LEGENDS WHO SHAPED THE ECONOMIC LANDSCAPE OF THE WORLD.. Adapted From the Book “What Would the Great Economists Do”? By Linda Yueh (Oct 2023)

Legends Who Shaped The Economic Landscape Of The World

Adapted From the Book “What Would the Great Economists Do”? By Linda Yueh

One of the most challenging questions that keeps haunting me all the time is one for which the answer is known but not a satisfactory one.  With problems in the field of Economics plaguing countries around the world increasing as never before, it is natural for you to turn to the real experts on the subject. The world has seen and experienced the wisdom of some of the extraordinary talents in the field of Economics.  As can be expected, they all belonged to different periods in the past and to different geographies.   If only one could tap their geniuses to glean a lesson or two on how to handle some of the intractable economic problems that we face today, we might end up with a gold mine of a different kind. In my pursuit to identify and shortlist such great economists and what they could teach us, I ended up with two books which were simply extraordinary on the subject. They were “The Worldly Philosophers” by Robert Heilbroner and “What Would the Great Economists Do?” by Linda Yueh. However, in a world that is inhabited by people with limited attention span and extremely limited time at their disposal, I finally zeroed in on the latter.  This book is written by Linda Yueh.  She is an economist, broadcaster and author – all rolled into one. Many a time, like everyone else, I also fantasise at the prospect of all those great souls from yester years making cameo appearances in our contemporary world and sharing with us the breadth and depth of their intellectual prowess on how to deal with today’s challenges on the economic front. At the very least, even an exercise of this nature could serve as a potent elixir like no other. “During times of fundamental change, economic expertise is in demand.” Yueh’s book starts with this statement. The author continues “Who, then, were these Great Economists whose theories changed the world and whose ideas can help us with our challenges today? My selection also reflects the issues that I have chosen to focus on.”  I agree with this proposition as it makes sense and also because it is an impossibility to cover all the eminent economists of yore which would be beyond the remit of a tome, let alone an article and above all beyond my competence. The Book gives decent summaries of the work done by twelve of the greatest economists of our times that could undoubtedly be fit enough as after-dinner speeches as well as subjects of research papers. This book gives us an introduction to who those great economists were and what they stood for. This book seeks to find answers to the big economic issues affecting all of us by drawing on the insights of these great geniuses. Let us first see who these great economists were. They are: 1. Adam Smith; 2. David Ricardo; 3. Karl Marx; 4. Alfred Marshall; 5. Irving Fischer; 6. Johon Maynard Keynes; 7. Joseph Schumpeter; 8. Fredrick Hayek; 9. Joan Robinson; 10. Milton Friedman; 11. Douglas North; and 12. Robert Solow. But before doing this odious exercise, let me confess that some of these are pure conjectures and the products of idle thoughts of mine that are extremely subjective. This is more in the nature of an avant-garde exercise and done based on cues culled from the economic policies and philosophies of these economists. Remember that we are now on a kite flying exercise in which the economists covered here have no say.

1.                Adam Smith (1723-1790):  He was a British economist. Famously known as the Father of Modern Economics he asked himself the fundamental question: “Should the Government Rebalance the Economy?” Widely viewed as the seminal figure in Economics, Adam Smith witnessed the beginning of the Industrial Revolution, which not only changed the Western world but also the subject of Economics. Adam Smith’s magnum opus “An Inquiry into the Nature and Causes of the Wealth of Nations” took a decade to write. It sets out the concept of the ‘invisible hand’, which refers to the unseen market forces that set prices by equating supply and demand.  As a reaction to the common policy of protecting national markets and merchants, what came to be known as mercantilism, is often referred to as "crony capitalism". Smith laid the foundations of classical free market economic theory.  He developed the concept of division of labour and expounded upon how rational self-interest and competition can lead to economic prosperity. Smith had the temerity to write that Britain should ‘endeavour to accommodate her future views and designs to the real mediocrity of her circumstances’.  Rebalancing the economy was crucial for Britain who had a flourishing manufacturing sector even as it had one of the largest services sectors. Adam Smith’s economic system is formulated around three pillars: the division of labour, the price mechanism and the medium of exchange.  One of the famous quotes from Adam Smith was this. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages”.  Smith, unquestionably the father of the field whose ideas of a freely competitive market still shape our thinking today. He believed in human endeavour above all. Smith's views on the role of government as a provider of public goods, enforcer of property rights, and regulator of markets would be relevant in discussions about the appropriate balance between government intervention and market forces in areas like healthcare, education, and environmental protection. Smith was not only an economist but also a moral philosopher.

