What is economics?
There are lots pithy definitions of economics, none of which I find very helpful. Think of it this way: it’s a typical day. You wake up. Maybe it’s in some luxurious house or maybe it’s in a cramped place, having to share a space with lots of other people. You get up. You make yourself food. You have access to all these resources that, previously, would have been incredibly difficult to get. It would have taken hours of work to make breakfast. Now, you just grab the cereal out of the cupboard, the milk out of the fridge.
You go to work. Where do you work? How do you get there? Do you get stuck in traffic along the way? What’s the infrastructure like? How much power do you have to defy your boss? What’s the sort of work that you’re doing? What services or products are you supplying to other people?
All of these everyday things—and I could just go on and on and on through the entire day—are the province of economics. So the choices that you have and how you make those choices, the resources that you have, how you go to work, how you make a living, this is all part of the economy, and economics is the study of the economy. That means it’s the study of statistics and history, psychology, physics, and all kinds of other things. It’s just a wonderful, wonderful subject, but it does defy easy definitions.
Given that it covers all these aspects of your life, you’re presumably going to be at a big disadvantage if you don’t know anything about economics in the modern world.
You could probably say that about all kinds of subjects, but I think having some grasp of economics does let you appreciate certain very interesting things about the way the world works and, in some circumstances, make better decisions.
A nice piece of intuitive economics that I heard from Martin Lewis, the money-saving expert, was when he was speaking on a panel about trust in banking and regulating banking, and how bankers should behave.
“The choices that you have and how you make those choices, the resources that you have, how you go to work, how you make a living, this is all part of the economy, and economics is the study of the economy”
Martin Lewis said, ‘What you have got to understand is banks are trying to get as much money as they can out of you. All businesses are trying to get as much money as they can out of you. That’s how it works and you are trying to pay them as little money as possible for the services they supply. That’s what I teach all my children. That’s what we’ve all got to understand and the whole of the rest of this discussion everybody is having makes no sense.’ I just thought, ‘Yes! That’s thinking like an economist.’
There is, to some extent, an adversarial relationship in the marketplace, but it doesn’t necessarily work out badly. You can make better decisions as a shopper. You can make better decisions as a citizen, as a voter, possibly you can even make—since I once used to write a personal advice column—better decisions as a husband or wife or on the dating scene using economic ideas, too.
And yet, as you’ve pointed out, we’ve managed to make economics feel arid, narrow, and distant from everyday concerns. Why do you think that is when it is such a lively subject?
It was partly Irving Fisher’s fault. So Irving Fisher—who we’ll discuss later because he’s one of the subjects of Sylvia Nasar’s wonderful book—was a really, really fascinating character. He was interested in everything from Esperanto to vegetarianism, dietary reform to voting reform, world government to eugenics. A man of many, many enthusiasms.
But he was also a brilliant mathematician and in the 1910s and 20s he put economics on a path where everything could be turned into an equation. You could understand economic forces as though they were physical forces—like flows of water or the pull of gravity. That was enormously powerful. It really works very, very well. It doesn’t work for everything, but it was so powerful that economists just said, ‘Okay. We’ll go with this.’
Then the problem is that as someone encountering economics for the first time—maybe because you’re interested or you’re an undergraduate—it’s all these differential equations describing the balancing of forces and stocks and flows. It doesn’t seem to reflect psychology. It doesn’t seem to reflect history. It doesn’t seem to really reflect anything physical about the world around us at all. I think that’s a shame. I mean, obviously, the maths is a very powerful tool and, if you use it in the right way, it sheds light on all of these things, but if we start only with the maths, I think the subject does tend to seem rather sterile and abstract.
But you have to be good at maths to do an economics degree. There’s no escaping that. Is there?
I didn’t do an undergraduate economics degree, I did philosophy, politics, and economics. There’s even quite a lot of maths in that. As a post-graduate, there’s an enormous amount of very abstract maths, which is beautiful. I never want to be seen as criticising maths. I love maths. But I did tend to find that the things that really grabbed my attention in economics were these interesting little examples of quirks of history or paradoxes or mysteries about the way the world worked. When I wrote my first book, those were the things I focused on.
Can psychology and history be represented in an equation? How would that work?
