David Warsh’s engaging new book Knowledge and the Wealth of Nations tells two stories. One story, beginning with Adam Smith, covers the history of thought about the relationship of economic growth and economies of scale. Warsh finds in Smith a contradiction between the huge technical economies of the pin factory, which should create monopolies, and growth driven by competition between many firms. From Allyn Young forward, he sketches the lives and ideas of major 20th century economists who addressed or neglected Smith’s puzzle, while building the mathematized economics of today. The players include George Akerlof, Kenneth Arrow, Robert Barro, Edward Chamberlin, Paul David, Gerard Debreu, Milton Friedman, John Maynard Keynes, Paul Krugman, Robert Lucas, William Nordhaus, Paul Romer, Paul Samuelson, Robert Solow, Joseph Stiglitz, John Von Neumann, and many more.
The other story details Paul Romer’s struggle to develop a new mathematical growth model that would solve Smith’s puzzle, culminating in “Endogenous Technological Change” in 1990. This model challenges the now classic 1956 model of Robert Solow, by explaining innovation rather that treating it as manna from heaven.
I found the book at least as interesting for its depiction of elite academic economists as for its account of growth theory.
Warsh views his economists as “a cat looking at kings.” They are “the best and the brightest.” In 1985 “[a]t the age of forty-eight, Robert Lucas has become the most influential economics theorist in the world…” Or, “At age forty-nine, [John] Taylor is on his way to becoming one of the fathers of the profession…” These economen — for they are all men — sally forth like heroes on the Trojan battlefield. Only it’s the “Saltwater” (Cambridge MA and allies) heroes versus the “Freshwater” (Chicago) heroes. Sometimes they collaborate; sometimes they go mano a mano against a single opponent–as does Romer against Solow.
Hovering over the scene like Athena and Hera are two women, neither of them accorded Warsh’s usual encomia. They are Joan Robinson, originator (with Edward Chamberlin) of the idea of “monopolistic competition,” and Jane Jacobs. Jacobs, known for her keen observations on the economy of cities, was not even an economist, let alone a mathematical economist.
I confess to skepticism. I find no contradiction in Adam Smith. I have difficulty with modern macroeconomics, which disregards factor proportions and prices, as well as distribution. I cannot swallow growth theory–especially the aggregate production function into which Romer incorporates knowledge acquisition. Warsh’s heroes battle for honor and glory–the admiration of colleagues, publications in top journals, prestigious professorships, the Clark Medal, the Nobel Prize. And they experience the sheer joy of solving puzzles. But, has their new mathematical arsenal enabled them to capture a better understanding of the economy, as Warsh assumes?
Surprisingly and annoyingly, Knowledge and the Wealth of Nations lacks citations and bibliography, though at least it has an index.
David Warsh edits www.economicprincipals.com, a weekly subscription column on the doings of the profession.
