Economics and its Stories

Amal Sanyal

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351581684
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

The book explains the basic ideas of economics along with their historical context. It includes the events and traditions of the era of mentors—Smith, Ricardo, Marx, Walras, Keynes—with the economics they developed and controversies around them.

1 Introduction

1.1 About This Book

‘An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.’ This is from Laurence Peter, a twentieth century US author. Although many people share Peter’s view, there is nevertheless an amazingly widespread interest in economics. The economy touches the lives of all, the tycoon as well as the pauper. A sign on US President Bill Clinton’s desk used to remind, ‘It is the economy, stupid!’ My excuse for writing this book comes from this widespread interest in economics and its relevance in our times.

This book will introduce the basic ideas of economics along with how the subject has grown and acquired the shape it has today. The growth of economics as a subject is fascinating because it is mixed up with the development of capitalism, modern government, world wars, the rise and fall of the Soviet Union, and much of today’s philosophy and art—in short, with life as we know it and live today. Two clarifications are in order at the start. First, the book is more about economic ideas and issues than the history of economics. So it does not follow a historical sequence. It follows issues and ideas as they relate to one another and moves back and forth in time with clippings of history. Quite often the historical episodes and personalities appear in special boxes rather than in the text. Second, it is not a scholarly book. It picks up only major viewpoints for discussion and avoids the finer points. There are footnotes but they do not necessarily follow scholarly norms and etiquettes; they are meant to clarify and arouse curiosity.

1.2 The Birth of Economics

Ancient discourses on the economy and public administration date back to at least three thousand years. Some of them are stunningly relevant even today.¹ However, economics, with a well-defined borderline separating it from subjects like politics, ethics, law, and administration,² is a relatively new academic field. What we now call ‘economics’ began tentatively in the 16th century.

A new science can be born only out of new questions in some areas of life. Questions about trade and wealth and how they work started appearing with increasing urgency as the sixteenth century dawned on Europe. Closely preceding that century, Bartholomeu Diaz had sailed round the Cape of Good Hope (1487), Columbus had ‘discovered’ America (1492), and Vasco da Gama had landed in India (1498). In the aftermath, gold from America and exotica from other continents started flooding Europe. As merchants and monarchs got busy with the new realms of gold and wealth, of export and import, of lending and borrowing, new questions started rising in the mind of Europe. It was these questions that sowed the seeds of the new discipline, economics. Chasing gold across the seas and amassing it in Europe had brought about a radical change in some sections of the European society. Christopher Columbus wrote about it in these telling words, ‘One who has gold does as he wills in the world and it even sends souls to Paradise’.³ Gold, as referred to by Columbus, and wealth in general were as enticing as they were enigmatic. Hence, the search for laws to govern them started in earnest.

The subject of economics developed over the next few hundred years. Philosophers and scholars played a role in the development as we would surely expect. But there were also serious contributions from people in the administration, professions, and various trades. The rising power of Europe’s parliaments meant a lot of political debate around the issues of the day. Hence public-spirited persons happened to contribute to the fledgling subject. Questions that appeared first, and theories and conjectures that answered them were more about the bigger questions of the time. Typical questions would be about where society was heading, towards progress or chaos? Hence, early ideas were rich in moral philosophy, political theory, and sociology. The discussion, of course, evolved and soon interest began to be focussed on more down-to-earth issues of business, government, and household purchases. Through all these quests and debates, and no less with the growth of new types of vested interest, economics grew its characteristic methods and concerns. Before long, economics would be clearly distinguishable from related social disciplines.

Thus economics was born in a very special period of our history. The sixteenth and seventeenth centuries saw big social and political changes in Europe. Following on from there, the next two centuries led to spectacular development of technology, business, public administration, and standards of living. Boxes 1.1 and 1.2 reveal the stunning breadth of the changes. They give some idea about the new things and firsts that began appearing every so often. Institutions that were born with them touched every bit of life and changed European society beyond recognition. The period of most intense change, a hundred years ending roughly around the third quarter of the nineteenth century, is called the Industrial Revolution.⁴

These changes brought about a fundamental shift in the way Europeans perceived life, society, and human endeavour. Life shifted out from idyllic villages: from farms and pastures to factories, ports, and market towns. The power of the church and the nobility was on the wane and that of parliaments on the rise. The number of things that farmers, traders, and the ordinary people could do without seeking anyone else’s permission increased spectacularly. This environment of political freedom was boosted by an increased economic freedom as well. Markets sprang up for food and everyday things. They were the most outrageously modern places where anyone could buy and sell as equals, no matter what their status.

But there were dark clouds as well. For many people the traditional source of income disappeared with no alternative in sight. Age-old skills suddenly became useless, attracting no takers. New skills and trades seemed alien and difficult. Villagers, swept out of their traditional ways of life, thronged the cities. However, they generally found nothing other than starvation and squalor, and crime increased at an alarming rate. Thus, the period was characterised by serious dualism. Charles Dickens would later describe this dualism in these words:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.…⁵

Germs of economic ideas had been developing since the sixteenth century but they remained nebulous until they had to face sterner questions raised by the Industrial Revolution. The revolution that appeared so scaringly contradictory, challenged thinkers to the limit. Out of this challenge came up the most important building blocks of economics.

