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A subject not in equilibrium Samuel Brittan: to appear in Jnl. of Econ. Lit. 03/03 Review of The Ordinary Business of Life: The History of Economics from the Ancient World to the 21st century by Roger E. Backhouse. Princeton University Press, 2002. pp368, (cloth). ISBN: 0-691-09626-0. Published in the UK as The Penguin History of Economics, Penguin Books, 2002. There is no need to justify a study of the history of economic ideas. It is a branch of history and will always be necessary so long as human beings are interested in their own past. But there are peculiarities about the subject which creates special problems. An author who regards economics as a well developed science, albeit with an ongoing research agenda, will approach it in a different way from someone who regards it as still inherently contestable. The first kind of author might be tempted to treat it much like the history of physics or biochemistry. Viewed in this light the history of economics is a specialist field in the history of science, and perhaps also a personal hobby or retirement job for economists. An author who regards the subject as still far removed from the most of the natural sciences in the solidity of its doctrines will adopt a different approach. He might for instance look at the ways in which certain ideas keep cropping up and then dropping out. He will also be inclined to draw links with general history and the political and ideological climate of the time and place when a particular economist was writing. And he will legitimately pay special attention to the theories which have influenced policy. Roger Backhouse's book is a blend of the above approaches. Its arrangement suggests a history of science method, especially for the modern period. But some of the author's own remarks, especially towards the end, indicate that he has his doubts. The merit of the book is its comprehensiveness. The demerit is that it is sometimes difficulty to see the wood for the trees. The Ordinary Business of Life will be most useful to those who have already a smattering of economic ideas but want to fill in the historical gaps. It might also be an eye opener to specialist economists who are well trained in the modern mainstream or in their own speciality, but who suspect like Shakespeare's Coriolanus that there is a world elsewhere. There is an underlying story. This tells how economics began as a branch of statecraft and commercial regulation which did not have a name of its own - the Greek word Oikonomicos, which first appeared as the title of a book by Xenophon, merely meant estate management. With the postmedieval commercial expansion, political economy developed in the form of writings specifically devoted to the subject, although the authors were often philosophers, statesmen or merchants who also engaged in many other activities. From around the time of the late 18th Century political economy became a fully fledged subject of its own although still accessible to the interested citizen prepared to take some trouble. High-minded British prime ministers such as Robert Peel and William Gladstone almost certainly knew the works of Smith and some of his successors. More self-consciously worldly prime ministers such as Melbourne or Disraeli certainly did not. By the late 19th century, political economy had become economics with a growing army of professors and faculties, but it was still penetrable to those who had done an undergraduate course touching on the subject or otherwise made an equivalent effort. But by the last third of the 20th century it had become a highly technical subject, accessible only to those with an appropriate mathematical background. Backhouse does not deny the technical achievements, but clearly believes that there was loss as well as gain from the self-generated internal development of the subject at the expense of stimulus from real world policy problems. The flavour of the book can only be given by samples skipping over the centuries. In contrast to the many authors who appear to think that economic thinking began with Adam Smith, Backhouse does begin with two chapters on the Ancient World and the Middle Ages. He dutifully excavates the proto- economic ideas to be found in Plato and Aristotle. But he says all too little about Rome, which was one of the great world empires with a flourishing trade and commerce. No one should expect an economic Decline and Fall; yet it would have been interesting to delve a bit further into the ideas which governed commerce and activity within the Roman world, even if they were not the subject of specifically economic treatises. The author does, refreshingly, say a little about the Old Testament and in particular the institution of the sabbatical year every seven years, during which all debts were to be cancelled, and the Jubilee every 50 years during which all land was to revert to its original owner. Backhouse records that there is no evidence of the Jubilee Year ever being enforced. He does not say whether the sabbatical year fared better. But he does offer a more general assessment: The Old Testament is not about withdrawing from the world. Money corrupts only when it becomes peoples' sole motive, as in the worship of the Golden Calf. Here surely is the via media between Gordon Gekko's "Greed is good" and the anti-materialist sermons of so many bishops. Jumping two millennia, Backhouse gives a fairly full account of David Ricardo, who was a theorist in the modern sense, even though he used arithmetic rather than algebra. One might have liked, however, a clearer underlining of the revolutionary aspect of his law of comparative advantage which implies that two countries can profitably trade with each other, even if one is much more efficient than the other in every product, provided that the differential varies. This is one of the few well established economic doctrines which cannot be met with I did not need an economist to tell