What’s in it for me? A rollicking, whistle-stop tour of the global history of economics.
You might think you know what economics is about.
Input-output, supply and demand, etcetera, etcetera.
In a way, you’d be right.
The word economics comes from the ancient Greek – oikos for house, and nomos for law.
For the Greeks, economics was about managing households.
But economics also seeks to explain the differences between societies.
Why does Britain have state-of-the-art buildings, teachers, and books to educate its young people, and Burkina Faso doesn’t?
No one knows the full answer.
But economists are the ones asking the questions.
In these blinks, we’ll learn the history of the field, from the ancient Greeks to the cowboy (and girl) bankers who triggered the global financial collapse of 2007.
Perhaps by considering how earlier economists sought to explain their own times, we can see our own more clearly.
In these blinks, you’ll also discover why the Catholic Church reversed its position on moneylending; why the renegotiated relationship between the Soviet government and economy led to the death of millions; and the bias most economists are likely to share.
The first question for early economists was the role of money and merchants.
Among many other things, the ancient Greek philosopher Aristotle was probably the first economist.
Aristotle thought deeply about the concept of money, in the fourth century BCE.
Money, of course, can be incredibly useful: it measures what something is worth, and allows things to easily pass from one person to another.
But money also opens dangerous doors.
If an olive farmer, say, realizes that he can make money from selling olives, he might begin to grow them purely for profit, rather than only growing enough to support his family.
Aristotle called this commerce, and he found it wholly unnatural.
Even worse were those who used money to make more money – the moneylenders, who lent money to people for a price.
We now call this interest.
Aristotle’s grumbling didn’t have much of an impact on the development of an economy, though.
Commerce, once it had begun, was here to stay.
The key message here is: The first question for early economists was the role of money and merchants.
Like Aristotle, early Christian thinkers didn’t much care for moneylenders.
In the thirteenth century, St.
Thomas of Aquinas detested moneylending, which he called “usury.
” The only proper, Christian use for money, he believed, was buying and selling.
But the practice of moneylending was becoming very convenient for the merchants of Venice and Genoa, who were beginning to trade with other cities in Europe and the Mediterranean.
The first banks emerged here to let merchants store their money and easily settle debts.
Peasants began abandoning their farms, where they toiled under feudal lords, to work for themselves in cities in exchange for money.
Soon even the Catholic church began softening its stance on usury: in the twelfth century, the pope even made an Italian merchant called Homobonus a saint.
A few centuries later, as European ships began exploring the world, they came upon civilizations rich in silver and gold.
European merchant-explorers looted them, delivering vast wealth to European rulers who bought ever-fancier castles and outfits, among other things.
So began mercantilism: the alliance between merchants and European rulers.
In England, economists such as Thomas Mun began thinking about how their country could become richer than its rivals.
He believed that what was good for merchants was good for the nation.
Countries set up special companies allowing investors to pool their money and share in the profits, like the East India Company, in which Mun was an official.
In medieval times, religion and personal relationships ruled economic life.
Mercantilism was a harbinger of change, a pivot to the industrial age in which money would take precedence.
As the Industrial Age dawned, economists came up with radical new ideas to explain the world.
The first school of economists formed in pre-revolutionary France, led by François Quesnay.
Quesnay was a monarchist, but he had a radical notion: do away with taxes on France’s peasants and tax the aristocrats instead.
Peasants worked with nature, given by God, and their products were the ultimate source of a nation’s wealth.
France had been foolish, he thought, to tamper with their earnings.
Worse, France had bestowed special privileges on merchants, allowing them to organize themselves into guilds to protect themselves from competition.
Quesnay advised the French government to remove controls on agriculture and do away with the merchants’ privileges.
This is laissez-faire economics, meaning a hands-off economic policy by the government.
It was the opening salvo in a debate that continues to rage to this day.
The key message here is: As the Industrial Age dawned, economists came up with radical new ideas to explain the world.
Meanwhile, in Scotland, Adam Smith published his 1776 opus The Wealth of Nations, which contained a number of entirely new concepts.
