The Economists Who Shaped the Modern World
It was the renowned theorist of the business cycle and progenitor of modern macroeconomics, John Maynard Keyes, who famously observed that “[p]ractical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” So it was that a small group of economists working in the interwar years at Cambridge University (Keynes among them), the London School of Economics, Harvard University, and the National Bureau of Economic Research (near Harvard, in Cambridge, Massachusetts), developed the theories and applied tools that, by the end of the twentieth century, came to define economic planning and public policy almost everywhere.
With the exception of Keynes, the members of this group were, and are, almost entirely unknown. Yet the project in which they were jointly engaged was as bold as it was generally unintelligible to the general public: reconstructing the study of human society upon an intellectual foundation no less solid than those on which mathematics and physics rested. To succeed in this endeavor would imply a proof of sorts that progress required neither proletarian revolution nor dictatorial fiat. The imposition of reason could serve just as well.
For centuries prior to World War I, economic power in Europe was centered on land. Agriculture created wealth; landed aristocrats controlled the wealth that agriculture created. The economics of the 16th, 17th, and 18th centuries reflected this fact. Though Adam Smith himself wrote memorably in The Wealth of Nations about the division of labor in factories, for him and other classical economists, production was fundamentally identified with the work of the plow. Nations did not “develop” so much as they accumulated wealth — or failed to do so.
All of that ended in just a few years from 1914 to 1917. The almost-accidental apocalypse that was “The Great War” (World War I) largely obliterated the aristocratic order that had dominated Europe since the Middle Ages. The sheer scale of the devastation led some in Europe to proclaim it “the war to end all wars.” But it was not to be so. To the contrary, World War I signaled a new type of warfare, which was the result of a key underlying social change: the advent of large-scale, mechanized production.
In the decade immediately following World War I, the center of economic power lurched from the inheritors of agricultural estates — many of whom lay buried beside battlefields in the north of France — to the owners of massive factories. The ensuing social shock waves unleashed new political ideologies that spread from nation to nation with a quasi-religious virulence. Writing in 1929, the great Spanish philosopher José Ortega y Gasset lamented the resulting devolution of public discourse: “Under the species of Syndicalism and Fascism there appears for the first time in Europe a type of man who does not want to give reasons or to be right, but simply shows himself resolved to impose his opinions. This is the new thing: the right not to be reasonable, the ‘reason of unreason.’”
War first broke out again in Ortega y Gasset’s native Spain. An ill-fated second attempt at democracy that began in 1931 quickly fractured into a civil war that pitted Republicans against Communists (a.k.a. “Syndicalists”) and Fascists. The outcome was the ascendency of the dictator Francisco Franco, who ruled Spain until his death in 1975 after taking power in 1939. That year — at about the same time that German Panzer Divisions were storming into Poland, igniting World War II — John R. Hicks (Nobel Prize in economics, 1972) at the London School of Economics published Value and Capital, a foundational work of neoclassical microeconomic theory.
Neoclassical (“new classical”) economics is so named because it represents a reformulation of the classical economics of Adam Smith and his contemporaries. Beginning in the late 19th century, a handful of mathematically adept economists began to formalize economic theory, identifying, clarifying, and, when necessary, eliminating its implicit assumptions. Contrary to the ideological ferment of their time, neoclassical economists sought to reconstruct their discipline on perfectly objective, axiomatic foundations. Among the assumptions they targeted was the idea that happiness — in the language of economics, “utility” — was quantifiable. To assume quantitative utility was akin to assuming it was possible to read another person’s mind and thereby gauge their wellbeing. Because such an ad hoc assumption at the base of the theory was anathema to neoclassical economists, they redefined “utility” as a subjective index of the value of different choices rather than an objectively measurable quantity. Hicks thus opens Value and Capital with a surprisingly militant declaration: “We have now to undertake a purge, rejecting all concepts which are tainted by quantitative utility, and replacing them, so far as they need to be replaced, with concepts which have no such implication.” Seeking immunity from ideology, neoclassical economics thus excluded empathy.
