Grand Pursuit: The Story of Economic Genius, Sylvia Nasar, Simon & Schuster, 558 pages

In December 1974, in the midst of the first energy crisis, Friedrich Hayek received the Nobel Prize in Sweden and confessed, “we have little cause for pride: as a profession we have made a mess of things.” He admitted that the stagflation of the 1970s was largely a product of policies “which the majority of economists recommended and even urged governments to pursue.”

His apology could equally apply today. The financial crisis of 2008 and subsequent Great Stagnation can largely be laid at the feet of a predominant school of economics. We still live in and suffer from the Age of Keynes, the primary protagonist in Sylvia Nasar’s new history of 20th-century economics. John Maynard Keynes’s followers continue to encourage deficit spending, easy money, and progressive taxation.

Nasar’s thesis is that “economics rescued mankind from squalor and deprivation.” I suspect that honor goes more to the inventors, entrepreneurs, and businessmen of the 19th and 20th centuries and to the statesmen who established a constitutional framework to preserve life, liberty, and property. Most of the geniuses in Nasar’s book—Marx, Sidney and Beatrice Webb, and Keynes, in particular—probably did more to thwart progress than to encourage it.

Nasar is a talented writer whose bestselling A Beautiful Mind, the life of the mathematical savant John Nash, was made into the award-winning film of the same name in 2001. She performs brilliantly when she tells the life of a single subject, but she faces a daunting challenge weaving together a coherent story covering some 150 years of history involving dozens of players and subplots.

Her overarching theme is noteworthy: humanity’s quest to break free from poverty and a 14-hour work day. She divides recent history into three major acts: “hope” (1870-1914), “fear” (1914-1945), and “confidence” (post-1945). She asks what role economists played in developing the framework of these acts.

Her characters are not the usual suspects found in the standard textbooks. Instead of starting with Adam Smith, the architect of modern economics, she begins in the mid-19th century with the depressing account of Marx and Engels and their doctrines of exploitation, alienation, and crisis of market capitalism. She rightly criticizes Marx, but she misses the chance to show how Marxism-Leninism was a giant leap backwards by failing to introduce the classical school before it. Adam Smith, David Ricardo, and John Stuart Mill, among others, had made remarkable progress—despite their errors—before Marx showed up. And the house that Adam Smith built was enhanced by the French laissez-faire school of J.B. Say, Frédéric Bastiat, and Alexis de Tocqueville and the subsequent marginalist revolution by Carl Menger, William Jevons, and Léon Walras. Only Alfred Marshall of the British economic school makes an appearance on her stage.

That’s unfortunate, given that Adam Smith’s 1776 magnum opus, The Wealth of Nations, focused on the very same theme as Nasar’s book. The avowed purpose of Smith’s “system of natural liberty” was to generate in his words “universal opulence which extends itself to the lowest ranks of the people.” Yet Nasar claims that the founding father of modern economics was oblivious to methods that could “raise living standards” and gives credit entirely to Alfred Marshall for discovering that increased labor productivity and entrepreneurship are the keys to higher wages and standards of living.

Had she not read about the pin factory and the benefits of the division of labor in The Wealth of Nations? Was she unaware of the earlier contributions of the Frenchman J.B. Say, which integrated the vital role of supply-side entrepreneurship into economic thinking; or those of Eugen von Böhm-Bawerk, the famed Austrian author of The Positive Theory of Capital and John Bates Clark, the Columbia professor who pioneered the principle that wages are determined by the marginal productivity of labor?

Surely Clark, omitted in The Grand Pursuit, qualifies as one of the “economic geniuses” of the 20th century. There’s good reason that the annual award given to the brightest, most prolific American economist under the age of 40 is named after John Bates Clark. The first two economists to win the Clark medal were Paul Samuelson and Milton Friedman, important figures in Nasar’s history. Clark would have been a perfect counterpoint to Beatrice Webb, whom Nasar praises as the inventor of the welfare state in Britain. Beatrice and her husband Sidney are given more coverage than any other personality in Nasar’s book except Keynes and Irving Fisher.

The story of Beatrice Webb is a neglected but fascinating tale that reads like a Jane Austen novel in Nasar’s romantic and absorbing account. (This chapter alone is worth the price of the book). Beatrice Webb’s life is tragic because she was a brilliant, charismatic woman who was a devout libertarian and intimate friend of social Darwinian philosopher Herbert Spencer. But she converted to gradualist Fabian socialism and was a key figure, according to Nasar, in convincing Winston Churchill and other British leaders to adopt the welfare state in Britain. She later became an apologist for the centrally planned Soviet Union. (Webb reminds me of Hillary Clinton, who started off as a Goldwater conservative but was radicalized in the 1960s.)

In the United States, Webb’s contemporary J.B. Clark moved in the opposite direction. He shifted from being a social reformer to becoming a conservative defender of the capitalist system after brilliantly solving the “joint-input problem” in economics. Clark’s marginal productivity theory undercut the socialist exploitation argument that workers were being unjustly underpaid in the unfettered marketplace. Clark opposed the power of both corporate monopolies that attempted to force wages below labor’s marginal value and labor unions that imposed above-market wages on big businesses. In 1914, he wrote a book entitled Social Justice Without Socialism. Apparently it was ignored by the Webbs and the British Parliament.

