Economan Captures the Knowledge Economy  
Review of David Warsh's Knowledge and the Wealth of Nations  
  
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 column on the doings   
of the profession.  
  
Mary M. Cleveland