If you’re thinking that a book on economics is something you only read to cure insomnia, you’re not alone. Even though I have a burning desire to advance my knowledge of the subject, I must admit that I needed several “breaks” in the process of reading this book. But although it was a lot like pulling teeth, I am much healthier for the missing teeth, and my understanding of economics is much healthier for having read this book.
OK, maybe you’d rather be watching baseball or football or the Olympics, or whatever. Or maybe you’d rather be out golfing on a nice day. Why study economics? The short answer is because economics drives everything in your life, and failure to understand it can ruin you and everyone else. Without some understanding of economics, there would be no sports, no leisure activities, no Olympics, no peace and no prosperity. The old adage for understanding life is true: follow the money.
I studied logic in college. I also liked Mathematics, but in my liberal arts program I wasn’t required to take any Math, much to my subsequent dismay. But logic was perhaps an even better discipline. Mathematics is basically logic applied to numbers. And understanding of logic, then, gives one the basis for delving into mathematics, but also it allows one to test theories in all other fields of study. Economics uses Math, but it also deals with other variables, such as human nature.
I find it interesting that, until now, even though I had no real knowledge of which economist was in which camp, I was able to apply logic to reach correct conclusions about the efficacy of their arguments. But I remained highly unsettled. After all, I was trained in Theology and linguistics. How could I possibly hold my own in conversations with economists. There are dozens of theories of macroeconomics and microeconomics. There are statistical analyses that I don’t have in my back pocket to offer in my defense. I felt very vulnerable.
One day, I began to search for texts on economics that might help me gain an overview of the subject. From there, I hoped to be able to branch my study into specific areas. I found hundreds of titles from different schools of thought ranging from libertarian to communist. Where was I to begin? I began looking for a book that could give some kind of comparison between left and right and centrist views (if there is such a thing) and perhaps find some benchmarks of economic thought from which to begin my study in earnest. I happened upon the book in question, The Big Three in Economics: Adam Smith, Karl Marx and John Maynard Keynes, by Mark Skousen (M.E.Sharpe, 20007).
I’d like to tell you that the book was an easy read. Even for me, that was not the case. The best way I can describe it is like trying to cram three college prerequisite courses into a week. There were a lot of names, places, dates, and events to nail down. But I was not merely reading the book as an overview. All the players, major and minor, are significant to me. I’m not sure if one can read this book without obsessing over the details, because each detail seemed to be important to the overall evolution of thought.
There are three major economic philosophies that have driven the last 230 years. Skousen summarizes the three and those who refined or refuted them as follows:
- Chapter One.
The first was introduce by Adam Smith in The Wealth of Nations, written not coincidentally in the year of the American Declaration of Independence. It may seem odd for us today to believe that there was a time before capitalism was the economic model of the Western World. But, although others had advanced such theories earlier, Smith actually was the first to attempt a systematic presentation of it is his book.
- Chapter Two
The Wealth of Nations was a weighty tome of some 1000 pages. However, it was somewhat rambling and lacked explanation of certain monetary forces. Several people, including Jean-Baptiste Say (1767–1832) and Frederic Bastiat (1801–50), helped spur optimism in the endless possibilities of capitalism. Others, such as Thomas Robert Malthus, David Ricardo, and John Stuart Mill, proposed that wealth was fixed within a system and could not be expanded, which meant that laborers would only be able to share the slice of the pie left to them by employers and Landlords, thus leaving them with subsistence wages. Although they would be refuted centuries later, they created the class consciousness that swelled in the 1800’s
- Chapter Three
Karl Marx (1818–83) wrote his Communist Manifesto in 1848 and his larger work, Capital, over the last third of the century. His constant promoter and financier was Friedrich Engels. Expanding on the concept of class struggle, his ideas of violent revolution struck a chord with passionate readers, especially the youth. Two of Marx’s biggest influences were Goethe’s Faust and, oddly, the Bible, in which he found the idea in Jesus of the overthrow of the bourgeois and the communist millennium. He came to reject the idea that God created man, and believed the men create God. He was panned by most economists of his day, and died in relative obscurity. It remained for a young Russian, Vladimir Lenin, to resurrect Marx from the scrap heap and turn him into the patron saint of the Bolshevik Revolution. After the rise of the Soviet Union, Marx gained a following in the west that reached its zenith in the 1960’s (Marxist dogma is still strong among college youth because of the takeover of American Universities by Marxist intellectuals, but that is another book to be reviewed later. See The Long March, by Roger Kimball.)
