commerce. So he became a provincial scholar, establishing a discussion group in his village and reading voraciously."
It was the turmoil of the 1840s that brought Bastiat into his own. That state of affairs is accessible to 20th-century Americans chiefly through the prism of Victor Hugo's Les Miserables. Bastiat was moved by the formation of the Anti-Corn Law League in England to defend free trade in France, issuing a furious stream of pamphlets against government intervention in bourgeoning international trade. Savagely funny, Bastiat is sometimes described as being "a combination of Voltaire and Franklin." A Gallic George Gilder is more like it.
At one point, for example, he wrote cleverly of the need for a law against sunlight, the better to promote the interests of French manufacturers of candles, streetlamps and everything else connected with lighting. At another point, he suggested that, because the citizens of Bordeaux wanted a gap in the railway there, the better to enrich its merchants, that similar gaps be established at every other city between London and Madrid. The resulting "negative railway" would make France the richest country in the world. Amid the general enthusiasm for socialism, culminating in the publication of The Communist Manifesto, Bastiat propounded the equal and opposite doctrine of "harmonization," an argument common to Adam Smith, Francois Quesnay, J.B. Say and Schumpeter that mutual interests among the social classes greatly outweigh their antagonisms -- and that a certain amount of convergence would be the result.
At his best, Bastiat penned passages that remain wonderfully clear insights into the overall workings of an economic order. "Upon entering Paris which I had come to visit, I said to myself, here are a million human beings who would all die in a short time if provisions of every sort ceased to go towards this great metropolis. Imagination is baffled when it tries to appreciate the multiplicity of commodities which must enter tomorrow through the barriers in order to preserve the inhabitants from falling prey to all the convulsions of famine, rebellion and pillage.
"And yet all sleep at this moment, and their peaceful slumbers are not disturbed for a single instant by the prospect of such a catastrophe. On the other hand, eighty departments have been laboring today, without concert, without any mutual understanding, for the provisioning of Paris."
What Bastiat was delineating here recently has come to be called the "self-organizing" quality of market economies. It was this that Adam Smith had described 75 years earlier as an "invisible hand" that led individuals, through the pursuit of private profit, to promote an orderly society "which was no part of [their] original intention."
The rest of economics is relatively simple, at least at an intuitive level. It has to do with the interplay of the forces of supply and demand, of selling and buying, of effort and desire. The theory is that the rising bread prices in Moscow are supposed to persuade more people to go into the baking business. As more bread reaches the stores (and more people cut their consumption because of high prices), the price will fall back toward "normal" levels -- and the lines that are ubiquitous in Moscow today will fade to an unpleasant memory.
There are imperfections in markets, of course. Often businessfolk seek to circumvent their smooth operation (a fact oft-noted by Adam Smith). Governments will always retain far-reaching economic responsibilities. But a belief that this nearly miraculous order will materialize through the simple act of deregulation is what is necessary now in Moscow -- and Beijing, for the matter.
It won't be easy: experience with market processes is simply in the air in the Western democracies. But it may not be as hard to develop as is widely expected in the newly emerging market economies, either -- especially if Americans are empowered to render aid in various forms. Certainly citizens of the newly democratizing nations will need all the help that they can get in understanding what is happening to them -- including, one hopes, not a few home-grown Bastiats.
Now the really interesting thing is the opposition between Bastiat and the economic theorists, both of his day and those who came after. Schumpeter described him as "a bather who enjoys himself in the shallows and then goes beyond his depth and drowns." Alfred Marshall said he understood economics hardly better than the socialists against whom he inveighed. And, indeed, the extensive theory of value that Bastiat devised made scarcely a dent on technical economics, as formulated by David Ricardo, Leon Walras, W.S. Jevons and other 19th-century thinkers.
Present-day theorists, Ricardo's heirs, met last week in New Orleans at the annual convention of the American Economic Association. They've come a long way since then. And their concerns are vital as today's headlines, though their interests are often concealed from laymen by inaccessible mathematics and opaque titles.
But the truth is that technical economists are not very good explainers for the most part. Economics has progressed a good deal in its understanding of certain aspects of its world. But more and better financial journalism, from economists and others, is what the world needs now.
January 5, 1992
The Search for Kondratieff's Wave
Nicolai Dimitriyevitch Kondratieff was a brilliant Russian economist who thought he had deciphered the secret rhythm of capitalism -- but he died in obscurity in the early 1930s in a Siberian prison camp, the victim of political commissars who thought his prognosis for the West too favorable.
Fifty years later, however, economists are still debating the existence of the "long wave" Kondratieff said he detected in the history of capitalism. And they argue whether the severe crash that this Kondratieff wave predicts really lies ahead.
A variety of pundits, including Geoffrey Barraclough of Brandeis University, Jay Forrester of MIT and W.W. Rostow of the University of Texas at Austin, have predicted a dolorous depression in 1983 or 1984 as a result of a deep structural wave.
Last month, at a session of the American Economic Association (AEA), a half-dozen top experts in the field considered the evidence for different mechanisms that might explain the observed pattern: institutional innovation, technological innovation, relative price shifts.
Their colleagues' conclusions, expressed privately and taken away to colleges and universities across the land, seemed for the most part a variant on the old Scottish verdict: not proven, and, for the most part, not interested.
Most economists continue to view the construction which "long-wave analysts" put on events as mere speculation, as nonsense and worse. Certainly the 50-year "Kondratieff wave" is in no danger of supplanting the mainstream concern of economics, which focuses on the business cycle, the 4- to 7-year dance of money, prices, business investment and consumption.
Indeed, the very existence of the session owed heavily to the efforts of Sir Arthur Lewis, the development economist and Nobel laureate who was president-elect of the AEA. He loaded the convention program with interesting and unusual sessions on productivity growth and economic development -- and personally put together the Kondratieff session.
"We probably wouldn't be here but for Shuman and Rosenau's book," grumped Martin Bronfenbrenner, naming a popular book about the Kondratieff wave of a few years back as he opened the session. Then Edwin Mansfield of the University of Pennsylvania and Nathan Rosenberg of Stanford University, perhaps the foremost American experts on the history of technical change, dismissed the evidence for long waves as almost totally lacking.
On its surface, the idea of Kondratieff is simple. It is to be seen most clearly in the history of the American consumer price index, but the same wave appears, suitably lagged or leading, in other economic variables. There does indeed appear to be a pattern. Three times in the last 180 years, the price level has drifted slighty upward for 20 years or so.
Then, usually during a war, it has shot up sharply to a fever spike, only to be broken by a fall -- a "primary recession," in Kondratieff parlance. Then, after a brief attempt to resume its upward progress, it falls again -- a "secondary depression," the Kondratieff analysts say.
The obvious questions are: will it happen again? Why did it happen before? Economists ordinarily explain such trends on the basis of mundane factors like wars and bad harvests, but Kondratieff thought he discerned a deeper reason for the cycle in the erratic pace of technological progress.
A cluster of innovations would turn up, followed by a binge of investment and good times. Then there would be overbuilding, and finally a crash. Depressions occur when high-powered innovations mature -- like steam engines in the 1870s, electric utilities in the 1930s, or automobiles and jet airplanes in the 1980s.
The idea probably would have died with its inventor but for Joseph Schumpeter, the thoroughly respectable Harvard economist, who took Kondratieff to his bosom and elaborated his ideas. Schumpeter, who loved cycles of all sorts, divided the recent history of the world into periods of Kondratieff "upswings" and "downswings," alternating 25-year periods of boom and bust, which it was relatively powerless to escape.
