Knowledge and the Wealth of Nations: discussing economists

Every profession has its own way of understanding the world, and the way economists understand it is the subject of a book by David Warsh,  Knowledge and the Wealth of Nations: A Story of Economic Discovery. It is a well-written book, and confirms my view that economists have a hard time understanding the world they live in.

Let me summarize its main points. Adam Smith’s Wealth of Nations dealt with the increase of wealth, which he attributed largely to specialization and market size. Things like roads and canals in Smith’s day expanded the market, and permitted greater specialization, as was illustrated by his famous example of the pin factory.

Thereafter, says Warsh, Ricardo and Malthus sidetracked the science into an obsession with the relative share of national wealth held by land, wages and capital. The issue of how wealth grows became, as he calls it, an “underground river”, periodically resurfacing but not much affecting the mainstream of the profession.

Warsh also notes that the profession tunneled into mathematization: that the profession inevitably follows the line of least mathematical resistance, and that those phenomena of the social and economic world that do not lend themselves to mathematics are not studied. This tendency to follow the topics, such as shortage, that lend themselves to a mathematical treatment, sent the profession for a century or more into a cul-de-sac. What had animated Adam Smith, the subject of economic growth, was ignored, says Warsh, until the 1970s.

Now the most obvious fact about the world since 1800 has been the vast growth of wealth, starting in north west Europe and North America and spreading to almost every place in the world not misgoverned by communism or subject to Islamic culture. Even poor places, such as sub-Saharan Africa, are doing much better than they were a century ago.

So, the thrust of the book concerns disputes within the profession itself as to what it considers the issues to be. “Knowledge and the Wealth of Nations” is an extensive set of fan’s notes, but it does not disguise the inability of the profession to embrace huge topics of vital interest to the public, and about which reasonable people would normally expect the profession to have a coherent view. Whence does economic growth come? The answer, says Warsh, is frequently what the waitress says: “not my table”.

The second obvious limitation of the profession’s world view has been, and continues to be, no insight into bubbles, manias, and the timing of crashes. The world is chaotic; economies are more like weather than they are like ordered systems. While economists cannot be faulted for failing to have insights where no one else has them either, it ought to chasten their pride. As Nicholas Taleb pointed out, there was nothing unpredictable about the 2007 housing crash, but Fed Chairman Greenspan said that since, in principle, everyone had perfect information, therefore there could be no bubbles. An idiot!

According to Warsh, the issue of highest importance is the range of issues that the profession can and should deal with. If it can be expressed mathematically, it is economics, and if it is not expressed mathematically, it is not. This attitude results in people like Jane Jacobs, author of  Cities and the Wealth of Nations, not being considered to be “economists”, when plainly they are

Economists are equally befuddled by scientific change. The phenomenon of electro-magnetism has gone from the tinkerings of Michael Faraday with magnets to the most important force that distinguishes the 21st century from the 18th. It is as if all of humanity dived through the worm-hole created by Maxwell’s field equations, and now we find ourselves in a world more closely resembling William Gibson’s Neuromancer than Thackeray’s Barry Lyndon.

Warsh, to his credit, covers the cascading revolutions engendered by electricity, computers, and the Internet. His coverage of the development of the Internet is, to my knowledge, insightful and complete. {He likens the old PSTN to a railway and the Internet to a highway, as I have since I first studied it in 1996.}

However, the issue for the economics profession was “why did it take them so long to address the issue of economic growth?”. Warsh writes:

“Economists recognized that the set of traded goods in an economy is always changing….but according to the economic version of plenitude, such turbulence was an epiphenomenon of no fundamental interest. The insistence of economists like Schumpeter and Young that the creation of new goods was of fundamental importance had been disregarded.”

“…in economics there has been a reluctance to believe new things can happen, and could have happened at any point in the past.” (pp.325-326)

 My problem with Warsh is that he likens revolutions in the economics profession with the actual technological and market revolutions happening in reality. When he writes:

“many people were reluctant to believe that sweeping changes in everyday perception and language could arise from a handful of equations”,

he is not referring to Maxwell’s field equations that linked electricity and magnetism, and from which the cascading revolutions of electricity, power machines, and computers have flowed. He is referring to equations by an economist called Paul Romer whom he credits with changing our idea of the factors of production from ‘land, labour and capital’ to ‘people, ideas, and things’.

In effect, then, the book is about the capacity of the economics profession to encompass and explain the forces that have been changing the world. It shows that, inevitably, economics barely explains the results of scientific and industrial revolutions, even long after they have happened. It shows that, for the most part, the profession is a carefully developed consensus among its practitioners as to what the profession will discuss. It still cannot explain  why poor countries continue to be poor because, for the most part, the explanations lie beyond the range of issues that economics allows itself to deal with, or into which economists have no obviously superior insights than anthropologists, political scientists, or even clergymen, such as institutions, religions, family structure, openness to ideas, and openness to novelty.  What cannot be mathematized, cannot be studied.

Some economists, such as Thomas Sowell, have much that is useful to say about wealth and poverty. But his explanations are not mathematical; frequently they are cultural, racial, or historical. If the creation of wealth remains a mystery to the economics profession, as indeed it does, and if they cannot explain the past let alone the future, how much respect should we pay to their opinions on subjects within their purview? If Jane Jacobs, one of the most interesting writers on economic growth who ever lived, is not an economist, then what does that say about economists as anything but an intellectual clique?

David Warsh concludes:

The really important changes are those in the world itself that have already occurred – the surge of discovery and innovation, the retreat of  the state from top-down economic management and control, the opening of global markets. Professional economics has caught up with these developments in the nick of time.The hard work of assimilating the new understanding, and acting on it, is still ahead.”

With respect, if economics comes so late to incorporating what has happened in the real world after 150 years of scientific and industrial revolution, then clearly it retrospective, and its principal problems are caused by the narrowness of what it will allow itself to study, and still be called economics by the professional estimation of its practitioners.

As my friend Mr Palmer says, “it is a particularly anorexic discipline”.

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