Economics in Context
Science is the study of Nature from an empirical perspective. Unlike physicists, biologists, and other scientists, economists have not been content to dispassionately comprehend the gyre of their purview and spin theories as to relations and plausible causes. Instead, economists have often acted as intellectual cheerleaders: touting their beliefs through theoretical propaganda that does not fit the facts. To this end, economists have often couched their favored system as representing a physiocracy: a natural order.
Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle.” Like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy. ~ English sociologist John Rapley
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In the mid-16th century, a group of Englishmen became transfixed on the acquisition of bullion – gold and silver – as the surest route to national power and wealth. Buillionists pointed to the grandeur of Spain, which built its ephemeral prosperity on precious metals looted from its New World colonies.
Mercantilism took bullionism one step further: stressing the value of international trade to amass riches. The mercantilist conception was that wealth was a zero-sum competition of economic winners and losers. Mercantilism inspired nationalist competition.
17th-century English merchant Thomas Mun, a staunch nationalist who was the director of the East India Company, was an enthusiast of mercantilism, and had great influence in promoting the doctrine. Mun advocated the “means to enrich a kingdom” was by achieving a positive balance of trade. The merchant class took to the idea like a fish to water.
The ordinary means to increase our wealth and treasure is by foreign trade; to sell more to strangers yearly than we consume of theirs in value. ~ Thomas Mun
More domestically, a group of 18th-century French economists, dominated by François Quesnay and Anne Turgot, believed that the wealth of nations was solely derived from the value of land and its produce. This notion was well-received at the French royal court, and made a splash in academic circles, but its preoccupation with land as the source of wealth ignored manufacture, which was playing an increasingly significant role in commerce.
Economic physiocracy had its strongest formulation with the late-17th-century idea of laissez-faire: that government should not interfere with the forces of the market in determining the allocation of resources. In the 1750s, French economist Vincent de Gournay popularized the term laissez-faire in promoting the free-market system as a natural order.
The promotion of laissez-faire was a direct attack on prevailing mercantilist doctrine, which favored government intervention to restrict free trade, subsidize non-competitive domestic businesses, and bolster monopolies which benefited the state. In contrast, laissez-faire physiocrats believed the government’s role should be restricted to national defense and domestic tranquility: unprofitable roles which nonetheless served business interests.
Adam Smith furthered faith in the physiocracy of laissez-faire. His 1776 Wealth of Nations laid the foundation for classical economics, which shaped economic thinking and public policy in Europe and the Americas for over a century. The American Revolution caused many to question the wisdom of mercantilism, and sparked interest in Smith’s formula to national wealth through free trade.
Some of the most widely read economists were economic classicists. Their moral sentiments were out of step with actual business practices. Classical economics was largely glossy theoretical myths.
One facet of classical economics was considering how economic changes occurred. In this vein, the marginalist school was founded in 1871 by English mathematician-turned-economist William Stanley Jevons, who explored marginal utility in his influential book Theory of Political Economy.
By the turn of the 20th century, marginalists had steeped economics in the fanciful ideas that business decisions were made at the margin, and that the decision-making process on both sides of the market – supply and demand – was rational. Marginalists developed the concept of utility to explain the prices that people were willing to pay for goods and services. Utility is the satisfaction derived from consuming something.
Capital is that part of wealth which is devoted to obtaining further wealth. ~ Alfred Marshall
Alfred Marshall became the most influential economist of his time with his book Principles of Economics (1890), which became the dominant textbook on the subject for decades. In it he defined neoclassical economics by coalescing supply and demand, production costs, price, and marginal utility into a conceptual coherency. Much of the success of Marshall’s book owed to its use of explanatory diagrams, which were soon emulated worldwide, and live on in this book in explaining price theory.
Consumption may be regarded as negative production. ~ Alfred Marshall
Marx’s stirring socialist sentiments had little effect until Vladimir Lenin used them to spearhead his autocratic takeover of Russia. Politically, socialism amounted to little more than cover for running a command economy by an elitist clique who called themselves communists. Lenin’s ruse was replayed decades later in China by Mao Zedong and his band of rebels.
The failure of neoclassical economics – that economic imbalances were naturally self-correcting – was painfully illustrated by the Great Depression. Global depression inspired John Maynard Keynes to fixate on demand as the wellspring of economic activity.
Keynesian economics was conventional for a few decades, until the gold standard started breaking down. This led Milton Friedman to fixate on money as the lever of economic activity. Unlike Keynes, who thought that government must occasionally act to keep the engine of capitalism running, Friedman’s monetarism did not stray from the religious faith of laissez-faire as a physiocracy, with an accompanying aversion to government interference.
Sensitive to the bilious externalities of free enterprise, John Kenneth Galbraith tried to break the spell of laissez-faire with his economic liberalism, which favored government regulation of capitalism. Galbraith’s sensibility failed to woo the mainstream, which remained in thrall to capitalist plutocracy. As Friedman might have explained: follow the money.
A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both. ~ Milton Friedman, explaining how American economic freedom delivered equality to the American people