According to present-day analysis, the first Kondratieff upswing began in Europe in the 1780s, with the spread of steam power, and a host of lesser inventions. It ended 30 years later, with a series of crashes following the Napoleonic Wars. Wars often occur toward the end up an upswing, Kondratieff said.
The second upswing coincided with the extension of railroads in Europe, England and the United States, and with the extension of steam power to shipping, which in turn fueled a world export boom in textiles. A collapse again occurred -- this time after the American Civil War. Stagnation ensued, until the age of electricity and cheap steel came along to rescue the world from economic depression in the 1890s.
The third Kondratieff upswing, according to its believers, rode on the wave of both the internal combustion engine and cheap electricity in the first two decades of the 20th century. By the mid-1920s it was pretty well spent, and it came to an end with the great crash of 1929.
The fourth Kondratieff upswing is the one which began in the heat of World War II. Based on plastics and consumer durables, it saw the world through more than two decades of banner growth, before giving way, in the mid-1970s, to the first tremors presaging a later shock.
To be sure, there are almost as many variations on the timing of these cycles as there are believers in them. MIT's Paul Samuelson has said, for example, "One believer almost annihilates the other. If the Rostow explanation works, there is nothing left for Forrester to latch onto, and vice versa." Samuelson was referring to the two most widely known proponents of the Kondratieff view, both mavericks. Walt Rostow has argued that the Kondratieff wave is generated by periodic shifts in raw material and food prices. MIT's Forrester, on the other hand, has argued that the logic of the wave turns on technological innovation.
Rostow, an economic historian widely admired by his colleagues, attended last month's session at the economists' convention, but Forrester, a pioneering computer engineer held in high esteem by businessmen, didn't turn up.
Perhaps the greatest excitement was occasioned by a paper prepared by three well-know radicals who argued the Kondratieff wave from a Marxist perspective. Samuel Bowles of the University of Massachusetts at Amherst, presenting the paper, said it is the famous "falling rate of profit, not inventions, that drives the wave."
"Long waves require the bunching of something," said Bowles, "but it is the bunching of institutions, not inventions."
Bowles said eras in the history of capitalism fell neatly into periods along the peaks and valleys of the wave, with periods of contraction following waves of expansion. Each time real wages climb high enough to impair profitability, Bowles said, institutional forces bring about a depression to knock them back down, a sort of cyclical "emiseration" of the worker. It is just such an attempt to make the cycle work again that is under way now, Bowles said.
"I'm not a Marxist, but their interpretation suggests a much more political, social way to view the cycle," says Robert Zevin, a Boston economist who was one of the discussants at the session. "Many of us felt we always knew that intuitively, but I thought they did a very persuasive job."
In the end, however, the real test of the Kondratieff wave comes on the numbers. Do you expect prices to fall? Most economists now believe the conditions are now in place for a normal expansion of the economy. Yet most long-wave fans believe the computer-driven economy of the future will represent a fifth Kondratieff expansion.
So if we go much longer without a depression, the Kondratieff wave will be, once and for all, just one more great-sounding economic idea that didn't work out. Not that it will cease to have its devotees, for people are always able to find excuses for why their pet ideas didn't work out exactly as expected.
But next time they will have an even harder time getting onto the program at the American Economic Association.
January 16, 1983
The New Palgrave: Smelly Cheese for Roquefort Addicts
Economists are different from the rest of us. To be sure, they are different from one another, too. An article by David Colander and Arjo Klamer in the new journal, Economic Perspectives, is causing something of a stir in the profession. They report a survey of graduate students in six top universities; their results reveal some significant differences of opinion among young economists about what they have learned and its relevance -- this division into technique-driven schools being a slightly scandalous situation, in the authors' view.
But from the outside of economics (and most often from the inside, too), these differences of opinion are less interesting than the enduring similarities that make the collective analytic standpoint of economics distinctive among all other attempts to parse the human condition. Practical men and women can shrug off the doctrinal disputes among "new Keynesians" and "new classicals" with jokes. Idealists may take the inability to achieve quick consensus perhaps more seriously than it deserves. But those working hard inside the field must expect that one after another, the differences of opinion will be resolved some day -- and therefore stick to their guns in the meantime.
A wonderful place to glimpse both the tension and the underlying unity of economic thought is The New Palgrave, A Dictionary of Economics to be published in America by the Stockton Press next month.
What's wrong with the old Palgrave? Nothing, except that the last attempt to survey economics whole was published over a 20-year span beginning just 100 years ago. A good deal has changed since R.H. Inglis Palgrave and the eminent Victorian economists who were his contributors surveyed the field from "abatements" to "workmen's insurance" and thereby put an enduring stamp on the way economics was taught. Palgrave's dictionary turned out to be a series of snapshots of enduring value of a discipline just on the threshold of professionalization; 50 years after its last revision, the best economists were still using it as a benchmark against which to measure change.
The New Palgrave is the product of the stylish imaginations of three economics professors -- Cambridge University's John Eatwell, Harvard's Murray Milgate, Peter Newman of The Johns Hopkins University -- who organized nearly 1,000 contributors with a view to showing what had changed since then (and how) and what has not. It includes 655 biographies, and 1,261 subject entries, ranging from "absorption approach to the balance of payments" to "zero sum games." (Michael Bacharach begins, "Zero sum games are to the theory of games what the 12-bar blues is to jazz: a polar case and a historical point of departure.") The essays are technically sophisticated, but, in general, they are pitched for the ear of the intelligent layman, accessible and concise.
Best of all, they are (courteously) contentious; paeans to monetarism exist side-by-side with wry dismissals of the dogma; great men are praised and then damned by different authors on the same page. "Our one stricture was that there be no surveys," says editor John Eatwell. "We were very much against the pseudo-Olympian style. Every article has a definite point of view." For anyone really interested in the field, the result is about as addictive as smelly cheese.
At $650 for the four-volume set, The New Palgrave may not be an appropriate New Year present for the struggling graduate student or the businessman-beginner with Something To Say. But it belongs in the library of any organization where economic advice is dispensed or consumed; and a thorough acquaintanceship with it should be part of any economist's kit of tools.
The old Palgrave was the product of a somewhat lonely labor, despite the fact that it was only Palgrave's editorship of The Economist magazine that enabled him to corral a high-quality stable of contributors. His three-volume work achieved its reputation for being a comprehensive, high-quality picture of the state of the art despite certain idiosyncracies.
Left out altogether was Alfred Marshall, for example, the Cambridge don who completely dominated the late Victorian age. And the only living economist whom Palgrave included was Leon Walras -- a wise pick, you might think, says editor Eatwell, but in fact included mainly as a vehicle for writing about the (spurious) triumphs of his illustrious father.
The New Palgrave hopes to make no such mistakes. Paul Samuelson is there, in a very sober and restrained essay by Stanley Fischer. Milton Friedman is included, in an effusive article by Alan Walters. Kenneth Arrow, born in 1921, doesn't get an entry (only those 72 and older are included -- some 75 living economists in all) but there are more than 20 entries under Arrow's name in the extensive index. For the rest, the dictionary is the equivalent of an all-star team writing about members of the hall of fame. Among the locals: Cary Brown on Evsey Domar, J. Fred Weston on David Durand, Donald McCloskey on Charles Kindleberger, Paul Streeten on Thomas Balogh and Gunnar Myrdahl, Gustav Papanek on Edward Mason, Robert Bishop on Sir E.H. Phelps Brown.
