Aims of the lecture

• 1. To explain the main problems involved in establishing that economic ideas are the product of economists’ political values.

• 2. To explain the economic ideas associated with some of the leading universities and other organizations since the Second World War.

• 3. To explore examples of the links between economists’ political views and the institutions in which they are located.

Bibliography

R. E. Backhouse’s The Puzzle of Modern Economics: Science or Ideology (Cambridge: Cambridge University Press, 2010), chapter 8, provides a short introduction to the problem of ideology.

Although it contains a major chapter on “The Rediscovery of the Market”, which deals with economics, most of D. Rodgers’s Age of Fracture (Cambridge, MA: Harvard University Press, 2011) is not about economics. The book is, nonetheless, very important because it documents how changes in attitudes towards individuals and society went far beyond economics. Economists were involved in the process but the breadth of the changes Rodgers writes about make it hard to believe that economists alone were responsible: it was a social change with much broader roots.

E. Schrecker’s No Ivory Tower: McCarthyism and the Universities (New York: Oxford University Press, 1986) is the classic work on McCarthyism and universities.

K. Phillips-Fein’s Invisible Hands: The Businessmen’s Crusade Against the New Deal (New York: Norton, 2009) discusses the hostility of many businessmen to the New Deal and the economic measures taken, rather than specifically to communism.

Useful references on the RAND Corporation include D. Jardini, Thinking Through the Cold War: RAND, National Security and Domestic Policy, 1945–1975 (2013), available online at www.smashwords.com, and A. Abella, Soldiers of Reason: The RAND Corporation and the Rise of the American Empire (Boston, MA: Mariner, 2009).

T. Mata’s “Migrations and Boundary Work: Harvard, Radical Economists, and the Committee on Political Discrimination”, Science in Context 22 (2009), 115, is one of the best analyses of radical economics around 1970. T. Mata’s “The Enemy Within: Academic Freedom in 1960s and 1970s American Social Sciences”, History of Political Economy 42 (2010), 77–104, follows this up by examining academic freedom cases in the same period.

Aims of the lecture

• 1. To explain how economists thought about macroeconomic problems before Keynes’s General Theory (1936).

• 2. To show that the early twentieth century was a very creative period in macroeconomic theory.

• 3. To illustrate this using the examples of Irving Fisher and Knut Wicksell.

Bibliography

The main texts covered in this lecture are those of Irving Fisher and Knut Wicksell.

Irving Fisher’s The Purchasing Power of Money (New York: Macmillan, 1911) is the classic statement of Fisher’s version of the quantity theory of money. It is available online at http://oll.libertyfund.org/titles/fisher-the-purchasing-power-of-money (accessed 26 October 2017).

Fisher’s “The Debt-Deflation Theory of Great Depressions”, Econometrica 1:4 (1933), 337–57, explains the Great Depression. Note that though this appears in a technical journal, Fisher’s article employs solely verbal analysis, supported by graphs and statistics.

In addition to reprinting Fisher’s main works, the 14 volumes by W. J. Barber, R. Dimand and K. Foster (eds), The Works of Irving Fisher (London: Pickering & Chatto, 1996), contain relevant selections from unpublished correspondence and other materials such as talks he gave. For example, it includes his (in)famous talk on the eve of the Wall Street Crash claiming that the United States was entering a new era of prosperity.

Wicksell’s most comprehensive statement of his ideas on monetary economics is Knut Wicksell, Interest and Prices: A Study of the Causes Regulating the Value of Money [1898], R. F. Kahn (trans.) (London: Macmillan, 1936), which is available online at https://archive.org/details/interestandprice033322mbp (accessed 26 October 2017).

Wicksell’s Lectures on Political Economy, volume 2 [1906], E. Classen (trans.) (London: Routledge & Kegan Paul, 1935), gives a slightly later account of the theory, and his “The Influence of the Rate of Interest on Prices”, Economic Journal 17 (1907), 213–20, gives a brief summary of his ideas.