Society, Smith believed, does best when everyone acts in their own selfish best interest.
Despite that, society manages to function just fine without any one entity deciding what’s best for it.
It’s as if it’s guided by an invisible hand.
Smith also responded to changes in the world around him.
At the dawn of England’s Industrial Age, huge new factories sprang up as the country’s wealth shifted from agriculture to industry.
The types of jobs available at these factories were highly specialized.
Smith explained these new jobs using the concept of division of labor.
In complex societies, there are lots of goods people want to exchange.
This means that people begin to specialize in particular jobs, because some people are naturally better at making bread than building chairs.
But then the specialization goes even further: in a chair shop, for instance, one person is in charge of hammering nails and another is in charge of sanding the wood.
When specialized work spreads throughout the economy, more types of goods can be made at lower cost.
Lower costs mean lower prices, and so everyone benefits.
In other ways, some benefit more than others – a lot more.
For one thing, specialized jobs are a lot more boring than non-specialized.
Imagine hammering nails all day as opposed to building a whole chair.
The hammering gets tedious fast.
Meanwhile, the owner of the shop is getting richer and richer from the increase in production.
Nineteenth-century economic thought was devoted to problems of wealth inequality.
England’s new factories created vast wealth and privileges, but only for landowners and the capitalists who owned the factories.
A diverse group of economists in the nineteenth century turned their minds to this new problem.
British stockbroker David Ricardo thought free trade would solve inequality.
At the time, Britain had laws in place that banned cheap foreign grain, resulting in high grain prices.
This made life more difficult for workers.
Meanwhile, Ricardo showed, the laws further enriched the capitalists and landowners who profited from domestic grain.
When Ricardo suggested removing the ban on cheap foreign grain to help equalize things between the classes, he was laughed out of Parliament.
But posthumously he had the last laugh, when decades later Parliament agreed.
The key message here is: Nineteenth-century economic thought was devoted to problems of wealth inequality.
Ricardo focused on decreasing the vast differences between workers, capitalists, and landowners.
Others took more extreme views on the relationships between the rich and poor.
Some thought Ricardo didn’t go nearly far enough.
The first socialist thinkers, like Charles Fourier and Robert Owen, believed communal ownership and sharing were the foundation of a happy society, rather than markets and competition.
Others, like Thomas Malthus, who taught young men to become officers of the British East India Company, thought that people were poor because they were lazy.
If they were given any help, this laziness would be rewarded.
Without aid, they would be more likely to help themselves.
But the most influential ideas to result from rising inequality in capitalist society came from a German: Karl Marx.
Marx laid out his grand theory of capitalism in a huge tome called Das Kapital.
Capitalists own the means of production and workers own only their own labor, Marx wrote.
Workers, therefore, have no choice but to be exploited by capitalists.
But within capitalism there are also the seeds for a new society.
Communism, which would eliminate class difference, was the inevitable outcome of late-stage capitalism.
The trouble was, Marx focused mainly on the reality of capitalism, rather than the details of the communist future.
This would spell trouble later on.
But governments slowly woke up to the reality of worker exploitation.
At the beginning of the twentieth century, some European governments started paying unemployment benefits, and funding universal education.
Soon, they also outlawed child labor.
The role of government in the economy would be a major topic of economic thought in the century to come.
As Europe debated over the relationship between government and economy, America’s great wealth became obvious.
In the early twentieth century, the Russian revolutionary Vladimir Lenin put Marx’s ideas into practice.
He and other economists hypothesized that imperialism, the European practice of taking over foreign territories for profit, had propped up capitalism longer than its natural life cycle.
When Lenin overthrew Tsarist Russia in 1917, he set up the world’s first communist state: the Soviet Union, also known as the USSR.
It would be, Lenin proclaimed, the enemy of imperialism.
The USSR practically addressed a problem that would be central to twentieth-century economics: the role a government should play in the economy.
The Soviet economy was subject to a system called central planning.
That means the economy took direction from the government, not the markets.