There is William Baumol, the actor, on performance arts; Hendrick Houthakker on futures trading; Dale Jorgenson on production functions and vintages; Harrison White and Robert Eccles on producers' markets; Alicia Munnell and Joseph B. Grolnic on indexed securities; Laurence Kotlikoff on Social Security; Andreu Mas-Colell on collective equilibrium; Peter Diamond on search costs. A number of entries from the original Palgrave are retained, many by F.Y. Edgeworth and P.H. Wicksteed. And, of course, there is a great deal of mathematics, including a serene essay by Gerard Debreu that is every bit as accessible as are forbidding the articles on gauge functions, saddle points and Bayesian inference.
Certainly, The New Palgrave reflects the political tastes of its editors. Chief editor Eatwell is economic adviser to Labor Party leader Neil Kinnock, and the Macmillan Publishing Co., which conceived the project, long has been associated both with publishing and politicizing John Maynard Keynes. (The late Harold Macmillan, former prime minister, was chairman of the firm that today his grandson Alexander runs.) Certainly, the Analytic Left is well-represented in The New Palgrave: Robert Heil-broner writes on capitalism and wealth; John Roemer on Marxian value analysis; Stephen Marglin on investment and accumulation; Francis Bator on fine tuning and functional finance; John Cornwall on inflation and growth, long cycles, stagflation and total factor productivity. And certainly the conservative new classicals are under-represented: there is but one piece by Thomas Sargent on rational expectations and none by Robert Lucas or Robert Barro. Neither did Harvard's Martin Feldstein nor Stanford's Robert Hall have anything to say about the considerable conservative revolution that they and their friends have made in the past 20 years. The Palgrave's contributors' list may not be much of a predictor of the future course of the Nobel Prize in economics.
But in general, the tugs-of-war of the past are well-limned; take the K-section, for example, on either side of Don Patinkin's article on John Maynard Keynes: there is Luigi Pasinetti on Roger Kahn and Adrian Wood on Nicholas Kaldor (both well-to-the-left of center) -- but a few pages later, there is George Stigler on the Chicagoan Frank Knight followed by David Belsley on the late Edwin Kuh, the computer pioneer who served as consultant to George McGovern's presidential campaign. As John Eatwell says, "part of the pleasure is the wonderful juxtapositions."
It's clear The New Palgrave is already a great success in its own terms; it includes in one way or another most of the best economists in the world -- 80 percent by the editors' reckoning. It seems to be a commercial success: 1,000 sets sold in Japan, 2,000 in the United States, another 2,000 in the U.K. and Europe. (When will it become available in paperback? Macmillan says its 20-volume Grove Encyclopedia of Music, published in 1980, is still selling well in hard-cover. ) What remains to be seen is what has been overdrawn, and what has been left out. This will come about through the slow process of scholarly opinion-making. And the early candidate for the Oops Award is surely Benoit Mandelbrot, the maverick IBM mathematician whose discovery of fractals stemmed from some early work on cotton prices. But in a sense it doesn't matter in the least. Economics is almost sure to change in the coming years, but for many years to come, The New Palgrave is likely to be the best record of where it has been.
December 27, 1987
In a little essay called "Ground Under Our Feet," Richard Ely Recounts how he and others founded the American Economic Association in 1886. It was a spirited meeting: its real business had to do with cutting out the conservative advocates of laissez faire in favor of more "progressive" scholars, excluding the religiously motivated investigators in favor of practitioners of a more "disinterested" economics, and with long-range plans to insulate economists from the general public. Long years later, Ely was still circumspect about these aspects of the occasion; they are described in detail only in Thomas Haskell's excellent account, The Emergence of Professional Social Science.
With the ink barely dry on the charter, however, Ely and E.R.A. Seligman tramped through the rain to the office of the Associated Press in Saratoga, "to see that we had such publicity as we both felt we deserved." Economists and those whom they have excluded have been arguing with the press ever since about exactly what each subsequent story is worth.
What is a reader -- or his proxy, the reporter -- to do when confronted with the vast array of double-domes and number-crunchers who can't agree on anything in the world worth knowing? The deficit is going up or down, productivity is a problem or it isn't, the savings rate a disaster or maybe not, the United States is in dire peril or else it has never been stronger. It is one thing when desk sergeants and community activists tell differing stories about what happened last night in the 18th precinct. They are expected to disagree. So are colonels, diplomats, politicians, lawyers and land salesmen.
But what are we to make of the myriad voices of the economic and financial commentary community? There are Wall Street touts and Washington policy jocks, self-taught businessmen and gifted politicians, Nobel finalists and interesting gadflies, textbook authors and left-field visionaries -- all vying for our attention. Amid the constant stream of chatter from the stands and the bench, and often irrespective of it, the world constantly is going forward powerfully in the hands of businesspeople, practitioners who are reflective and otherwise, inventors, bankers, corporate planners, magnates, organizers, investors, regulators. Conflicting views, anyone? At least Americans don't have a Likud GNP and a Labor GNP, as they do in Israel.
At bottom, reporting economics is no different from reporting anything else. The cast of characters is just a little more complicated, that's all. The reporter's tools, as Stanley Karnow once described them, are nothing more than background knowledge and skepticism. In the name of background knowledge, I will sketch here a few things worth knowing about the production and distribution of economic knowledge.
Technical economics, as we know it, appeared on the scene a little more than 200 years ago. Indeed, The Wealth of Nations was published in 1776, the same year that the American colonies cut loose from England.
To be sure, there were plenty of beginnings before that. On the one hand there were politically-motivated students of trade like Barbon and Cantillon who sought to advise kings on the best way to raise taxes or otherwise compete successfully among nations. These thinkers were then known as mercantilists; today they tend to identify themselves as political economists -- with an emphasis on the political.
On the other hand, there was the tradition of "political arithmetic," associated with Gaunt, Petty and King. Begun in frank imitation of the successes of early physicists like Issac Newton and Robert Boyle and physiologists like William Harvey, this school aspired to create a truly "scientific" economics -- hence its concern with objectivity and empirical inquiry.
Technical economics burst decisively on top with the work of Adam Smith and his less-appreciated contemporary Sir James Steuart. The galvanizing concept at the heart of The Wealth of Nations was the idea of the economy as a big interdependent system, in which everything was dependent on everything else, rather like celestial mechanics. To convey the working of this system, Smith conjured up the famous metaphorical "invisible hand," which led every individual, pusuing his own self interest, to promote the greater good of all, giving rise to a order "which was no part of his intention." Lowly porters, rich landlords and everybody in between would come together to contribute their unique skills in the self-organizing system of the market.
To put it slightly differently, the fundamental idea in Wealth was the concept of negative feedback, the notion that the price of tea in China -- and every other price -- was somehow self-regulating, that if its price might rise, less of it would be demanded and more would be supplied, until the price returned to its normal level, and the system that supplied it -- tea plantations, sailing ships, merchant bankers, warehousers and jobbers and retail shops -- returned to "equilibrium." This glimpse of a systematic, predictable interdependence among individuals organized in markets was quickly seized upon and rendered more precise by David Ricardo. It has been the indispensable core of economics ever since.
