Paulo Roberto de Almeida
BOOKSHELF
Grand Pursuit: The Story of Economic Genius
By Sylvia Nasar
Simon & Schuster, 558 pages, $35
Simon & Schuster, 558 pages, $35
Follow the Money
The best economists are formidable intellects,
but do they really know what they are talking?
James Grant
The Wall Street Journal, September 10, 2011
By JAMES GRANT
Mankind missed a bet 2,000 years ago when no one thought to invest $100 or its equivalent in Roman coin in a certificate of deposit compounding at 2% a year forever. The principal balance today of this ungifted benefaction would come to the astounding sum of $15,861,473,276,036,900,000. That would be $2.3 billion, before tax, for every man, woman and child on earth. But the ancients bungled, perpetuating the problem of scarcity and leaving the way open for Sylvia Nasar to write her "Grand Pursuit: The Story of Economic Genius," a survey of economic thought from Charles Dickens to Paul Samuelson and beyond.
Economic genius would seem to be in short supply these days. On the say-so of economists, Congress has spent upwards of $1 trillion to "stimulate" an economy that remains unstimulated. The best economists are formidable intellects, as it goes without saying—Ben Bernanke was the spelling champion of South Carolina—but you begin to wonder if they know what they're talking about.
Ms. Nasar divides her book into three "acts," like a play. They are "hope," "fear" and "confidence." "Hope" is what the Victorian thinkers, including Dickens, in his role of social reformer, and Karl Marx (of all people), gave the world concerning the possibility of solving the economic problem through conscious effort. "Fear" is what the interwar economists—confronting first hyperinflation and then the Great Depression—had to wrestle with and surmount. "Confidence" is what returned after World War II, as governments implemented the allegedly constructive notions of the Keynesians and monetarists.
Her collected geniuses, Ms. Nasar claims, were "instrumental in turning economics into an instrument of mastery." I find nothing in these pages remotely to substantiate that contention. Economics may be an "engine of analysis," as Alfred Marshall said, or an "apparatus of the mind," as Keynes put it. But economists no more set the world to producing and consuming than baseball statisticians hit home runs. Then, too, you'll never see Bill James, the dean of the baseball sabermetricians, trip up a base runner the way the government thwarts an entrepreneur. The intervention-minded economists are the ones who give the government its big ideas.
Ms. Nasar, the author of "A Beautiful Mind" (1998), the story of the mathematician John Nash, is a superb writer, fully meeting the standard set by Robert Heilbroner, in his "The Worldly Philosophers" (1953), for graceful writing on a difficult subject. You may or may not agree that the word "genius" fairly describes the mental apparatus of each of her heroes, but you can't help becoming engrossed in their lives. In her telling, Karl Marx has never seemed more repugnant or Joseph Schumpeter more persevering.
The book is a kind of portrait gallery of economic thinkers, each artfully set down in his or her time and place. Thus, in post-World War I Vienna, the fortunate were preoccupied by the destruction of the Austrian currency, the krone. The less fortunate, having no krone, worried about starving to death. The author quotes a conversation between Anna Eisenmenger, a middle-class Viennese diarist, and her know-it-all banker.
"If you had bought Swiss francs when I suggested, you would not have lost three-quarters of your fortune," said he.
"Lost!" she exclaimed in horror.
"Why don't you think the krone will recover again."
Her money was invested in government bonds. "Surely," she said, "there can't be anything safer than that."
"But, my dear lady," the banker replied, "where is the State which guaranteed those Securities to you? It is dead."
Schumpeter and Friedrich Hayek were in Vienna in those awful days, Schumpeter living large. A failed Austrian finance minister, the future author of the memorable phrase "creative destruction" and of the great book "History of Economic Analysis" got himself elected the president of Vienna's oldest investment bank. The timing was perfect, and Schumpeter plunged into the bull stock market that Anna Eisenmenger's banker had been talking up.
"The frenzy of deal making, buying and selling was intoxicating," Ms. Nasar writes. "Schumpeter may have dressed like a bank president, but, as the Viennese press observed snidely, his lifestyle was as extravagant as a lord's . . . . He was as careless of his reputation as he was of his money. In response to a business associate's warning about appearing in public with prostitutes, he rode up and down . . . a main boulevard in the inner city . . . with an attractive blonde prostitute on one knee and a brunette on the other."
The May 1924 crash of the Vienna stock market cost Schumpeter his money as well as what was left of his self-respect. "Despite his misadventures in politics and banking," Ms. Nasar relates, "his reputation as a brilliant economic theorist had survived."
Irving Fisher, too, gave a better account of himself in theory than in practice. There was seemingly nothing that didn't interest the tireless Yale economist. He made time for the hard sciences and the soft. He was an entrepreneur, scholar, exercise fiend, Prohibition exponent, paper-money zealot and eugenics advocate. Attempting to develop a model of the U.S. economy, he didn't just settle for a mathematical exposition but designed and built a hydraulic contraption to raise his ideas to the third dimension. They called him a genius.
