We have made a long run since Adam Smith. So long and so fast that it’s like roller-skating past centuries of masterpieces in the Louvre with just enough time to flash a puzzled Mona Lisa smile. Pity the poor economist. He is expected to cull the “truth” from the twisted tour of history and then confidently counsel presidents.
The truth is that economics befuddles even the sharpest mind. To speak boastfully invites punishment. Brash economists would profit by taking Prometheus’s place and having eagles pick at their livers until they learned humility. Why does economics stump so many and scare off even more? Unlike biologists, economists cannot conduct scientific experiments with carefully monitored control groups. Of course, not all natural sciences have control groups. Astronomers can no more harness a sample of moons than economists can manipulate a random sample of homemakers. But at least astronomers do not have to worry that planets will suddenly act whimsically, as consumers might. Astronomers have a pretty good record of predicting when Halley’s comet will return. Economists have a pretty lousy record of predicting household savings rates. In a joke from the Soviet Union, a man asks, “Was communism invented by biologists or politicians?” “Politicians, of course. Biologists would have tried it out on rats first.” Unfortunately, rats cannot help economists very much, either. Rats may have circulatory systems similar to human beings’, but economics is more a matter of mind than of anatomy.
Economics is not, as Adam Smith and some of his rationalist successors tried to depict, a science of precise laws. Tendencies, maybe. Higher output usually means lower prices, except when Veblenesque goods enter the scene. A higher money supply usually means lower interest rates, except when fears of inflation push interest rates higher. Stock prices usually represent rational predictions of future cash flows, except when “animal spirits” panic or excite investors into dramatic swings. Investors usually take risks until the marginal benefits equal the marginal costs, except for Schumpeterian Übermensch entrepreneurs, who perceive values better than the market. These imprecise forces that disrupt the scientific approach are not necessarily irrational (that is, crazy). They may be nonrational and unpredictable, as in quantum physics, where electrons do not act crazily—they simply defy our current methods of modeling. As economists, we haven’t figured out everything. On the other hand, to deliberately flout the tendencies discovered by the “Hall of Fame” economists is to flirt with economic calamity. Price supports, protectionism, and laissez-faire pollution policies can quickly deliver high prices, high taxes, and filthy air. Despite a reputation for contentiousness, few educated economists would advise any of them.
It’s not easy being an economist. As usual, Keynes found the most sparkling words to describe the master economist, who “must be as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.”1 All the king’s headhunters and all the king’s men couldn’t fill this job description.
None of the economists we have surveyed was able to flawlessly balance general/particular, future/present, or heaven/earth. None proved equally prodigious at microeconomic and macroeconomic analyses. They had their limits. Some of them even knew that.
They all knew one thing, however: they could not ignore the interplay between government and the economy. Adam Smith blasted the government for supporting the trade restraints of the guilds. Malthus contended that Poor Laws promoted poverty. Ricardo warned that protectionism could sink England into the abyss of a new dark age. Marx argued that government worked only as a tool of exploitation and oppression. Keynes tried to shake government employees from a deep and dangerous sleep. And so on.
Despite the lonely cries of extremists, we have learned that governments are not necessarily evil or good. They are neither saviors nor satans, although their policies may at times have salvific or satanic consequences.
Nonetheless, each of the economists we have studied, despite their many differences, warned us that governments always face political pressures to take measures that can ruin good economies. U.S. congressmen can spend their entire careers consoling and consorting with victims of good economic policy. Free international trade hurts some domestic producers. Low inflation hurts borrowers. Falling interest rates hurt bond buyers. Technological innovation hurts some workers. Taxes on pollution hurt corporations.
Do not be inveigled into thinking that the victims of good economics exactly offset the beneficiaries. Good economics is not a zero-sum game, taking from Petra to pay Paula. As a matter of fact, we may define “good economics” as policies that produce positive gains, even though victims may be created.
Because even good economic policies often produce victims, economists have a very tough time persuading democratic governments to take good advice. Good economics may not be popular economics, especially in the short run. The benefits of lower inflation and higher investment may take some time to shine through—especially to shine through television images of fallen farmers and depressed homeowners (who enjoyed soaring asset values during the inflationary 1970s, suffered tougher times in the 1980s, and enjoyed a surge in the late 1990s and early 2000s). Unfortunately, the media generally prefers short bursts of wrenching, violent images to lengthy exposures of pleasing, peaceful images.