In a second vital turn, just a little over a hundred years ago, economics went professional -- that is, it ceased being a field for talented amateurs and became a self-selecting community which aped the social organization of science. This is the movement described so well in Thomas Haskell's book. Economists came to be those who taught in colleges and universities. They learned from texts, published in journals. They freely gave advice to politicians and business but they relied on one another for credentials and advancement. About the same time, their field underwent a considerable deepening, which gave a distinct psychological cast to their investigations. The central tenet of this "marginal revolution's" new emphasis on the psychology of value has been summed up this way: pearls are expensive not because men dive deep for them; rather men dive deep for them because they are expensive. Economists have been talking about the "utility" of pearls ever since.
(Largely left out in this transformation were the political economists, those enthusiasts for policy who sought to ground their prescriptions in some theory of how the world works that has not been submitted to economists. When you meet someone like, say, Jude Wanniski or Robert Reich, who identifies himself as a political economist in the pre-Marshallian sense, what he means is that he dissents from all that has happened in economics these last 100 years. He simply is operating in a different tradition.)
The rest is simple. From the 1870s until 1945, the world capital of economic understanding was Cambridge, England. Alfred Marshall gave way to John Maynard Keynes; his smooth Victorian confidence as propounded in the 24 editions of his Principles yielded to Keynes' preoccupation with the central role of government in everyday economic affairs, described in The General Theory of Employment, Interest and Money.
With the end of World War II, however, the center of intellectual inquiry shifted to Cambridge, Massachusetts, and, in time, a couple of counterrevolutions occurred -- launched mostly from Chicago. Keynes, having been widely diffused, was rolled back on the topic of money by Milton Friedman, on interest by Robert Lucas, on employment by Martin Feldstein. All the while the field of technical economics itself has only grown. The number of economists employed in goverment, industry and finance since World War II has simply exploded.
Business and financial journalism grew up from quite other roots than these. For at least a couple of centuries, neither reporters nor their editors were very interested in economists. After all, it wasn't economists who built the modern world; it was businesspersons, investors and inventors and salesmen and empire-builders who created the far-flung and intricate international economy. It was these movers and shakers and their stock touts and lawyers and press agents that the financial press covered, from the beginning of the modern industrial economy. For a long time, most journalists paid relatively little attention to the economists. They were interested in the markets themselves.
The key event in the emergence of financial journalism probably was the shift during the Napoleonic Wars of the center of world finance to London from Amsterdam, according to Richard Fry's essay in The New Palgrave: A Dictionary of Economics. In London there was, for the first time, a large middle class interested in opportunities for investment. The newspapers were not slow to attempt to shed some light. Thomas Massa Alsager, a cultured businessman, was appointed the first financial editor of the London Times in 1817. He set a pretty good example, according to Fry. "For some years he stood alone in warning investors that the great boom in railway collections was bound to collapse. The Times lost a great deal of adverstising but the proprieters were high minded and Alsager was proved right."
In economic journalism, the signal event probably was the founding of The Economist magazine in London in 1843, and the appointment of the great Walter Bagehot as its editor in 1857. Bagehot was perhaps the first man to write about economics as a modern science writer might; that is, he reported the views of some leaders of the field as though they were most probably correct; he was honest about disagreements between experts when they arose; he mixed in liberally his own convictions. Ever since, The Economist has reported on professional debates with distinction, though never flinching from imposing its own journalistic convictions on events. Oscar Hobson's brief but extremely influential tenure as editor of the Financial Times in the early 1930s should be noted, as well as the rise to prominence of the Neue Zurcher Zeitung.
In the United States, there probably has been a good deal more action from the magazines than the newspapers. The New York papers had for many years covered Wall Street aggressively. The long boom of the 1920s persuaded Henry Luce to launch Fortune and the McGraw family to start Business Week to compete with more personal magazines like Forbes and Barrons and Duns. Barney Kilgore built The Wall Street Journal into a national business daily in the years following World War II, utterly eclipsing the daily Journal of Commerce. The founding of the McGraw-Hill economics department by journalist-turned-economist Dexter Keezer deserves special mention; it contributed a steady stream of talent to The New York Times, notably its great economics columnist, Leonard Silk. The Times, in turn, has greatly influenced the television networks.
Today, a remarkable array of reporters and editors for the daily and electronic press, financial magazines, trade journals and newsletters track developments in the global economy -- in the U.S., Europe and Japan. Coverage is not as good as it could be; it never is: but certainly there is plenty of it.
The degree to which technical, university-based economics informs our view of the world shouldn't be underestimated, but it shouldn't be overstated, either. Today, bright kids go from classroom training at the London School of Economics to doing narrative and news on the money wires and soon leave their formal training far behind. Wall Street economists have PhDs, but they wear them lightly. Business schools see to it that their graduates have only a smattering of managerial economics, lest they come to think that they know more than they really do. All this community is loosely yoked in a great but fuzzy hierarchy at whose uppermost reaches are the great university departments.
But economics is not the only explanatory game in town. Lawyers, historians, political scientists, sociologists, anthropologists, social psychologists, linguists all have something to contribute. A good many independent thinkers and gadflys dwell on the outskirts of the field as well, latter-day mercantilists with strong positions on the issues but few ties to the academic traditions.
These persons tend to obey Paul Samuelson's dictum: over time, they either grow closer and are assimilated into economics or they grow much farther away and are forgotten. But at any given moment, they -- and not the professoriat -- may be right. A prime example is Jane Jacobs, whose insights into the economies of cities have been for the most part slowly confirmed and adopted by technical economists. Other major heterodox thinkers, from Henry George to Thorstein Veblen to Walter Isard to Jay Forrester can expect similar treatment. And of course the "supply side" thinkers who raised a ruckus over taxes in the late 1970s are a prime example of how grassroots, outside challengers can have a major influence on the field.
Indeed, for journalists and political types, who need right answers to serious problems in real time, the lesson from the constant tension between insiders and outsiders is a sobering one. It is that the lost key is often to be found some distance from the lamplight. The economists are at all times full of certainty. But a little knowledge, excessively depended upon, can be a very dangerous thing -- a fact that is, happily, well known to most practicing politicians.
For all these reasons, there is a vast difference in point of view between the successful journalist and the good economist. Economists are those who have been "hit by the meatball" (as Robert Crumb once described the experience of conversion); reporters will take a more agnostic stance towards economic knowledge, as it is communicated by the texts and in the seminar rooms. The basic distinction here is between those who see the story as being somehow entailed by the theory they have learned and those who don't embrace the theory. For economists, the outlines of the map are already known; in some sense they already know the answers. Good journalists are good precisely because they don't.
So professors will continue to stream down to the AP office with their press releases. Wise journalists will continue to scratch their heads and finally ask each other (and not their academic advisers), What's this story worth?
On "Tech-ing It Up"
Are you interested in the way the world works? Pick up a journal of technical economics and you will be confronted with impenetrable prose and abstruse mathematics that is quite beyond the ability of businessmen, investors or even most economists to read. The recent blocking of the nomination of Harvard political scientist Samuel P. Huntington by members of the National Academy of Sciences is a reminder of a long-simmering dispute about the social sciences that takes place at every level of debate. For all the window-dressing, how scientific are they, anyway? A prime suspect is economics, which has undergone a tremendous high-tech revolution since World War II, with advances in technique coming so fast nowadays that the current crop of theorists has left most of the rest of the profession behind, in their rhetoric at least. Is all this formalization desirable? Is it necessary?