2.                David Ricardo: (1772 - 1823): In the context of international trade Ricardo set out to answer the question: “Do Trade Deficits Matter”?  David Ricardo was a British political economist. Here is a classic economist who never went to a university. Ricardo followed the principle of utility for a society which advocated the greatest happiness for the greatest number. Ricardo, in one sense, became famous as he developed the theory of economic rent. Another notable contribution from him was the theory comparative advantage. Even if China can produce everything more cheaply, America should still produce what it is relatively better at, and so should China. Thus, it is in the interests of every country to specialize in terms of what it produces and trade for what it no longer produces as much of.  Nobel laureate Paul Samuelson observed that this fundamental premise of international trade developed by Ricardo of comparative advantage, was the best example of an economic principle that is undeniably true yet not obvious to intelligent people. Aiming for a trade surplus without examining what needs to be done in the domestic economy to make exports more desirable to the rest of the world would have struck Ricardo as the wrong way to go about it.  Ricardo would have pushed harder for the opening of global markets, particularly the relatively closed services sector. The core of Ricardo’s theory is that production and exchange were what determined economic prosperity, not the mercantilist policy deployed to foster a trade surplus in his day.

3.                Karl Marx: (1818-1883): Marx did not live to see the answer to this question: “Can China Become Rich”? Karl Marx was one of the most influential and also one the most controversial economists in history. Marx was a German-born philosopher, economist, political theorist, historian, sociologist, journalist, and revolutionary socialist.  Marx was a man of contradictions. He advocated for the working class but lived in genteel circumstances.  Posthumously, Marx’s theories of communism transformed the economies of some of the largest countries in the world. A discussion on Marx cannot be complete without a reference to his collaborator Friedrich Engels. Marx wrote the Communist Manifesto in collaboration with Engels. It is in this that Marx made those memorable words – “the proletarians have nothing lose but their chains.  They have a world to win”. Progressively Marx developed his theory of surplus value that endeared him to the trade unions. He predicted the end of capitalism. According to the book China’s revolution seemed to fit Marx’s paradigm.  He prophesied that social conflict between the exploited labourers and the capitalist classes that would lead to the overthrow of the old system and the adoption of a communal or communist system of ownership.  Ironically, the outcome predicted for capitalist economies was actually realised in communist ones.  Marx would have been surprised that China turned out to be more unequal than capitalist America. Marx would not have recognized China today as an embodiment of his principles.  According to Marx, Economics must move beyond philosophical principles. Marx said, “Philosophers have hitherto only interpreted the world; the point is to change it”.

4.                Alfred Marshall (1842 – 1924): Marshall was preoccupied by this ethical question: “Is Inequality Inevitable?”  He was a British economist.  Marshall may be rightly considered the father of free-market economic theory. He is, many people would say, the father of Economics as we know it today.  Marshall’s specialty was microeconomics—the study of individual markets and industries, as opposed to the study of the whole economy. His most important book was Principles of Economics. In its country-of-origin Alfred Marshall’s principles stand with Adam Smith’s Wealth of Nations and Ricardo’s Principles as one of the three great watersheds in the development of economic ideas: with the usual qualifications, we may divide the history of English political economy into three distinct epochs – the Classical, the Ricardian and the Marshallian or reformed-Ricardian … it must be accounted as one of the foundation stones of modern American Economics. Marshall saw the government’s role more as that of regulator than as provider of goods and services.  According to Marshall  the function of Government is to govern as little as possible; but not to do as little as possible. Although Marshall is viewed as the economist who increased the rigour of economics, he taught his students to see economics as offering a set of tools and an analytical way of thinking but not to believe that the textbook reflected the real world.

