Explaining the dismal science

In clear, beautifully-written papers, 11 contributors make 13 mighty economists and their often lofty ideas remarkably accessible. They also confirm D’Maris Coffman’s introductory citation of John Maynard Keynes: the ideas of economists and political philosophers rule our lives.

There are surprises too. Jonathan Conlin notes that Adam Smith’s metaphor, ‘an invisible hand’, appears only twice in Smith’s major works. It does not capture the complexity of our motivations, and Smith also sees self-interest as inferior to valour, benevolence, and self-command, in Conlin’s phrase.

Another surprise is the wide agreement between Smith, David Ricardo, John Stuart Mill, and Karl Marx. Helen Paul describes the way Ricardo follows Smith’s identification of the value of goods as the labour-time needed to produce them; Ricardo then argues that a nation’s comparative advantage depends on productivity, which requires the specialisation of labour and the public’s capacity to act in advance of policy changes — Ricardian Equivalence.

Ideas and the minds

Joseph Persky explains Mill’s demonstration of the way workers’ labour-time itself generates profit for the controller of capital; Mill knows that capitalism is controlling and destructive, but, to preserve competition and ensure that workers shape progress, he advocates cooperative worker-ownership.

While Mill, who owes much to Harriet Taylor, strongly attacks inherited power and privilege, Marx and Smith agree on the effects of the division of labour. Paul Prew, writing about Marx and Friedrich Engels, shows how terrifying alienation is in commodity-producing society, where labour power — human creativity itself — is only a commodity for sale.

Prew gives a fine account of how surplus value — the working hours beyond those the worker puts in to earn their own upkeep — is generated (Marx disliked Mill for showing this first). Furthermore, electronic communications turn all time into work time, and for capital, nature is just an expendable resource.

Technical concepts — like supply and demand curves — arrived with Alfred Marshall, but Katia Caldari reminds us that these microeconomic ideas come from just one Marshall chapter. Marshall, a self-described socialist, rejected the idea of homo economicus ; for him, economics involves ethics and state-supported education, and is a means towards better lives for all.

It was Joseph Schumpeter who, as Mário Graça Moura shows, strengthened technical economics; he considered innovation and entrepreneurship as endogenous to capitalism, partly because the falling rate of profit creates permanent pressure towards slowdown. This contradicts Schumpeter’s conviction that economic systems tend to equilibrium, but his concepts of creative destruction and of business cycles have endured.

Keynes, whose global impact Victoria Bateman outlines, repeatedly challenged economic conceptions of rationality. He recognised that supply does not eo ipso create demand; capitalism itself generates recurrent crises resulting mainly from collapses in aggregate demand.

Secondly, Keynes warned against excessive punishment of Germany after the First World War, and he feared that state failures to mitigate capitalism’s inherent instability would help the Left.

Friedrich von Hayek disagreed on epistemological, economic, and political grounds. We cannot have complete contextual knowledge or predict the overall effects of planning, and have only our limited present knowledge.

Scott Scheall notes that Hayek takes markets as forces of nature, tending towards spontaneous order, so planning is misconceived — but in Milton Friedman’s work this causes paradoxes, as Victoria Bateman shows. For Friedman, people’s lived experience, not economic theory, drives major changes in economic policy, but he tried to turn economics into a value-free discipline consistent with his idea of the natural sciences; this helped formalise economics, but eliminated ethics. Feminists have also criticised Friedman for making economics a macho activity, and behavioural economists have found that markets can feed addictions, exploit imperfect knowledge, and manipulate people.

John Forbes Nash went further, identifying a game-theoretic solution — Nash Equilibrium — for suboptimal outcomes in imperfect contexts, such as situations where firms circumvent regulations. Nash won an economics Nobel, but Karen Horn points out that he saw game theory as a trivial area of his work.

Even technical approaches retain judgment, but Michelle Baddeley notes that it was economic psychologists like Daniel Kahneman and Amos Tversky who found ways of overcoming the dissonance between intuitive judgment and other assessment criteria. That led into heuristics — how we make decisions under pressure — and prospect theory, the study of how adverse events make us cautious about future gains.

Making Sense

Utility theory, nevertheless, remains largely technical. Returning to political economy, Jonathan Conlin shows how Amartya Sen started with the recognition that famines have less to do with a lack of food than a lack of currency, such as labour power, and moved towards the concept of capabilities.

Sen rejects the idea that economics is about facts and not ethics, and opposes stipulated poverty lines. For example, African-American men and women in the US have higher mortality rates than men and women in India or China. Secondly, women’s literacy reduces infant mortality more than men’s literacy does, and has wider effects on overall economic activity; trade-offs between, say, population growth and GDP are mistaken, and Sen restores the concept of justice to economics.

The concluding figure, Joseph Stiglitz, is a neoclassicist, with a Nobel for work on ‘imperfections’ like unequal knowledge in transactions. Stiglitz blames politics for not ensuring perfect markets, but in his ‘pure competitive model’, a central figure proposes prices and tries to identify those which will equalise supply and demand; individuals are barred from direct reciprocal trade. Moreover, Stiglitz assumes an equilibrium unemployment rate, but notes that Yugoslavia’s self-managed firms seemed free of cyclical crises. Why, however, should anyone relinquish informational advantage? For Emanuelle Bénicourt, Stiglitz’s thinking expresses conventional market concepts, but is far from planet Earth.

In sum, this collection is extremely welcome. If, for example, David Hume, William Petty, and AC Pigou appear only fleetingly, well dare we hope, Conlin, for a successor volume?

The reviewer teaches at IIT Madras

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