Grand Pursuit

Sylvia Nasar, “Grand Pursuit: The Story of Economic Genius” Simon & Schuster, 2011, 463 pps plus 63 pages of notes

The author, a business journalism professor at Columbia University, states that since Stalin’s day, the world's population is six times greater, but 10 times more affluent. And "the average Chinese lives at least as well today, if not better, than the average Englishman did in 1950." Going back, the author points out that in just a sixty year period we went from Charles Dickens, Henry Mayhew, and Karl Marx describing a world in which the material conditions that had condemned mankind to poverty since time immemorial were becoming less fixed with more chances for the individual to advance himself. In 1848 Karl Marx showed how competition drove businesses to produce more with the same resources, but argued that no means existed for converting production increases into higher wages and living standards. Then, in the 1880s, Alfred Marshall discovered that the mechanism of competition encouraged business owners to make constant, incremental improvements in productivity that accumulated over time and, simultaneously, compelled them to spread the gains in the form of higher wages or lower prices. As long as productivity determined wages and living standards, people could alter material conditions individually and collectively by becoming more productive.

Beatrice Webb invented the welfare state; sociologist Mill argued that a welfare state would eventually absorb the entire tax revenue. Irving Fisher was the first to realize how powerfully money affected the real economy and to make the case that government could increase economic stability by managing money better. So, by control of the money supply, government could moderate or even avoid inflationary booms or deflationary depressions. (p. 169).

My Notes:
Pg. xv: this book chooses and outlines contributions various personages in economics who were instrumental in forming the profession from 1840 to the turn of the twenty-first century.

Pg. 4: Malthus published An Essay on the Principle of Population in 1798; he died in 1834. Malthus sought to explain that in all societies and all epochs including his own, ‘nine parts in ten of the whole race of mankind’ were condemned to lives of abject poverty and grinding toil. When not actually starving, the typical inhabitant of the planet lived in chronic fear of death by hunger. In attempting to answer ‘Why’ he anticipated not only Darwin but Freud. Sex, he argued, was to blame. Malthus concluded that the drive to reproduce trumped all other human instincts. From this premise, Malthus deduced the principle that human populations tended always and everywhere to grow faster than the food supply. In any economy where businesses compete for customers and workers for jobs, an expanding population meant more households contending for the food supply, and more workers competing for jobs. Competition would drive down wages while simultaneously pushing food prices higher. The average standard of living—the amount of food and other necessities available for each person—would fall. At some point, grain would become so expensive and labor so cheap that the dynamic would reverse itself. As living standards declined, men and women would once again be forced to postpone marriage and have fewer children.

This Malthusian premise permeated the thinking of Adam Smith, Marx, Ricardo, and John Stuart Mill. A particular nasty conclusion was Ricardo’s iron law of wages—stating that wages may go up or down based on short-run fluctuations in supply and demand but always tend toward subsistence. Laissez-faire and the invisible hand guiding the economy became the inspiration for government policies.

Pg. 57: The Reform Act of 1867 turned England into a democracy. The act more than doubled the size of the electorate by extending the franchise to some 888,000 adult men, mostly skilled craftsmen and shop-keepers, who paid at least £10 a year in rent or property tax.

Pg. 86: Henry George’s premise was that poverty was growing faster than wealth and that landlords were to blame. Identifying rental income as the cause of poverty, he proposed a massive tax on land as a cure. The land tax would not only eliminate the need for all other taxes, he claimed, it would also raise wages, increase the earnings of capital, extirpate pauperism, abolish poverty, and on and on.

Henry George: (1839- 1897) writer, politician, and political economist: on a visit to New York City, he was struck by the apparent paradox that the poor in that long-established city were much worse off than the poor in less developed California. These observations supplied the theme and title for his 1879 book Progress and Poverty, which was a great success, selling over 3 million copies. In it George made the argument that a sizeable portion of the wealth created by social and technological advances in a free market economy is possessed by land owners and monopolists via economic rents, and that this concentration of unearned wealth is the main cause of poverty. George considered it a great injustice that private profit was being earned from restricting access to natural resources while productive activity was burdened with heavy taxes, and indicated that such a system was equivalent to slavery—a concept somewhat similar to wage slavery.