You can try. Economic historians tend to bring the maths in and economic psychologists tend to bring the maths in. Maths is a very powerful way of talking about the world, but there’s an old joke that is sometimes applied to physicists and mathematicians. The punchline is, “Imagine a perfectly spherical cow in a frictionless environment.” You can imagine what the setup of the joke is.
There is this sense that, sometimes, we are stripping away everything that’s inconvenient in our models. There is a good reason for that, but the inconvenient stuff is a) really, really interesting and, b) potentially incredibly important. Sometimes it’s okay to strip it away, but in the banking crisis, for example, it wasn’t that the fundamental economic models were all wrong—it was that they were missing all of the interesting details that turned out to be driving the situation.
In some physics models, you might say, ‘We’re going to ignore friction here because it doesn’t really help us understand what’s going on.’ But I promise you, if you walk out the door and try to walk down the street, and there is no friction…. That friction is very, very important because without it, you will not be able to get anywhere. You’ll be flat on your face. For some applications, you can ignore the friction. For others, it’s absolutely central otherwise you do not understand what’s going on.
It’s the same with economics. Some things that you abstract away turn out, as in the case of the banking crisis, to be the whole story.
But just as I could read and enjoy Pride and Prejudice without knowing any literary theory, couldn’t I enjoy economics without…
You can enjoy it in an everyday way, but a little bit of economic knowledge would go a long way towards spotting fascinating patterns in the world around us that you might not have picked up on. Similarly, if you’ve studied a little bit of English literature, you’re going to get a lot more out of the next book that you read. You may not get more if you go on to do a doctorate in English literature, but a little bit does go a long way in harnessing your enjoyment and appreciation of what’s happening.
Let’s go through the books you’ve chosen to help people to get to that stage. First on the list is Thinking Strategically (1991), which you’ve told me is the book that first made you fall in love with economics.
Well, as I mentioned, I studied philosophy, politics, and economics, which is quite a common degree course for people who have no idea what they plan to do with their lives. I assumed I would drop economics and that philosophy and politics would be the things that would interest me. But, actually, economics slowly but surely got more and more intriguing. At first, it was easy rather than interesting. It was just maths problems that I didn’t find very difficult. Then, later, I started encountering ideas that I found genuinely fascinating. Dixit and Nalebuff’s book Thinking Strategically is full of them. It’s all about game theory and its practical, everyday applications.
What game theory is is an attempt to try to represent competition and cooperation in a proper, formal analytic way. There’s the idea that people may be lying to you and that you can’t trust everybody. People may tie their own hands to improve their bargaining position—like Odysseus tying himself to the mast so, even though he could hear the Sirens singing, he couldn’t dive into the sea and swim towards them and his doom.
It’s about bargaining or coordination problems—say where you’re trying to meet somebody. You don’t know exactly where to meet them. You haven’t got your phone with you. Where is the right place? You’ve arranged to meet them somewhere in town at noon. Where do you go? Where might they go? You’re thinking, too, what they might want. Game theory is full of surprising results and little paradoxes and things that you don’t, at first, appreciate about the world.
All these very, very rich ideas in social science were originally expressed mathematically by John von Neumann, a great mathematician who also helped to invent the computer and the atomic bomb. He started by trying to analyse poker: “Real life consists of bluffing, of little tactics of deception, of asking yourself what is the other man going to think I mean to do. And that is what games are about in my theory.”
Dixit and Nalebuff have basically taken this set of ideas, stripped away a lot of the mathematics—but kept a little bit—and illustrated it with everything from competition policy cases to sports decisions on the tennis court or yachting races. They really just brought it alive.
Can you give me an example?
I had the privilege, recently, of interviewing Garry Kasparov, the chess grandmaster—perhaps the greatest chess player ever to grace the world stage. (It was terrifying, by the way, to meet him.) We were talking about how he would prepare exhaustively for games with ‘novelties.’ When someone is playing a well-understood line of moves, a novelty is something that no one has ever tried before, but turns out to be a really good counterattack. Kasparov was famous for having this enormous database of novelties that he wouldn’t reveal to anybody. He’d memorised them all.