Good economics does not do well in fifteen-second sound bites. In fifteen seconds, a shill from any number of lobbyists can clobber an unbiased economist. What economists really need are lessons in sloganeering and pamphleteering. What news programs need is the patience to listen to difficult arguments.
Let’s be honest, though. To a large extent, the media only reflect the demand of viewers for titillating tidbits. Apparently, people enjoy gruesome news stories, just as they enjoy horror movies. Some of the fault for inane news programs lies in ourselves. We cannot sympathize with market economics and then slam networks for pandering to the public.
As a public, we have at least three psychological barriers to economic literacy. First, we prefer brief, flashy bursts of information. Second, we prefer immediate results and quickly grow impatient. Keynes had it wrong. In the long run, we, or at least our descendants, are not dead. If we surrender to every urge today, we leave nothing for tomorrow. If we do not save, if we only borrow, if we dance too merrily tonight, tomorrow will be a very long and arduous day. Societies prosper only when they think of a long run. This is not to say that a society of misers always thrives. While the medieval obsession with a heavenly afterlife probably drained the energy to innovate and excel on earth, we in our century have exalted tonight as the chiliastic moment rather than tomorrow or the day after tomorrow.
Third, despite our short-run focus, we find it difficult to recognize the “good times” even when we have them. Economic happiness is not an explosion of wealth. The Industrial Revolution, the most dramatic economic event in the history of mankind, came at a rate of only about 5 percent per year. A 5 percent rise in the living standard does not sweep a pauper into the master bedroom of the palace. Nor does it replace gruel with foie gras. Year-to-year changes come slowly. But when he nears death, the pauper may find that his standard of living has multiplied fourfold. Life is seldom blissful and often just tolerable. Even if a higher living standard could bring happiness, it usually comes too slowly for us.2 When it finally comes, we’re at just the right age to sing nostalgic songs about the good old days. As we travel through time, we peer through the front window with nearsighted glasses, yet we glance through the rearview mirror with rose-colored glasses. It’s hard to move forward that way. And it’s hard for economists to point us in the right direction.
Newspapers seldom declare heydays. Only history books can. In retrospect, the middle 1960s were the heydays of economics. Sustained economic growth spanned years. Keynesian theory appeared powerful. Yet contemporaneous reports of that period highlighted despair and economic uncertainty. The good times passed by without too much notice, as if we had a right to expect prolonged economic success. Only a recession would have made the front pages. As Schopenhauer noted, peaceful years appear in history books as brief pauses scattered here and there, while wars and revolutions dominate. More pithily put by Beccaria, “Happy is the nation without a history.”
Samuel Goldwyn warned us not to make any predictions, especially concerning the future. Let’s ignore him. For despite jeremiads of a coming apocalypse bringing global hunger, despair, and misery, we do have reason for optimism. No guarantees, no overwhelming odds, just reason. Recall that national income depends on labor, capital, natural resources, and technology. Recent developments in each of these factors of production point toward economic growth in the long run.
In the United States, as well as other Western democracies, labor seems better acquainted with management than a decade or two ago. Through the influence of Japanese management techniques, workers in large plants play a larger role in designing and refining the production process. Furthermore, unions recognize that their prosperity rests on the success of the company, not on the extraction of high wages without concomitant increases in productivity. American unions seem willing to accept lower wages during recessions rather than layoffs, allowing their fortunes to rise and fall with the company’s. In return, management finally understands that workers should have a large stake in the performance of the company. Many employees now receive stock options as part of their compensation. A more cooperative relationship promotes economic growth.
Capital markets are more efficient than they were twenty years ago. International financial capital moves more fluidly across national boundaries. Inefficient governments and corporations feel strong pressure to mend their ways, lest they fail to attract investors. Firms find it easier to raise funds to build new plants and buy new equipment. Once upon a time, a firm could draw a circle around the geographical area from which it could get financing. A century ago, the radius was perhaps ten miles. If the locals did not save enough money, the firm could not borrow anything from a bank. Throughout the century the radius has expanded. It now equals the radius of the earth. Today a Pittsburgh company can float a bond in Australia, even if all its Pittsburgh neighbors save their money in mattresses rather than in mutual funds.