The answer, it will come as no surprise, seems from the boundaries of the professions to be both yes and no. It is always difficult to discriminate between the significance of criticism that arises from within an institution and criticism that is directed at it from outside. The great preponderance of criticism from outside economics probably is unmerited -- despite the fact that there is always some Marxist, Austrian or journalist ready to denounce the field as a wild-goose chase or even as wholesale fraud. But there is a constant chorus of criticism from within the field that bends it, shapes it and keeps it a living, changing discipline. The National Academy of Sciences furor probably belongs in the former category, despite the credentials of the luminaries who administered the snub.
The National Academy of Sciences is a largely honorary organization designed to single out the nation's top scientists in five classes: the physical sciences and mathematics, the biological sciences, engineering and the applied sciences, medical sciences, and behavioral and social sciences. Each year sections within these classes nominate 90 persons, then poll members, who pick 61. Their election is nearly automatic, unless their nomination is challenged at the annual meeting and a third of the membership subsequently vote a one-year blackball. This was the case with Huntington. He probably will be elected in the next year or so, as his sponsors press the issue. But his defeat this year was widely advertised as a blow to the prestige of the social sciences.
One key to understanding the Huntington rejection is to recall that it was a Yale mathematician, Serge Lang, who led the charge against the nomination, just as it was a group of mathematicians who fought a successful action 10 years ago against the appointment of sociologist Robert Bellah to the faculty of the Institute for Advanced Study at Princeton on similar grounds, and chased director Carl Kaysen out of town for good measure. It is not that mathematicians are politically of a single point of view, but rather that they have an exaggerated sense of personal efficacy that somehow makes them professionally closer than any other group. They have greater solidarity. They can operate as a phalanx, and can achieve the same sort of effects that Birchers used to manage at school board meetings.
Another key is to understand that Huntington's nomination was a natural magnet for the opposition. The Harvard government professor has always been fairly political, for one thing, and during the 1960s he consulted to the government on Vietnam. He was head of Hubert Humphrey's task force on Vietnam and urged the senator to campaign on a bombing-hah platform -- unsuccessfully, until near the end of the campaign. But to have been pro-Humphrey meant being a certain kind of hawk. So fighting Huntington's nomination was a means of carrying on opposition to the war by other means.
Moreover, as a political scientist, Huntington is at the top of a pinnacle all right (the Social Science Citation Index shows that he was the single most-frequently quoted authority in international relations in the early 1980s) but in a fairly loosely-defined field. Of all the social sciences, perhaps the least satisfying -- and certainly the least high-tech -- is political science, which has never made a satisfactory settlement with philosophy. The rap of pseudo-science is relatively easy to hang on a man who once wrote, "The overall correlation between instability and frustration was. 50." But the irony is that Huntington has always operated far more in the literary than in the quantitative mode, in books The Soldier and the State and Political Order in Changing Societies.
The class of social scientists to which Huntington's entry was blocked was added to the National Academy of Sciences only in 1971 -- in the same general wave of prestigification as the Nobel Award in economics. Today it includes undisputed stars such as Paul Samuelson, Robert Solow, David Landes, Hendrick Houthakker, Dale Jorgenson, David Landes and Peter Diamond among economists; linguists such as Noam Chomsky; psychologists such as B.F. Skinner; sociologists such as James Coleman. Huntington is of roughly similar caliber as a political scientist, a fluent scholar who has done his share to maintain high standards; by common consent among social scientists, he is well above the cut necessary to make the list. "It is not my problem," says Huntington. "It's their problem."
Recently, there has been a wave of criticism within economics of the tendency to overstate the precision and certainty of results. Donald McCloskey and Edward Learner especially have gone out of their way to tackle those who "tech it up" without regard for underlying uncertainties. One of the more interesting critiques to appear is What's Wrong With Formalization in Economics, by Henry K.H. Woo, chairman of the Hong Kong Institute of Economic Science. Woo gently argues for the superiority of natural language to rigid formal mathematization when it comes to describing and analyzing complex economic events. He may be right. But inside the social sciences, it is fair to say that there is more demand for high levels of abstraction and deep structures of analysis than ever before. Moreover, there's some reason to think there is today an outpouring of really high quality work being done; it may not be too much to call it an explosion.
This is not to say that the worries about "teching it up" are unjustified. But to suspend the search because it has not produced totally satisfactory answers is the wrong approach. It is tantamount to having wished to pull the plug on 18th-century chemistry because it was having trouble figuring out why things burn. The proper stance is to treat the claims to certainty of social scientists with great skepticism; to be highly tolerant of other ways of knowing; but to continue to place the preponderance of our bets on scientific methods.
May 10, 1987
Sand Sketches and Skyscrapers
One of the consequences of modern specialization is that it is often hard to judge competing claims to competence. The world is organized in an intricate hierarchy of different and sometimes competing domains; people who have been successful in a particular discipline sometimes seek out the large sphere of the common culture to submit their claims to wisdom, often with surprising results. It is here that businessmen and politicians and journalists vie with economists for the public's attention -- and the results are often exasperating to the experts. MIT's Paul Krugman put it memorably once when he said that Wisconsin's John Culbertson getting ink in the newspapers for his support of protectionism was analogous to the man who works on the power of prayer on plants getting equal billing with molecular biologists.
A pair of lively books are out, each concerned with predicting a terrible economic depression in the next few years. Each presents some great truth of its own. Mega-politics, the interplay of impersonal forces in history, is the subject of Blood In The Streets: Investment Profits in a World Gone Mad by James Dale Davidson and Sir William Rees-Mogg. It is the "law of social cycles" that foredooms the world to the fate which is described in The Great Depression of 1990: Why It's Going to Happen and How to Protect Yourself by Ravi Batra.
At the same time, a slender book by a couple of university professors has appeared, also offering a potentially far-reaching new method of using the patterns of the past to predict the future. Dynamic Fiscal Policy, by Alan J. Auerbach and Laurence J. Kotlikoff, addresses many of the same concerns about how tax reform, investment incentives, security prices, social security and deficit spending are connected over the really long haul. But instead of a new law of cycles, Dynamic Fiscal Policy offers the same old insight of economics, namely that all prices and quantities are related to each other through the interplay of supply and demand. What is new is the choice of tools: an extensive computer simulation model.
The authors of the pop books are no dummies. James Dale Davidson founded the National Taxpayers Union; Rees-Mogg, his partner, was editor of the Times of London until Rupert Murdoch kicked him out. Batra is a technical economist and, once upon a time, at least, a leading trade theorist; Lester Thurow wrote the forward to his book. Each of these authors has strong views of what is likely to happen next; each felt compelled to write it down, take it to a publisher who would hire a publicist to promote his views.
Batra says that a growing disparity between rich and poor will trigger the next depression; the only thing that can help is an immediate draconian redistribution. Davidson and Rees-Mogg say we are in "the twilight of a major phase of history"; there is enormous turbulence ahead. Their theory is cloaked in the form of investment advice, and they roam with crisp intelligence over an extraordinary range of topics.
No such grand schemes or colorful bits of detail are to be found in Kotlikoff and Auerbach's book, however. In fact it is a little hard to read. There are no jokes and more than a few equations. At every crucial juncture, though, the authors use a simple two-period model to illustrate the principles of the big 55-period model; these illustrations can be worked through by anyone with a little patience and a knack for algebra. The payoff is a glimpse of a world seen whole; push it here or there and everything else changes accordingly over time.
