What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems

by Linda Yueh

Overview

A Newsweek "Best 50 Books of the Year (So Far)" Pick

"What Would the Great Economists Do? comes at the right time: a highly accessible and acute guide to thinking and learning from the men and woman whose work can inform and ultimately aid us in understanding the great national and global crises we're living through." --Nouriel Roubini, author of the New York Times bestselling Crisis Economics: A Crash Course in the Future of Finance

A timely exploration of the life and work of world-changing thinkers—from Adam Smith to John Maynard Keynes—and how their ideas would solve the great economic problems we face today.

Since the days of Adam Smith, economists have grappled with a series of familiar problems – but often their ideas are hard to digest, even before we try to apply them to today's issues. Linda Yueh is renowned for her combination of erudition, as an accomplished economist herself, and accessibility, as a leading writer and broadcaster in this field. In What Would the Great Economists Do? she explains the key thoughts of history's greatest economists, how our lives have been influenced by their ideas and how they could help us with the policy challenges that we face today.

In the light of current economic problems, and in particular economic growth, Yueh explores the thoughts of economists from Adam Smith and David Ricardo to contemporary academics Douglass North and Robert Solow. Along the way, she asks, for example, what do the ideas of Karl Marx tell us about the likely future for the Chinese economy? How do the ideas of John Maynard Keynes, who argued for government spending to create full employment, help us think about state intervention? And with globalization in trouble, what can we learn about handling Brexit and Trumpism?

What Would the Great Economists Do? includes:

Adam Smith

David Ricardo

Karl Marx

Alfred Marshall

Irving Fisher

John Maynard Keynes

Joseph Schumpeter

Friedrich Hayek

Joan Robinson

Milton Friedman

Douglass North

Robert Solow

Product Details

ISBN-13:	9781250180544
Publisher:	Picador
Publication date:	06/18/2019
Pages:	368
Sales rank:	640,333
Product dimensions:	5.40(w) x 8.20(h) x 1.10(d)

About the Author

LINDA YUEH is an economist, broadcaster, and author. She holds senior academic positions at Oxford University, London Business School, and the London School of Economics and Political Science. She is also a broadcaster and was an anchor/correspondent at the BBC and Bloomberg TV. She is a widely published author and serves as editor of a book series on economic growth and development.

Linda's books include What Would the Great Economists Do?, China's Growth: The Making of an Economic Superpower, and Enterprising China.

Read an Excerpt

CHAPTER 1

Adam Smith: Should the Government Rebalance the Economy?

Widely viewed as the seminal figure in economics, Adam Smith witnessed the beginning of the Industrial Revolution, which fundamentally changed the Western world. During this time and in the decades that followed, Britain became the world's first industrialized economy. This extraordinary period formed the backdrop to one of the most influential books in 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. It has become the mantra for laissez-faire economics. Even though Smith himself never used that term in that specific way, his writings did envision a limited role for the state:

The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Smith was even more dubious when it came to taxation: 'There is no art which one government sooner learns of another than that of draining money from the pockets of the people.'

Adam Smith would view a policymaker who intervened in the operation of market forces with scepticism. Yet, that's what post-industrial nations like Britain and the United States are attempting to do – roll back the deindustrialization process by encouraging manufacturing and reducing the share of national output accounted for by services. This urge to rebalance the economy arose after the 2008 financial crisis which revealed the fragility of a large banking sector that brought the economy to its knees. It led the then-UK Chancellor George Osborne to start wearing hard hats and to promote the 'March of the Makers'. In the US, President Barack Obama invested in advanced or high-tech manufacturing. His successor, Donald Trump, explicitly extolled companies to bring factories back to America.

What would Adam Smith make of these efforts? Should government rebalance the economy towards making things once again? Is it possible to rebalance the economy in countries where the services sector makes up more than three-quarters of national output, as it does in Britain and the US? The answer holds lessons for other economies that may follow those two nations as they embark on the typical economic path of industrialization followed by deindustrialization.

Industrialization, deindustrialization and reindustrialization

Great Britain became the first industrialized nation in the late eightteenth and nineteenth centuries, followed by Germany and the United States. The period, which became known as the Industrial Revolution, saw the economy transformed from an agrarian society into one characterized by factories owned and run by merchants who traded their wares both at home and overseas.