David Laidler’s The Golden Age of the Quantity Theory (Princeton, NJ: Princeton University Press, 1991) covers the period leading up to the First World War, focusing on Fisher, the Cambridge school (Marshall and Pigou) and Wicksell, though also with useful chapters on monetary theories of the cycle and on monetary policy problems of the period.

Aims of the lecture

• 1. To explain the origins of modern econometrics.

• 2. To explain the transition from measurement to testing.

• 3. To comment on the relationship between econometrics and economics more broadly.

Bibliography

A primary reference here is Walter Friedman, Fortune Tellers: The Story of America’s First Economic Forecasters (Princeton, NJ: Princeton University Press, 2014).

M. Morgan’s A History of Econometrics (Cambridge: Cambridge University Press, 1990) is the key text on the history of econometrics, which is the basis for much of this lecture. D. F. Hendry and M. Morgan’s The Foundations of Econometric Analysis (Cambridge: Cambridge University Press, 1995) is a book of readings covering the material on which Morgan’s history was based. There is value added in that the introduction contains interesting additional commentary on the articles.

J. D. Angrist and J.-S. Pischke’s “The Credibility Revolution in Empirical Economics: How Better Research Design Is Taking the Con out of Econometrics”, Journal of Economic Perspectives 24:2 (2010), 3–30, argues that there has been a profound change in econometric methods over the past 20 years. M. Panhans and J. Singleton’s “The Empirical Economist’s Toolkit: From Models to Methods”, History of Political Economy (forthcoming), seeks to understand the change in econometrics described by Angrist and Pischke.

Though it stops as the story told here begins, Judy Klein’s Statistical Visions in Time: A History of Time Series Analysis, 1662–1938 (Cambridge: Cambridge University Press, 1997) covers the origins of time-series analysis.

This lecture does not go into detail on the history of the creation of statistics. Those who want a more detailed introduction to the topic than the brief account offered in this lecture can find it in four short pieces discussing developments in three countries: A. Vanoli, “National Accounting, History of “ (2008), in New Palgrave Dictionary of Economics, second edition (available online at www.dictionaryofeconomics.com); K. Tribe, “The Measurement of Economic Activity and the Growth Metric: Constructing National Income in Britain, 1907–41”, in The Economy of the Word: Language, History and Economics (Oxford: Oxford University Press, 2015), chapter 3;

Aims of the lecture

• 1. To outline the three main elements of Marshall’s “project” for a modern economics: the writing of a central text, the establishment of a specialist journal, and the creation of the first three-year undergraduate degree in economics.

• 2. To demonstrate that his influence ran not only through these institutional innovations, but through the students that he taught.

• 3. To show that his ambition for economics – that it become a central part of the training of businessmen, administrators and civil servants – had more mixed, and delayed, success.

Bibliography

Principles of Economics as published in 1890 was planned as the first of two volumes, but Marshall eventually dropped “Vol. I” from the title page and published the material he had assembled for the second volume in two books: Industry and Trade: A Study of Industrial Technique and Business Organization; And of Their Influences on the Conditions of Various Classes and Nations (London: Macmillan, 1919); and Money, Credit & Commerce (London: Macmillan, 1923). Principles itself went through several editions: a second edition in 1891 up to an eighth in 1920, the last in Marshall’s lifetime. In the process it was revised and rearranged; here we are chiefly concerned with outlining the originality of Principles, so reference will be exclusively to the first edition of 1890. While physical copies of this edition are rare, an electronic version is available through archive.org. There is no definitive edition apart from the variorum (ninth) edition prepared by Claude Guillebaud and published in 1961, based on the eighth edition. Marshall also published a condensed version of the second edition under the title Elements of Economics of Industry (London: Macmillan, 1892) which should not be confused with his and Mary Paley Marshall’s Economics of Industry (1879), which it was designed to replace.