Pg. 89: Alfred Marshall (1842-1924) his book, Principles of Economics (1890), was the dominant economic textbook in England for many years. It brings the ideas of supply and demand, marginal utility and costs of production into a coherent whole. He is known as one of the founders of economics. Marshall spent many hours touring and examining actual factories, (Marx had written Das Kapital without ever going into a single factory) he empirically concluded that competition forced managers to constantly make small changes to improve their products, manufacturing techniques, distribution, and marketing. This resulted in doing more with the same or fewer resources over time and raised average productivity and wages in real terms.

Pg. 94: The Married Women's Property Act 1882 was an Act of the Parliament that significantly altered English law regarding the property rights granted to married women, allowing them to own and control their own property and be considered a person, separate from their husband.

Joseph Alois Schumpeter (1883 –1950) was an Austrian-American economist and political scientist. He popularized the term "creative destruction" in economics.

Irving Fisher (1867 – 1947) was an American economist, and one of the earliest American neoclassical economists. Fisher’s reputation during his lifetime was irreparably harmed by his public statements, just prior to the Wall Street Crash of 1929, claiming that the stock market had reached "a permanently high plateau." His subsequent theory of debt deflation as an explanation of the Great Depression was largely ignored in favor of the work of John Maynard Keynes. His reputation has since recovered in neoclassical economics, particularly after his work was popularized in the late 1950s and more widely due to an increased interest in debt deflation in the Late-2000s recession. Fisher made important contributions to utility theory and his work on the quantity theory of money inaugurated the school of economic thought known as "monetarism." Milton Friedman called Fisher "the greatest economist the United States has ever produced."

Pg. 161: Interest is the price that those with savings charge to let others use their capital…The value of capital, in turn is determined by expectations on the part of savers and investors about the future stream of interest payments. Inflation and deflation produce large and arbitrary shifts in income and are the effects of the fluctuating value of the monetary standard—a rubber yardstick rather than a constant one—not conspiracies by demagogues and mobs on the one hand or Wall Street bankers on the other.

Pg. 167: Fisher: even if everyone were perfectly rational, the pursuit of self-interest would not necessarily add up to socially desirable results. Individual action would never give rise to a system of city parks, or even to any useful system of streets.

Pg. 285: WWI had wrecked the gold standard. Since 1875 the British government had guaranteed that £6 could be exchanged at the Bank of England for one troy ounce of gold, and it was the bank’s job to see to it that the supply of pounds grew no faster or slower than te rate required to maintain that parity. When other countries pegged their currencies to gold, the effect was to fix the rate of exchange between all ‘hard’ or gold-standard currencies. So when the U.S. determined that $30 could be exchanged for one troy ounce of gold, £1 equaled $5. Thus, the nineteenth-century gold standard operated almost like a single world currency regulated by the Bank of England.

Pg. 326: April 19, 1933 Roosevelt announced that the U.S. would go off the gold standard. This meant that the Federal Reserve would no longer push up interest rates to prevent the dollar’s exchange rate against the pound and other foreign currencies from falling.

Pg. 370: Before 1942, income taxes were due on the previous year’s income in four quarterly installments. This was no problem as long as tax rates were low and only a small fraction of the population paid them. In 1939, fewer than 4 million returns were filed, and the total collected was less than $1 billion, roughly 4 percent of taxable income. Now that taxes were to become more significant, Milton Friedman proposed withholding taxes on payrolls as they were paid.

Pg 384: During WWII the U.S. was supplying planes, ships, and tanks by cranking up production, not by tightening belts. The economy’s annual output, or GDP, was growing at a nearly 14 percent annual rate.

Pg. 396: The Communist Party of the U.S. membership peaked in 1944 at eighty thousand or so, the overwhelming majority of members drifted away in less than a year, and it exerted scant influence beyond a few neighborhoods in the Bay Area, Boston, and New York and a handful of trade unions.

Pg. 443: Solow produced a stunning empirical result: Nine-tenths of the doubling in output per worker in the U.S. between 1909 and 1949 was due neither to the accumulation of physical capital nor to improvements in the health or education of the labor force, but rather to technological progress. The implication that an economic environment conducive to innovation mattered more than its stock of factories and machines flatly contradicted Robinson’s central premise, not to mention that of the widely imitated Soviet model.
Martha Beatrice Webb, (1858–1943) was an English sociologist, economist, socialist and social reformer. She coined the term collective bargaining. Along with her husband Sidney Webb and numerous others, she co-founded the London School of Economics and Political Science.