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Book Review: The Making of Modern Economics

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The Making of Modern Economics: The Lives and Ideas of the Great Thinkers
by Mark Skousen (Armonk, N.Y.: M.E. Sharpe, 2001); 485 pages; $25.

IN THE EARLY DECADES OF THE 19TH CENTURY, Thomas Carlyle was the first one to call economics “the dismal science.” He considered the study of the market economy “dismal” because it emphasized individualism and freedom of association on the basis of voluntary agreement. He believed that human relationships should be based on hierarchical tradition, in which the individual was made to recognize his “proper place” in the social order of things for the common good.

Throughout the 20th century, both conservatives on “the right” and socialists on “the left” have shared Carlyle’s disapproval of the market economy, though for different reasons. But many others in society also consider economics to be a dismal science because the subject seems dry, abstract, highly mathematical and, well, just downright boring. To most people, moving up and down those supply and demand curves to find that special equilibrium point apparently doesn’t seem to be a fun way to spend a free evening.

It shows that there is just no accounting for tastes. As a professor of economics, I just can’t wait to get back into the classroom at the beginning of each semester and start connecting those dots in the diagrams on the chalkboard and trace out those old supply and demand curves. And tracing out a production possibility frontier, to demonstrate to my students the trade-offs people must make between different combinations of desired goods because of the scarcity of resources, gives me goose bumps every time I do it.

Mark Skousen has now written a book that helps to take the “dismal” out of economics. The Making of Modern Economics both tells the story of the development of economic ideas during the last 250 years and makes those ideas intelligible and fascinating for the general reader.

Starting with Adam Smith, Skousen recounts the lives of the most famous economists and clearly and simply explains their writings about the market economy. But there is nothing either dry or dull as the reader travels back through time and is introduced to these individuals, to the times in which they lived, and to their ideas.

Indeed, at the bottom of the first page of every new chapter, Skousen even suggests a piece of classical music that the reader should listen to as he reads about the economist to whom the chapter is devoted. Thus, he recommends Aaron Copland’s “Fanfare for the Common Man” to accompany chapter one on Adam Smith and The Wealth of Nations.

David Ricardo is famous in the history of economic ideas for being one of the first thinkers to come up with the idea of comparative advantage. Suppose you are a medical doctor and could care for your own garden in three hours of time. If you hired some gardener to do it he might, doing his best, take four hours to complete the same job, at $25 per hour. Should you hire him? It depends on the value of your time doing something else. Suppose that you could treat some of your patients with those three hours, earning $50 an hour. Even though you’re more time-efficient than the professional gardener is, you’d be better off hiring him for $100 and earning $150 in your medical practice. Your garden would be taken care of, and you’d be ahead $50.

But besides Ricardo’s being a respected contributor to economic theory, Skousen also tells us he was one of the wealthiest and most successful economists in history. He was an arbitrageur in the stock market, mostly dealing in government debt, and a whiz in the futures market. Indeed, in a one-day trade he made £1 million during the Battle of Waterloo in 1815.

The chapter on Marx is an excellent summary of this evil man’s ideas. But Skousen also tells the story of Marx’s life, including his student years as a budding radical, driving his classical-liberal father crazy. When Marx married they had a live-in maid to whom Marx never paid a dime over the years; but he did have an affair with her and had an illegitimate son, whom he refused to recognize his entire life.

The chapter on John Maynard Keynes is an excellent weaving of theory and history, in which Skousen details and critically evaluates Keynes’s writings on economics and tells the story of Keynes’s fascinating but perverse life. In a “tell-all” style, he recounts Keynes’s preference for young boys as his sexual companions before his marriage to a Russian ballerina.

But he also presents a careful and detailed critical evaluation of Keynes’s macroeconomics, including Keynes’s misunderstanding of the function and importance of savings, the role of speculation, and the workings of the market economy.

Also in the chapter on Keynes, Skousen briefly discusses Arthur C. Pigou, one of the intellectual fathers of modern welfare economics. He writes that there is strong evidence to suggest that Pigou, one of the most respected economists in the period between the two world wars, was also a recruiter of spies at Cambridge University for Soviet foreign intelligence. Pigou even tried to entangle Austrian economist Friedrich A. Hayek in this spy network during World War II.

Skousen has two excellent chapters on the Austrian economists, the first one on the earlier Austrians, Carl Menger, Friedrich von Wieser, and Eugen von Böhm-Bawerk. He presents a very good summary of the Austrian theory of subjective value and marginal utility and the Austrian theory of capital and production, as well as Böhm-Bawerk’s criticisms of the Marxian labor theory of value.

The second chapter devoted to the Austrians offers a detailed and sympathetic exposition of the ideas of Ludwig von Mises and Hayek on money and the business cycle, and their criticisms of socialist central planning. And, again, Skousen offers intriguing details about the personal lives of both Mises and Hayek.

There are chapters on the French laissez-faire economists of the early 19th century, including Jean-Baptiste Say and Frédéric Bastiat, as well as on Thomas Malthus and John Stuart Mill. He compares the writing of other contributors to marginal utility theory, including Alfred Marshall, John Bates Clark, and Frank A. Fetter. And Thorstein Veblen and Max Weber are discussed in terms of their different views on the nature and meaning of capitalism.

Skousen describes the development and influence of Keynesian economics in the post–World War II era through a critical discussion of the writings of Paul Samuelson. And modern monetary economics is explained in chapters devoted to Irving Fisher and Milton Friedman.

The theory of economic change and the role of the entrepreneur are emphasized in a chapter on Joseph A. Schumpeter. And in a concluding chapter entitled “The Triumph of Market Economics,” the reader is introduced to the ideas of public-choice theory and the modern Chicago school of economics.

It should be said, however, that there are factual errors in various places throughout the book, which suggests that Skousen, perhaps, too hastily rushed the volume into print. Some are noticeable, if not too important. For example, he says that Schumpeter was a student of Mises. In fact, they were students together before the First World War in the Vienna University seminar of Böhm-Bawerk.

Others are not so insignificant. For instance, Skousen repeats the claim that Herbert Spencer had espoused a form of “social Darwinism,” in which there was a survival only of the fittest. In fact, Spencer emphasized, in his three-volume Principles of Sociology, that one of the benefits of peaceful industrial society’s replacing militant political regimes was that even the weaker members of society could find a niche in which to prosper in the market system of division of labor. In the market economy, after all, even the weak and the frail could find gainful employment for a comfortable life. For Spencer, this was one of the great hallmarks of modern capitalist society. Also, Spencer emphasized, under capitalism kindness replaced cruelty in human relationships.

But nonetheless, Mark Skousen has performed a superb job in writing one of the most informative and readable books on the history of economic ideas in the 20th century.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).