http://www.businessweek.com/printer/magazine/book-review-grand-pursuit-the-story-of-economic-genius-by-sylvia-nasar-09082011.html

THE STACK September 08, 2011, 5:45 PM EDT
Book Review: Grand Pursuit: The Story of Economic Genius by Sylvia Nasar
Economic theorists as heroes for our time? Nasar makes the case

By Roger Lowenstein

Grand Pursuit:
The Story of Economic Genius
By Sylvia Nasar
Simon & Schuster; 576 pp; $35.00


It’s a dubious hour to proclaim the triumph (much less the genius) of
the “dismal science.” Western economies are a wreck, the U.S. is
suffering 9.1 percent unemployment, and Europe is teetering on the
abyss of default. The economics profession bears no small measure of
blame—first for inventing or adopting modern risk management, which
failed so spectacularly during the financial crisis, and second for
believing that central bankers had unlocked the key to managing
growth. In the U.S., politicians have been reenacting a tired budget
deficit debate from the 1930s. Whatever economics we may have learned,
we seem determined to forget.

Yet proclaim a triumph is precisely what Sylvia Nasar, author of the
acclaimed A Beautiful Mind, sets out to do. Nasar has written a
compelling history of modern economics, a story of the theorists as
well as of their theories. Grand Pursuit retraces much of the same
ground as Robert L. Heilbroner’s 1953 classic The Worldly
Philosophers—which is to say, Nasar gives us Karl and Jenny Marx in
their crowded London flat, Joseph Schumpeter, and, of course, John
Maynard Keynes. Nasar is more idiosyncratic in her choice of subjects;
she omits Adam Smith, almost entirely. On the other hand, she reclaims
the lesser-known Beatrice Webb, a richly interesting and path-breaking
Victorian who founded the London School of Economics and sold none
other than Winston Churchill on the need for a welfare state.
Similarly, Nasar glosses over the Great Depression but lingers on the
less familiar crisis in post-World War I Vienna because, well,
Schumpeter happened to be there and was enlisted by the Socialist
government to help stave off mass starvation and communist rebellion,
none of which interfered with his conspicuous pursuit of women and
Thoroughbred horses.

Nasar’s story is centered in London, and its appeal is enhanced by the
inclusion of literary masters such as Charles Dickens, who was, she
points out, obsessed by the great Victorian issue of eradicating
poverty. Although not quite framed in these terms, Nasar’s narrative
encompasses, I think, two motifs. The first is how economists came to
decipher that capitalism is, ultimately, an engine of progress rather
than despair. To focus on just one sequence within this theme, she
starts with the Reverend Thomas Robert Malthus and his dire thesis
that the sex drive condemns the masses to live at the edge of
starvation.

Marx is similarly pessimistic, if for different reasons. He sees
society and the Industrial Revolution, rather than nature, as the
agent of human misery. “Poverty was not, of course, new,” Nasar
writes, which the would-be revolutionary readily acknowledged. But the
juxtaposition of poverty amid rising wealth made poverty seem
“manmade, almost gratuitous.” Marx’s explanation was that the
competition for profits impels factory owners to steadily reduce
wages, leading to a downward spiral in living standards. That the
emigré Marx never bothered to visit an actual factory, or even to
learn English well, is one of the human failings Nasar engagingly
brings to the surface. The great revolutionary was too busy holding
forth at cafes, soused in an atmosphere of “wet woolens and warm
beer,” to notice that living standards were rising. Marx comes off
badly, yet his conclusion that society offered the masses little hope
(short of revolution) was widely accepted. Only in a novel such as
Great Expectations might the orphan Pip vault to the middle class; for
the real-life masses, such advancement was “the stuff of pure
fantasy.”

This is Nasar’s setup for Alfred Marshall, who, though trained as a
mathematician, was inspired by both Dickens and Marx to study how
companies actually operated. “He did not doubt that the chief cause of
poverty was low wages, but what caused wages to be low?” Marshall, who
began his work in the 1860s, noticed a dynamic that Marx hadn’t:
“Competition forced owners and managers to constantly make small
changes to improve their products, manufacturing techniques,” and so
forth. Over time, the improvements wrought greater productivity and
higher wages. The significance of this idea for human progress cannot
be overstated. The historian Arnold J. Toynbee later called it “the
first great hope which [wage analysis] opens out to the laborer.”

I have lingered on Nasar’s treatment of Marx and Marshall to give a
sense of the vividness of her story. Her second motif, though she
doesn’t frame it explicitly, concerns the evolution of the role of
government: the great upheaval that was the welfare state, the
struggle to regulate—with or without gold—the money supply, and the
parallel effort to control booms and busts. The latter is especially
relevant today; thus, eminences from Keynes to the American Irving
Fisher inquire whether panics and slumps are “generated by the
economic system” or are “random shocks that originated outside the
economy.”

Neither Nasar’s topics nor her characters conform to a neat, linear
organization. Economics has no agreed-upon catechism, and Nasar has
written the book she chose to write, not a book that a conventional
reading of history demands. Curiously, she includes a fine portrait of
the young Milton Friedman as a New Deal bureaucrat, but not of the
later free-market apostle who achieved influence and fame. And she is
too forgiving of the modern academy’s enslavement to the computer.
“The fear that using mathematics would cause other languages to wither
turned out to be overblown,” she asserts. If anything, they were
underblown. Formula-derived economic models, embraced by economists
with utter certainty, helped to foster the financial crisis and other
modern traumas. Perhaps inevitably in a broad survey, some of Nasar’s
transitions are abrupt, but overall Grand Pursuit is artfully rendered
and a delight to read.

The question is whether Nasar’s subjects truly deserve her laudatory
subtitle, The Story of Economic Genius. To Nasar, economic history is
a story of intellectual progress, albeit with some fairly nasty bumps:
“Economic calamities”—she specifies the Great Depression—“have always
triggered crisis of confidence but they have not come close to wiping
out the cumulative gains in average living standards.” Extending her
gaze to India, China, and other developing nations, she observes,
“Since World War II, history has been dominated by the escape of more
and more of the world’s population from abject poverty.” Such
arguments seem to conflate economic progress with economic thinking.
To put it bluntly, railroads weren’t developed by economists, and it
is unclear whether Marshall et al. enabled such progress or merely
explained it.

Nasar would have us believe that the present crisis has not even
nicked the busts in her economists’ pantheon. It is certainly true, as
she notes, that the Great Recession of 2008 and 2009 “did not reverse
the prior gains in productivity and income” and that (so far) “there
was no second Great Depression.” But this a debate she could have
wrestled with more, especially the assertion that “governments
achieved some success in managing their economies.” With Europe in
disarray, the last word on managing economies has yet to be writ. One
suspects that future economics textbooks will warrant some revisions.
All the same, their authors would profit from consulting Grand
Pursuit.

Lowenstein is a columnist for Bloomberg News.