Skousen The Big Three in Economics - Smith, Marx, Keynes (Sharpe, 2007)

xINTRODUCTION

Figure A The Pendulum Approach to Competing Economic Theories

“extreme”intheirpositionsandthereforeequallybad.Byimplication, neither man’s position is sensible and must be rejected. The result is a pendulum-like swing between the two extremes, eventually coming to rest in the middle. Consequently, the moderate, middle-of-the- road position held by John Maynard Keynes appears to be the more balanced and ideal. But is his system the way to achieve growth and prosperity? Or is the middle of the road simply the path toward big government and a cumbersome welfare state?

I suggest as an alternative the “hierarchal” approach. In Indian folklore, the higher one’s placement on the totem pole, the higher the rank of significance. Instead of comparing economists horizontally on a pendulum or spectrum, we might choose to rank them by height according to the same standard of achievement. Using this totem pole structure, I would reformulate the diagram according to Figure B.

The Totem Pole of Economics

I have chosen a ranking system consistent with the opinions of most economists.Alargemajorityofeconomistsandhistoriansofeconomic thoughtconsiderAdamSmiththegreatestoftheBigThree.Hismodel of competitive markets constitutes the “first fundamental theorem of welfare economics,” what George Stigler called the “crown jewel” of economics, the “most important substantive proposition in all of economics” (Stigler 1976, 1201).

Next on the list is John Maynard Keynes. Despite substantial criticism of the Keynesian model, it continues to endure as a macroeconomic model in institutional analysis and policy matters. As a defender of bourgeois values, Keynes supported individual liberty, but on a larger scale, he thought that macroeconomic intervention is

INTRODUCTION xi

Figure B The Totem Pole Approach: The Ranking of Three Economists

(Smith, Keynes, and Marx) According to Economic Freedom and Growth

essential to stabilize the economy, a view still held by many economists today.

ThethirdmanonthetotempoleisKarlMarx.Althoughhisendorsement of centrally planned command economies at both the micro and macro level has been largely discredited, Marxist interpretations of class conflict and economic crisis still draw the attention of sociologists, historians, and economists.1

The story of modern economics can be told through the eyes of the Big Three. I have added vital transitional chapters between the three biographies to complete the story.As you will see, it is a cunning plot that has many unexpected twists and turns. Let us begin.

1. Those radical economists who take issue with my ranking of Marx as “low man” on the totem pole may take comfort in the argument made by some experts in Indian folklore who claim that the figure on the bottom may in fact be the founder or most significant chief in the history of the tribe.

The BIG

THREE in

ECONOMICS

1

Adam Smith Declares an Economic Revolution in 1776

Adam Smith was a radical and a revolutionary in his time—just as those of us who preach laissez faire are in our time.

—Milton Friedman (1978, 7)

The story of modern economics begins in 1776. Prior to this famous date, 6,000 years of recorded history had passed without a seminal work being published on the subject that dominated every waking hour of practically every human being: making a living.

For millennia, from Roman times through the Dark Ages and the Renaissance, humans struggled to survive by the sweat of their brow, often only eking out a bare existence. They were constantly guarding against premature death, disease, famine, war, and subsistence wages. Onlyafortunatefew—primarilyrulersandaristocrats—livedleisurely lives,andeventhosewerecrudebymodernstandards.Forthecommon man, little changed over the centuries. Real per capita wages were virtually the same, year after year, decade after decade. During this

3

4 THE BIG THREE IN ECONOMICS

age, when the average life span was a mere forty years, the English writer Thomas Hobbes rightly called the life of man “solitary, poor, nasty, brutish, and short” (1996 [1651], 84).

1776, a Prophetic Year

Then came 1776, when hope and rising expectations were extended to the common workingman for the first time. It was a period known as the Enlightenment, which the French called l’age des lumieres. For the first time in history, workers looked forward to obtaining a basic minimum of food, shelter, and clothing. Even tea, previously a luxury, had become a common beverage.

The signing of America’s Declaration of Independence on July 4 was one of several significant events of 1776. Influenced by John Locke, Thomas Jefferson proclaimed “life, liberty, and the pursuit of happiness” to be inalienable rights, thus establishing the legal framework for a struggling nation that would eventually become the greatest economic powerhouse on earth, and providing the constitutional foundation of liberty that was to be imitated around the world.

A Monumental Book Appears

Four months earlier, an equally monumental work had been published across the Atlantic in England. On March 9, 1776, the London printers WilliamStrahanandThomasCadellreleaseda1,000–page,two-volume workentitledAnInquiryintotheNatureandCausesoftheWealthofNations.Itwasafatbookwithalongtitledestinedtohavegargantuanglobal impact.TheauthorwasDr.AdamSmith,aquiet,absent-mindedprofessor who taught “moral philosophy” at the University of Glasgow.

