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As current as 60 years ago
on 16 May 2013
Heilbroner wrote this classic in 1953, but reading it in 2013 you cannot help thinking how relevant it is to today's world economy. A few random examples:
He kicks off by explaining why Economics did not exist before the eighteenth century. In a traditional economy, where everybody does his father's job as best he can, there's simply nothing to study. And you open the newspaper today and read about the 28 "closed professions" that dominate modern Italy's services sector and you realise "oh, wow, this is a traditional economy." No wonder it can't be helped by the tools of fiscal and monetary policy. It predates Adam Smith, the invisible hand, perfect competition, supply, demand and all that jazz. Simple as that!
Halfway through the book he discusses the work of Hobson, a man who observed that capitalism leads to income inequality because some people are more able than others. No big deal, except over time this leads to underconsumption. The poor can't consume because their incomes are too small, and the rich because their incomes are too large! Now, where have I heard that before? Turns out it's a problem as old as the hills. Well, not quite. It's as old as our system. Hobson goes on to say this was the cornerstone of Imperialism, and I am not in a position to agree or disagree. I sure don't think it applies to today's world, but that's beside the point; I got so excited to read about it. It's just one of the things about our system that's here to stay.
The treatment of Keynes' ideas (if not the idealised tour of his private life) is the very best bit of the book, though. Two big ideas, basically. First the idea that you don't get recessions in traditional economies or under the Pharaoh or Stalin. You get them in economies with a business sector only. What we earn we mainly spend. What we don't spend we save. Business takes our savings (be it the money in our bank account or what we paid to buy the stock of a company) and invests it. But every once in a while, fearing we won't spend enough, businesses sit on our savings and don't build that new plant / don't develop that new pill / don't write as many new computer games and the economy stalls as the consumers earn less from their work. This, however, drives down the price of money. The bank won't pay us as much on our deposits if business won't ask for a loan. Rates come down, more projects make sense for business and they invest again, they hire again, they pay again and we start all over. This drives up the price of money just as investments are being made that might have been marginal even at the old price of money and the set-up is in place to go down the elevator again. But the key insight is that the cycle is a business cycle. You don't get it outside of a capitalist setting.
The second idea is very relevant to today and it's that the elevator can get stuck on the ground floor. Suppose the most recently fashionable type of investment bombs and there is no ready substitute for it. Then, until business can come up with its next big investment opportunity, the economy can get stuck in a rut where people keep losing jobs and a spiral of contraction emerges. Under those circumstances, Keynes sees a potential role for government to bridge the gap between now and when the next use arises for the savers' cash. Not only that, but in doing so the government can protect the value of their previous investments, as business is not forced to retreat.
I'm probably making a hash of explaining it all, I probably ought to copy/paste Heilbroner's concise and elegant prose. My main point is that many of the big questions have been posed in the past, many of the answers have been posited and if you are thinking about the present without having looked at the past you're giving yourself unnecessary work. This is as good a guide to the history of capitalism as you will ever read. Heilbroner takes you through the thoughts of the people who first described it, like Smith and Ricardo, those who incorrectly prophesised its demise, like Malthus, Marx and Veblen and those who best understood it, like Keynes and Schumpeter.
I'm not sure I've ever read a better book.