Technology represents the most fascinating and unpredictable part of the production function. Who knows when the next Turing or von Neumann will emerge and where they will take us? They brought us modern computers, but even they would be surprised by how quickly and powerfully the Internet has woven the world together. A schoolgirl in Jakarta is just one click away from a virtual tour of Disney World or a NASA briefing on the next mission to Mars. A man with prostate cancer in the Congo can download research from Johns Hopkins and show it to his doctor. Physicists and chemists furiously work on superconductivity, a project that nearly eliminates the barriers that friction presents to us. Superconducting materials and nanotechnology will transport our bodies and our messages at mind-boggling speeds. Biologists scramble (carefully, we hope) to exploit recombinant DNA to improve the sources of nutrition and erase the blight of disease. On an institutional level, we see a burgeoning of cooperation between university research centers and corporations. Ventures joining the genius of both types of institutions accelerate the already lightning pace of science.
And of course, our natural resources multiply whenever technology grants new methods of extracting, recovering, or replenishing the earth’s bounties (and the resources of space).
Surely, we should not ride into the future on a wave of reckless optimism. With each possibility of positive development comes risks and drawbacks. Recalling our production function, labor unions do not always hold hands with management. Factory innovations may displace some workers; prolonged strikes may take place. Capital markets may be thwarted by insider trading and other scams. Natural resources may be exploited selfishly by irresponsible firms. And so on.
Finally, we must consider all those other political, psychological, and institutional factors that mold our minds. Technology can blossom, but tribal taboos can halt progress. For example, if we thought that sand was holy, we might not have glass or semiconductors, much less vacation homes in Miami Beach. Surely, ancient and medieval restraints on lending restricted economic progress centuries ago. In addition, as Nobel laureate Robert Solow discovered, economic growth demands an educated populace. Paul Romer of Stanford has urged economists to spend as much time on “idea gaps” as on deficiencies in factories and roads. Romer argues that most technologies do not just pop up by accident or get delivered to man as Prometheus brought fire. Since so many people benefit from discoveries like the transistor and chemotherapy, societies should encourage scientists and engineers, whether by tax breaks or by patents, which give discoverers a temporary monopoly on profits. Sometimes ideas do begin with flash insights or even the work of tinkerers. Take a look at any airport terminal and watch thousands of people rolling their luggage with ease. Although a new Boeing 737 looks much the same on the outside as the first model built in 1967, passengers look different. When the initial Boeing 737 rolled off the assembly line, passengers dragged or carried their luggage in hand. “Lug” was a verb, and it was an unpleasant thing to do. Wheeled luggage was not patented until 1972. Since that time, wheels and hideaway handles have saved untold visits to chiropractors and drugstores. A few years ago, I had a flash insight that would make arithmetic more intuitive to children. I arrayed the numbers 1 to 100 in a special zigzag matrix called the Math Arrow. It turned out that no one had presented numbers in such a way, and when it raised test scores for first-graders, mathematicians wondered whether it could replace the number line in classrooms.3 Nonetheless, it is not easy to persuade school bureaucrats to entertain a new idea. Many of the most important discoveries are not sudden flashes but instead might come from years of full-time laboratory experimentation. For seven years, Jonas Salk toiled in laboratories before bringing forth the life-saving polio vaccine in 1955.
Beyond innovations, insights, and inspirations, economic growth also requires, as Joseph Schumpeter taught (prior to the establishment of a Nobel Prize in Economics), an entrepreneurial drive. Who knows whether mental and spiritual forces will push us forward or twist us around and send us reeling toward barbarism? How free do entrepreneurs feel under the ever-too-watchful eyes of the Taliban or “Dear Leader” Kim in North Korea?
Schumpeter speculated about capitalism’s future in his masterful Capitalism, Socialism, and Democracy. To Schumpeter, the greatest threat came not from economic factors such as falling profits but from political factors. In fact, capitalism’s very successes would destroy capitalism. By creating a highly educated class with plenty of leisure time, capitalism would allow a new generation to begin questioning its moral framework. They would begin asking questions about income inequality, justice, pollution, and so on. Finally, their acidic questions would burn through capitalism’s weak moral foundation, and they would turn nations to socialism, which would promise material welfare and moral support for those yearning for justice on this earth. In his now famous query, Schumpeter asked, “Can capitalism survive? No. I do not think it can.”4
During the late 1960s, as long hair, bongo drums, psychedelic colors, and drug use spread, Schumpeter’s predictions seemed to be coming true. Third World nations, newly liberated from Europe, turned to socialism. By the early 1970s, Ph.D.s were driving taxicabs and blasting the establishment.
