What would Adam Smith say?

Venky Vembu

US President Harry S Truman famously jested that he yearned for the services of a “one-handed economist” — because the ones he knew were forever going “on the one hand... on the other hand.” Macroeconomics is, of course, not quite an absolute science and, therefore, its practitioners oftentimes lack the certitude that men and women bring to, say, pure sciences such as mathematics or chemistry.

Even so, the giants of the profession, both in the realm of academia and in policy - making, have distinguished themselves over time with the forthrightness of their theories and principles, which have been validated by history. Economic theories may occasionally go unfashionable in the short run, blown away for the moment by the fickle winds of politics, but in most cases the intellectual underpinnings of their wisdom are no less robust today than they were when they were first articulated.

The Great Economists by Linda Yueh is a fascinating thought experiment that marshalls the collective wisdom of some of the great economists of times gone by — and explores how their theories may have been applied in the world of today, which is awash in many macroeconomic challenges.

Economic all-star team

As part of that experiment, Yueh introduces readers to an admittedly subjective list of “great economists” and their distinguishing theories. There are, among others, Adam Smith, who saw the ‘invisible hand’ of market forces as the critical determinant of the economic destiny and the wealth of nations; David Ricardo, acknowledged as the “father of international trade” for his theory of comparative advantage; Karl Marx, who rejected market-driven outcomes and instead favoured collectivisation over capitalism; Alfred Marshall, the proponent of a laissez-faire state; John Maynard Keynes, whose arguments in favour of government spending to revive down-and-out economies enjoyed fresh resonance in the wake of the 2008 financial crisis; Joseph Schumpeter of the Austrian School of economics, a passionate advocate of allowing the forces of ‘creative destruction’ to play themselves out; and conservative economist and free-market champion Milton Friedman, arguably the foremost scholar of monetary economics.

The context in which Yueh frames this “what-if” exploration is the peculiar crossroads the global economy finds itself in today. Having emerged from the 2008-09 crisis, the US, the UK, the European Union, Japan and China (among others) are experiencing significant challenges to growing their economies. The US, for long the world’s leading economic engine, sees that engine sputter as slow wage growth weighs on its future.

In the UK, the Brexit vote has compounded weak productivity growth, posing a question mark over its future. The EU faces tough questions about how to reform the economies in its area and stimulate sustainable growth. Japan’s debt-deflation spiral has already claimed two “lost decades of growth”. Even China, until recently hailed as the growth engine of the future, faces structural challenges as it pivots its economy from a manufacturing-centric one to a services-driven one.

And to compound these challenges, a backlash against globalisation is building up in many parts of the world, as was made clear by the election of Donald Trump in the US and the Brexit vote in the UK. This has been driven in large part by those who fell off the map and haven’t quite benefited from the fruits of globalisation.

India doesn’t quite make it onto Yueh’s radar, not even peripherally, which is a pity because the mixed-economy model that India exemplifies represents a fairly unique case study for economic policy exploration, and ought to have kindled an economist-journalist’s curiosity.

Lessons for India

Even so, some of the policy lessons derived from the ‘great economists’ apply forcefully to India as well. For instance, where Yueh cites Adam Smith’s prescription for limiting the role of the state and allowing markets to operate freely, it accentuates the Modi government’s signal failure to abide by its promise of “minimum government, maximum governance”.

Likewise, Indian policy-makers, who have been excessively eager to slap protectionist import tariffs, would be well-served by a reminder of Ricardo’s theory on the merits the openness of trade since, in his reckoning, countries gain from trade even if they are less efficient in all productions than their trading partners.

Of course, the one ‘great economist’ whose policy recommendation virtually every Indian government has internalised faithfully is Keynes, who argued for government spending as a means to counteract slow growth. After all, spending borrowed money comes naturally to Indian politicians and policy-makers.

Yueh’s narrative tone is a trifle academic, and the book suffers somewhat from its failure to summon up a boots-on-the-ground feel from her exertions as a former journalist.

Beware of policy rigidity

And for all the intellectual rigour of the thought experiment that lies at the core of the book, the larger cautionary lesson, which goes largely unaddressed, is that the biggest threats to economies as they struggle to grow come from ideological rigidity, which cramps governments’ policy action space. After all, the limits of laissez-faire capitalism are just as clearly manifest in the developed economies of the West as are the downsides of a doctrinaire view of Marxism in select pockets of the world.

Increasingly, countries and economies need to be agile in their responses to unfolding geopolitical and geoeconomic events, which process may be assisted by pragmatism in policy matters. In that sense, the learnings from these masters must be taken down from the pedestals on which they have been placed and made into living, breathing policy prescriptions that infuse life to everyday governmental actions. Yueh’s book marks the first step on that journey.

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