At the heart of the economists' model is, of course, the life-cycle, the deceptively simple idea for which Franco Modigliani was awarded the Nobel Prize in economics two years ago, that people tend to spend and save differently over the course of their lifetimes. Before the authors have gone a dozen pages, the work of 50 celebrated scholars over 50 years has been invoked in an ever-tightening web, until the book arrives in the vicinity of what is modern public finance. The authors then build dense links between their work and the work of the 40 or 50 other economists who together more or less define the interesting questions. This is what is sometimes called "the tapestry of economics," but when you come on it in the guise of a book, it more nearly resembles an act of architecture, a combination of vision and craft, a huge analytic skyscraper, whose turrets, towers and even fundamental underpinnings are forever susceptible to reorganization.
It is the level of its reorganization of a great deal of previously existing material that makes this book attractive to its technical readers. It incorporates into the Keynesian tradition of scrutinizing the effects of fiscal policy most of the criticisms of the "rational expectations" school -- that is, its actors learn from their mistakes and change their behavior over time, switching their bets from sector to sector as opportunities arise -- just like real people. It is for the reasoning-out the consequences of these choices that the authors need their computer. In their phrase, the simulation is "macroeconomics taken beyond the blackboard to where only the computer can see."
Economists who have read the book say it is full of surprises. Deficits may actually lower interest rates at first and "crowd in" investment as a result. Consumption taxes may be the best way to tax inherited wealth. Tax breaks for business investment may be self-financing. The effects of adopting the framework can be almost dizzying; Kotlikoff argues that because of arbitrary accounting conventions, the significance of the deficits of the Reagan years has been wildly overstated. The administration's fiscal policy may even have generated a small economic surplus so far, he says. But the long-term decline in savings that are associated with Social Security and other intergenerational transfers probably are creating unreported deficits over time that are truly dangerous, he adds.
Given the verdict on the Great Depression that began in 1929 -- that the U.S. government aggravated the contraction severely by misapprehending the money supply and by failing to exercise global leadership -- you would think there might be a premium on this sort of attempt to see economic relationships as they really are. And indeed there is: Kotlikoff and Auerbach are both impressive figures in university economics; they each consult to the government at high levels.
But they don't go on talk shows, like the authors of the depression books. They are not household words. And almost inevitably the author of some pop book is going to get credit for predicting the future, whatever happens next. Compared to the skyscraper-like edifice that is technical economics, they are just sketches in the sand, soon to be washed away. What accounts for their popularity is that given the dispersion of opinion, some of them are bound to be right.
July 12, 1987
Short-term Sacrifices and Long-term Gains
Headlines in the newspapers read, "Many students fail quiz on basic economics." And indeed, a report prepared by the Joint Council on Economic. Education showed that when a multiple choice test was administered to 8,000 high school students last spring, as many as 75 percent were unable to correctly identify definitions of terms like inflation and budget deficit and profits.
So there was more than a little wistfulness in the hall Thursday when Northwestern University's Robert Eisner rose to the lectern to deliver his presidential address to a meeting of the American Economic Association -- and promptly tore into the terms in which technical discussion of the deficit is framed. Conventional measures of investment, capital and private and public saving were conceptually flawed, he said, to the point of being seriously misleading. They have often given the wrong reading on whether the American government is in surplus or deficit.
Make some basic adjustments to bring measurement in line with fundamental theory, Eisner said, and the dreaded "twin deficits" more or less disappear. Merely by marking to their current market price the value of U.S. holdings abroad and of gold held in reserve at home (it is on the books now at $42 an ounce, less than one-tenth its present value) would be enough to counterbalance the entire American debt to foreigners; so much for being "the greatest debtor nation in the world." And further adjusting government accounts to identify capital expenditures and the effects of inflation "makes such a huge difference in the federal government budget as to wipe out the much decried 'budget deficit.'"
"To put matters bluntly," Eisner said, "Many of us have literally not known what we were talking about, or have confused our listeners -- and ourselves -- into thinking what we were talking about was directly relevant to the matters with which we are concerned."
This was the 103d annual meeting of the AEA, 8,000 professional economists parachuted into New York between Rockefeller Center and Times Square for three days of meetings, job interviewing and gossip. It was in part just bad luck -- a stochastic shock, in the lingo of the trade -- that it was Eisner's turn to talk as president. It had to happen sometime. For years, he has been part of a running controversy among senior economists over the meaning of deficits. It is just one of many disagreements that have divided the profession in recent years.
To be sure, professional economics has come a long way from 1972. That was the year when Wassily Leontief denounced the science as a near fraud in his presidential address, when radicals and dissidents threatened disruptions of the meetings, and when Harvard University led by, among others, Hendrick Houthakker, defenestrated several of its young Marxist professors who were in line for tenure.
f0 Accepting an award this week (along with Bell Labs' Roy Radner) as a distinguished fellow of the association, Houthakker said, "I feared that 1972 might have barred me from any further role in the Association. I'm glad to see it was not so." Meanwhile, the exiled radicals, no longer young, are publishing econometric critiques of capitalism in the top technical journals from a comfortable and lively bastion at the University of Massachusetts at Amherst. So civility has returned to economics.
But underneath, there continues to be a deep division of how to think about economic events in time. Princeton's Alan Blinder, praising MIT's Robert Solow at a festive luncheon in honor of his Nobel Prize, compared "the great civil war" of macroeconomics in which Solow has been a leading skirmisher to the American Civil War. Joking aside -- it was the funniest lunch the association had seen in a long time -- the continuing stand-off between the two leading schools of economic theorizing still causes a great deal of pain to the people in its trenches, "New Keynesians" and "New Classicals" alike.
What triggered the war? It was the recognition -- discovery is too strong a word -- of the central part in economics played by information and expectations formed by individuals about future events. The suspicion that growing sophistication on the part of financial market participants at all levels will defeat easy manipulation by fiscal and monetary authorities has all but paralyzed discourse in the higher realms of theory, reducing it (in the view of many theorists) to the kind of Does! Does Not! Does Too! Does Not! Does Not! exchange that is more characteristic of the playground than the seminar room. A second insight, that motives don't have to be pecuniary in order to be self-aggrandizing, has sowed its share of mischief too, calling into question the motives of would-be policymakers and reformers.
How complicated are these issues? The editorialists at the Wall Street Journal last week found a charming illustration of their deep, deep roots: among the questions that the high school students last spring were asked to answer in the investigation of their economic literacy was this one: "To promote economic growth, a developing country must (a) increase investment, (b) increase consumption, (c) use the market system or (d) use central economic planning." The people who graded the test, mainstream Keynesians and new Keynesians, figured that (a) was the correct answer. The Wall Street Journal, presumably along with most New Classical economists, preferred (c). There is a world of difference between the two.
There was, however, a far simpler argument at the heart of Robert Eisner's views on the relative insignificance of the deficit as a policy issue. His critique was no more hard to fathom than the argument that just because a house costs $200,000 today instead of $10,000 ten years ago doesn't mean its real cost has gone up. Just as inflation wipes out the value of money, it also wipes out the value of debt; you can either mark liabilities down, or mark assets up, but either way you ought to systematically restate government accounts to reflect the results of inflation.
Fine, say Eisner's critics, as long as you are as assiduous in the hunt for liabilities as for assets; "I'll bet there's no $100 billion for nuclear weapons cleanup in his estimates, much less a contingent liability for our defense of Western Europe," says Harvard's Lawrence Summers, who has consistently argued that it is important to reduce the budget deficit. It is true that inflation has diminished the value of the government's past-tense obligations, its bonds, in other words; but it has also greatly increased the price of its future consumption and investment.
