Bloomberg News

Schumpeter Goes Bust, Mankind Booms in Story of Economic Genius

October 10, 2011

Oct. 11 (Bloomberg) -- Famous economists are often remembered as adversarial eccentrics.

John Maynard Keynes is pictured as the government pump- primer who phoned his broker from bed, married a Russian ballerina and owned a Rolls-Royce. Joseph Schumpeter was the Austrian upstart who celebrated “creative destruction,” swanned around with prostitutes on his arm and lost millions in a stock-market crash.

For all their differences, though, these economists -- along with Friedrich Hayek, Irving Fisher and others -- shared a conviction that gained ground in Victorian Britain, as Sylvia Nasar argues in her absorbing book, “Grand Pursuit: The Story of Economic Genius.” They believed that mankind could improve the circumstances that long condemned nine out of ten humans to grinding poverty.

Nasar is the author of “A Beautiful Mind,” a life of mathematician John Nash that became an Academy Award-winning biopic. In “Grand Pursuit,” she chronicles the lives of thinkers -- from Beatrice Webb to Amartya Sen -- who believed that humanity could control its destiny. To anyone in a funk over Europe’s sovereign-debt fiasco or America’s Misery Index, she offers a bracing reminder: Economic progress has dragged millions out of poverty and can continue to do so.

Like “Lords of Finance” by Liaquat Ahamed, “Grand Pursuit” is narrative history at its finest. Told with unpretentious verve and vivid detail, the story stretches from the days of Jane Austen, when farm laborers buckled under chronic hunger if not outright starvation, through the collapse of the Soviet Union and on to contemporary India.

Malthusian Nightmare

In the beginning was Thomas Malthus, an Anglican clergyman who deduced that human populations multiply faster than the food supply. Charity simply encouraged early marriage and larger families, he concluded, inspiring an 1834 Poor Law that effectively limited public relief to people toiling in workhouses. Charles Dickens, appalled, rebuffed Malthus with the tale of a flinty miser who had a change of heart. “A Christmas Carol” is still in print.

From there, the narrative winds through the proletarian ruminations of bourgeois Karl Marx and the grounding-breaking work of Alfred Marshall, a Cambridge mathematician of humble origins. Unlike Marx, who never set foot in a factory until the end of his life, Marshall tramped through copper mines, steel works, textile factories and slate quarries, collecting data.

Less Is More

Marshall’s research revealed that competition boosted more than profits; it also raised living standards among workers and consumers, as Nasar deftly shows. Doing more with less, manufacturers boosted productivity by increments, yielding higher wages, better goods and cheaper prices. Economic ideas, thinkers began to see, were more crucial to a nation’s success than its landmass, population or natural resources. What mattered most was not what you had, but what you did with it.

The narrative culminates with four economists whose ideas were forged in the furnace of financial panics, world war and depression -- Irving Fisher, Hayek, Schumpeter and above all Keynes. Though we’re accustomed to thinking of these men as ideological opponents, Nasar shows how each was coming to grips with the same dynamic: violent swings of inflation, deflation and unemployment that threatened the survival of capitalist democracies.

Fisher, a Yale professor and health nut who invented the Rolodex, put his finger on how money influenced the real economy and how controlling its supply might moderate booms and busts. Schumpeter, a parvenu with a taste for Savile Row suits and a respect for Darwin’s theory of national selection, argued that gales of innovation, entrepreneurial drive and credit drove economies forward. Busts were the price of progress.

Keynes’s Shadow

Hayek, who survived the horrors of World War I only to witness mass hunger in postwar Austria, turns up to warn of the drift toward collectivism and elucidate the power of market prices to communicate vital information.

Keynes casts a long shadow across this stretch of the book. Shuttling between posts at the U.K. Treasury and the University of Cambridge, he pulled together the strands of academic theory and government policy. Subtle and supple, he urged deficit spending when the jobless rate reached 15 percent and recommended restraint as it sank under 4 percent.

The quest to make humanity “the master of its circumstances,” as Nasar calls it, has direct bearing on our own turbulent times, of course.

“Economic calamities -- financial panics, hyperinflations, depressions, social conflicts and wars -- have always triggered crises of confidence,” she writes, “but they have not come close to wiping out the cumulative gains in average living standards.”

It’s a reassuring thought, even if you wish Keynes and Schumpeter were still around to advise Barack Obama and Angela Merkel.

“Grand Pursuit” is from Simon & Schuster in the U.S. (555 pages, $35). It will be available from Fourth Estate in the U.K. later this month. To buy this book in North America, click here.

(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)

--Editors: Laurie Muchnick, Mark Beech.

To contact the writer on the story: James Pressley in Brussels at jpressley@bloomberg.net.

To contact the editor responsible for this story: Manuela Hoelterhoff at mhoelterhoff@bloomberg.net.


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