Smith, Marx and Ricardo are giants of economic theory. Here, economics professor Linda Yueh imagines what advice they'd give us todayby / April 13, 2018 / Leave a comment
Published in May 2018 issue of Prospect Magazine
Adam Smith: build a smart state
Smith’s writing famously urged a limited role for government—but he should not be caricatured of as believing in pure laissez-faire. He argued that the state should step in where markets don’t work. It should, for example, maintain good transport facilities, as that would break monopolies and encourage competition. He also thought government should provide universal education. So, it isn’t impossible to imagine a modern-day Smith decrying excessive educational fees and a poorly-run privatised railway system.
A truly Smithian state would intervene whenever it will improve competition, and particularly the quality of the society in which we live. Smith was, after all, a professor of moral philosophy as well as an economist. Our own times are incomparably more abundant than his, and perhaps the single lesson he would most press on economics today is to remember that it is the quality and not just the quantity of economic growth that matters.
David Ricardo: How (and why) to avoid a trade war
Ricardo debunked the old 18th century mercantilist doctrine —which is today being reborn in some respects as Trumpism. It assumed the path to prosperity was for nations to amass gold and silver through a favourable balance of trade and money. Ricardo pointed out, instead, that the important thing was to get the economy producing more goods. He argued, too, that increasing the volume of trade could help with that: it could make allnations more productive.
He explained how through his theory of comparative advantage. Even countries who are less efficient than others in producing everything could gain, thanks to to specialisation—nations which were open to trade would do more of what they were relatively better at, spurring their growth.
Today, Ricardo would again be teaching us to concentrate on making the domestic economy more productive. Fixating on a better trade balance without first examining how to make exports more desirable to the rest of the world would have struck Ricardo as upside-down. Increasing exports by removing trade barriers would be the Ricardian way to proceed.
Karl Marx: How markets can yet pave a way to communism
Communist China’s evolution would have left Marx scratching his head. The country adopted market-oriented reforms in 1979 amid the failure of a centrally-planned economy. The reforms ushered in 40 years of growth, and made it the world’s second largest economy.
The state still retains —and perhaps Marx might have approved of this bit—more of a guiding hand over finance and investment than in the western economies. The regime still claims to be Communist, but Marx wouldn’t have bought it—he simply didn’t think that communism could co-exist with capitalism in a market-based economy
China is now seeking to grow more by relying less on investment and more on its own consumption; less on exports and more on domestic demand; less on agriculture and lower-end manufacturing and more on high-tech activities. None of this will involve putting market forces back in their box.
But if China can pull it off, then in the coming decades it will become truly rich. But therein, for the most determined Marxist, lies the opportunity. After all, communism was always meant to kick off in the most developed parts of the world first, because a growing and confident industrial workforce are the most promising for rebellion and revolution. But, Marx once wrote of his disappointment with successive revolutions in France in the 19th century: “history repeats itself, the first time as tragedy, the second time as farce.” The last Chinese revolution might have ended in tragedy for Marxist economics, but after markets have made China rich, it must hope that the rerun can avoid descending into farce.
Although economics has tended to become more specialised, may economists continued to paint on a wide canvas well into the 20th Century—foremost among them John Maynard Keynes—as well as two big beasts who are mostly claimed by the political Right, Milton Friedman and Friedrich Hayek. All of them are covered in The Great Economists. But three offer lessons that economics would do especially well to pay heed to today:
Irving Fisher: Don’t let deleveraging tip you back into recession
Fisher thought economies can get trapped in a persistent deflationary spiral of “debt deflation,” where prices fall as the economy stalls, since people are not consuming and firms are not investing while they repay debt. Attempts to liquidate assets in order to reduce debt become self-defeating as the ensuing fall in prices raises the real value of debt even more.
The risks are especially marked when economies are weighed under with a great deal of debt. That was what happened in 1937. The US economy fell into the second downturn of that decade when debt deleveraging occurred alongside the government cutting back spending and tightening monetary policy. In our own still-indebted post-crisis economies, there could again a risk that premature tightening of policy will lead us back into a downturn. For Fisher, the way out of a debt deflation spiral was to reflate the price level, which would reduce the real value of debt.
Joseph Schumpeter: Hold your nerve to solve the productivity puzzle
The champion of the doctrine of “creative destruction” would be reluctant to give prescriptions about intervening in a capitalist system. So long as the state supported entrepreneurs by providing a system to raise funds for investment, Schumpeter would expect that enterprising innovation would—in combination with obsolescence of out-dated practices—allow the economy to produce more output with the same inputs. If there was an extra lesson, it might be: hold your nerve. Don’t presume there is less scope for innovation in the giant service sector than in the manufacturing sector. It’s always possible to raise productivity.
Joan Robinson: Getting wages rising again
The answer, in a word, is competition. Robinson’s theory of imperfect competition explains why wages do not keep up with productivity growth: firms can pay workers less due to a lack of competitors. Rising wage growth requires competition and ensuring that employers do not hold “monopsony power”—the flip-side of monopoly power—where big employers, or big buyers, hold a dominant economic position.
Dr Linda Yueh is author of The Great Economists: How Their Ideas Can Help Us Today.