me that. Yet it would not command the majority in almost any legislature of the world and is equally opposed by the American or European farmer fighting for state protection and the Seattle anti-globalisation demonstrator. Some of the arguments on the subject between economists and others are hardy perennials. In 1903, 14 leading British economists signed a letter to The Times in favour of retaining free trade; they were opposed by most contemporary economic historians. For all the refinements of modern trade theory the argument still goes on in the old way. It would have been good, if before leaving the classical period, Blackhouse had analysed in more depth the English New Poor Law of 1834, which was supported by some contemporary political economists and gave all of them a bad name. It is difficult to read any 19th Century English novelist without realising how the horror of being sent to the poor house affected several generations. The prevailing doctrine of less eligibility said that state support for a person without means should not make him better off than the least well off person in a job. Welfare programmes which provide a better standard of living than available to low wage-earners are indeed a disincentive to work. It is today possible to tackle the problem from the other end by topping up the pay of unskilled worker by means such as the US Earned Income Tax Credit or the British Working Families Tax Credit. The early 19th century British economy could not afford to do this. But there was still no need to insist that all welfare should be delivered indoors, still less to separate husbands, wives and children. And surely for those who were too old to work the question of disincentives did not apply. Too many perfectly humane modern market economists praise the work of classical economists and also enjoy in their leisure the writings of Charles Dickens, but without bringing together the two sections of their brains. Coming to the first half of the 20th century the author notes the domination of Alfred Marshall's 1890 Principles over British economics. Marshall did indeed provide a handy set of tools for analysing specific markets; and his division between short and long period remains useful. But the great disservice of his partial equilibrium analysis was the lack of a scheme for explaining the interrelations of different markets and thus of the whole economy. Neoclassical economists had to turn to the much more abstract general equilibrium analysis of Leon Walers and his modern successors, which have been highly praised for their rigour, but which give us little feeling for how real world economies function. It is almost comic to see how imperfect competition has recently been presented to the world as a revelation. Imperfect and monopolistic competition were in fact extremely familiar to mid-20th century students who had read the works of Edward Chamberlain or Joan Robinson; and there was a good deal of inter war discussions of their policy implications. But they re-emerged as sudden discoveries in the late 20th century when radical critics found to their delight that mainstream general equilibrium theorists had assumed perfect competition, more for reasons of mathematical convenience than for any insight that this was how the world works. As a result they played into the hands of many interventionist economists especially in Oxford and Cambridge, England, who encouraged their pupils to believe that the slightest departure from perfect competition or the existence of externalities enabled them to advocate any political measure that caught their fancy. It was this dialogue of the deaf which renewed interest in the teachings of Austrian economists such as Friedrich Hayek which viewed competition as a discovery process and market prices as a way of utilising diffused information, and which did not have to work perfectly or be in equilibrium to be superior to centrally directed systems. The crucial point is that the Austrian school, like Adam Smith before, envisaged competition as an on-going process rather than as an end state. More mainstream approaches to information theory and even to the public choice analysis of politics are still predominantly cast as a search for equilibrium conditions. Backhouse gives the Austrians their due. But a surprising omission is the contributions of European sociologists such as Weber and Durkheim who had much to say about the conduct of economic life even though they did not put their insights into equilibrium equations. The author is at his happiest in 20th century America. Here he emphasises the continued role of the US institutionalists from Veblen to Galbraith who provided an ongoing dialogue with the neoclassical mainstream until the conquest of the universities by the mathematical general equilibrium approach in the last third of the 20th century. Yet he does not mention the rise of a new much more sophisticated new institutionalist school led by the Nobel prize winner Douglass North who have emphasised the importance of institutions and legal rules if markets are to do their job. If North and his followers had received more attention, there would have been less disastrous advice given to the post-Soviet economies by international bodies, and more distinction made between countries such as Poland and the Czech Republic which had a tradition of property rights and the rule of law and countries such as Russia which did not. Earlier in the 20th Century US economists scored by their much greater emphasis on business cycles and money, in contrast to their relative neglect in Europe. None of this intellectual ferment prevented the disaster of the Great Depression. But at least it provided Milton Friedman and others with the instruments for investigating ex post the role of the Federal Reserve in what happened and suggesting some guidelines for avoiding future disaster. Coming back to his own British side of the Atlantic, Backhouse joins the fashionable