I just finished listening to the audiobook version of Mark Skousen’s “The Making of Modern Economics.” It was a good overview of the history of economic thought starting just a little before Adam Smith up to the late 90’s. This time period captures all of the really big events, “The Wealth of Nations,” Marxism, the marginal revolution, Keyensism, the Austrian school sorting things out (as usual), and culminating with Milton Freidman’s Moneterist revolution and getting back to Adam Smith’s ideas of freedom being the basis of economic prosperity.
The book has as it’s main theme the idea that Adam Smith got it basically right and throughout the years people have either added more understanding to his basic model (Mises, Hayek) or have taken us down what looked like a promising path but ended in failure (Marx, Keyenes). I think that this is basically right and history certainly seems to back that up. I knew quite a bit about a lot of the bigger names but this book filled in some of my gaps when it came to people like Shumpater, William Bates Clark, and Malthus.
For the non-economic minded among you (what?), I’ll give the you the punch line. If we hadn’t listened to Malthus (there is a limited amount of resources and we’re all doomed), and if the marginal revolution had come about a litte earlier, we could have saved millions of people. Marx had a lot to do with it, but his fatal flaw from a theory point of view was his labor theory of value (I’m ignoring the equally powerful, but much more involved Hayekian critique of central planning). Marx (among others at the time) thought that the value of any given thing could be found based on the cost of the labor that went into it. His whole theory sprang out from that. It wasn’t until the marginal utility theory came around to explain subjective value that economists could point out the problems with socialism in general and marxism in particular. But it was too late, Marxist ideas had taken hold and millions upon millions of people paid for it.
Marx is an obvious wrong turn in history, but Keynes may be more pernicious. Keynes was the economist that popularized the notion of government interference being the only way to get out of depressions. He assumed that capitalism was inherently unstable and used the great depression as evidence. His solutions flew in the face of traditional (classical) Adam Smith inspired economics. Deficit spending, massive government projects, and a hatred of saving were the outcomes of his theories. Keynes’ ideas took hold and basically ruled the roost for the next 40 years.
When you listen to Keynes, you end up with England in the 1970’s. High unemployment, low to no growth, and government debt spiraling out of control. Maggie Thatcher (with some help from Hayek) cleaned that place up… It wasn’t until Milton Freidman’s ideas came into popularity did things start to come around. He proved that the great depression was caused by incompetent monetary policy, not any inherent instability of capitalism, and used that as a springboard to dismantle Keynes’ theories.
Government incompetence and/or ignorance is another theme running through not only this book, but history in general. The great depression is a great example. The crash itself may very well have been a bubble popping, but the blame for the depression that followed can only be laid at the feet of the government. Milton Freidman showed that the Fed shrunk the amount of money in the economy by a third, thus plunging the country into depression. The Smoot-Haley tariffs caused an amazing amount of damage, and FDR’s directionless fiddling prolonged it for another 8 years or so. It wasn’t until the war ended did we pull out of it. If they had left well enough alone and not screwed with the money supply, the depression likely wouldn’t have lasted nearly as long…
With Milton Freidman’s contributions we may have seen the last bit of huge economic principles being introduced. There is still plenty of research into the finer points, but the big picture seems to have been pretty well explained. The hell of it is, Adam Smith pretty much did that way back in the 1700’s, it’s a shame that it took us this long to realize it…