5.                Irving Fisher (1867 – 1947): This American economist had a modest question to ask himself.  “Are We at Risk of Repeating the 1930s?”  Just before the Great Crash this American economist infamously declared that the stocks had reached a ‘permanently high plateau’.  As they say, the rest is history. History though has been much kinder and recognised Fisher’s huge contribution to Economics.  Irving Fisher’s economic theory describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. His most influential contribution concerned his Equation of Exchange, which sought to predict what might happen to prices when the money supply changed. It had been known for centuries that there existed a relationship between the amount of money in the economy and prices, commonly known as the Quantity Theory of Money.  His book “The Purchasing Power of Money” was very well received around the world. Keynes described it as a better exposition of monetary theory than was available elsewhere.  Irving Fisher’s insights were revived in the 1990s by Hyman Minsky, who had incorporated ideas from Fisher as well as others in formulating his theory that private corporate debt, largely ignored in macroeconomic models, would lead to a financial crisis. He warned against speculative bubbles arising in inflated asset prices which had economy-wide implications. The intellectual pursuit that dominated Fisher’s work stemmed from his experience in losing his fortune in the Great Depression. Fisher was at the vanguard of modern economics, essentially inspiring the leading central bankers who were at the helm when the entire banking system was on the brink of collapse. There is no doubt his thinking continues to remain relevant today.

6.                John Maynard Keynes (1883-1946): The British economist convincingly answered the question “To Invest or Not to Invest?” and much more. He was the most famous of the species called economists after Adam Smith. Arguably this most famous economist did not have a qualification in Economics.  He had a BA Degree in Mathematics.  He has been credited with the launch of Keynesian revolution in Economics.  He advocated government spending in sharp break with neoclassical economics that eschewed the active use of fiscal policy in response to a downturn.  His followers helped to incorporate Keynesian thought into neoclassical economics which came to be known as neoclassical synthesis.  Keynes famously argued that Germany could not afford the post war reparations demanded of it 1919.  His ‘animal spirits’ description of investment is as relevant today as it was when he propounded it.  The post war sluggish recovery saw the launch of the Keynesian revolution.  Once he famously observed “’But in the long run’ is a misleading guide to current affairs.  In the long run we are all dead”. Classical economists had assumed that savings automatically became investment. Keynes’s insight was to treat savings distinctly. He discovered the ‘paradox of thrift’ that arises when, as more people try to save, the aggregate amount of savings in an economy actually falls. This happens because, as savings increase, consumption falls, which reduces total output, which in turn reduces the income from which savings are made.  He believed that the economic problem is not – if we look into the future – the permanent problem of the human race.  Keynes felt that “for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well”. Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the financial crisis of 2007–2008.  Time magazine included Keynes among its Most Important People of the Century in 1999. It reported that his radical idea that governments should spend money they don't have may have saved capitalism.  The Economist described Keynes as "Britain's most famous 20th-century economist.

7.                Joseph Schumpeter (1883 – 1950): The Austrian political economist’s aim was to comprehensively find an answer to the question: “What Drives Innovation?” Schumpeter was one of the most influential economists of the early 20th century who popularised the term “creative destruction” that has become the essential feature of capitalism. He firmly believed that capitalism required vibrant entrepreneurship and prudent regulations. He grew up at a time when the engine of capitalism was transforming society.  Paul Samuelson, a Nobel laureate described him as completely qualified to play the important sociological role of the alienated stranger. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as US Steel illustrate the same process of industrial mutation – if I may use that biological term – that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. Innovation is the engine of economic growth, or, as Joseph Schumpeter put it, innovation in a capitalist economy is the ‘perennial gale of creative destruction. Schumpeter once said that socialist bread may well taste sweeter to them than capitalist bread simply because it is socialist bread, and it would do so even if they found mice in it. Schumpeter saw a paradox in that capitalism was being killed by its own achievements. Schumpeter saw entrepreneurship as essentially one and he same thing as technological progress that raises the growth of the economy.   Nokia and BlackBerry phones are good illustrations for Schumpeter’s ‘creative destruction’. in 1942 he published what became the most popular of all his works “Capitalism, Socialism and Democracy” reprinted many times and in many languages in the following decades, as well as cited thousands of times. His last book was published posthumously in 1954. 

