Bloomberg News

The Beautiful Minds That Created Modern Economics: Sylvia Nasar

September 06, 2011

Sept. 7 (Bloomberg) -- For the bottom nine-tenths of humanity, the world has changed more in the last century and a half than in the 20 centuries before.

The idea that mankind could master its material circumstances was born in Charles Dickens’s London. Over the next century and a half, the grand pursuit of economic thinkers was to overcome scarcity, to loosen the grip of iron necessity on ordinary lives and minds. The new way of thinking spread outward from mid-Victorian London like ripples in a pond until it transformed the lives of every person on the planet.

Here, in a five-part series, are stories of the men and women who helped speed that transformation -- and in the process invented an apparatus of the mind that is modern economics.

The Reckoning

On the afternoon of Thursday, May 10, 1866, in the first week of the boating season, a frightful rumor swirled through London. Overend, Gurney & Co., a bank considered by the average citizen to be as solid as the Royal Mint, had failed.

By 10 the following morning, a horde of “struggling and half frantic creditors” of both sexes and seemingly all stations of life invaded the financial district. A correspondent for the New York Times called it “a more fearful panic than has been known in the British metropolis within the memory of man.”

Before an extra battalion of constables could be called out to control the crowd, the British money market froze and scores of banks and businesses that lived on credit were facing ruin. “Englishmen have been running mad on speculation,” the Timesman concluded. “The day of reckoning has arrived.”

Overdue

When news of the panic reached Karl Marx, the shaggy-haired German philosopher was in his study in north London pondering a financial crisis closer to home. His income, which was enough to put the Marxes in the top 2 percent of British households, never could keep pace with his outlays, and the rent on their villa was overdue. So was “Das Kapital,” the critique of English political economy that Marx had claimed for years was “virtually finished.”

Marx had set out to prove not only that free markets and democracy didn’t work, but also that they couldn’t work. Even as the economy’s productive capacity soared and the rich got richer, he would reveal society’s “law of motion” that made it inevitable that wages must sink, the middle class must disappear and the poor must starve. The wealthier the nation became, the greater the misery of the masses, the ones “designed” for labor and little else.

The “Communist Manifesto,” hastily drafted in a long-ago year of revolutions, referred to “ever-decreasing wages” and “ever-increasing burden of toil” as a matter of historical fact. Ever since, Marx had been trying to prove that the “law of capitalist accumulation” actually required that wages fall, the length and intensity of the working day increase, working conditions deteriorate, the quality of food and other necessities decline, and the average life spans of workers shrink.

Unhappily for Marx, the 20 years in which he was dragging his unfinished book around coincided with the Victorian economic miracle, an unprecedented surge in real wages and living standards, and a wave of middle-class social and political reform. Now the prospect of economic Armageddon lit a fire under him. Within days of the Overend, Gurney collapse, he was back at his desk. By the time he dashed off the words, “The death knell of capitalist private property sounds,” a real-life doomsday scenario was unfolding.

Misery and fear spread through London, the center of the world market and the heart of British industry. An avalanche of bankruptcies ruined thousands of the newly rich and deprived many thousands more of their jobs. A cholera epidemic, a freak freeze and a doubling of bread prices multiplied the hardships. “What that distress is no one knows,” wrote Florence Nightingale, the heiress and hospital reformer. Bread riots broke out, small shopkeepers threatened to arm themselves and thousands of East Enders battled mounted police in Hyde Park to vent their frustration and fury at the rich.

‘A Strange Land’

Popular discontent did not lead, as Marx hoped, to the overthrow of existing society, but rather to universal male suffrage. The upsurge in joblessness and distress converted university students, women, journalists and artists into social reformers and stimulated the search for ideas that would “put mankind in the saddle.”

Alfred Marshall, a 23-year-old mathematician who had escaped poverty for the life of a Cambridge don and gentleman, was compelled to tramp through the slums “looking into the faces of the poor.” The sight of “so much want” amid “so much wealth” prompted him to ask whether the existence of a proletariat was, as he had been taught to believe, “a necessity of nature.” Why, he wondered, “should you not make every man a gentleman?”

Feeling that he was “a philosopher in a strange land,” Marshall took up economics. As he read John Stuart Mill and other founding fathers, Marshall noticed that many things in society that they had assumed were fixed were in fact fluid and subject to change.

Like Marx, they ruled out the possibility that the mass of humanity could improve its material circumstances. Yet Marshall observed that the average standard of life, for example, was higher, not lower, than 20 years before. Managers, white-collar workers, factory operatives and skilled artisans earned large premiums over the pay of unskilled laborers. And the fraction of higher-paid brain workers in the labor force was growing while that of brute workers was shrinking. The world was more amenable to improvement than they had realized.

Competition, Reconsidered

In contrast to Marx, who had never ventured inside a factory and had virtually no contact with the society around him, Marshall made a lifelong study of business enterprises, unions and charities, which he saw as primary agents of change, and made close friends among their leaders.

While Dickens compared factories to prisons and Marx saw work as dehumanizing, Marshall noted that the primary economic function of the modern company was to raise living standards. Competitive pressures forced managers to constantly look for ways to do more, better and faster by adopting new technologies, improving organization, using resources more efficiently and by hiring more experienced and better-educated workers.

True, Marx had also emphasized that competition pressured businesses to increase efficiency. But he overlooked that competition would also force owners to share the gains from productivity improvements with employees and consumers. Marshall concluded that as productivity rose, real wages would too, until unskilled labor disappeared altogether. That meant that workers could affect their future by acquiring training, forming unions or emigrating. Their children’s futures could be improved through education.

When Marshall traveled around the U.S. in 1875 to see where modern society was headed, he returned to England “more sanguine with regard to the future of the world.”

Instruments of Mastery

The Panic of 1866 was no death knell -- only the trigger for a temporary setback, a transient slump. The economy rebounded, England became a democracy, the average wage continued to rise instead of dropping back to subsistence, and Alfred Marshall helped turn the old dismal science into a search for instruments of mastery. Yet he was troubled by London’s underclass, whose condition was seemingly impervious to economic progress. The cause of their poverty seemed to be poverty itself, with each generation preventing the next from breaking out. Who was responsible? Who could intervene?

(Sylvia Nasar, a former New York Times economics reporter and the author of “A Beautiful Mind,” teaches journalism at Columbia University. This is the first in a five-part series excerpted from her new book, “Grand Pursuit: The Story of Economic Genius,” to be published by Simon & Schuster on Sept. 13.)

-- Editors: Timothy Lavin, Stacey Shick

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this article: Sylvia Nasar at szn1@columbia.edu.

To contact the editor responsible for this article: Timothy Lavin at tlavin1@bloomberg.net or


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