Marshall’s writings prior to 1890 have been collected in The Early Economic Writings of Alfred Marshall 1867–1890, two volumes (London: Macmillan, 1975), edited by John Whitaker; Whitaker also edited a three-volume collection of correspondence (Cambridge: Cambridge University Press, 1996). The book written with his wife Mary, The Economics of Industry (1879), is significant in part by virtue of it having been commissioned for use in Cambridge University extension lectures, and so can be regarded as the first textbook specifically composed for use in the teaching of economics in Britain.

Aims of the lecture

• 1. To demonstrate the emergence in France during the first half of the eighteenth century of arguments over trade and regulation in relation to issues of food supply that moved away from comparisons of the “strength of a nation” and introduced arguments about the existence of a “natural order” in economic life.

• 2. To outline the early history of physiocracy through discussion of Quesnay’s Tableau Économique and the associated Maximes, and show how these economic principles transformed in the course of the 1760s into a more general argument concerning natural order and good government.

• 3. To demonstrate that arguments about “free trade” in the early eighteenth century were related primarily to grain markets, but that by the 1780s these had transformed into general arguments about economic deregulation.

• 4. To show that the criticisms of the “physiocratic System” made at the time were uniform, limited and general, that its direct influence quickly waned, but that Quesnay’s Tableau in the 1860s became an inspiration for Marx, and thence indirectly for both Soviet planning and early input–output models of the economy.

Bibliography

There are some older translations of physiocratic writings into English but they are not entirely reliable, belonging to a now-dated tradition that linked them to Marx and Marxist debates of the later nineteenth century: Ronald L. Meek, The Economics of Physiocracy (London: Allen & Unwin, 1962); Marguerite Kuczynski and Ronald L. Meek (eds), Quesnay’s Tableau Économique (London: Macmillan, 1972).

There is a good modern edition of Quesnay’s writings: François Quesnay, (Euvres économiques complètes et autres textes, two volumes, Christine Théré, Loïc Charles and Jean-Claude Perrot (eds) (Paris: Institut National d’Études Démographiques, 2005).

In addition, the writings of Quesnay and many others can be found online at http://gallica.bnf.fr (accessed 26 October 2017).

The best general introduction available in English is Arnaud Orain and Philippe Steiner, “François Quesnay (1694–1774) and Physiocracy”, in Gilbert Faccarello and Heinz Kurz (eds), Handbook on the History of Economic Analysis, Volume I: Great Economists since Petty and Boisguilbert (Cheltenham: Elgar, 2016), 28–39.

Key questions

• Why do we have collective insurance solutions to personal risks, rather than leaving people to make their own arrangements?

• Should welfare be delivered by the state, or privately?

• How can we ensure that the welfare bill does not grow inexorably and undermine self-sufficiency?

• How do we ensure “generational equity” when the old vote in greater numbers than the young?

Summary

Life springs surprises, and sometimes these are not pleasant or welcome. Unemployment and sickness can come out of the blue to upset our carefully laid plans. But even life events that are more predictable, such as getting old, can be difficult to prepare for on our own. This is why collective social protection, or welfare states, can sometimes come to the rescue by allowing us to pool our risks and resources to deal with unexpected events. Modern welfare states are designed to take care of us “from the cradle to the grave”: from helping with childcare to maintaining an income for pensioners and the unemployed. One of the biggest drivers of increasing costs is medical progress in producing greater longevity. Having and raising children is a big expense for families, and a particular focus for policy-makers is how to help people deal with this in ways that will not disrupt their participation in the labour market, for example. The trouble is, if the state, or my private insurance scheme, will always take care of me, however I behave, why should I work hard, take care of my kids properly or look after my own health? Welfare states therefore face challenges in overcoming moral and other hazards to keep the lid on affordability. Although a well-designed and fully resourced welfare state, such as Denmark’s, helps the economy stay competitive, some others, such as Greece’s, are a huge drag on the economy. And, with so many vested interests bound up in welfare states, they can be very difficult to reform.

