I am a sad man. Instead of enjoying the sun on my holiday and reading some good novels, I waded through some new books on economics. Well, waded through is unfair really, because Sylvia Nasar’s book, Grand Pursuit, the story of the people who made modern economics, is an absorbing account of the ideas and intimate lives of all the major economists and social commentators of the period since the capitalist mode of production became dominant in the 19th century.
Nasar starts with Charles Dickens and the satanic mills of industrial revolution in Britain, along with the dismal economics of Thomas Malthus and Karl Marx, and then onto the optimistic pro-capitalist economic ideas of late 19th century Alfred Marshall. After that, comes the story of the Fabian socialists of the early 20th century, the depression economics of Irving Fisher, the ‘creative destruction’ theory of capitalist cycles by Joseph Schumpeter, the battle of ideas between Keynes, Friedman and Hayek over the causes and solutions to the Great Depression, and finally the modern New Keynesian economics of Paul Samuelson of the post-war Golden Age.
Nasar’s underlying theme is that capitalism is really a success, contrary to the dismal views of the early classical economists like Ricardo, Malthus and Marx, or social reformers like Charles Dickens. They reckoned capitalism had fatal flaws that would drive it into crisis and the majority of the population into poverty and unending misery. They were wrong, suggests Nasar, as capitalism has leapt forward, dramatically increasing the productivity of labour and also the living standards of the majority of the world’s ever-growing population.
Contrary to what the ‘misery economists’ had forecast, within two or three generations, the industrial revolution showed that the wealth of nation can grow by multiples rather than percentages. Nasar recognises the terrible conditions of the industrial workforce in the slum cities of northern industrial England and Scotland in the early 19th century, through the eyes of Dickens, Mayhew and Booth – indeed I reckon it’s being repeated now in the current experience of the Chinese rural migratory workforce into the coastal cities to work in dormitory-style sweatshops making Nike shoes.
But the pessimism of the early economists does not appeal to Nasar. In particular, she very much dislikes Karl Marx – both his ideas, which she thinks have been proven wrong, and his personality, as she sees him as an upper-class sponger, continually begging from his comrade in arms, Frederich Engels and never doing a proper day’s work in his life, or for that matter, ever finishing a piece of academic work properly.
This jaundiced view of Marx naturally leads her to make startlingly wrong commentaries about Marx’s ideas. For her, Marx forecast that average wages would fall over time and workers would become impoverished. But she comments that “a surprising number of scholars deny that Marx ever claimed that wages would decline over time, but they are overlooking what Marx said in so many words on numerous occasions”. But the reason so many scholars think the opposite of Nasar is that they are right: Marx never said ‘in so many words’ that wages would decline in absolute terms over time.
But Marx was not a nice person, according to Nasar. He never bothered to learn English well, he never exposed his ideas to people who could challenge him on equal terms. He never met or conducted correspondence with ‘geniuses’ like John Stuart Mill, Herbert Spencer and others. He never visited a single English factory in his life, or any factory at all. Moreover, he was overweight!
Marx’s eyesight was so bad that he had to hold books and newspapers a few inches from his face, says Nasar. She comments: “one wonders what effect this myopia had on his ideas. Perhaps he wants to shut out the messy confusing shifting world of facts so that he can contemplate the images and ideas in his own head without these bothersome distractions.” You get the idea. Nasar can hardly wait to quote Keynes on Marx that Das Kapital was “an obsolete economic textbook which I know to be not only scientifically erroneous, but without interest or application to the modern world”. By the way, according his biographers, it is unlikely that Keynes ever read Capital.
In contrast, Alfred Marshall, the key proponent of pro-capitalist economics in the late 19th century, is not only the epitome of wonderfully relevant economic theory, he is also extremely handsome! Marshall was the patron of optimism about capitalism. This middle-class academic worked his way up to become the guru of economics at the elite University of Cambridge and the leading expert on all things economics. Like John Stuart Mill before him he was biased towards helping the ‘working poor’ and against ‘vested interests’, but only as long as reform did not conflict with the efficient workings of the capitalist economy.
Businesses had to make profits, but no problem: in doing so, they raised the productivity of labour through ‘economies of scale’ that overcame the ‘diminishing returns’ expected by the classical economists. That allowed owners to pay more wages to their employees. This was best possible of all possible worlds: more profit meant more productivity which meant more wages. Thus was Marshall’s capitalism.