“The story of where this thing called ‘the economy’ came from is fascinating… It makes things more concrete but also more human”
He was explaining why that was useful. You would think, ‘Well, that’s useful because you can spring out one of these surprise moves and beat people at their strongest game.’ In fact, the main effect of the novelties was that people wouldn’t play their strongest game. They’d be thinking, ‘If I play this line of attack that I always play, Kasparov will have an answer, so I will have to do some other thing that I’m not nearly as familiar with. I’m not as comfortable with it, but at least I won’t have to deal with a Kasparov novelty.’
That’s a classic piece of game theory. This preparation that Kasparov did was very, very powerful—even though he never used it. It was just the knowledge that it was probably there that had an impact on the game. That can all be expressed in game theoretic terms.
Equally, let’s say Rafael Nadal has an absolutely fantastic backhand, which I suspect he does. How does he make his backhand more effective and win more points on his backhand? The answer is to improve his forehand. If he improves his forehand, people won’t be so happy to hit to his forehand. They’ll hit more to his backhand and that means he gets to use his backhand more often. It’s that kind of analysis.
Does this kind of thinking need to be mathematized to be useful?
No, you don’t need to mathematize it at all. I once heard somebody say, ‘The best argument for studying game theory is if you have a conversation with someone who has never studied any game theory and you realise the basic mistakes they are making in thinking about the world.’
Game theory can get very, very technical and very abstract and at certain points you start to go, ‘Well, I’m not sure this highly abstract representation of the world is really telling us anything.’ That’s what I like about Dixit and Nalebuff: they have a little bit of maths, but not a lot and, basically, the way they communicate is through these nice, simple examples.
They have a nice quote, that game theory is all about strategic decision-making and that “all of us are strategists, whether we like it or not.”
The definition they have in mind of ‘strategic’ is not necessarily the same as most people’s. By ‘strategic,’ they mean taking into account the incentives and likely moves of the other person. That’s what an economist typically means by strategic interaction.
If I’m trying to figure out how to bet in a game of roulette, that’s a decision problem. It’s not a strategic problem because the roulette wheel isn’t counter-strategizing. In poker, it is a strategic problem because there are other people and I have to think about what they might do in certain circumstances. I have to think about confusing them and not becoming too predictable myself.
There are all these strategic considerations. Strategy can be completely competitive—it could be about enemies. But strategic considerations also apply when you’re trying to coordinate with people. It may be silly, but a classic example is when you’re going out on a date with somebody and you both agree that you’d like to go out, but you differ about exactly where you’d prefer to go. Would you like to go to a restaurant or would you like to go to the movies? That’s a strategic interaction as well.
Let’s talk about the next book, Money Changes Everything: How Finance Made Civilization Possible (2016) by William Goetzmann. This looks fascinating.
This book is about the history, often the ancient history, of all sorts of financial innovations, from the limited liability company (Rome) to paper money (China) to accounts (ancient Mesopotamia) to the money transfer service (Europe during the Crusades, courtesy of the Knights Templar).
It has been a fantastic source for my own book, 50 Things That Made the Modern Economy, which is how I discovered it. It’s a totally global perspective and you’re constantly encountering stuff you had no idea about.
What I also like about it is that economics is often taught in a very ahistorical way. There is this thing called ‘the economy.’ We don’t need to bother with the details of where it came from or how it’s grown. We just need to understand how it works now. That’s fine, but the story of where it came from is fascinating.
I know, even though I drive a diesel car, before I read your book I knew nothing about Rudolf Diesel. What a tragic figure! It’s like van Gogh—he’s short of money in his lifetime but then his work generates vast amounts of wealth after his death—but it’s worse, because at least most people have heard of van Gogh and know a bit about him. I didn’t even realise Diesel was a person.
Yes, poor guy. There are a couple of tragic gems in the book. One of the things I really enjoyed about writing 50 Things was that you could smuggle in economic ideas—some of them quite deep and quite abstract—under the guise of ‘once upon a time there was this person who invented this thing and this is what it did to the world.’ The ‘and therefore this happened’ is classic economics, but putting the story at the beginning just makes it much easier to grasp. It makes it more concrete but also more human.
Going back to Goetzmann, it turns out that we actually owe the first writing to a bunch of accountants. Can you tell me more about that?