In our own times, Britain and several other advanced economies, including the United States, have experienced yet another fundamental structural change: deindustrialization. Since the 1980s Thatcher-era reforms that liberalized the financial sector – notably the 'Big Bang' of 1986, when markets were opened up to greater competition – Britain has seen industry give way to services. (Relatively speaking, that is. The UK is still the ninth biggest manufacturer in the world, and was in the top five until around 2004.) Similarly, although the US remains the second biggest manufacturer in the world (having been overtaken recently by China), its services economy accounts for the larger part of American national output. In the European Union the services sector makes up 70 per cent of the GDP or national output for the bloc, but the EU also counts among its ranks some of the biggest manufacturing nations in the world, for example Germany, France and Italy. Even the world's biggest manufacturer, China, which is only a middle-income country, has seen its services sector overtake industrial output in the economy.

When countries grow, they tend to industrialize, so they move out of agriculture and into manufacturing, which has higher productivity or output per worker and thus generates higher wages. Industrialization is how countries become middle class and prosper. Deindustrialization then follows. In advanced economies, manufacturing starts to become relatively less important as a share of output once they become richer and services in the business, retail and finance sectors start to dominate the economy while employment shifts from factories to offices or stores.

The 2008 crisis revealed the downside to having an economy with a large financial services sector. Banks had become complex and interconnected, and their business became harder to understand and to regulate. Their responsibility for causing the worst recession in a century prompted calls from the public to regulate the banks more tightly in the US and UK. The crash also led the American and British governments to want more manufacturing, thus they have sought to 'rebalance' the economy towards making things once again.

That's a big task. Manufacturing accounts for around only 11 per cent of Britain's value-added output, while, as noted, the dominant services sector accounts for over three-quarters of the economy. British manufacturing has declined from contributing a quarter of national output in 1980 to 20 per cent in the 1990s to just 12 per cent in the 2000s. It's a similar picture in theUS. By contrast, manufacturing still makes up about 20 per cent of the German economy on the same value-added basis. At its peak, financial services alone made up some 8 per cent of UK national output, which is not that much smaller than all of Britain's manufacturing combined. This is theessence of deindustrialization, where industry has given way to a dominant services sector in the same way that agriculture was overtaken by manufacturing during Adam Smith's time.

* * *

The question is, can the US, and perhaps the UK, reverse deindustrialization? It's a refrain heard frequently since the crisis. 'Made in America' and 'Made in Britain' are among the phrases uttered by governments and businesses after the worst recession in a century. But, reversing the process of deindustrialization is challenging in a globalized world economy.

Emerging economies like China can produce more cheaply while information and communications technology (ICT) has lowered the costs of logistics, so globalization makes it harder for rich nations to compete with lower-cost producers. In fact, Harvard economist Dani Rodrik even points to 'premature deindustrialization' in some developing countries which are moving from agriculture directly to services due to the forces of globalization, which holds potentially worrying consequences for countries that have yet to gain a firm foothold in the middle-income stratum.

We are in unknown territory. The impetus for deindustrialization is greater in Britain and America than in other nations. After suffering their worst financial crisis in a century, they are anxious for change.

That's not the sole consideration. Adam Smith may be the economist who named the 'invisible hand' that allowed the market to dictate what was produced and how it was priced, but he did not think highly of the services sector. A product of his time, he did not believe that services could produce output that was as valuable as that from a factory or a bakery. In fact, Smith didn't condone much of what makes up the modern economy, for example he wasn't in favour of joint-stock companies, which are the basis of modern-day corporations.

His legacy continues to affect attitudes today. Even the way that national statistics are collected breaks down manufacturing data in great detail while aggregating much of services output. That's probably also because it's hard for statisticians to put a figure on what a consultant contributes while he sits at his computer or what a meeting adds to national output. We've all been in too many of those to know that they are not all productive!

So, should the government be trying to rebalance the economy? Can market forces driven by the 'invisible hand' be reshaped by the state? What would Adam Smith have to say about it all?

The life and times of Adam Smith

Adam Smith was born in 1723 in Kirkcaldy, a seaport near Edinburgh in Scotland. His deceased father was a Customs officer, and his well-to-do family was friendly with members of the Scottish Enlightenment. The Scottish movement paralleled the European Enlightenment, which counted among its ranks writers like Voltaire, and was characterized by a focus on science and rationality. This period has been called the Golden Age of Scotland, and Smith would figure prominently among its leading thinkers as the father of economic science.

Like many early economists, he wasn't taught the subject. Instead, he studied physics and mathematics at Glasgow University from 1737 to 1740. It was at this time that he also developed an interest in Stoic philosophy. Most early economists were also philosophers, among whom the likes of David Hume and John Stuart Mill were influential in shaping economic thinking.