1.3 The Industrial Revolution: Order or Chaos?

Among the myriads of smaller concerns, two very big questions loomed in the minds of that era. The first was that with the diminished power of lords, churches, and tradition, no one was left to take basic economic decisions. No one was there to order what to produce and how much, and what resources to use for them. Nor was there any guidance as to who would get how much of the produce. These are the three central questions of an economic system. Determining the mix of things produced is called the production decision. How much of various resources are used to produce the mix is called allocation of resource. And, who gets how much of the product or income is the decision about income distribution. After the breakdown of feudal authority, it appeared that there was no one in charge of these decisions. They were being addressed by uncoordinated actions of the crowd of buyers and sellers. How would these actions come together to produce some sort of consistency? Wouldn’t all that lead to either over-production or short supply of most goods? There would also be misallocation of inputs, that is, things not going to their best uses; and unfair distribution of income, that is, people not getting according to their contribution. In short, the new system might have been the start of a perennial chaos in the garb of political and economic freedom; the beginning of the end.

Box 1.1 ‘Firsts’ and new things were coming thick and fast. The momentum increased with time. Here are some 16th century oddments.

•English Parliament declares the Pope’s authority void in England

•Regular mail between Vienna and Brussels started

•London’s waterworks founded

•London Exchange established

•First scientific society founded in Naples

•The first life insurance on the life of William Gibbons

•A marine insurance policy issued at Florence

•Royal College of physicians of London empowered to dissect humans

•Attempt to restrict medicine practice to qualified doctors

•Public lottery held in London to repair the port

•Slave trade begins

Scientific breakthrough:

•Tycho Brahe finds a new star in the Milky Way

•da Vinci designs a water turbine

•Copernicus states that the earth and other planets move around the sun

•Frisius suggests that longitude can be calculated from time difference

•Francois Viete introduces decimal fractions

•Galileo discovers the property of pendulums

•Telesio’s De Rerum Natura foreshadows empirical methods of science

•Varolio studies anatomy of human brain

•Galileo’s experiments on falling bodies

•Mercator’s maps

Discoveries and inventions: pulmonary circulation of blood; magnetic dip; variation and movement of a magnetic needle; anatomy of the teeth; earth’s magnetic pole; thermometer; ‘Nuremberg Egg’, the first watch; glasses for the short sighted; the spinning wheel; the knitting machine.

Firsts: bladder and cataract operations; caesarean delivery by a living woman; first botanical garden; use of letters for algebraic quantities; trigonometric tables; silk manufacture in France; a lunatic asylum; ether produced from alcohol; workman’s bench; newspaper; travelling and standing clocks; coffee and chocolate come to Europe; bottled beer; black-lead pencil.

Books: 35,000 books with approximately 10 million copies were printed during 1445–1500. In the century 1501–1600, first treatises were published on: mineralogy; agriculture; animal husbandry, herbs; epidemiology and infectious diseases; paints and inks; flowers of Spain and Portugal; Historia anemalium; Tabulae Anatomica; optics and binocular vision; veterinary science; ornithology; pharmacopoeia.

Universities and colleges founded: Universities of Konigsberg, Granada, Frankfurt (Oder), Wittenberg, Lima, Pisa, Jena, Geneva, Berlin, Leiden, Warsaw, Messina, and Edinburgh. Royal College of Physicians, London; Christ’s College, Magdalen College, and Emmanuel College, Cambridge; Trinity College and Jesus College, Oxford.

1.4 The Industrial Revolution: The Question of Poverty

The second question that arose amidst the confusion of the Industrial Revolution was about poverty. Earlier, landowning noblemen had no interest in the output from their land. With the growth of commerce they started getting interested in it. They converted the land in their fiefs for commercial cropping. The permission to enclose land by the nobility for private use had been in force for several centuries. However, land enclosure and displacement of commoners became pronounced by the end of the seventeenth century. This displaced poor people who earlier relied on subsistence farming and cattle grazing on common land. Displacement of the commoners—generally forceful and ruthless—was an event of immense consequence for England and Western Europe. Watched helplessly, it was recorded in the folk memory for posterity:

The law locks up the man or woman

Who steals the goose from off the common

But leaves the greater villain loose

Who steals the common from off the goose (anonymous)

Displacement over many decades created a mass of destitute people who migrated to the emerging industrial towns in search of a living. Life was not very kind in those towns either. Poverty and filth in the workers’ neighbourhoods in boomtowns were pathetic. The situation disturbed many contemporary thinkers profoundly. They asked if the prevalent poverty and destitution were only a passing phase or permanent features of the new order. Thus, income distribution of the emerging social order became a vital question of the time.

Debate around the above two questions characterised the intellectual and political scene of the period. It was joined by not only scholars and philosophers, but also people from other walks of life. Politicians—both statesmen of stature as well as the small-time rabble-rousers—made their contributi...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Acknowledgements
• 1. Introduction
• 2. Markets, Efficiency, and Adam Smith
• 3. Many Forms of Market: Sellers Big and Small
• 4. Markets Often Fail and So Do Governments
• 5. Unemployment and J.M. Keynes
• 6. After Keynes
• 7. Money, Banks, and Finance
• 8. Trade, Foreign Investment and Migration
• 9. Economic Growth and Development
• 10. Conclusion
• Index