On the whole, there was a great deal of promise in the meeting, of events more clearly understood, of "a society more busily engaged than ever in trying to know itself," as Hugh Heclo has put it. For example, Federal Reserve chairman Alan Greenspan told a meeting that, "The severity of the crash of Oct. 19, 1987, was in a sense the outcome of a confrontation between dramatically advancing computer and telecommunications technology on the one hand and ingrained human speculative psychology on the other." Assar Lindbeck and Dennis Snower reported on the investigations of insider-outsider relationships in European labor markets, where incumbent employees whose jobs are protected by the high cost of replacing them are subtly arrayed against the unemployed and the easily replaced.
Sheldon Dantziger, Peter Gottschalk and Eugene Smolensky reported on the changing distribution of income -- including their surprising finding that the nuclear family "rich," meaning those whose incomes are nine times the poverty line (about $95,000 for a family of four), actually doubled their numbers during the Reagan years, from around 3.5 percent to about 7.0 percent of the population, thanks mainly to the increase in working wives.
And MIT's Rudiger Dornbusch turned up with a new promising 10-year plan for the rescheduling of Mexico's debt, calling for 55 percent of its debt service to be paid in pesos, 25 percent to be capitalized as a kind of equity kicker designed to give lenders a share of any big gains, and 20 percent to continue to be paid in dollars. Hopes rose somewhat after Paul Volcker, long an opponent of more imaginative forms of debt relief, declined to dismiss the plan when Dornbusch brought it up before a crowded session. The need to come up with some new form of financing to replace the bridge loan that was hastily arranged by George Bush just before the election lent plausibility to the notion that a breakthrough may be near.
But when all was said and done, it was Eisner who dominated the meetings by his bold dissent from the conventional wisdom. Murray Weidenbaum, a former Reagan adviser who is one of the architects of the view that the diminution of the deficits is a top priority, was asked, "Has he made life much more difficult?" He answered, "For himself, yes." Perhaps.
But for generations yet to come, whose discussions will be illuminated by the "total income system of accounts" (with their separate governmental capital accounts) on which Eisner has been working for years, he will have made life considerably better, and ultimately easier to understand. As he said last week, "Fuller and more appropriate measures of investment and productivity might make clear that the best and perhaps the only feasible way to provide the sustenance of our future aged is to develop our public, social infrastructure and endow our young with all the education, training, research output and good health that our society is capable of offering."
January 1, 1989
The Wizard of Ec?
Readers sometimes note the Olympian tone affected by this column: The confident judgments, the frequent demurrers from conventional wisdom, the offhand references to arcane information, which are all designed to buttress the impression of an effortless mastery of the field of economics in the vicinity of politics with which it is concerned. As my colleague Chris Black once said about a column, which depended on certain parallels between the life and times of Warren G. Harding and Ronald Reagan to make the point that George Bush probably would be elected easily in 1988, "Gee, it made you sound like you know all that stuff." Exactly.
Into this comforting murmur punctuated by "of course" and "to be sure" is injected from time to time a clinker. A ferocious one occurred last week, when in the course of remarking the importance to Massachusetts of Silvio Conte's seniority as ranking minority member on the House's Appropriations Committee, I mentioned casually the Speaker of the House, Edward J. McCormack.
Now the man who represented what was then the 9th Congressional District for 42 years, who served as Speaker for eight years in the 1960s, was John W. McCormack; his brother was Edward J. (Knocko); Edward J., the former attorney general turned real estate developer, is his nephew, as was John W. (Jocko), the vending machine representative, who died in 1982. Nor was this all. In the same column, I suggested that McCormack served as Speaker before, not after Sam Rayburn. And more subtly, the explanation of how Conte went to the Appropriations Committee from day one in the Congress left out the vital link of former House Speaker and Minority Leader, Joe Martin, who was beaten in a primary by Margaret Heckler in 1966.
Fiorello LaGuardia said that when he made a mistake it was a beaut. This one was a corker, especially in Boston, where I hold down a day job as a newspaperman. I failed to be reminded of the basic fact of the matter by the spelling on two major downtown office buildings, and in my newspaper's own neighborhood, of an institute at the University of Massachusetts, a middle school, and a small park on Columbia Road where the man his friends called Uncle Jawn used to live (to say nothing of the housing project around the corner that is named for his mother.)
Nor is this ancient history: McCormack died only in 1980 at 88; his career was a symbol of the power of old Boston, from his election in 1928 to his crucial vote to save the draft on the eve of World War II and the period after President John F. Kennedy's assassination when he was de facto vice president to Lyndon Johnson. John W. McCormack was Boston before John Kennedy, before Route 128 and the Miracle. As much as Cardinal Cushing or Mayor Curley or Joe Welch or Ted Williams, he symbolized the city to the nation.
In other words, it is serious business to confuse him with his nephew. It is perhaps reasonable to dig a little beneath the surface, to inquire how it happens -- and what it is that's lost -- when details like these don't jibe.
Surely one of the more striking attributes of this column is the voice in which it is written. This I take to stem in large part from the two magazines where I once worked, Forbes and Newsweek. Tough Henry Luce invented this omniscient (all knowing) magazine voice, but it is the London Economist that refined it to the purest state of hyperconfidence. Thousands of journalists speak it in varying degrees. Note that it is almost the opposite of the standard Associated Press style, in which everything is attributed, and the newsman seeks to appear as passive transmitter. In the omniscient voice, almost nothing is attributed, and the anonymous newswriter is the authority.
This omniscient voice is designed to convey several messages, the most important of which is that life is, if not actually under control, at least susceptible to understanding. The authorities may have conflicting opinions, it seems to say, but the tacit presupposition is that the intelligent layman can listen to debate and form a firm opinion as to who is right -- at least provisionally. The magazine voice thus serves the deep human need for narrative order; its structure has to do with "before," "during" and "after." Deep down, this column is really about what constitutes a satisfactory explanation.
The omniscient voice emphatically doesn't work without reporting, and plenty of it. Underneath the voice is a method of beat checks, of phone calls, of an ongoing conversation among a loose group of sources and friends and readers about what matters. It is not necessarily contributed to directly. The meditation on Silvio Conte was sparked by reporter David Rogers' observation in the Wall Street Journal that Conte was the last of Massachusetts' Big Three to leave its delegation, Edward Boland and Tip O'Neill having preceded him.
Above all, the voice must seek to be an expression of a coherent framework; it must attempt to see the world whole. Magazines each have their standpoints, so do columns. This column in particular is interested in scouting out the connections among technical economics, folk economics and politics. It is a regular Chinese box of predispositions, in part an effort to do science reporting, to see events from the point of view of corporate and government managers, and to be fair-minded to leaders and followers alike.
There are pathologies of the omniscient voice: The bigger disorders include tendencies to Panglossian optimism or Spenglerian doommongering. The oracular mode, with no quotations or sometimes even any information, is to be avoided; so is the ingratiating tense. Indirection, in which it is not clear whose interest is being served, is also a significant shortcoming. Perhaps the most common failings involve sins of omission, of leaving out factors better included.
But there is nothing worse than simply being wrong, as when I once identified Robert Maxwell, the famous bouncing Czech, as an Australian, or wrote of Daniel (not Danforth) Quayle. In moments like these, it can seem that there is something of the Wizard of Oz about the column, of the reporter huffing and puffing away to produce an authoritative voice, while the dog pulls away the curtain to reveal his shabby resources, a lopsided list of names, a pile of old clips. (L. Frank Baum had a point about authority, after all.) So destructive are these sloppy errors that magazines have staffs of fact checkers to avoid them. Columnists, lacking the apparatus, make occasional elaborate corrections.