And capitalism’s main objective was not to make profits, apparently, but to create more goods to consume. How wrong could Marx be! Marshall’s main economic treatise, The Principles of Economics, embodied his rejection of socialism, embraced the system of the private property and competition and “optimism about man” (Nasar). And Marshall was proved right over Marx as wages and living standards did rise under capitalism, concludes Nasar.
Nasar is somewhat superior and ironic about the Fabian socialists Beatrice and Sidney Webb, but she does reveal the close connections they had with all the top political leaders of the time, including Winston Churchill, as he swung from Tory patrician to ‘welfare state’ reformer to further his political ambitions in the early 20th century. She quotes Churchill in early 1906 when he recognised the movement towards the collective functions of society (in contrast to modern Thatcherism, where there is ‘no society’). Churchill argued that the state should be “the reserve employer of labour, it must concern itself with the care of the sick and the aged and children”, and he called “for the railways of this country to be in state hands.” Such a demand has just been tentatively resurrected by the current crop of Labour leaders in the UK after the disaster of the privatisation implemented by Thatcher’s government and resolutely backed Labour’s Blair and Brown governments afterwards.
As US capitalism took over the leadership of world capitalism in the early 20th century, so did the focus of economic ideas shift. Irving Fisher was America’s leading economist in the boom time of the 1920s, but saw his demise in the Great Depression. Again, like Marshall, he was very sympathetic to the cause of the ‘working man’, but also defended the gold standard and the stability of currency, and the latter objective should prevail, according to Fisher.
In the early 1900s he said if he had to choose between libertarianism (free markets) or socialism, he would choose the latter – but he did not choose. What did him in was the capitalist slump. For Fisher, that was caused by “unforeseen conditions or partly by the lack of credit”. It was ‘unforeseen’ by him and he kept on predicting a recovery in the stock market and the economy right through the 1930s to his eventual financial ruin (although, through the adoption of scientific patents, he later went on to make millions).
Back in Europe, economists were facing the terrible results of the World War one and the ensuing depression and hyperinflation. Nasar is excited by the colourful and profligate Joseph Schumpeter, the economist of business cycles and the concept of capitalism moving forward in bouts of ‘creative destruction’. Schumpeter recognised that capitalism moved in fits and starts or in booms and slumps. But this was unavoidable and even necessary: in order to create, capitalism needed to destroy: “the pattern of boom and bust is the form that economic development takes in the era of capitalism”. It was like a mirror of Marx’s theory of capitalist crisis, namely that the destruction of capital was inevitable but good for you. As finance minister in post-war Austria, Schumpeter fought to preserve Austrian capitalism from revolution from within and German dominance from without, while living the high life with prostitutes and bank bonuses. But no matter, he was a “genius” and not dislikeable like Marx, Nasar tells us.
This brings us to John Maynard Keynes, the colossus of capitalist economics in the 20th century. Nasar reveals Keynes as a fast mover, quickly adapting his ideas to events. As I have mentioned before, Keynes puts it thus: “if the facts change, I change my ideas, don’t you?” His main objection was to sticking to the ‘classical’ economic theory of long-term equilibrium in the economy when the world is in a depression. Classical theory is no good if we die before we get to the promised land. Keynes wanted policies to solve the short term problems of capitalism in crisis; he was less interested in why capitalism got into crisis at all.
This was in contrast to his American counterpart, Fisher, who said that the cause of economic cycles could be identified scientifically,“much as we forecast weather”. Once we understand the cause, we can adopt policies to avoid them. For Fisher, money was the key to the causes of crisis (excessive credit) and so monetary policy was paramount. Indeed, “we must regard banking as more than a private business; it is a great public service” – an interesting observation in the light of current opposition from leading economists to any move towards public ownership of the banks after the great banking collapse of 2008-9.
For Keynes, however, policy was more important that a scientific analysis of causes, it seems. Nasar points out that Keynes became disillusioned with monetary policy as a tool to overcome depression as it failed and opted increasingly for fiscal measures and government intervention. But he had no time for Marxist solutions which he saw as based on “exalting the boorish proletariat above the intelligentsia, who carry the seeds of all human advancement”. Marxism was really the product of a combination of ‘Jewish and Russian natures’. Keynes was an upper class snob with all the class prejudices, despite associating with (upper-class) Bohemian artists and poets. He would not support the Labour party during the inter-war period because “it is a class party and the class is not my class. The class war will find me on the side of the educated bourgeoisie.” Whatever the radicalism of Keynes’ ideas, as expressed by some modern heterodox economists, the man himself was not so.