Three More

 This is the day I celebrate 2 million clicks! 

And it’s still only 18th June, showing 295,000 clicks compared with 258,000
 last month! So onwards and upwards!

Waves of War – nationalism, state formation and ethnic exclusion in the 
modern world Andreas Wimmer (2013) 

The Making of Modern Economics Mark Skousen (4th ed 2022)

The history of modern economics is a cunning plot that can match the best of historical novels. The running story line is man’s search for wealth and pros-perity and the economic model that best serves the needs of the common man.

The main character is Adam Smith, a child of the Scottish Enlightenment, and the philosophy he represents, the self-regulating system of natural liberty and competition. Our hero has gone through untold triumphs and tragedies in the unfolding of over 200 years of economic history. Sometimes he appears lifeless following the blows of his opponents. But he always recovers.

A QUICK OVERVIEW

The plot begins in dramatic fashion in 1776, when a London publisher printed Adam Smith’s monumental work, The Wealth of Nations, the intellectual shot heard around the world. Smith’s captivating philosophy of natural liberty and the invisible hand rapidly became the central character of modern economics as the Industrial Revolution and political liberty exploded on the scene, and created a new era of wealth and economic growth over the next two centuries. The enlightened Scottish model of prosperity quickly spread to France (via J.-B. Say and Bastiat), America (via Thomas Jefferson), and the rest of the Western world. Yet the optimistic world of Adam Smith was almost immediately chal-lenged by Robert Malthus and David Ricardo, two serious scholars who propound the gloomy doctrine of the iron law of subsistence wages and the permanent misery of the working class. These pessimistic forecasts were fol-lowed by the appearance of John Stuart Mill, who vacillated between liberty and socialism as utopian communitarianism reached its zenith of popularity.

Introduction.

Then, in the middle of the nineteenth-century Industrial Revolution, Karl Marx suddenly strode onto the scene with talk of exploitation and alienation among the industrial workers, and plunged economics into a new dark age. The rise of socialism would be the biggest challenge Smithian capitalism would face over the next century.

THE MARGINAL REVOLUTION

Fortunately, a new light appeared to counter the dark forces of social engi-neering. This “marginal” revolution gave new life to our main character, the invisible-hand model of Adam Smith. It came from three sources in the early 1870s—from Carl Menger in Austria, Léon Walras in Switzerland, and Wil-liam Stanley Jevons in England. Eugen Böhm-Bawerk, a colleague of Menger, was the frst economist to take on Marx with a devastating critique of his labor theory of value and exploitation. Through the textbooks of Alfred Marshall in England, and Frank Taussig and Irving Fisher in the United States, the Smi-thian model of modern economics was rebuilt. Thus resuscitated, it made an effective counterattack on the growing socialist movement. Scientifc econom-ics had come of age.

Nevertheless, the late nineteenth century was the era of big business and the giant trusts of Carnegie and Rockefeller. Institutionalists like Thorstein Veblen swayed the crowds of cynics with their warnings of conspicuous con-sumption and monopoly power, while German sociologist Max Weber wrote of the religious underpinnings and the “iron cage” of capitalism.

KEYNES AND THE GREAT DEPRESSION

But the biggest blow to Adam Smith’s world of free-market capitalism came with the 1929 crash and the Great Depression of the 1930s. Neoclassical econo-mists comprehended the nuances of supply and demand, but failed to grasp the mysteries of the “money nexus,” the vital connection between the micro economy and the macro economy. The great Yale professor Irving Fisher made bold attempts at solving the missing link between micro and macro in the early twentieth century, and the Austrian Ludwig von Mises, relying on the pro-found work of the Swede Knut Wicksell, fnally bridged the gap in his Theory of Money and Credit. But the Mises—Wicksell theories didn’t take hold in aca-demia or the halls of government, and by the early 1930s, banks collapsed, businesses failed, and millions of workers begged for a living wage as gov-ernments around the globe struggled to overcome the decade-long fnancial nightmare.

Who would save capitalism? The battle lines were drawn between the classical economists who defended the policies of laissez faire, and the Marxists and socialists who demanded a revolutionary overthrow of the old order. Amid the global intellectual confict appeared John Maynard Keynes, the economist as savior. This Cambridge don proposed a new, sophisticated model based on a “fnancial instability hypothesis” inherent to the capitalist system. This “new economics” required government intervention in the monetary and fiscal arena to stabilize the market economy. Yet, unlike its chief Introduction rival, Marxism, the Keynesian model did not require nationalization or micro control of supply and demand. The classical model of thrift, balanced budgets, low taxes, and the gold standard was relegated to periods of full employment, while the Keynesian prescription of consumer demand, deficit financing, progressive taxation, and fat money played out during periods of economic recession and unemployment. It was viewed as the ideal compromise and soon college instructors, their heads buried in a popular new textbook by MIT wunderkind Paul Samuelson, were teaching students strange new tools—the multiplier, the marginal propensity to consume, the paradox of thrift, aggregate demand, and C + I + G. Keynesian economics reflected the high tide of macroeconomic theorizing and mathematical modeling.