So what was it that went wrong when I typed Edward J. McCormack into the computer last week instead of John? It was not a failure of reporting so much as a failure of background knowledge. John McCormack would have loomed large in the mind of anyone who had done Boston neighborhood newspapering; I did mine in Chicago. The name would have been a big deal in anyone who covered the Hill in the 1960s; I covered Vietnam. The right name would have been on the tip of the tongue for anyone coming out of the tradition of political reporting; I came out of business and economics. Something failed; newsmen are trained to check out facts when they have the slightest doubt of them; they are supposed to know when they are skating on thin ice and to do something about it.
Does it mean I don't know what I am talking about? Well, yes, in the sense that I don't possess all the knowledge that, in the course of a few days, I collect and fashion into a column. But the fundamental proposition on which the column rests week after week is correct, I'm convinced. It is that we know a great deal about ourselves, though it is often less than we wish.
The world can be understood. Its sudden and unexpected events can be apprehended and fit into enduring interpretations. There are answers to our questions and some of them are more correct than others. I made a mistake; forgive and remember, as the surgeons say, of the mistakes their colleagues make. The moving finger writes -- and having writ and erred -- moves on.
Februry 17, 1991
Scientists See Vast Changes
For those who are tempted to be hard on economists, it is worth reflecting on a headline in The New York Times last week. The story was about a big meeting of geochemists, ecologists, paleontologists and the like in Worcester to consider the climatological and other effects of recent economic development. "Scientists see vast changes in earth," said the headline; "But little consensus about what they might mean," said the deck beneath it.
Certainly there is a great deal of skepticism in the air these days about the economic consequences of U.S. government budget deficits, even as Congress meets with the administration in search of a compromise. It is said almost ritually now that deficits caused the crash. America has been living beyond its means, the story goes; the markets, in their infinite wisdom, realized it and tried to escape the future, all at once. The only answer now is to balance the budget.
You get the feeling that even if the economists have the general direction right, the map of economic reality is not yet a very good one.
Take Robert Eisner, a Nortwestern University economist, for example. "If large budgets caused the market to crash," Eisner writes, "why did the market roar along when the deficits were at their greatest and tumble only after the deficit fell by 33 percent?" It was rising interest rates that caused the crash, according to Eisner; looser money now is the answer, not higher taxes.
Eisner says, "The conventional wisdom of lowering the deficit, either by raising taxes or by cutting government expenditures -- whatever the merits on other grounds of reducing certain swollen budgets, such as those of the Pentagon and farm problems -- threatens economic disaster" to an already weak economy that needs stimulus, not contraction. "It is a mindless throwback to the economics of Herbert Hoover. We must not forget where that led."
Forget about the deficits, says Lawrence Kotlikoff, chairman of the economics department at Boston University. They are an artifact of the accounting system, which makes trivial and misleading distinctions between Social Security "contributions," federal taxes and debt. If you take a broader view of receipts and payments, Kotlikoff says -- especially a view that focuses on the intergenerational balance sheet -- U.S, fiscal policy in the 1980s has been tighter than in the 1970s, he says; it doesn't need to be tighter still.
Robert Barro goes even further. The Harvard economist has been arguing since the early 1970s that it makes little difference whether the government finances its activities by debt or by taxes. Borrowings today imply taxes tomorrow; smart citizens realize it and make adjustments. It is the overall size of government, not the particular distortions in the economy occasioned by its revenue-raising efforts that is of interest. The deficits are only a minor crisis, Barro says.
These sentiments are especially troubling because the authors are not peripheral guys. Eisner is president this year of the 19,000-member American Economic Association. Barro and Kotlikoff are among the smartest and most influential theorists of the generation of economists under 40.
Nor is there any comforting unity in their dissent. Eisner is a Keynesian economist who believes that government is in a position to actively manage the economy; Barro and Kotlikoff are "new classicals," who believe that markets ordinarily outwit those who seek to manipulate them, and who depend on a series of intergenerational "life-cycle" models to make their points.
Yet a large chorus of voices in the mainstream of economics disparages these arguments that the deficit is really not a problem. Harvard's Lawrence Summers is typical. "The fact is that with a national savings rate of around 2 percent, we finance what little investment we do by borrowing from abroad. We need to cut consumption and increase investment and all the fancy accounting won't change that."
These are the sentiments that have the politicians locked in a room in Washington, and in the end, they will probably elicit a significant budget deal. Even if it involves a combination of tax increases and spending cuts far in excess of the $23 billion mandated by the Gramm-Rudman approach, it is unlikely to have a major effect on the $4 trillion US economy, the conventional wisdom says; instead it will be symbolic of an American willingness to resume saving more than it spends.
Such arguments between experts are a common feature of life in the 20th century. Usually the science goes forward in due course. Citizens who must make decisions on the basis of what they know, who can't wait for the resolution of such doctrinal disputes, may take comfort from Robert Frost's poem, "Why Wait for Science?"
Sarcastic Science, she would like to know,
In her complacent ministry of fear,
How we propose to get away from here
So she had made things so we have to go
Or be wiped out. Will She be asked to show
Us how by rocket we may hope to steer
To some star off there say a half light-year
Through temperature of absolute zero?
Why wait for science to supply the how
When any amateur can tell it now?
The way to go should be the same
As fifty million years ago we came --
If anyone remembers how that was.
I have a theory, but it hardly does.
November 8, 1987
Copyright © 1993 by David Warsh
- Publisher: Free Press (June 15, 2010)
- Length: 525 pages
- ISBN13: 9781451602562
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Raves and Reviews
Robert E. Lucas, Jr. John Dewey Distinguished Service Professor University of Chicago David Warsh has two qualities rare in economic journalism: He actually likes economics, and he knows a great deal about it. The columns contained in Economic Principals are consistently well-informed, lively, and interesting. Together, they provide a marvelous introduction to the current scene in economic thinking.
Kenneth J. Arrow Joan Kenney Professor of Economics and Professor of Operations Research Stanford University Over the years no journalist has kept up so well and so acutely with the development of economic thought as David Warsh. His precise and interesting sketches have stood the test of years very well indeed.
Martin Peretz The New Republic David Warsh writes lucidly and wittily about the most complicated matters in economics and in economic thought. With stunning scope and great depth he has written a book that is by itself a rewarding education. It could be the core curriculum for those who want to understand why we are in our present fix and how we might get out of it.
Carl Kaysen D.W. Skinner Professor of Political Economy, Emeritus MIT Is he intellectually stimulating? Decidedly. Is he coherent, clear, readable? Eminently. Does the public need the information he offers? Desperately. Does Warsh have a critical understanding of the complicated ideas he is simplifying? Very frequently. Do the professional economists accept his conclusions? There are always some who do and some who don't -- they treat him like one of themselves.
Dr. Albert Wojnilower First Boston Asset Management Spiced with wide-ranging references to the humanities as well as the physical and social sciences, Warsh's succinct summaries, warm praise, and gentle but unmistakable criticisms always go to the heart of the matter.
Jane Jacobs Author of Systems of Survival David Warsh is one of a kind as an economic journalist. His knowledge of what makes economists tick and his wide-ranging curiosity mean that these columns are as informative and timely as when they were first printed. Collected, they form a valuable and fascinating running account of an important decade's intellectual economic history.
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