While Hicks and his cohort reconstructed the foundations of modern microeconomics, Frank Ramsey, among the great prodigies in the history of economic thought, produced the foundational model for the representation of macroeconomic dynamics. In 1928, Ramsey published a paper in The Economic Journal titled “A Mathematical Theory of Saving” which created, essentially de novo, the framework within which macroeconomists study the process of economic growth today. In that paper, the fundamental inputs into economic advancement are capital and labor; land, which had been central to the classical economist view of productivity and wealth, no longer appears. An all-knowing social planner balances current consumption and savings to maximize the aggregate utility of society. By solving this problem over time, the planner guides the society to a “bliss point,” at which the proper balance between consumption and savings is eternally maintained. Successors to Ramsey developed decentralized versions of the same model that sidestepped the need for a social planner; in so doing they increased the model’s alignment with parallel developments in neoclassical microeconomics.
The same year that Ramsey published his paper, his mentor John Maynard Keynes delivered a talk to a group of students at Winchester, one of England’s elite public schools (the equivalent of prep schools in the United States). The title of the talk, which appeared in print in 1931, was “Economic Possibilities for Our Grandchildren.” Keynes had made his name a decade earlier with a bitter attack on the Treaty of Versailles, which imposed onerous terms on Germany after World War I. Yet in his talk to the students at Winchester, Keynes struck a decidedly more optimistic tone. “My purpose … is not to examine the present or the near future, but to … take wings into the future,” he stated. Continuing, he argued that the “true interpretation of the trend of things” for humanity in the long term centered on the miracle of capital accumulation: By saving and investing in productive machines, each successive generation could produce more output than the one before, thereby increasing per capita consumption over time. As such a process followed its natural course, Keynes predicted that human societies would attain Ramsey’s bliss point: “Assuming no important wars and no important increase in population, the economic problem may be solved, or at least within sight of solution, within a hundred years.”
Keynes’ essay on the inevitability of economic bliss appeared in print just as the Great Depression was hitting the economies of Europe and North America in full force. When he responded to the historic downturn, he did so in grand form with the publication in 1936 of his masterwork, The General Theory of Employment, Interest and Money. The book offered a new way of understanding the source of economic depressions and how governments should best address them. In so doing, it established the theoretical framework for modern macroeconomics.
As Keynes was working on The General Theory, a Soviet émigré named Simon Kuznets (Nobel Prize in economics, 1971), then an economist at the National Bureau of Economic Research, presented the first formulation of the concept of Gross National Product (GNP) in a report to the U.S. Congress. (Two years later, Kuznets proposed a related metric, Gross Domestic Product (GDP)). At a time of crisis when governments around the world had very few measures of aggregate economic performance to guide them, Kuznets designed GNP as a rough indicator of the overall vibrancy of an economy. “Year in, year out the people of this country, assisted by the stock of goods in their possession, render a vast volume of work toward the satisfaction of their wants,” Kuznets explained. “If all commodities produced and all personal services rendered during the year are added at their market value, and from the resulting total we subtract the value of that part of the nation’s stock of goods which was expended (both as raw materials and as capital equipment) in producing this total, then the remainder constitutes the net product of the national economy during the year.”
In presenting the metric to Congressmen, however, Kuznets was also careful to note its limitations and warn of its possible abuses. “The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria,” he observed. More specifically, he emphasized that GNP only reflects market transactions and does not account for the distribution of national income. For these and other reasons, Kuznets cautioned against interpreting GNP as a measure of aggregate wellbeing: “The welfare of a nation can … scarcely be inferred from a measurement of national income as defined above.”
The efforts of these economists did nothing to forestall the renewal of conflict on the European continent, nor to diminish the brutality of the war which was to follow. Yet, by the end of the twentieth century, they had decisively eclipsed Karl Marx and overshadowed Adam Smith in their practical impact on the conduct of human affairs.
When World War II was over, the ultimate victor was neither fascist dictatorship nor communist revolution. Rather, it was economics — albeit of different varieties on either side of the Iron Curtain.
(Excerpt from a longer work.)
