An Idea Lives On: Why Defunct Economists Matter

David Cappella weaves a story connecting historical economic thought and modern-day economic policy.

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

–J. M. Keynes

The emergence of economics as a field of study is attributed to Adam Smith, a Scottish philosopher of the 18th century. It is no coincidence that the field emerged alongside the industrial revolution in Britain and the concurrent arrival of market capitalism as the principle means of organizing the material distribution and production within society. Before capitalism, societies relied on either tradition or a strict command system to decide who did what and who got what.

Smith’s revolutionary insight was that the cacophonous world of 18th century Europe was overlaid by orderly self-regulating mechanisms: self-interest and competition. Even as individuals pursue wholly selfish ends, they must still adhere to market pressures arising from competition—this ensures that the prices of goods meet the dual criteria of people’s effective willingness to buy and the production cost of the good (demand and supply). If either of these criteria are not met, competitive pressure from self-interested individuals will drive the price back to the theoretical equilibrium (e.g., if the price is too high, less people buy, the price sinks; if the price is too low, the suppliers produce less, the price rises).

The Smithian view of the economy is, at its root, how many conservatives understand the economy today. Smith’s masterful elucidation of purely market pressures creating balance and harmony amid ruthless competition is the chief argument for avoiding government meddling in the private economy. Some contend that if there are problems in the economy, they arise due to government interference, not from an internal issue with capitalism.

A half-century later the German philosopher Karl Marx built a quite different theory of capitalism using the same logic as Smith. If prices are a perfect equilibrium of demand and supply, there is thus nothing left over for the businessman to profit from. Marx proposed that the profit must come from remunerating workers at a rate far below their productive contribution (paying unfair wages). He elaborated that even as the economy grows, the upward pressure on wages will be negated by the use of labor saving technology. Technology thus pushes workers into unemployment and ensures those remaining will have low wages. However, since the price paid for the new technology cannot be less than a perfectly determined market price, profits cannot be realized, and thus capitalism crumbles and decays.

Although Marx’s theory does not hold empirically (businesses still make profits), he did point out in meticulous detail internal contradictions of capitalism which underlie contemporary issues. For instance it could be argued that technological advances of the past thirty years have eaten away middle class jobs and led to the persistence of low wages. And that the drive for profit contributed to the unstable dynamics leading up to the 2007-08 financial crash.

After Marx, moderate economists John Stuart Mill and John Maynard Keynes would propose how public policy can ease the internal problems with capitalism. Today, this thinking has led to progressive calls for universal education, expanded suffrage, and countercyclical macroeconomic policy. While Marx certainly made large errors, his sharp focus on the problems within capitalism gave progressives their drive to reform capitalism’s worst abuses.

Thus the split between conservatives and progressives broadly amounts to a divide over a Smithian, optimistic trust in the self-regulating market, and the guarded, saturnine Marxian awareness of capitalism’s tendency to break down. Right or wrong, the ideas of defunct economists undeniably live on.

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