Economics has often been defined as the study of “who gets what and why”. Cynical to be sure, but nonetheless, on the mark. It also probably the only definition that will resonate with ordinary people. One thing I have noticed though, everybody cares about knowing who gets what but almost nobody cares in knowing why.
This series of essays is about knowing why. It is about the great economic ideas that have shaped our world and the great economists that thought them into being. Few other set of ideas have had as powerful an effect on our world as economic ideas. Those ideas could determine whether millions, perhaps billions (think of China) get to live in wealth or poverty, in comfort or misery. Given the enormous stakes, it behooves us to understand these ideas and the people who gifted them to the world.
Before we do that, it might be worthwhile to understand why the need for the economist arose in the first place. The economist was a relatively late entrant to the group of thinkers, scholars and creatives. Scientists, political theorists, philosophers, historians and artists had existed for thousands of years before the economists came on the scene. Our exploration of the great economic ideas would go better if we understood why.
Economic society is an extremely complex social artifact that requires the coordination of millions, and in some cases, billions of notoriously self-centred individuals, who are very often at cross purposes with one another. This puts economies in a near-perpetual state of constantly being on the verge of anarchy.
Over centuries and millennia, mankind has found three ways of dealing with this constant threat. The first of these is now obsolete, the second very increasingly becoming so, and the third has largely become the standard of modern times but with unique challenges of its own.
The first solution was to organize society around tradition. This took the form of handing down the varied and necessary tasks from generation to generation according to custom and usage, like for example, the time honoured custom of son following in the footsteps of his father. The second was to allocate tasks by decree and threaten to mete out severe punishments if they did not get done. In other words, by instituting dictatorship or authoritarian rule.
Now for much of human history, man resorted to either one or the other of the two methods discussed above to deal with issue of survival. The important to grasp is that for as long as man resorted to either method, there was no need for economists.
It was only with the emergence of the third solution that the field of economics was born. That solution was to allow every man to do what he thought was to his monetary advantage, so long as that activity did not violate the laws of the land. That solution is formally called the market system.
The reason that the emergence of the market system called forth the role of the economist was because it was not all obvious that if every man was allowed to do as wished that society would endure. Why if every man was allowed to do as he wished how could society guarantee all its necessary tasks would get done?
After all, in every society there are tasks nobody wants to do but need to be done. It was far from clear that all necessary tasks would get done. It was up to the economist to explain how this complex system could still help society achieve its goals.
The transition from running economies either by custom or command to running economies on the basis of the market system was a gut wrenching revolution that took about six hundred years in the western world, starting in the 13th century, and not stopping till about the 19th century. For us in the developing world, that revolution is still ongoing in some parts.
The reason it took that long is because it that long to bring the factors of production that we are taught in economics 101, Land, Labour and Capital into being. This probably requires some explaining. Of course Land, Labour and Capital in the sense of soil, human beings and private wealth have always existed and are as old as society. But under the market system, land becomes real estate that can generally be bought or sold. That is something that generally did not happen before the introduction of the market system. The same for Labour.
Prior to the market system, a labour market where people sold their labour to the highest bidder simply did not exist. The mechanisms and institutions necessary for the emergence of the real estate and labour markets to centuries to build. As for capital, the culture of risking it on entrepreneurial endeavours is a relatively new phenomenon as far as mankind is concerned. It too took time to develop.
The market system ushered in the modern age. The new age needed explanation and rationalization. Enter the economists, and the first great one among them was Adam Smith. It is to his ideas that we now turn.
Adam Smith was the first to penetrate the hurly burly of struggle for survival in modern society, distilling its scientific underpinnings and turning that into a system that was widely embraced or at least admired. That system among many other things is captured in his defining work, The Wealth of Nations, published in 1776.
Recall when we discussed the introduction of the market system, a huge question it elicited was “How can a society composed of individualistic mean and women, each seeking his or her own gain remain in harmonious unity and not splinter apart?” Smith sought to answer that question in The Wealth of Nations, and in the process laid bare the mechanisms of the market that help it achieve self-regulation, thus preventing the market from tearing society apart.
First, he points out that though society is composed of self-interested individuals, that self-interest compels them to only carry out tasks that society is willing to pay for. Second, though an individual may go about carrying out those tasks with no though or concern for society, just about every other individual is of the same mindset.
This inevitably brings about competition among individuals in society, which thus forces them to produce not only the goods society desires but at a price society is willing to pay and in the quantities desired. Thus, the two mechanisms of the market, self-interest and competition, working in opposition to one another end up producing social harmony (at least often enough for it to become a mainstay of society).
If all of this sounds like common sense, it is because The Wealth of Nations largely turned these insights into common sense.
There was another question that The Wealth of Nations was majorly concerned with. That question was “To what end is all this market activity for?” Fine the market may have in-built mechanisms preventing it from pulling society apart, but in the market’s evolution is it pushing society along the way to a goal that society would ultimately find desirable? Smith argued that it was because the market’s typical operation led to a phenomenon popularly referred to as “division of labor”.
The beautiful thing about division of labor that Smith noticed was that it led to the continual increase in productivity and productivity is the wellspring from which wealth comes from. The process of course Smith noted, was far from smooth but that the long-term end was, in his eyes, an increase in the goods and comforts of modern life being increasingly affordable by the mass of society was indisputable.
To this end, Smith argued that it was in the long term interest of society not to intervene in the workings of the market. In other words, markets are best left alone. Smith was writing in the 18th century. It wouldn’t be until the early 20th century markets that Smith’s faith in unfettered markets would be seriously called into question.
Major disasters like the stock market crash of 1929 which ushered in the Great Depression would make the markets imperfections too big to ignore leading to calls for government intervention in the markets workings, calls that have been generally heeded worldwide ever since. Nevertheless, the beauty of Smith’s system, particular the notions of self-interest and competition, remain crucial parts even of 21st century economies.
Bibliography
- Heilbroner, Robert. 1965 The Worldly Philosophers: The Lives, Times and Ideas of the great Economic Thinkers. New York: Simon and Schuster