Nasar often juxtaposes her favorite characters, which makes for compelling reading in the battle of ideas—Joseph Schumpeter and Friedrich Hayek in Vienna, Keynes and Fisher in the Roaring Twenties, Hayek and Keynes in the Depression Thirties, Keynes and Friedman in the war years. She could have added others: Webb and Clark, for example, or the American Thorstein Veblen versus the German Max Weber on the meaning of market capitalism.

Keynes gets the most ink in Nasar’s account, and for good reason. Time rated him the most influential economist of the 20th century, ahead of Milton Friedman at number two. But influential is not the same as good. Lord Keynes has created more mischief than any other economist in modern times. Marxists, socialists, and cranks had long attacked thrift, capitalism, and laissez-faire policies before he came along. They advocated progressive taxation, easy credit, and deliberate deficit spending in bad times. But it was the “ingenious” Keynes—who told his students his name was pronounced “Keynes as in brains”—who provided the theoretical underpinnings of today’s spendthrift society in a book presumptuously called The General Theory of Employment, Interest, and Money. 

The Roman philosopher Seneca wisely said, “There is no genius without a touch of madness.” And there is plenty of madness in Keynes. His whole purpose was to turn classical economics on its head. Instead of balanced budgets, sound money, and laissez faire, he created a new model justifying a debt-laden consumer society, a welfare state, and permanently cheap money. He even advocated building bridges to nowhere. “To dig holes in the ground will increase employment,” he wrote. “Pyramid-building, earthquakes, even wars may serve to increase wealth.” Lord Keynes is the father of today’s fiscal insanity.

Nasar is critical of many players in her dramatis personae, especially Karl Marx and Joan Robinson, but Keynes escapes unscathed. She glorifies his genius in solving “the political problem of mankind,” to wit, “economic efficiency, social justice, and individual liberty.” While she pays polite homage to market-defenders like Friedrich Hayek and Milton Friedman, Keynes is clearly the hero of her book. He championed big government as the golden mean between the extremes of totalitarianism and laissez faire, and his new macroeconomic model provided a “lifeline” for “drowning men” in the 1930s. Nasar approvingly cites Hayek’s letter to Keynes’s widow wherein he fawns that Keynes was “the one really great man I ever knew, and for whom I had unbounded admiration.”

The final chapters about post-World War II global economy are surprisingly unfinished, as if Nasar had to cut the story short because her book was running over 500 pages. For example, she fails to bring back the market defender Milton Friedman as a counterweight to Keynesian wunderkind Paul Samuelson. Friedman versus Samuelson would have made a great clash of the titans and a fitting ending to the book. In an earlier chapter, Friedman is introduced as a young economic statistician at the U.S. Treasury Department and an early convert to Keynesianism who introduced income-tax withholding to help pay for the war. Amazingly, Friedman never shows up again, despite his transformation at the University of Chicago into the most passionate critic of Keynesian economics and the welfare state.

Virtually nothing is written in this book about Friedman’s heralded work A Monetary History of the United States, co-authored with Anna Schwartz, which countered the Keynesian/Marxist argument that the Great Depression was caused by defects in the free market. “Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government,” Friedman wrote. An “inept” Federal Reserve allowed the banking system and the economy to collapse, he contended.

A book that promises to tell the story of the miracle of economic growth in the 20th century surely should include a discussion of the supply-side revolution of the 1980s and 1990s that has spread around the world. Yet Nasar is silent about that revolution, the collapse of the Soviet Union and socialist central planning, and the impact of both on emerging markets, whose leaders finally threw off the mind manacles of socialist thinking. Franklin Roosevelt shows up regularly in the 1930s, but there’s not a single word about Thatcher or Reagan in Nasar’s account.

She ends her book with the story of Amartya Sen, an Indian-born Harvard professor who won the Nobel Prize in 1998, and his theme of social justice. She notes how Sen was inspired by John Rawls’s “magisterial” thesis that “a just society should maximize the welfare of the worst-off group.” Nasar made a wise choice in selecting India as a laboratory to discover ways to alleviate poverty and social injustice. The world’s largest democracy has indeed made much progress, thanks not to the heavy central-planning model of Nehru but to a succession of recent leaders determined to open India’s economy. Sen has long known that famines are government-made, not natural disasters. The key to India’s success in raising living standards and curtailing poverty has been a large dose of economic freedom. Still, India has a long way to go and continues to suffer from wide-ranging state economic intervention, onerous rules for business licensing, and corruption.

Nasar’s epilogue is perhaps too optimistic. “Confidence” is not a descriptive word for describe today’s global economy. Investors and political leaders have anything but confidence in the West after the financial crisis of 2008-09. She says “there is no going back,” but there may not be any going forward either—until those “madmen in authority” (Keynes’s term) in Washington get out of the way.

Mark Skousen has taught economics at Columbia University and is the author of The Making of Modern Economics.