Adam Smith by Jesse Norman

Author:Jesse Norman
Language: eng
Format: epub
Publisher: Basic Books
Published: 2018-09-10T16:00:00+00:00

MAINSTREAM ECONOMICS

Before we can gauge the true magnitude of Smith’s achievement, however, we need to go deeper into the nature of mainstream economics itself. What exactly is ‘mainstream economics’?

This apparently straightforward question has proven to be rather contentious, for the word ‘mainstream’ can be used and misused for ideological or professional purposes to define and sideline others as unorthodox, narrow or irrelevant. It is conventionally identified with the work of Paul Samuelson, the third (1955) edition of whose best-selling Economics offered a mathematically rigorous but accessible synthesis combining ‘foundations’ in the microeconomics of companies and markets with a wider picture taken from the Keynesian macroeconomics of GDP, inflation, employment and the rest; it became over many editions the best-selling economics textbook of all time. But this conventional account greatly underplays the achievement of Keynes himself. Keynes saw his General Theory of Employment, Interest and Money (1936) as exactly that—a general theory, of which classical economics is supposed to be a special case—but it is of a radically different kind to those of the equilibrium theorists. Yes, Keynes argued, there can be points of equilibrium in an economy, but this may be precisely because markets, in particular labour markets, are not clearing: an economy can be trapped for long periods in high unemployment and low aggregate demand. And these can occur because of factors affecting the real economy—above all, radical uncertainty, hoarding and what Keynes called ‘animal spirits’ affecting confidence and morale—which appear nowhere in the standard economic models.

Keynes advertised the General Theory as a break from what he called the ‘classical tradition’. But he traced the origins of that specific tradition, accurately, not to Smith but to Ricardo and the French economist J. B. Say. For Keynes, Smith stood above it; as he wrote in his Essays in Biography, ‘Economists must leave to Adam Smith alone the glory of the Quarto, must pluck the day, fling pamphlets into the wind, write always sub specie temporis, and achieve immortality by accident, if at all.’ And in his insistence on seeing man as a human animal, and on embedding markets within a social and normative context, Keynes was perhaps more Smithian than he acknowledged. Paul Samuelson later took Keynes’s economics and—drawing on work by John Hicks—turned it into the crucially different ‘Keynesian economics’. But in many ways that so-called ‘neoclassical synthesis’ would be better described as a Keynesian synthesis; and even that phrase does insufficient justice to Keynes’s own creativity, realism and willingness to explore behaviour that others took to be economically irrational or mathematically intractable.

However it is described, this broad cluster of views remains the economic mainstream. It has arguably had policy disasters in recent decades, but it would be absurd to play down its achievements. It has proven to be of central importance in understanding human behaviour, in analysing economic activity, and in explaining, framing and guiding the decisions of individuals, households, corporations and governments. But mainstream economics has also grown in public stature from having three key features less closely connected to its intrinsic merits.

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