denigration of the General Theory, which has even affected admirers of Keynes's other works, such as his biographer Robert Skidelsky. Of course Keynes did not initiate the concept of public works in a depression; and in some practical ways Roosevelt was a Keynesian before the master. But there remains one truly revolutionary idea in the General Theory. In standard neoclassical economics an increase in savings brings about a reduction in the rate of interest and an associated increase in investment. Keynes suggested that it might instead lead to a reduction in output and employment. One certainly should not expect in a general history yet another detailed exposition of the still unresolved Keynes versus the classics debate that dominated macroeconomic writing for about 30 years after 1936. An impartial assessment today would be a boring it all depends. But at least it is worth underlining the contribution that Keynes made to the debate. The author emphasises the mathematisation of economics in recent decades. The use of complex mathematics is indeed de rigueur nowadays in any economic analysis which wants to be taken seriously. A low level explanation is that it is used as a filter to limit the number of discussants rather like the footnotes and references which are almost equally de rigueur. Every economics editor hears from all too many people who believe they have fathomed for themselves the working of the economic system (or for that matter the key to world history) on their kitchen tables. Debate on all these homemade insights could take more time than there are man hours in the world -- my own shameful technique is to suggest that such authors send their ideas to prime ministers or presidents who have large staffs to write polite stonewalling replies. Mathematics is of course just a language or set of techniques, to be employed when useful and should not be a central issue. Backhouse's valid criticism is of the way in which mathematics has been introduced, which has loosened the links, strong in earlier centuries, between economic research and the economic problems facing society. Much research has been driven by an agenda internal to the discipline even where this has not helped solve any real world problems. Economics is what economists do and there is no point in saying it should be something else. The Nobel prize is the one great accolade which the academic mainstream can still confer. But one only has to look at the correspondence columns of the Financial Times, or the books that leaders such as Bill Clinton are occasionally photographed reading as they board aircraft, to see that contributors from other areas such as business schools, modern history, departments of politics and government -- not to speak of media-appointed experts from no discipline at all - are serious rivals for public attention. Not all of what they say can be dismissed as nonsense; but unfortunately many of these outsiders have lost sight of -- if they ever knew -- some of the long-established concepts common to most economic schools, such as comparative advantage and the circular flow of income. Backhouse ends his narrative by reminding us that academic promotion and salary depend on regular publication, and reputations are made by claiming much, not by being modest - in other words by product differentiation. Karl Popper once said that in the physical sciences too much money was chasing too few ideas. This could also be true of fundamental economic research. Another issue left hanging is whether economics is best viewed as applied logic. Is the domination of rational choice models right and proper? Or should it be the study of how economies actually behave? Backhouse cites some of the ample experimental evidence that in small scale experiments, even when sizeable sums of money are at stake, human beings are not rational. The orthodox reply is that businesses that do not approximate in their behaviour to profit maximisation will dwindle and disappear to the benefit of those that do. On some readings the fundamental theorem of economics might be stated -- in contrast for instance to Freud -- that people are rational despite appearances to the contrary in big decisions. It would have helped if the author had tackled Friedman's early and still controversial methodological paper, arguing that the realism of economic assumptions does not matter so long as they provide testable hypotheses. Economics can be regarded either as a set of tools for analysing problems; or it can be regarded as an explanation of how economic systems work, their virtues, defects and possibilities of reform. Keynes in his time embraced braved both views. In his general introduction to the interwar Cambridge Economic handbooks he originally wrote: The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps its possessor to draw correct conclusions. In the late 1930s he wrote a new concluding paragraph where he spoke about an outbreak of controversy and doubt - largely stirred up by his own General Theory - which had temporarily destroyed al hope of certainty and lucidity. The controversies to which he referred were about how the economy worked and what its main tendencies were, and not just about the tools of analysis. One way of studying the history of economic thought would be to list the questions which have troubled human beings for centuries and examine how they have been tackled by different writers at different times. Why there is unemployment? What to do about famines? How to finance wars? Must technological progress put people out of work? Why have some nations a grown much richer than others? A study along these lines would not need to take a dogmatic stance on the scientific standing of the subject, or the progress made, but could still make interesting observations. Backhouse's book is not quite that; but at least it provides much of the material for anyone brave enough to tackle the big issues.
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