Smith then studied at Balliol College, Oxford University until 1746. As he wasn't a member of the Church of England, he could not matriculate at that time, so was more like a visiting student. Suffice it to say he did not enjoy his time at Oxford: 'The discipline of colleges and universities is in general contrived, not for the benefit of the students, but for the interest, or more properly speaking, for the ease of the masters.'

So, in the tradition of self-learning that has characterized a number of Oxford experiences, Smith spent his time there on the classics and immersed himself in modern languages. Since, in his view: 'In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching.'

Afterwards, Smith returned to Scotland and gave a series of publiclectures at Edinburgh University in 1748. It was there that he became friends with David Hume, a leading figure in the Scottish Enlightenment. That was when Smith's views on the 'invisible hand' started to form. He thought government intervention in the economy was a disruption of the 'natural course' of markets, a view which he later developed in The Wealth of Nations. His seminal work argued for a limited state that allowed markets to operate freely. As he stressed in one of his lectures: 'Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.'

Smith's successful lectures led to a professorship at his alma mater. From 1751 to 1764 he taught at the University of Glasgow. First, he took up the Chair in Logic, and was subsequently appointed Chair of Moral Philosophy. During this time he gained fame with the publication of his ethics lectures. In 1759 The Theory of Moral Sentiments was published, leading him to become a well-known figure in the European Enlightenment. He described his time as an academic as 'by far the most useful, and, therefore, as by far the happiest and most honourable' of his career.

Nevertheless, in 1764 Smith was tempted to leave academia for a lucrative stint as private tutor to the third Duke of Buccleuch, who was the stepson of Charles Townshend, a politician. He accompanied the young duke for a two-year tour abroad, and spent 1764–6 in Paris, Toulouse and Geneva.

It was in France that he came across the Physiocrats, a prominent group of economists, who viewed agriculture, not manufacturing, as the source of wealth. For Smith, this jarred with the British experience of industrialization, and it is somewhat ironic that Smith's arguments in favour of manufacturing over services share some parallels with Physiocrat thinking.

Upon returning to Britain, Smith moved to London and spent 1766–7 researching public finances for Charles Townshend, who was now Chancellor of the Exchequer. He subsequently returned to Kirkcaldy to live with his mother, and focused for the next six years on writing The Wealth of Nations. From 1773–6, he returned to London to finish the book. Smith's publication aimed to influence British MPs to support a peaceful resolution to the American colonies' War of Independence. In the final paragraph of The Wealth of Nations, Smith wrote that Britain should 'endeavour to accommodate her future views and designs to the real mediocrity of her circumstances'. It was a sentence retained in all subsequent editions and reflected Smith's enduring belief that the market, and not the state, should dictate economic progress in all respects, including colonialism.

Adam Smith retired in 1776, the year that America declared independence, and he spent the next two years in Kirkcaldy writing another book, on the 'Imitative Arts', which covered painting, music and poetry. But, in 1778, he re-entered public life and became the Commissioner of Customs for Scotland, following in his father's footsteps. He moved to Edinburgh, where he lived again with his mother, Janet Douglas, a cousin who was also the housekeeper, and his heir, a cousin's son, David Douglas, who was to become Lord Reston, a distinguished jurist.

In 1784 he finished the third edition of The Wealth of Nations. A few years later, he also completed the sixth edition of Moral Sentiments, which included his thoughts on framing a constitution, which was highly topical at the time of the American Revolution as well as burgeoning revolutions on the Continent, notably in France.

Despite his path-breaking work, Adam Smith was highly self-critical of the slow pace of his writing. In 1785 he claimed the 'indolence of old age' and was uncertain that he could finish the 'Imitative Arts' or another book on the theory of jurisprudence. He had envisaged his major works as a trilogy: Moral Sentiments,The Wealth of Nations and a third book on Law and Jurisprudence, which was never written. Rather surprisingly, Smith expressed disappointment that he had not achieved more, and insisted that his manuscripts should be burned after his death.

Why rebalance the economy?

Before we assess what Adam Smith would have made of the attempt, let's look at why there is a debate over rebalancing the economy. It's an issue that's at the forefront in Britain, a country that has one of the largest services sectors among advanced economies. As noted earlier, even though the US was at the epicentre of the 2008 financial crisis it remains the world's second biggest manufacturer while the UK has slid down the rankings. So Britain's experience in particular holds potential lessons for other countries.