So Goetzmann tells the story of Babylonian cuneiform and trying to figure out what was going on with that. By the way, that’s also discussed in Felix Martin’s book, Money (2013), which is another good book.
What was cuneiform?
Cuneiform is writing on clay tablets discovered in ancient Mesopotamian cities. It’s about 4,000 years old—so older than any previous writing that had been discovered. It was very hard to decipher. The thinking had been that early writing was hieroglyphic, so pictograms, but cuneiform seems to be purely abstract.
So it’s a really old form of writing and no one could figure out what was going on. The other mystery was that, along with the cuneiform tablets, there were all these beads and baubles that look almost like playing pieces of some child’s board game. Nobody could figure out what those were all about, either, because they’re not particularly ornamental and they don’t seem to have any value.
Both puzzles were simultaneously solved by a French archaeologist called Denise Schmandt-Besserat. She realised that the little tokens are designed to count stuff. So if your maths isn’t very good and you’re trying to count 10 amphorae of olive oil you’ve got one bead here shaped like a vase. That’s one vase of olive oil and there’s another vase of olive oil so now I’ve got a second and now I’ve got another one, and another one, and another one. It’s called correspondence counting. Now, although I can’t really count, I have managed to count how many amphorae of olive oil have come into the temple as taxation or tribute or—we’re not sure exactly why they were coming in.
Then she realises that the cuneiform is the imprint, in soft clay tablets, of these hard clay baubles. So you can print this one, which is a sheep. This one’s wheat. This one’s wine. They’re different shapes. So they are kind of pictograms, but they’re not pictures of sheep. They’re pictures of tokens that represent sheep. They’re not pictures of amphorae of olive oil. They’re pictures of tokens of amphorae of olive oil.
There is that extra layer of abstraction and, very quickly, they start realising they can make the same marks with a stylus. So she solves the puzzle about what this is all about. It’s counting the flows and stocks of products.
So this is the first maths and the first writing. It’s also the first accountancy. It’s all wrapped up together—dealing with the struggle of trying to manage these increasingly sophisticated urban economies. The city of Uruk would have held maybe 5,000 people. It’s not big, but big enough that you need to start keeping track of things. Because there are these agricultural economies attached to cities, you start having to plan ahead.
The book sounds brilliant.
It’s great fun. It’s big and thick and it’s got small print and lots of footnotes—it’s an academic book, but by the standards of most academic books it’s incredibly lively.
The next book on your list is Hidden Order (1996) by David Friedman. Is this Milton Friedman’s son?
It is Milton Friedman’s son. So Milton won a Nobel Prize in economics and is a famous libertarian thinker arguing for small government. David Friedman took the libertarian project further and has done a lot of philosophical work on how a proper libertarian society could work. But alongside that he wrote this lovely book, Hidden Order. It’s sort of a textbook and sort of a popular introduction to economics—it hasn’t quite made up its mind which it is.
It was published about the same time as Steven Landsburg’s The Armchair Economist, which is also a great book. Both are great introductions to what it means to think like an economist. A typical example: Friedman uses an economic lens to explain why marriage has become less popular. It’s simple: before the pill, the freezer, and antibiotics, women were kept busy full-time having babies and putting food on the table. With few marketable skills they had to stay married, no matter how miserable the relationship. Once women had more time and the ability to earn a living independently, there was far less reason to stay in an unhappy marriage—or to bother with marriage in the first place.
“Friedman uses an economic lens to explain why marriage has become less popular. It’s simple: before the pill, the freezer, and antibiotics, women were kept busy full-time having babies and putting food on the table”
I chose Hidden Order because it’s full of these intriguing economic insights into the way that the world works and the way the economic mode of reasoning can be powerful, but it also has a little bit of maths. So you can read this book—which is very, very readable—and, at the end of it, you have actually covered a basic microeconomics 101.
I’ve been intrigued by the difference between macro- and microeconomics during the last few years. There’s all this talk about economics being in trouble because it didn’t predict the financial crisis. But whenever I mention this to an economist, they tell me that all the problems are in macro and things in micro are going swimmingly. Is that accurate do you think?
I have to say, I don’t think the strengths and weaknesses of economics are best judged by whether the subject predicts banking crises. I’m not saying it’s not a problem. I’m not saying that economics doesn’t have things to think about. But the number of people in academic economics who were trying to predict banking crises was vanishingly small. Maybe that’s a problem in and of itself, but if you weren’t trying, you can hardly blame them for not succeeding.