Key topics and theories covered

Social insurance and risk pooling; moral hazard and welfare state design; children and the welfare state; old age and pensions; poverty and inequality; welfare and the public finances; “worlds of welfare capitalism”.

Key questions

• What is money and saving, and why is money so useful?

• What is the role of banks in the financial system?

• Is it ever possible to prevent financial crashes, or is instability the price to be paid for a vibrant financial sector?

• What is the future of money and banking?

Summary

The banking and personal finance industry can do a useful job in smoothing out consumption patterns over people’s lifetimes: lending to them when they are young and cash-poor, but with most of their working life ahead of them; helping them save for family, house buying and retirement when they are older and earning at their peak; insuring against risks and misfortunes along the way; and, finally, paying out through pensions and annuities when they quit work to spend more time in the garden. Businesses also need credit to grow, and in order to employ people to generate income and savings. Balancing out the demands of these groups and their various needs, across the whole country is a big and complex business, begetting an enormous financial services industry. The flow of credit has to be managed and regulated through complex regulation alongside other tools, such as interest rates. Stabilizing these financial activities is a headache for the authorities, and sometimes – as in the financial crisis of 2007– 2010 – things go horribly wrong.

Key topics and theories covered

Money, savings and investments – the banking system and the role of central banks; the economic role of debt and credit; theories of investment; stock markets and booms and bust; interest rates; Bitcoin and new forms of money and saving.

Introduction

This chapter deals with something close to many people’s hearts: money (and saving). Money is central to economics because spending it greases the wheels of commerce and consumption. Saving our income instead of spending it can finance investment in the practices and technologies that fuel wealth creation. Both activities also entail the creation of financial institutions, such as banks, that help us manage this.

Key questions

• What is human capital, and why are people’s education levels linked closely to their performance at work?

• Why is a nation’s prosperity so closely related to how well educated and skilled its workers are?

• Are narrow, specialized skills better than general ones, and how can we ensure these fit with people’s aspirations and the needs of employers?

• Should those who benefit most from higher education pay for it themselves?

Summary

It is a fact that better-educated societies tend to be richer and happier. Highly skilled and educated workers are simply more productive and efficient, benefiting the economy and society in general, as well as leading more fulfilling and financially rewarding careers themselves. Yet there can still be problems supplying the right kinds of skills, and this presents a dilemma for governments and employers. Education and training are expensive, so who should pay for it: the individuals who stand to directly benefit from it, their employers, or society at large? Furthermore, technological change is profoundly affecting the world of work and putting a premium on workforces with ever more specialized skills. Governments are increasingly realizing the importance of research and innovation in universities and encouraging entrepreneurship, so should learning and education be geared towards the interests and needs of employers?

Main topics and theories covered

The division of labour and the gains from specialization; skills and productivity; the skills of the future; the economics of innovation.

The economics of education

Philosophers and poets have long extolled the value of learning. Now economists are getting in on the act, pointing to the substantial material benefits that stem from having a good education system and getting the right number of people through it. And, for many parents in developed countries, a good schooling for their children, followed hopefully by university, has become something of an obsession. Likewise, governments nervously eye league tables of educational attainment and steal policies from countries at the top. Yet education is expensive, time-consuming and difficult to get right. We have all probably been served enough coffee by recent graduates in shops and cafes to know that its benefits are long-term and uncertain.

Key questions

• How does the labour market function and how are wages set?

• How does the work we do impact the wider economy?

• Can the government intervene to solve unemployment?

• What is the future of work?