Changing its economic growth drivers is indeed what Britain set out to do after the 2008 financial crisis. It was termed the 'March of the Makers' under the David Cameron government. The UK wants to rebalance its economy towards making things and selling more of its wares overseas. The two are related in the era of globalization, where much of manufacturing output consists of tradable goods. The British government wants to rely less on financial services, given the banking bust of a few years ago, but manufacturing accounts for only around a tenth of the economy, while the services sector accounts for the bulk of national output. Also, Britain, which until recently exported more to Ireland than to the emerging markets dubbed the BRICs (Brazil, Russia, India, China) combined, wants to reorient more towards developing economies and help its companies access the fastest growing markets in the world.

If it is to succeed in this endeavour, it clearly needs to be peddling the right stuff abroad. However, Britain's trade deficit – the difference between the value of imported and exported goods and services – widened precipitously and hit record highs in the years after 2008. That's not a great piece of evidence for the rebalancing efforts. The hope was that with sterling having lost about a quarter of its value at one point after the banking crash, a cheaper currency would boost exports in the same way that it did during the early 1990s when the pound left the exchange rate mechanism (ERM) that had tied it to the German Deutschmark. The last time that Britain had a trade surplus was towards the end of that decade in 1997, on the back of a depreciated pound.

Before then, Britain had run a deficit in its current account, the broadest measure of trade that includes financial flows, every year since 1984. Notably, the deficit in goods trade grew after the late 1990s with further deindustrialization. Recall that manufacturing's contribution to GDP has halved since 1980.

(Continues…)

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Table of Contents

CONTENTS

Introduction: Great Economists on Our Economic Challenges

1. Adam Smith: Should the Government Rebalance the Economy?

2. David Ricardo: Do Trade Deficits Matter?

3. Karl Marx: Can China Become Rich?

4. Alfred Marshall: Is Inequality Inevitable?

5. Irving Fisher: Are We at Risk of Repeating the 1930s?

6. John Maynard Keynes: To Invest or Not to Invest?

7. Joseph Schumpeter: What Drives Innovation?

8. Friedrich Hayek: What Can We Learn from Financial Crises?

9. Joan Robinson: Why Are Wages So Low?

10. Milton Friedman: Are Central Banks Doing Too Much?

11. Douglass North: Why Are So Few Countries Prosperous?

12. Robert Solow: Do We Face a Slow- Growth Future?

Epilogue: The Future of Globalization

Glossary

Bibliography

Notes

Index

Editorial Reviews

"Are you looking to learn about the very greatest economists of all time? Linda Yueh's book is the best place to start, a modern-day version of Robert Heilbroner's classic The Worldly Philosophers." —Tyler Cowen, the Holbert L. Harris Chair of economics, George Mason University, and author of The Complacent Class and The Great Stagnation

"An extremely engaging survey of the life times and ideas of the great thinkers of economic history, woven together with useful discussions of how their ideas still shape economic policy today. Yueh’s book is reminiscent of Heilbroner’s marvelous classic The Worldly Philosophers, but more focused on contemporary debates on inequality, trade and productivity. Although targeted at readers interested in economic issues, this book would also make an excellent supplementary reading for undergraduate courses in economics, politics and social studies." —Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Economics, Harvard University, former chief economist at the IMF, and the author of The Curse of Cash

“What would the great economists of the past make of today’s problems? Linda Yueh takes on this ambitious task in this engaging book, introducing us to the work of each economist and conjecturing how they might have advised us. This book is a very readable introduction to the lives and thinking of the greats, and reminds us that policymakers continue to be, as Keynes wrote, 'slaves of some defunct economist'.” —Raghuram Rajan, Professor of Economics at The University of Chicago and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy

"To anyone with even a passing interest in the economic problems, large and small, affecting us today, What Would the Great Economists Do? comes at the right time: a highly accessible and acute guide to thinking and learning from the men and woman whose work can inform and ultimately aid us in understanding the great national and global crises we're living through." --Nouriel Roubini, author of the New York Times bestselling Crisis Economics: A Crash Course in the Future of Finance

"A timely and original guide to some of the key economic challenges facing society." —Robert A. Cord, editor of The Palgrave Companion to Cambridge Economics

"Is economics a science in which each new generation’s discoveries build on those of the old? Or a humanistic study in which old ideas remain valid and relevant today? Linda Yueh’s account of the thinking of the great economists demonstrates that both perspectives are true." —John Kay, Professor of Economics at the London School of Economics and the author of Other People's Money: The Real Business of Finance