The distinction between microeconomics and macroeconomics is an interesting one. Microeconomics was always my enthusiasm. It’s trying to use mathematical logic to understand how people make choices, how they respond to different price incentives, how competition works. Increasingly, in modern times, through this new field of behavioural economics, it’s incorporated psychology as well. So, if you go to a supermarket and you’re trying to figure out these three-for-two offers, and why certain products are prominently displayed and others aren’t, all of that is microeconomics.
Macroeconomics is much more about, ‘Why are there recessions? Why is the unemployment rate 6% rather than 12%?’ Macro is just intrinsically a harder problem. You’ve got less data. You can’t run experiments very easily. Everything is connected to everything else. It’s just a hard problem to solve. I did write a book about macroeconomics, partly to teach myself macro…
Which one was that?
The Undercover Economist Strikes Back (2013). By the end of writing that book, I was a little bit in love with macro. I thought, ‘Okay. I understand even though macroeconomists have made all these mistakes and even though the subject often seems highly mathematical and seems to have all these flaws, there is a reason why they do the things they do. It’s not just because they’re a bunch of crazy people. There is a logic and they do have some achievements, and there is a certain sort of beauty to the almost impossible task of trying to understand the macroeconomy.’
So going back to Hidden Order—it’s very much about micro, isn’t it?
It’s very much micro. So let me give you one beautiful example of the way he thinks. Imagine a factory which has invented this amazing way of turning grain into automobiles. It’s like a Dr. Seuss invention, you just pour in the grain at one side and out the other side come these automobiles. It’s a Silicon Valley startup, on the coast of California. So people grow grain in Iowa and they send it to the factory, and out come cars.
Then there is an investigative report by local journalists who break into the factory and discover that, actually, there is no factory. It’s just a dock. It’s a concealed dock and all they’re doing is they’re putting grain on ships that set sail for Japan and when the ships come back, they’ve got Toyotas on them. So it’s a trick. It’s not this new technology at all.
Then Friedman says, ‘Okay. What’s the difference? Why does it matter that there isn’t actually a machine in the factory and that the machine is actually Japan?’ Japan is a machine for turning grain into automobiles. Should we feel differently about it?
Now, whether it’s good or bad is a separate question that we can discuss and explore. But it was just a beautiful piece of reasoning that makes you understand that, fundamentally, there is an enormous amount of similarity between technological progress and just opening up trade with other countries. He then asks what the consequences would be.
One of the consequences, by the way, is that American grain farmers are in direct competition with American automobile manufacturers, because you can turn grain into automobiles via Japan. Therefore, if you want to protect American automobile manufacturers, you can do that by hammering American grain farmers, but is that what you want to do? Maybe. Maybe not. But you start to understand that things are connected not-at-all in the way that you thought they might have been.
“If you want to protect American automobile manufacturers, you can do that by hammering American grain farmers, but is that what you want to do? Maybe. Maybe not…”
Friedman being Friedman, he’ll then take it further and say, ‘And therefore, free trade is great, et cetera, et cetera.’ But you don’t need to go all the way down that line to appreciate the power of that kind of reasoning.
There is this stereotype that economists are right wing, isn’t there?
You mean like Thomas Piketty? He’s really, really not right wing. There is a huge amount of political variability in economics. There are some very left-wing economists and some very right-wing economists, just as in any other profession.
Is it a neutral subject?
I’m not sure I would say that it’s neutral. It has certain biases to it and it leads to a certain way of perceiving the world. So I think economists do tend to the right on certain issues and to the left on others. We tend to be pro-choice. We are pro-immigration, generally, and pro-human freedom in all sorts of ways. These causes are often associated with the left. But we also tend to be pro-choice when it comes to buying from Amazon. That’s okay. You don’t have to feel embarrassed about it. So pro-market but also pro-freedom. So that often leads to economists being in rather strange political spaces.
Right now in the UK, the leader of the Liberal Democrats is an economist, but both of the leaders of the main parties are very, very far away from positions that most economists would recognise as rational.