The Wealth of Nations was the intellectual shot heard around the world. Adam Smith, a leader in the Scottish Enlightenment, had put onpaperauniversalformulaforprosperityandfinancialindependence that would, over the course of the next century, revolutionize the way citizensandleadersthoughtaboutandpracticedeconomicsandtrade.Its publicationpromisedanewworld—aworldofabundantwealth,riches beyond the mere accumulation of gold and silver. Smith promised that newworldtoeveryone—notjusttherichandtherulers,butthecommon man, too. The Wealth of Nations offered a formula for emancipating

ADAM SMITH DECLARES A REVOLUTION 5

Figure 1.1 The Rise in Real per Capita Income, United Kingdom,

1100–1995

Income of England (1100–1995)

GDP per Capita (1990 $)

18,000

16,000

14,000

12,000

10,000

8,000

6,000
4,000
					Wealth of Nations
2,000					published (1776)
0
		1200	1300	1400	1500	1600	1700	1800	1900	1995
1100

Courtesy of Larry Wimmer, BrighamYoung University.

the workingman from the drudgery of a Hobbesian world. In sum, The Wealth of Nations was a declaration of economic independence.

Certain dates are turning points in the history of mankind. The year 1776 is one of them. In that prophetic year, two vital freedoms were proclaimed—politicallibertyandfreeenterprise—andthetwoworkedto- gethertosetinmotiontheIndustrialRevolution.Itwasnoaccidentthatthe modern economy began in earnest shortly after 1776 (see Figure 1.1).

The Enlightenment and the Rumblings of

Economic Progress

The year 1776 was significant for other reasons as well. For example, it was the year the first volume of Edward Gibbon’s classic work,

History of the Decline and Fall of the Roman Empire (1776–88), appeared. Gibbon was a principal advocate of eighteenth-century Enlightenment, which embodied unbounded faith in science, reason, and economic individualism in place of religious fanaticism, superstition, and aristocratic power.

To Smith, 1776 was also an important year for personal reasons.

6 THE BIG THREE IN ECONOMICS

His closest friend, David Hume, died. Hume, a writer and philosopher, was a great influence on Adam Smith (see “Pre-Adamites” in the appendix to this chapter). Like Smith, he was a leader of the Scottish Enlightenment and an advocate of commercial civilization and economic liberty.

For centuries, the average real wage and standard of living had stagnated, while almost a billion people struggled against the harsh realities of daily life. Suddenly, in the early 1800s, just a few years after the American Revolution and the publication of The Wealth of Nations,theWesternworldbegantoflourishasneverbefore.Thespinning jenny, power looms, and the steam engine were the first of many inventions that saved time and money for enterprising businessmen and the average citizen. The Industrial Revolution was beginning to unfold, real wages started climbing, and everyone’s standard of living, rich and poor, began rising to unforeseen heights. It was indeed the Enlightenment, the dawning of modern times, and people of all walks of life took notice.

Advocate for the Common Man

Just as George Washington was the father of a new nation, so Adam Smith was the father of a new science, the science of wealth.The great British economistAlfred Marshall called economics the study of “the ordinary business of life.”Appropriately,Adam Smith would have an ordinary name. He was named after the first man in the Bible,Adam, which means “out of many,” and his last name, Smith, signifies “one who works.” Smith is the most common surname in Great Britain.

The man with the pedestrian name wrote a book for the welfare of the average working man. In his magnum opus, he assured the reader that his model for economic success would result in “universal opulence which extends itself to the lowest ranks of the people” (1965 [1776], 11).1

1. All quotes from The Wealth of Nations are from the Modern Library edition (Random House, 1937, 1965, 1994). In this book I refer to the 1965 edition, which has an introduction by Max Lerner. There have been many editions of The Wealth of Nations, including the official edition issued by the University of Glasgow Press, but this edition is the most popular.

ADAM SMITH DECLARES A REVOLUTION 7

It was not a book for aristocrats and kings. In fact, Adam Smith had little regard for the men of vested interests and commercial power. His sympathies lay with the average citizens who had been abused and taken advantage of over the centuries. Now they would be liberated from sixteen-hour-a-day jobs, subsistence wages, and a forty-year life span.

Adam Smith Faces a Major Obstacle

After taking twelve long years to write his big book, Smith was convinced he had discovered the right kind of economics to create “universal opulence.” He called his model the “system of natural liberty.” Today economists call it the “classical model.” Smith’s model was inspired by Sir Isaac Newton, whose model of natural science Smith greatly admired as universal and harmonious.

Smith’s biggest hurdle would be convincing others to accept his system, especially legislators. His purpose in writing The Wealth of Nationswasnotsimplytoeducate,buttopersuade.Verylittleprogress hadbeenachievedoverthecenturiesinEnglandandEuropebecauseof the entrenched system known as mercantilism. One ofAdam Smith’s main objectives in writing The Wealth of Nations was to smash the conventional view of the economy, which allowed the mercantilists to control the commercial interests and political powers of the day, and to replace it with his view of the real source of wealth and economic growth, thus leading England and the rest of the world toward the “greatest improvement” of the common man’s lot.

The Appeal of Mercantilism

Following a long-standing tradition in theWest, the mercantilists (the commercial politicos of the day) believed that the world’s economy was stagnant and its wealth fixed, so that one nation grew only at the expense of another.The economies of civilizations from ancient times throughtheMiddleAgeswerebasedoneitherslaveryorseveralforms of serfdom. Under either system, wealth was largely acquired at the expense of others, or by the exploitation of man by man.As Bertrand de Jouvenel observes, “Wealth was therefore based on seizure and exploitation” (Jouvenel 1999, 100).