Summary

Most of us spend most of our lives at work, and it is a crucial part of the economy. The labour we provide generates wealth for the wider economy and taxes for the government to spend on public services. But the world of work is complex and daunting, especially when first starting out. The range and quality of jobs available reflects many things: the structure and strength of the national and international economy; the health of particular business sectors; the present vibrancy and future plans of individual employers; and how each and every employee meshes with this – what they have to offer, in other words. Jobs also vary widely in terms of how secure they are, their hours and conditions, and the pay and other benefits on offer. What determines this, and, given the importance of work to society, should more be done to protect jobs and/or help the jobless back into employment? Meanwhile, the work we do and the wealth our labour creates drive the economy and generate the taxes to pay for the services we consume – health, welfare and defence, for example. But with an increasingly mobile and freelance workforce it can be difficult for governments to make sure highly paid individuals pay their fair share of tax. This chapter explains why the workplace is organized the way it is and how it is changing.

Main topics and theories covered

Theories of unemployment and labour markets; the political economy of skill formation; active labour market policies; the economics of job search; inequality and the labour market; the future of work.

Introduction: why work?

Apart from those of us lucky to be born wealthy enough to not have to work, or unlucky enough to be unable to work through some disability, nearly all of us are likely to encounter the labour market throughout a good portion of our existence.

Key questions

• What are the key influences on consumer behaviour?

• From factory to high street: how do global supply chains respond to our changing needs and tastes?

• How does what we buy drive the national and international economy?

• How are technology and the internet changing the way we shop?

Summary

We live to shop. Consumer spending comprises a major part of the economies of most rich countries, but consumers’ behaviour is unpredictable and it can wreck or rescue the economy. Besides shops themselves, huge distribution chains and freight transport networks, employing millions of people, are dependent on customers opening their wallets. Consumers themselves are the targets of advertising, marketing and other forms of persuasion by retailers chasing their business. But is the growing scale and diversity of retail operations and global supply chains – while, admittedly, driving down prices and widening choice – being bought at the expense of dubious ethical standards? Some argue that our obsession with low prices in shops and supermarkets is harming workers in developing countries and cruel to animals. It could also lead to the extinction of the “high street” as consumers flock to out-of-town malls or use the internet. Do the benefits of these changes outweigh the costs?

Key topics and theories covered

The “affluent society” and consumer choice; globalization and global value chains in retail; the environmental and ethical impact of supermarkets and cheap clothing; new ways of shopping.

The economics of shopping and consumption

Shopping is one of our favourite activities and is therefore something of keen interest to economists. We certainly love to splash the cash. Private consumption spending in most advanced economies comprises a half to two- thirds of GDP and consumer sentiment is considered a critical indicator of economic vigour. Consumers spent $43 trillion worldwide in 2015, a 35-fold increase on 1965. Americans, who account for more than a quarter of this total, lavished $274 billion on new cars and trucks, $24 billion on dishes and flatwear, $44 billion on breakfast cereals and $60 billion on their pets.

Key questions

• Who should pay for and/or provide healthcare: the public or private sector?

• Why are healthcare costs rising, and are they containable?

• Is there one “best” way of organizing healthcare systems?

• How can we ensure that healthcare is equitable, affordable and effective?

Summary

Healthcare systems vary widely across countries, but individuals everywhere face versions of the same set of choices: whether to pay for, or get their employer to pay for, a good personal healthcare package, or to fall back on the state. People face dilemmas over how much to put aside for unknown future health risks, however, and how to offset the costs of doing this against more immediate demands on their time and money. Governments can always step in to provide collective, public solutions but given that health is a massive, global business with vast economies of scale should more of a role be handed to the private sector? And, if so, how should big pharmaceutical and medical companies that operate across borders be regulated? Ultimately, with ageing populations in advanced economies putting a massive strain on resources, individuals may need to take more responsibility if societies are to avoid having to ration ever more expensive healthcare.

Main topics and theories covered

Health economics and arguments for public intervention; why national healthcare systems differ; markets in healthcare; longevity and public health; the role of big drug companies and private medicine.