But what did the 1980s bring us? Yuppies, short hair, striped shirts, and a parade of underdeveloped nations trading Das Kapital in for Dress for Success. Even the Soviet Union strove to revive its sclerotic economy. Nobody urges centralized planning anymore. Here are just a few headlines from New York Times feature stories: “Yugoslavia’s Capitalist Tilt Becomes a Headlong Plunge”; “Adam Smith Crowds Marx in Angola”; “A Radical Diagnosis of Latin America’s Economic Malaise: A Book Promoting Entrepreneurship Takes the Region by Storm.”5 Finally, read a few lines from the New York Times story “The Global March to Free Markets: As the World Economy Becomes More Competitive, Capitalists and Communist Countries Alike Are Turning to Adam Smith”:
In Moscow, entrepreneurial comrades are running their own beauty parlors and auto repair shops, while in China many farmers are eschewing the communal system in favor of selling produce they grow themselves. . . . It seems that no matter where you look, governments have been turning to market mechanisms—Adam Smith’s ingenious invisible hand—to pep up their economies. Economists say there is unusual agreement among capitalist and Communist countries about the importance of giving freer rein to the market: that overarching mechanism that helps articulate consumer desires, encourages inventiveness, and disciplines inefficient producers.6
The 1990s and early 2000s broadly reinforced these trends, even though Russia and the Far East stumbled. When the Communist Party won democratic elections in Poland in 1995, for example, they committed themselves to capitalist rule. Only their pedigree was communist. Romania, which once practiced a more austere communism than the USSR, signed a free trade pact with Turkey in 1998. Sandinista leader Daniel Ortega tossed aside his old Marxism and ran for president in Nicaragua under a pro-capitalist banner (only to relapse into authoritarian repression and earn condemnation from Amnesty International). When Labour governments replaced Conservative governments in Great Britain and Canada, they outdid their predecessors by keeping tight budgets and privatizing national industries. One of Prime Minister Tony Blair’s first acts was to liberate the Bank of England from political rule so that it could determine monetary policy without feeling the pressure of squeamish politicians. No wonder Margaret Thatcher declared that Blair would do just fine.
Even if a return to market mechanisms does not magically turn poverty into wealth, at least governments have jettisoned rigid, ideological abhorrence of market economic systems. Most important, the wondrous communications technologies that brought us the Internet make it nearly impossible for despots to keep their people in the dark or in silence.
Of course, material prosperity will not cure some of the problems that Schumpeter thought would plague the educated class. Inequality and poverty may still remain. How can they best be assuaged? Taxes and redistributions that tend not to discourage invention and entrepreneurship would help. Many economists advocate for consumption taxes to ultimately replace income taxes.
One problem may not be solved by markets or shrewd governments, though. Can human beings keep up with the pace of new inventions that make traditional jobs and roles obsolete? Can human beings educate themselves fast enough to handle the computer and post-computer age? Most probably can. But as society grows more complex, more and more will fall through the various safety nets—those with psychological, physical, and intelligence handicaps will falter. The world is materially easier but psychologically more difficult to live in today than it was two hundred years ago. Life in the twentieth-century city is as tough on the human spirit as life on the farm ever was. It’s quite easy to lose one’s footing in the modern world, to be whirled around a factory and spat out a homeless waif, like Charlie Chaplin in Modern Times.
Our biological clocks may no longer be synchronized with our lifestyles. Two hundred years ago, women bore children by the age of twenty. By then they knew what the world had to offer, what kind of jobs they could hold, what kind of future they could expect. They could teach their children to survive. How many twenty-year-olds today know what they can or will do when they are twenty-five? The modern world presents us with so many more opportunities that we cannot be good predictors of our own lives, much less our children’s. Our children are no longer raised by people who know the world, not because parents have gotten stupid or lazy, but because the world has gotten too big to master. Parents must eventually learn to teach their children how to handle uncertainty—not how to ensure stability.
In reciting glum news, we have ignored many other possibilities, including natural disasters. California may float off into the Pacific Ocean. Plagues may strike down millions. Drought may starve millions more. Wars may rob the youth from many nations. It is easy to paint a dark portrait of the United States and of the rest of the world.
The economist must study all these events. They all impinge on his easel, splattering blotches all over the carefully crafted, elegant portrait he wants to unveil to the world.
For most of man’s life on earth, he has lived no better on two legs than he had on four. Give the economist a little credit for explaining and depicting the brief, shining moments when there has been a difference.