For instance, in the USSR, cars would be painted blue due to a decision made in the highest levels of government – not consumer demand.
The key message here is: As Europe debated over the relationship between government and economy, America’s great wealth became obvious.
The Soviet approach to the relationship between government and the economy was extreme, and the transition to communism was very painful.
In the 1930s, famine in the Soviet Union killed some 30 million people.
But despite this, economists increasingly advocated for the government to have at least some involvement in the economy.
Arthur Pigou pointed out that sometimes people and companies acting in their own best interests have unintended, negative side effects on the economy as a whole.
The government should step in to manage these unintended side effects Others took the opposite perspective on government involvement in the economy.
Ludwig von Mises argued that prices set by the government were meaningless.
He believed that markets only work when people know what money represents, and they use it to try and make a profit.
Therefore, he argued, capitalism is the only rational economic system.
A new class of Americans, nouveau riche industrialists like the Vanderbilts and Carnegies, would be inclined to agree.
They’d made vast fortunes from construction and transportation, and they loved showing off how rich they’d become.
The disapproving economist Thorstein Veblen deemed their silk cravats and marble mansions evidence of conspicuous consumption, designed to demonstrate that they didn’t have to work for a living.
Slowly, Veblen argued, this type of consumption trickled down to the lower classes as trends, forcing everyone to work harder to buy the things they needed to keep up appearances.
It couldn’t go on like this, Veblen said.
In the mid-twentieth century, political events inspired economists to develop theories of government involvement.
Things were headed for a crash.
When the Great Depression hit the US in 1929, fortunes were lost overnight and 13 million Americans – about a quarter of the working population – were plunged into unemployment.
Economists were faced with an urgent new question: How could the world’s richest country be experiencing such acute poverty?
The British economist John Maynard Keynes, whose influence endures even today, believed that the Great Depression was the result of governments failing to respond properly to early signs of recession.
When the Depression hit, worried people stopped spending and started saving.
When businesses followed suit, things only got worse.
The economy wasn’t going to right itself, Keynes believed, so the government had to step in.
The key message here is: In the mid-twentieth century, political events inspired economists to develop theories of government involvement.
As we saw in the Soviet Union, too much government control of the economy can have devastating results in the form of famine.
But Austrian-born economist Friedrich Hayek predicted other potential problems of government interference in the economy.
During World War II, Hayek shocked Britain when he wrote that the British had more in common with the Nazis than anyone was comfortable with.
The Nazi economy was controlled carefully by the government.
In Britain too, Hayek said, many people thought that the government should control the economy.
Hayek warned that government control of the economy would result in a loss of individual freedoms, ultimately resulting in totalitarianism, where the government is all-powerful and citizens must obey totally – like Nazi Germany.
After the war ended, people all over the world continued thinking about the ideal relationship between individuals and government – especially people who had been colonized by European countries.
In 1957, Ghana became the first colonized sub-Saharan African country to gain independence.
Ghana’s economic advisor was Arthur Lewis, who advised total government control of the economy.
This was necessary to engineer a big push that would allow Ghana to catch up with the economic behemoths of America and, increasingly, Europe.
Sadly, in Ghana and other African and Latin American countries, government control of the economy wasn’t so successful.
The linkage between politics and the economy hindered development.
But in other countries, like South Korea, hitching the economy to the government was extremely successful.
State-controlled businesses established in the post-war period, like Hyundai and Samsung, are today household names.
After World War II, economists turned their minds to new problems, big and small.
We’ve seen how Keynes ushered in new thinking about government’s role in economics – he believed that government should preside over the economy, taking steps to enact change.
This became known as macroeconomics.
But what about the small decisions people and companies make every day, which cumulatively make up an economy?
Beginning around World War II, economists started to study everything that goes into these small decisions.
This is known as microeconomics.
But during the Cold War, it became clear that one political decision-maker’s actions could decide the economic fates of many.
To help decision-makers choose a course of action based on strategic factors and predictions of an enemy’s behavior, a group of American economists and mathematicians developed what’s called game theory.