- Chapter Four
Austrian Carl Menger (1840–1921), Frenchman Leon Walrus (1834–1910), Brit William Stanley Jevons (1835–1882) gave new life to Smith’s capitalism with the formulation of the principle of marginal subjective utility. Whereas Smith had erroneously posited that the value of an commodity was based upon the amount of labor used to produce it, the marginalists advanced that the cost of an item is based on utility. This created the idea that market value was determined by the price one was willing to pay, rather than the amount of labor needed to produce an item. This gave rise to the idea of extrinsic value. for instance, a book is worth more than just the paper on which it is printed.
During this time, Austrian Eugen Böhm-Bawerk (1851–1914) published his landmark Capitol and Interest (1884). This and other works served to punch more holes in Marx’s anti-capitalist writings as well as provide much-needed historical context for the understanding of markets and economic growth.
- Chapter Five
When the Great Depression overtook the world in the 1930’s, trust evaporated in the classical capitalist system. Along came John Maynard Keynes to introduce to the world the idea that government manipulation was essential to restoring full employment, especially in times of deep recessions and depressions. He advanced the idea that governments could run deficits indefinitely without ever suffering any long-term harm. He espoused the idea that saving was a drain on the economy, and that people should be coerced to spend, rather than save. He talked about the spending multiplier, claiming that a dollar spent could generate as much a 9 dollars of economic activity. His ideas became the mainstream of economic thought by which most Western governments operated. Classical capitalists like Austrians Mises and Hayek were unable to unravel the slump of 1929. Keynes believed that the Federal Reserve would be able to head off any future market crashes. (Interestingly, Keynes lost three fourths of his vast fortune in the 1929 Crash.)
- Chapter Six
Keynes’ theories continued to be promoted in most economic classrooms. American Paul Samuelson’s Economics (1948) simplified and formulated the rather sloppily written and hard-to-follow Keynesian tome The General Theory of Employment, Interest and Money. Economics was the standard textbook into the 1960’s. During this time, classical capitalism managed to mount several attacks against Keynesian theory, but the Keynesians had the ear of legislators.
- Chapter Seven
Stagflation, as the malaise that struck the 1970’s was termed, turned out to be the undoing of the iron grip of Keynesian policy. Milton Friedman (1912–2006), launched a decisive attack in his best-seller Capitalism and Freedom (1962), and followed up with his monumental A Monetary History of the United States, 1867-1960. Friedman was able to show that the Great Depression had not, indeed, been caused by free market weaknesses, but by flawed intervention from the Federal Reserve. He was able to show that continued injection of government funds into public works in the 30’s rendered private sector investment impossible, which contributed to the prolonged lag in production. He was able to put to rest the idea that the gold standard had played a part in the Depression.
Friedman also turned the theory of spending and saving on its head. First of all, he was able to show that the multiplying effect of spending never reached higher than 4, and was usually even less. Meanwhile, he proved that the multiplier of saving was even greater. He showed that the real drain on the economy was spending, while saving was the key to long-term investment growth and subsequent economic expansion.
I guess you could say that this book was preaching to the choir. Of course I rate it five stars. First of all, Skousen manages to condense 230 years of economic thought into less that one page per year. Secondly, he reaches the same conclusion that I do–laissez-faire! Government should keep its hands off the capitalist economic engine. The economic ship rights fastest when the government stops shifting the ballast. If this is not your thought, you are not alone. Nearly half of all Americans think the government should be doing something in the line of handouts to help them. But this book makes a pretty convincing argument that the best thing the government can do is to throw us, individually and collectively, into the economic waters, and let us learn to swim on our own.