Economic Thinking
Very few of history's great economic thinkers are household names, but their ideas are more relevant today than ever before, as Tim Harford explains...
"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist," John Maynard Keynes once commented.
Not every economist is quite as quotable as Keynes, although Joseph Schumpeter came close. Schumpeter is said to have remarked, "Early in life I had three ambitions. I wanted to be the best lover in Vienna, the best horseman in Austria, and the best economist in the world. I never became the best horseman in Austria."
But for every Keynes or Schumpeter, there are a dozen truly great economic thinkers whose discoveries languish, entirely ignored by 'practical men'. That is a real shame as their ideas would certainly come in useful in the 21st century.
Keynes understood the poor standing of the field of economics and exploited it. Although he was actually based at Cambridge, Keynes was a political player as much as an academic, and he boosted his own reputation by branding classical economists "a gang of incompetent bunglers".
For some reason this type of comment did not endear Keynes to contemporaries such as Arthur Pigou, who held the celebrated chair of political economy at Cambridge from 1908 to 1943. While Pigou's name has been eclipsed over the years by that of Keynes, Pigou was the man who produced an idea to save the world.
Pigou introduced the idea of 'social costs', and the 21st century's most notorious example of a social cost is the carbon dioxide pollution that leads to climate change. The problem we have with pollution is that, while it is damaging, some of it is the essential side effect of vital processes. Carbon dioxide pollution, for example, is produced as a side effect of breathing. For this reason, a government can't just ban polluting activity; it must discourage the activity only when the damage outweighs the benefits.
Pigou argued that the solution was a tax on pollution designed to reflect the social cost, which is not otherwise properly included in the price paid by the consumer. With a stroke, green taxes were invented. Now that green taxes are so high up on the political agenda, one might have thought that Pigou had triumphed at last. But no. In the UK, the only green taxes (i.e. levies that are enforced by the Government) are those paid by motorists, and even those have been falling (after inflation) for several years. Many other polluting activities escape any kind of green tax. Replacing some income taxes with green taxes would help to encourage green behaviour, but politicians will not touch this plan.
Keynes' most famous idea - that governments should have spent their way out of the Great Depression - has itself been corrupted into the convenient notion that governments in trouble should offer tax cuts. Another great figure from economic history, David Ricardo, knew better.
David Ricardo was elected as an MP in 1819, and would have had a few choice comments for Alistair Darling if he had been in the House of Commons earlier this year. Ricardo was a self-taught economist and self-made millionaire, and is famous in the economics profession for his analysis of international trade. But Ricardo also realised that tax cuts - like the one Mr Darling announced in May - are mere conjuror's tricks.
When a government cuts taxes without cutting spending, it is simply running up debt. Future taxpayers have to repay the debt, plus interest, and might just as well put the tax rebate into a savings account to await the day the debt will become due. So, whenever a chancellor cuts taxes but not spending, he is relying on the fact that few voters have ever heard of David Ricardo.
Perhaps more voters will have been reminded recently of Ricardo's contemporary and good friend, the famously gloomy economist Thomas Malthus - commonly, but wrongly, supposed to be the inspiration for the profession's enduring reputation as the 'dismal science'. Every time there is a hike in food prices, someone is sure to wheel out the pessimistic prediction that made Malthus his name - that population growth will ultimately outpace technological progress and doom humanity to poverty and famine.
It is curious that Malthus' fame still endures despite the fact that he has been entirely wrong for 210 years and counting - as wrong as he was in his trading instructions to his friend Ricardo, who alongside his other occupations acted as Malthus' investment manager. True to type, when things were going well, Malthus wanted to take his profits and run. Ricardo obliged, but kept his own position open and earned double the return.
The fact that the best-known economists are not necessarily those with the best ideas may go some way towards explaining why the soubriquet 'dismal science' seems destined to live forever. And yet economists can take solace in the true origin of the phrase: it was actually an insult hurled by the pro-slavery campaigner Thomas Carlyle in 1849. Carlyle preferred the 'beneficent whip' to the insistence of economists such as John Stuart Mill that workers should be paid wages. The context forgotten, now only the insult is celebrated; history's great economists will have to content themselves with having been on the right side of that debate.
Tim Harford is a Financial Times columnist and author of The Logic of Life and The Undercover Economist. To read more of Tim's work, visit his website at www.timharford.com
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