Game theory turned out to be as relevant to geopolitics as it is to individuals and firms.
The key message here is: After World War II, economists turned their minds to new problems, big and small.
The Cold War wasn’t the only thorny problem economists started tackling after World War II.
In the 1950s, the economist Gary Becker began using economics as a tool to describe social phenomena like crime, which he believed is a cost-benefit analysis like everything else.
Criminals measure the cost to them – going to jail, perhaps – versus the benefits they might enjoy from having, say, a free new Ferrari.
The best way to get rid of crime, Becker argued, was to make the potential costs greatly outweigh the benefits.
But the thorniest problem of all remained global inequality, which some still traced back to capitalism.
In the 1950s, Che Guevara and Fidel Castro overthrew the Cuban government and established a communist state.
They believed that poverty in Latin America was caused by the greed of wealthier countries, especially the US.
How could wealthy countries exploit entire less-wealthy ones?
The German economist Andre Frank answered this question, showing that trade harmed less-wealthy countries, exacerbating the differences between the two.
Frank, as well as Guevara and Castro, believed that it was impossible for poor countries to become rich under a capitalist system.
But they didn’t convince everyone.
Even some Marxists were skeptical, believing that true socialism was a natural outgrowth of a high level of capitalist development.
It would never work in Latin America because countries there hadn’t developed enough.
Meanwhile, South Korea and other Asian countries were steaming ahead, proving that development under a capitalist system was indeed possible without revolution.
In the decades after World War II, Keynes’s ideas of government involvement in the economy were put to the test.
The popularity of Keynesian economics waxed and waned in the decades after World War II.
A group of economists, the young Keynesians, developed practical applications of Keynes’s theories.
Their ideas gained currency, and in the 1960s President Kennedy adopted a Keynesian policy of tax cuts, with the goal of jump-starting the economy by putting more money in the hands of consumers.
The policy was a success, and for a while, everybody was convinced – even the Republican party, which was traditionally skeptical of government interference.
But by the late ’70s, economists began to wonder whether too much government spending was causing a rise in inflation.
Perhaps the good economic performance of the 1960s wasn’t due to Keynesian policies at all.
The key message here is: The popularity of Keynesian economics waxed and waned in the decades after World War II.
Skepticism of Keynesian ideas grew as the economic downturn spread in the 1970s.
In 1978, strikes protesting unemployment and inflation spread throughout Britain.
Economists blamed these economic woes on Keynesian policies.
Milton Friedman was the most prominent of these.
Sure, Friedman said, a government boost in spending might work for a bit.
But then there’s a return to the original level of unemployment.
And with more money in circulation, there’s also higher inflation.
Markets, not governments, should lead society, Friedman argued.
Governments can’t predict what will happen in a market, so they should commit to a fixed rate of growth in the money supply, one that’s in line with the growth in the economy.
Friedman advocated for governments to enhance conditions for business, allowing them to produce more – the economy’s supply – rather than giving more cash to consumers, enhancing demand.
This is called supply-side economics.
Margaret Thatcher and Ronald Reagan adopted Friedman’s policies.
Many economists blame their strict control of the money supply for making the economic downturn of the 1970s worse than it needed to be.
Another question, though, was whether governments should be trusted to carry out economic policies in the first place.
American economist James Buchanan argued that government is just a group of people with the same selfish motivations as everyone else.
Politicians are motivated by the desire to stay in power, he believed, just like businesses are motivated by the prospect of making money.
If government spending is popular, politicians will do it regardless of whether or not it’s good for the economy.
At the end of the twentieth century, risky financial behavior led to catastrophic loss.
Before the 1980s, bankers were stodgy types, typically stuffy men in tweed suits.
In the 1980s, though, a new breed emerged: brash, arrogant cowboys, brazen with their risk-taking.
They engaged in speculation, making guesses about what a commodity such as wheat or oil would cost in the future, then buying a lot of it based on that guess.
When their guesses were right, they then sold the commodity for a profit.
Sometimes that commodity was currency.