8.                Friedrich Hayek (1899 to 1992): Hayek was an Austrian-British economist.  He set himself to finding an answer to “What Can We Learn from Financial Crises?” Hayek propounded the theory that posits that the natural interest rate as an intertemporal price; that is, a price that coordinates the decisions of savers and investors through time. The cycle occurs when the market rate of interest (that is, the one prevailing in the market) diverges from this natural rate of interest. There is no figure who had more of influence on the intellectuals behind the Iron Curtain than Friedrich Hayek. He believed that the prosperity of society was driven by creativity, entrepreneurship and innovation, which were possible only in a society with free markets.  With the publication of his book “Collectivist Economic Planning” in 1935 Hayek marked his transformation from economic theory to political philosophy. Hayek disputed the use of fiscal policy in moderating business cycles though Hayek started off as a fan of Keynes. In his book “The Road to Serfdom” He argued that the abandonment of individualism led not only to a loss of freedom and the creation of an oppressive society but inevitably also to totalitarianism and effectively the serfdom of the individual.  In Hayak’s view society evolves so that behaviour of successful individuals is adopted and imitated. Hayek had built on Adam Smith’s ‘invisible hand’ and specifically homed in on the role of prices in determining the value of goods and services in an economy.  Hayak would witness the fall of the Berlin Wall and the disintegration of the Soviet Union that followed it. He lived long enough to see the victory of capitalism over communism, but only just.  In 1992 he died at the age ninety-two.  In 1979 Friedrich Hayek remarked: ‘I have arrived at the conviction that the neglect by economists to discuss seriously what is really the crucial problem of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions. Both Ronald Reagan and Margaret Thatcher were his famous admirers.

9.                Joan Robinson (1903 to 1983): Robinson was a British economist.  Incidentally in this book she is the only female economist.  The question that bothered Joan Robinson was “Why are Wages So Low?”  Again, as per the book the oft repeated question of Barack Obama was also just that. Robinson’s work followed Keynesian thought, so it disputed the neoclassical economic notion of perfectly competitive markets.  According to her one of the unrealistic constructs of economics that helps with solving mathematical equations but isn’t how the real world operates. Robinson’s first book, “The Economics of Imperfect Competition”, was published in 1933 and brought her international recognition. Joan Robinson was a pioneer in introducing imperfect competition into economics, a concept that has fundamentally transformed the field. Keynes even wrote the introduction to the “Theory of Employment”, which was the first textbook in Keynesian economics. In her 1962 book “Economic Philosophy” she wrote wryly ‘All along [economics] has been striving to escape from sentiment and to win for itself the status of a science.’ She added: ‘lacking the experimental method, economists are not strictly enough compelled to reduce metaphysical concepts to falsifiable terms and cannot compel each other to agree as to what has been falsified. So, economics limps along with one foot in untested hypotheses and the other in untestable slogans”.  Robinson's contributions to growth theory focused on the role of capital accumulation and its implications for economic development. She emphasized the importance of investment, savings, and technological progress in driving long-term economic growth. Robinson was the first to define macroeconomics, which became a separate field of inquiry. She coined the term “monopsony,” which presupposes a single buyer in a market. Like a monopolist (a single seller), a monopsonist has power over price through control of quantity. In particular, a monopolist can push the market price of goods down by reducing the quantity it purchases.  She held the view that without scientific proof like in natural science, economic analysis cannot offer definitive answers. ‘The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists. She said once famously ‘The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all’.

10.              Milton Friedman (1912 – 2006): The question for which Friedman was looking for answers was: “Are Central Banks Doing Too Much?” Friedman was an American economist. The answer to this question by Mark Carney, the Governor of Bank of England was they’re trying to get ‘theory to catch up with practice’, while former Fed Chairman Ben Bernanke reworked the classic economics joke: ‘The problem with QE is that it works in practice, but it doesn’t work in theory.’  That in a way shows the axiom when you apply it to practice.  QE (Quantitative Easing) was a euphemism for injecting cash into the economy. Injecting cash to boost the economy because interest rates have been cut to zero or even into negative territory is one of the most controversial monetary policy tools in recent times. Friedman remains a divisive figure in popular opinion largely because of his libertarian and pro free market positions. He was conferred the Nobel prize in Economics in 1976. He was viewed as one of the key influences behind both the Reagan and Thatcher administrations in the 1980s, both of which were ideologically driven towards smaller government and more laissez-faire capitalism. Both leaders attracted criticism, some of which inevitably reflected on Friedman as a well-known conservative who was central to their economic thinking. According to him an over governed society tend to undermine the good objectives through bad means. This quote from him is classic.  “If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage sand”.  “Underlying most arguments against the free market is a lack of belief in freedom itself”.  He also held the view that the mistakes people make is to judge policies and programs by their intentions rather than their results. In 1980 he published the book “Free to Choose”, a best seller.  Friedman’s style was to have a very simple punchy message and stick to it.  Once after a debate after a Keynesian who would win if Friedman had debated Keynes himself.  The answer was : “Friedman would win, Keynes would be right. He held the view that the surest road to a healthy recovery is to increase the rate of monetary growth.