Let’s move on to your next book, The Truth About Markets: Why Some Nations are Rich But Most Remain Poor (2003) by John Kay.
John Kay has written many books but this one feels, to me, like his masterpiece. John is a very, very interesting thinker and an old mentor of mine. I used to work as a research assistant for him in the 1990s. He’s fascinating because he is a brilliant thinker. He has a really sharp grasp of all the classic economic ideas—everything from the economics of trade to the economics of price discrimination, and how markets work. He’s got all of that and he probably had all of that at the age of 19. Then he spent the rest of his life—so far—thinking about the extensions and the complications, and all the messy details. So one of the joys of David Friedman’s book is the way that he strips away all the complications to show you something really powerful about the basic way of reasoning about the economy.
John Kay is the antithesis of that. He understands everything in Friedman’s book, but he’s saying, ‘Well, there’s this other consideration. There is this historical consideration. There is this psychological consideration. There is this political consideration or moral consideration.’ All of this stuff needs to be taken into account. Markets are not just a system of equilibrating equations. They have a historical context. They have a political context. They’re a lot messier than they might seem in a textbook.
He says that a good model is like a Biblical parable. It’s not true or false. It’s either illuminating or un-illuminating.
Yes, and whether it’s illuminating or not depends on whether you’re using it in the right context and in the right spirit. The basic idea of a model is to simplify, to strip away detail. That’s really, really powerful. But if you use it in the wrong way, you are going to lead yourself very badly astray.
There is this classic idea, in the social sciences, of foxes versus hedgehogs. A fox is going to see everything in all kinds of different ways, a little bit of everything, whereas a hedgehog has one big idea and sees the world through that lens. When the model does not actually apply, you can go incredibly badly astray with that sort of logic. John is a classic fox.
So what is the truth about markets?
That markets are a part of society. They are not this thing that exists in the abstract that either work or don’t work and that’s all there is to it. There is always history. There is always culture. There is always politics, and if you try to diagnose what’s wrong with the market or try to make a market work better and you’re ignoring the history and the politics, and the culture, you’re going to make very bad decisions.
Do you want to give me an example?
The very first column I researched for John would have been, probably, around the time of 1999’s Wimbledon. I said, ‘Oh, Wimbledon’s coming, John. We could write a column about ticket touts and how ticket touts are good for markets.’ He said, ‘Okay. Why don’t you set out your thinking?”
This is classic. I’m in my mid-20s and full of the joys of economics. The Economist magazine used to write this sort of column every year, all about how the ticket tout is basically taking a ticket away from someone who doesn’t value it very much—because they pay them enough to persuade them to part with the ticket—and they then turn around and sell the ticket to someone who’s willing to pay more. It’s efficiency-enhancing and everyone’s better off.
“The basic idea of a model is to simplify, to strip away detail. That’s really powerful. But if you use it in the wrong way, you are going to lead yourself very badly astray”
I sketched all this out for him. He then went and wrote a column about ticket touts, explaining how it all began with Thomas Aquinas and his concept of the just price. Prices are not just market clearing, they embody moral and cultural norms and if you don’t understand that, you don’t really understand anything about markets. I always remembered that. I’m not sure I agreed with him, but I was just astonished that an economist would write this piece that was so equivocal about ticket touts and, also, was talking about Thomas Aquinas.
Is he an anti-economist, in some ways?
No, no, not at all. He’s a brilliant economist.
Is this economics at its best, then?
I think so, yes. He’s an amazing thinker. There is so much stuff out there that is anti-economics, all about how economists get this wrong and don’t understand that, and bla bla bla. Some of it is true or makes good points, but a lot of it is based on no understanding whatsoever of how economists actually think. John really does know, so when he criticises economists he really understands what he is criticizing. If you want somebody to give economics a kicking, it’s got to be somebody who understands how economists think.
The great thing about reading John is that he’ll be explaining how an economic idea works with tremendous clarity on one page and the next page he’ll be explaining how economists have made a terrible mistake. And it’s all there together, so he’s well worth the read.
Talking about critiques of economics and its teaching, what do you think about the CORE textbook, which you mentioned in a Tweet the other day, as a way of introducing economics? Isn’t that about bringing economics into the 21st century?