"A great way to learn in an easily readable manner about some of the greatest economic influences of the past, but also a good way to test your own a priori assumptions about some of the big challenges of our time." —Jim O'Neill, former UK Treasury minister and chief economist at Goldman Sachs who coined the acronym "BRIC" to describe the emerging economies of Brazil, Russia, India, and China

"Highly accessible...Linda gives us great insights into the issues of the current Chinese economy but at the same time links them to the ideas of Marx. With Keynes she explains how his ideas were very relevant to the 1930's but, at the same time, explains why governments confronted with massive debt today do not always follow Keynes' philosophy. I am sure Linda Yueh's original approach will deepen students' understanding of the Great Economists." —Lord Norman Lamont, British politician and former Conservative MP for Kingston-upon-Thames

“Economics students are not taught the history of economic thought. They, like others, can learn a lot from this book: some of the great economists of the past had insights that could have saved the subject from its recent embarrassments.” —Paul Collier, Professor of Economics and Public Policy at Oxford University

“This well-written book provides more than an engaging discussion of how the "Great Economists" changed the course of economic thinking and history. It links their insights to current economic challenges, assessing how their unique contributions can improve future wellbeing. It concludes by artfully bringing together the economists' individual insights to shed light on the backlash against globalization. Read it not only to learn about the world's great economists, but also to see how consequential thought innovations can be, and have been.” —Mohamed A. El-Erian, Chief Economic Adviser at Allianz, former CEO of PIMCO

“I certainly wish that it had been around when I started to study the subject.” —Moneyweek

"Readable, informative, and thought-provoking." —Booklist (starred)

“A highly accessible and lively evaluation of the global financial crisis through the work of 12 top economists, from Adam Smith to John Maynard Keynes. Yueh…has a way of simplifying the arcane and ferreting out good news—of which we need a lot.” —Newsweek, "Best 50 Books of 2018 (so far)"

From the Publisher

03/12/2018
An appealing thought experiment—what if the great economic thinkers of the past took on today’s most intractable problems—supplies the premise for this provocative work from economist Yueh (China’s Growth). Unfortunately, Yueh’s answers are less stirring than the question, principally because her subjects’ work has already been absorbed into mainstream economic thinking. She devotes much of the book to profiles of her “great economists,” among whom she includes Milton Friedman, John Maynard Keynes, Karl Marx, and Adam Smith, and while the compressed biographies are sometimes helpful with understanding their ideas, they more often distract from the book’s exploration of contemporary issues like income inequality and the role of central banks. Elsewhere, Yueh is more on point, as in the chapter on Joan Robinson (an overlooked female economist), who studied why wages do not necessarily rise in economic recoveries. The epilogue addresses the future of globalization and invokes the thoughts of the greats (largely arguments for free trade), but feels tired and less than revelatory, suggesting that the modern world would be better served by looking for the next great economist than by looking to the past. (June)

Publishers Weekly

2018-04-11
Invisible hand, meet trickle-down: a lightly learned but deep-reaching look at classic economic problems through the lens of classical economics.Business schools across the land teach a set of canonical precepts: The free market is good and self-correcting, corporations have the sole duty of maximizing return for shareholders, and commerce is indifferent to larger matters of ethics. But are all those points true? Also, are they useful in addressing obdurate problems that seem custom-coined for our time, such as, in the face of economy-must-grow models, the future seems the province of low productivity and lower expansion? Enter BBC broadcaster and Oxford economist Yueh (China's Growth: The Making of an Economic Superpower, 2013, etc.), who turns to Robert Solow, "the author of the workhorse of economic growth models," for guidance. She also goes against Solow and on to the ground of endogenous growth theory but returns with a humane prescription: Just as Solow located growth in, among other things, how workers are treated, maybe we can learn to retool. (Yueh adds that Solow, still at work in his 90s, also counsels relaxing some: "learning to adjust, to adapt, is not a bad thing for economists to learn".) And what of quantitative easing in recessive economies? Well, throw Keynes into the mix, then see what Milton Friedman would say about whether increasing the monetary supply is the right thing to do. Concludes Yueh, with sidestepping befitting a careful economist, "it's fair to say the jury is largely still out." The author, who once ran for Congress as a kind of made-for-TV thought experiment, has solid, interesting things to say about globalization, human capital, and kindred matters and a correct sense for which economist to bring to the problem at hand, whether Paul Samuelson ("the last of the great general economists") or Alfred Marshall, the anti-socialist who still supported redistribution—with qualifications.A pleasure for the fiscally minded and a good introduction to applied economics for readers with a smattering of theory.

Kirkus Reviews