Like Keynes—indeed, like Milton Friedman—Fisher had no time for the gold standard. Economists could do better with paper money, he insisted. Actually, economists have not done better with paper money. Of Friedman, a later monetarist, an exasperated critic once said he wished that he (the critic) was as sure of anything as Friedman was of everything. Fisher, too, had the cocksureness gene. In 1914, he insisted there would be no war because the nations were economically one. And in 1929 he was certain that there would be no bear market—stock prices, he famously declared, had reached what "looked like a permanently high plateau." Fisher by then was a rich man—in his spare time he had helped to found Remington Rand—but he lost everything in the Depression. People mocked and scorned him.
You wonder how he could find the strength to swing his legs out of bed in the morning. "Public recrimination and ridicule added to the stress and humiliation of financial ruin," Ms. Nasar relates. Yet Fisher not only bore up but also produced some of his best work, including a 1933 essay, "The Debt Deflation Theory of Great Depressions," that sophisticated investors, post-2008, have avidly rediscovered.
Once upon a time, economics was called political economy. Reading "Grand Pursuit," you more than ever regret the change in nomenclature. Economists turn out to be political creatures, much like the rest of us. It's a nice question whether, for instance, Friedman espoused floating exchange rates because he believed in the principle of unfettered action or because he believed that floating rates were technically superior to fixed rates (the kind in place for most of modern economic history until 1971). Ecumenically, Ms. Nasar's cast of economists includes righties as well as lefties: Friedman, Hayek, Schumpeter in the cause of more or less free markets; Joan Robinson, Sidney and Beatrice Webb, and Marx himself for collectivism. The author plainly sides with the interventionists, but she calls a Red a Red.
There are some strange ducks among the geniuses. When the Webbs were courting in 1891, he sent her a full-length photograph of himself. In reply she sent what might be the least romantic epistle ever written, even by an economist. "Let me have your head only," she pleaded—"it is your head only that I am marrying."
There are bulls and bears, too, in these pages, the bears seeming to predominate. Schumpeter and Fisher are the standout optimists, each irrepressible in his belief in the capitalist future, even when they didn't have two nickels to rub together. Alfred Marshall also took a sunny view of mankind's material prospects. He marveled at the sheer power of compound interest: "If you can get mental and moral capital to grow at some rate per annum there is no limit to the advance that may be made." As for America, which the English economist toured in 1875, he called it an "empire of energy."
By contrast, the Keynesians were inclined to doubt that the world could get along without the intercession of governments staffed by people like themselves. The phrase "secular stagnation" fell from their lips in the 1940s, even on the eve of the great postwar boom. As for Marx 100 years earlier, the sight of prosperity drove him to distraction. He had, he was sure, ruled out the possibility in his writings. In especially low moments he would pray for war.
There isn't room for every economist in this book or any other, but I myself missed the voice of Jacques Rueff, the 20th-century theorist who was able to demonstrate the superiority of the classical gold standard over the faux gold standard devised by Keynes (incorporated in the Bretton Woods system of 1944-71) or the paper-money regime advocated by Fisher and Friedman.
I missed, as well, Murray Rothbard, who blamed the Great Depression on the Hoover administration. It didn't intervene too little, Rothbard unconventionally sought to show in his 1963 book, "America's Great Depression," but rather too much. The economics profession just smiled at this contention, but the unsolved case of the depression of 1920-21 counts heavily for Rothbard's thesis. It was a deep and painful slump (a young Army veteran, Harry S. Truman, lost his Kansas City haberdashery to bankruptcy), with the wholesale price index dropping by 37% and the measured rate of unemployment tripling to 12%.
But it ended. Why it ended will mystify anyone who has taken to heart the arguments of Keynesians for more fiscal and monetary stimulus to revive today's economy. To meet the crisis that spanned the administrations of Woodrow Wilson and Warren Harding, the Treasury ran a budget surplus and the Fed raised interest rates. Yet the slump did end, and the 1920s roared.
The musicologist Ludwig von Köchel systematized, cataloged and published the musical output of Wolfgang Amadeus Mozart—he's the "K" that denotes a particular Mozart composition. Köchel was a botanist and mineralogist as well as musical scholar, but Mozart was the genius. In the matter of income and wealth, savings, and investment, the Köchels are the Friedmans and Schumpeters and Hayeks. The Mozarts are the Fultons and Edisons and Jobses.
Mr. Grant, editor of Grant's Interest Rate Observer is the author, most recently, of Mr. Speaker: The Life and Times of Thomas B. Reed, The Man Who Broke the Filibuster.
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