11.              Douglass North (1920 -2015): The problem before him was “Why Are So Few Countries Prosperous?” He was an American Economist known for his work in economic history. North won the Nobel prize in Economics in 1993. He published his book “Institutions, Institutional Change and Economic Performance’ in 1990 - seminal work in Economics.  North created a new way of thinking about Economics, which put human behaviour at the core. It led to a long career of not just research but also policy engagement.  He held the view that history matters - not just because we can learn from the past, but because the present and the future are connected to the past by the continuity of a society’s institutions. North believed that institutions perpetuate themselves. His view that good and bad institutions tend to self-perpetuate implies that there is something called ‘path dependence’. Path dependence means that good or bad institutions lead to persistently good or bad institutions, which reinforce an economy’s growth path – either positively or negatively. What comes next depends on what has come before.  One of his observations is of particular importance to India. According to him history highlights that the most vulnerable to crises are those emerging economies with the greatest exposure to foreigners owning their debt.  Borrowing in US dollars is referred to as the ‘original sin’ of developing countries for this reason. In his opinion there are three reasons that typically motivate multinational companies – natural resources, lower costs and new markets. This indeed is an eternal truth.  North was prescient when observed that “nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction”.  We Indians know this only too well. According to North even if economics doesn’t have all of the solutions, looking more broadly at institutions holds the promise that one day we will learn why some nations are rich and others are poor, and, most importantly, why some nations fail and why some ultimately prosper”.

12.              Robert Solow (1924 - ): The question that he tries to answer is: “Do We Face a Slow Growth Future?” He is an American economist whose work on the theory of economic growth culminated in the exogenous growth model named after him. The growth model known as Solow Residual refers to the unexplained portion of economic growth which isn’t attributed to adding inputs such as workers and capital.  Once Solo famously quoted thus in the context of justification of computers.  “I always thought that the main difference the computer made in my office was that before the computer my secretary used to work for me, and afterward I worked for my secretary”.  Solow held the view that technical improvement in an economy is proportional to its growth rate. ‘I am also inclined to believe that the segmentation of the labour market by occupation, industry and region, with varying amounts of unemployment from one segment to another, will also react back on the equilibrium path. This is the well-known concept of hysteresis whereby long stints in unemployment render workers’ skills obsolete.  Solow would probably view the debate over whether the technologies of the digital era are as productive as the steam engine or electrification of the earlier industrial revolutions as being related to investment. If the computer age is to increase productivity and so lead to a stronger phase of economic growth, it will require investment in not just R&D but also people’s skills and firms’ practices to embed those technologies into how businesses operate. The basic tenets of Robert Solow’s model of economic growth point the way forward. As the saying goes “demography is not destiny”.  Solow has some advice for the economists as well.  “An economist trying to talk to the general public gains respect by insisting on the qualifications by not appearing as pundit, as someone who knows all the answers”.

An exercise of this nature to bring alive those lived in the distant past is both an arduous task and a challenging assignment. On top of this, writing a summary on a review of a book is also a daunting project. Still, I undertook this only with a view to rekindle interest of those who look for credible solutions to the intractable economic problems of the day. Economics is a science in which each new generation’s discoveries build on those of the old. It is a humanistic study in which old ideas remain valid and relevant even today. If you doubt this statement, all that you have to do is to read this book.  However, as I  finished the book, I developed a nagging sense of disappointment.  At a time, when India has acquired an enviable reputation for being an economic powerhouse, conquering the cricketing world comprehensively and is on its way to pitch its tent on the moon, there is not a single economist of stature from India in the list of all-time greats in the field of Economics. 

Thank you.

Venkat R Venkitachalam