THE RETURN TO MARKET ECONOMICS

The final chapter in our story begins after World War II. Through the monetarist counterrevolution, led by Chicago’s Milton Friedman, economists began to focus more on the instability of government macro policies. Fried-man, relying on empirical work more than abstract model building, demonstrated how the Federal Reserve, a government creation, was the principal culprit in causing the Great Depression. By adopting a stable monetary policy, the self-regulating market economy of Adam Smith could once again flourish. The Chicago School became the driving force behind the return to classical economics and the need for empirical evidence to support theory. Soon other schools of free-market economics—supply side, rational expectations, and Austrian—challenged the Keynesian monolith.

The triumph of the market reached its zenith of success with the collapse of the Soviet economic system in the early 1990s. The Austrian economists Ludwig von Mises and Friedrich Hayek had predicted the demise of socialistic central planning for years, and now their prediction was finally fulfilled. The failure of the socialist paradigm ushered in a new era of free trade, denationalization, and privatization throughout the developing world. Our story of modern economics ends here on an optimistic note, even as battles are still being fought over the right kind of economic policies to pursue in the face of fnancial crises, war, uncertainty, and globalization. In many ways, this final ichapter of modern economics foreshadows the continuing battle between two paradigms, laissez faire versus socialist interventionism, and Adam Smith’s world of imperfect capitalism appears to be challenged again.

STRANGE AND TORRID LIVES 

Yet our story is not just an account of conflicting ideas. It is also an amazing tale of idle dreamers, academic scribblers, occasional quacks, and madmen in authority. The lives of economists are often just as exciting and unusual (even bizarre) as those of most famous people. In these pages, you will fnd the story of:

• A professor of moral philosophy who burned his clothes, then burned his papers before dying; Introduction

• A Cambridge economist who may have been a secret agent for the Soviet Union during World War II;

• A revolutionary who, though his income was in the top 5 percent in Europe, constantly begged for money and speculated wildly in the stock market;

• A government advisor who was so fascinated with people’s palms that he had casts made of his friends’ hands;

• A multimillionaire who lost everything during the stock market crash of 1929;

• A wealthy economist who was murdered by his housekeeper;

• A utilitarian thinker who demanded that his preserved body remain on display at the University College of London;

• A free-market advocate who invented income tax withholding to help fnance World War II;

• A multimillionaire broker who gave all his wealth to his three sons;

• An economist who spent two months in jail, charged with blasphemy against the Virgin Mary;

• A philosopher who learned Greek at age three and suffered a mental breakdown at age twenty;

• An economist who fancied himself as an informal consultant to Italian dictator Benito Mussolini;

• A famous minister of fnance who paraded around the streets of Vienna with two prostitutes and later became president of the American Eco-nomic Association;

• An American economist who refused to use a telephone, make his bed, do the dishes, or clean his clothes, and gave all his students the same grade, regardless of their work;

• A European professor who was determined not to use charts or graphs of any kind in his voluminous writings, and who was a confirmed bachelor until age fifty-seven.

Welcome to the bizarre world of academic economists!

Why study the lives of the economists, and not just their ideas? It would be unfair to dismiss a philosopher’s theories simply because he may have been a bad husband or a drunk. We may fnd Karl Marx’s life reproachful, but does that mean his theories of alienation and exploitation are wrong? Ideas must stand on their own merit, not on the basis of who invented them. Yet we study and judge the actions of our heroes and villains, not just to prove or disprove their philosophies, but to better understand them, and why they said what they said.

The history of economic thought is not normally taught this way, but then this book is not a normal history. It is, candidly, an irreverent, passion-ate, sometimes humorous, and often highly opinionated account of the lives and theories of famous economists, from Adam Smith and Karl Marx to John Maynard Keynes and Milton Friedman.

To enhance the readers’ interest in the book, I’ve added a variety of side-lights, including photographs, diagrams, boxed commentaries, and even classical music selections appropriate to the different chapters.

The Big Three in Economics – Adam Smith, Karl Marx and John Maynard Keynes 
Mark Skousen (2007)
The stories and ideas of these Big Three economists are told in context of a larger 
history I have described in greater detail in “The Making of Modern Economics”. 
In the introduction to that work, I describe two possible approaches to writing about 
the lives and ideas of economists, what I term the spectral versus the hierarchal 
approach. The most popular method of analysis I describe as a pendulum, by 
which historians place each economist somewhere along a political spectrum, 
from extreme left to extreme right. Simple though it is, I see several problems 
with the spectral approach. First, it treats Karl Marx and Adam Smith as coequals