Currency speculators like George Soros made money by guessing how a country’s currency would fare over the course of weeks or months.
And it wasn’t just a couple of bucks here and there: in 1992, Soros made a profit of £1 billion after his speculative behavior destabilized the Bank of England.
The cowboy bankers’ highly lucrative practices became increasingly attractive to armchair stock traders too.
But there were serious consequences to their risky behavior.
The key message here is: At the end of the twentieth century, risky financial behavior led to catastrophic loss.
In the 1990s, exciting new companies that sold exciting new products like web browsers and search engines were entering the stock market.
People rushed to buy shares in these companies, and when share prices increased, their friends and neighbors wanted to get in on the action too.
The companies’ stock prices soon spiraled out of control – not because people had made sound decisions about the value of the companies, but because they were feeling emotional about the possibility of getting rich.
When the bubble burst, $2 trillion vanished.
People lost their fortunes and companies went out of business.
But soon enough, the next bubble formed.
This time, the product was housing.
When the US housing market bubble burst in 2007, the entire global economy collapsed.
The details of what happened can be explained by a little-remembered economist called Hyman Minsky.
Minsky believed that as capitalism develops, it becomes unstable.
People and banks become more daring, borrowing and lending increasingly recklessly to maximize profit.
As the economy surges ahead, banks start giving loans to people with little ability to pay them back, betting that house prices will keep rising.
When people stop paying back their loans, then selling their houses, prices fall.
Investments stop, and the economy starts receding.
This is what happened in 2007.
In response to the crisis, the world’s economic giants, including America and China, adopted policies that represented a return to Keynesian thinking, increasing spending to revive the economy.
Elements of these policies are still in place today.
Inequality remains the most pressing topic for modern economists.
When he was a boy, the Indian economist Amartya Sen was witness to horrific violence between Hindus and Muslims in Bangladesh.
This led him to pursue a career thinking about the reasons behind inequality.
Poverty, Sen believes, is about more than just material goods.
It’s about a lack of capabilities that open up possibilities for advancement – a lack of transportation or education, for example.
According to Sen, developing society is more about expanding peoples’ capabilities than it is about economic development.
Sen helped the United Nations develop the Human Development Index, which measures income alongside other metrics like life expectancy and literacy.
To Sen, economics is about the various things people need to live happy lives – not just money.
The key message here is: Inequality remains the most pressing topic for modern economists.
Amartya Sen was also interested in the inequality between genders.
Economists, he found, were biased in the way they think about the world.
As most were men from a similar background, they were, unsurprisingly, biased.
In the 1990s, a new group of feminist economists addressed the ways that economics sees the world through a male point of view.
Unpaid work – like shopping, cooking, cleaning, caring for children, plowing land, and repairing huts – is largely done by women.
Because women’s largely unpaid labor isn’t taken into account in traditional economic narratives of success, women are at a disadvantage when it comes to the distribution of resources, like wages, food, and medicine.
Social change and good policy, feminist economists believe, can help alleviate these problems.
But without policies aimed squarely at alleviating discrepancies between men and women, these discrepancies will only become worse.
But correcting global inequality will require more than thinking about poverty, or the discrepancies between men and women.
The wealthy have become wealthier than ever, earning exponentially more than even the middle classes.
The French economist Thomas Piketty has an explanation for this.
He argues that what he terms the historical law of capitalism allows people who are already wealthy to make money from their existing wealth.
But how to stop it?
Economists have suggested higher minimum wages, and increased taxes on wealth.
But governments seem uninterested in rectifying the situation.
In fact, since the 1970s, governments have cut taxes on the wealthy.
Given the power and influence of these people, income redistribution in the next decades is not a very likely outcome.
Today’s economists and those of the future will have to creatively think of new ways to move forward.
Final summary
Economics might sound like a lofty, impenetrable school of thought, but actually it is concerned with the problems of real people.
Just as money is a tool you use – in exchange for your labor, and for the things you need – economics is a tool for understanding the differences between individuals, groups, classes, and countries.
It’s also a way of understanding how to decrease inequality for all.