I’ve only skimmed it and haven’t studied their resources in great detail, but I’m very much in sympathy with what they’re doing, which is, first of all, to start with the concerns of students who show up interested in economics. What are students interested in economics actually interested in? Apparently, one of the main things they’re interested in is inequality. Well, inequality was not studied much in economics courses—certainly 25 years ago. It was studied, but in a quite theoretical way. So that’s front and centre in this course.
It talks about the Industrial Revolution. It talks about the last 200 years of economic history. You’ve got the process of economic growth, you’ve got the process of growing inequality, you’ve got technological aspects of how the economy works, and you’ve got history—all in that opening salvo.
They’ve been criticised by some people for not being heterodox enough. Fundamentally, it is all classic economics. They’re not bringing in Marxist or new institutional or feminist perspectives on economics. It is a straightforward economics textbook, just told in a much more human way—which actually is what we’ve been trying to do throughout this interview.
On to your last book, Grand Pursuit: the Story of Economic Genius (2011) by Sylvia Nasar, who also wrote A Beautiful Mind (1998). In this book she’s writing about all these famous economists…
Yes, Marx, Keynes, Fisher, Alfred Marshall—but also less well-known figures, like Beatrice Webb. I had no idea who Beatrice Webb was when I was studying economics, but she co-founded the London School of Economics and coined the term ‘collective bargaining.’
One of the things that’s interesting about Sylvia Nasar’s work is that she is trying to take some of the undisputed big players in economics and put them in a social context, describe how they’re related to each other but, also, focus the spotlight on less well-known thinkers.
This book was very educational for me. As an undergraduate, I learnt economics as ahistorical, a kind of maths. This is a book that talks about the history of economic thought and makes it very personal. It talks about economic thinkers and their hopes and dreams and their personal failings.
It also connects the thoughts they were having with the economic situation at the time. In the late 19th century, in the United States, people were starving to death because of the recession of 1897. Then there was the Great Depression. Then there was the post-war period and Bretton Woods. All these different experiences were shaping how economists thought about the world.
It’s all in this book and I would say 99.9% of it was missing from at least my study as an undergraduate. So it was a great thing for me to read. I think knowing where these ideas come from makes you a better economist, but it’s also really interesting to read about people.
At the beginning, you mentioned Irving Fisher?
Yes, Irving Fisher is the character who has captured me. He really was one of the founders of modern economic thought, but was basically completely disgraced by his failure to predict the Wall Street Crash of 1929. It was a very public failure because he was an enormously famous economic commentator and forecaster at the time. Not only that, but he was a multimillionaire and he lost everything—literally everything—in the crash. So he’s a fascinating and tragic figure. He was truly a genius and, yet, utterly failed in one of these central roles of what we expect from economists.
At the beginning of the John Kay book, doesn’t he make fun of CNBC and Bloomberg TV, saying these ridiculous programmes aren’t about economics?
John Kay says, ‘This stuff is nothing to do with economics,’ but for Fisher it was, definitely, to do with economics. He was very actively involved as an economic and financial forecaster and investor. What kind of economist were you if you couldn’t make profitable investments, and forecast economic fluctuations? As it turned out, he was the greatest economist on the planet, but he couldn’t forecast economic fluctuations, so there you go. Draw whatever modern-day lessons you like from that.
“What kind of economist were you if you couldn’t make profitable investments, and forecast economic fluctuations? As it turned out, he was the greatest economist on the planet, but he couldn’t forecast economic fluctuations. Draw whatever modern-day lessons you like from that”
People say Marx forecast the crisis of capitalism and Keynes was a successful investor so perhaps you’re not always doomed.
I like the Alfred Marshall quote she uses, that the mainspring of economic study is the “desire to put mankind in the saddle”—and that that marked a big change from before, when humans felt themselves at the whim of fate and the gods. It’s quite a new discipline, isn’t it?
It is. The early economists were also philosophers—people like Adam Smith and Karl Marx. Irving Fisher did the first ever PhD in economics at Yale. That was in the early 1890s. So just over a hundred years ago, the subject didn’t even exist. But I think it was Alfred Marshall who described economics as, “a study of mankind in the ordinary business of life.” Having said that economics defies easy definitions, you could do worse than that one.
Interview by Sophie Roell
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