Healthcare and risk pooling

This chapter is about the role of healthcare systems in keeping us healthy and happy. The contribution of economics to this might not be immediately obvious. Surely, meeting our healthcare needs is a simple matter of building enough hospitals, stocking them with enough equipment and drugs and letting the medical professionals get on with the job?

As can be imagined, though, the reality is a lot more complicated than that. For a start, it is quite hard even to define “health” in terms useful to an economist or policy-maker.

Introduction

It must have been a fairly toe-curling moment. Opening a new academic building at the London School of Economics and Political Science (LSE) in 2008, as the financial crisis was raging unchecked, Queen Elizabeth II asked her academic host a cutting question: “Why did none of you see this coming?” Her Majesty’s comment, and the awkward embarrassment with which it was greeted, was reported around the world as an emblem of the inability of the economics profession to prepare the world for disaster.

Were these accusations fair? Yes and no. No, because economists are not omniscient and, the mini-industry of economic forecasting notwithstanding, cannot predict the future. The claim of economists that they are (social) scientists is often mocked by “real” scientists studying applied natural phenomena, as opposed to the behaviour of unruly human beings. Yet some of these are equally poor at making predictions about disruptive occurrences in their own realms: seismologists cannot predict earthquakes; meteorologists can make reliable weather forecasts only for the next few days; and so on.

But, on the other hand, yes; because the financial crisis was an extraordinary event that shook the discipline of economics to its core, exposed some of its central tenets as wishful thinking and revealed a stunning level of complacency on the part of leading members of the profession, including highly paid analysts in government and financial institutions. Among the most searing criticisms was that modern economics was addicted to abstract theorizing and thereby irrelevant to the everyday concerns of ordinary mortals. This was not merely sniping from the sidelines. Leading economists and financial insiders felt the same way. Just before he quit his job, the president of the European Central Bank (ECB), Jean-Claude Trichet, complained in exasperation that, “as a policymaker during the crisis, I found the available [economic and financial] models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.”

The crisis and its aftermath have prompted much soul-searching among economists, as well as ridicule from many commentators (although applications to university economics courses shot up).

This is a book about economics for non-economists. It requires no grounding in economics at all – just, hopefully, a lively interest in the world around and an ability and willingness to think about things logically and systematically. It is aimed at students in the humanities and the social sciences who are likely to encounter some economics in their work and studies, and thereby perhaps want to know a bit more about the economy without needing to sign up for a lot of mathematical-sounding economics modules. As such, it tries to place economics in its real-world, political context, and for this reason it may even appeal to trained economists wanting a rounder view of their discipline.

Hopefully, all kinds of readers will find something of interest in the book and will be left with a desire to know more. It is for this reason that copious references are provided, not just to support various assertions and data points but also to guide readers towards further sources that may be of interest. As well as laying out how economists approach the topics examined here, the book also tries to serve as a guide to past and current debates and controversies in economics. Although mildly critical of some of the tenets of neoclassical economics, it does not consciously take sides in any of these debates but aims to instil in readers a curiosity to learn more about the economy and what economists have to say about it.

A great many people assisted in the writing of this book. In particular, I would like to thank my publisher at Agenda, Alison Howson. In addition, Waltraud Schelkle, Bob Hancké, Nick Barr, Michael Beveridge, Darren Acheson and several anonymous reviewers read all or part of the manuscript and gave immensely helpful comments. Any errors are mine, of course. Pieter Tuytens, Marina Cino-Pagliarello, Chrysa Papalexatou, Frieder Mitsch, Dimitrios Koutsoupakis and Sarah Watters provided invaluable research assistance. Finally, my greatest debt and fondest appreciation go out to Sunita and Lucas, to whom this book is dedicated.

Key questions

• Why do house prices keep on rising, and is this good or bad for individuals and the wider economy?

• What determines whether individuals can get onto the housing ladder or whether they have to rent?

• What is the place of the construction and mortgage lending industry in the economy?

• How does housing contribute to financial crises and cycles of boom and bust?

Summary

For those lucky enough to afford one, a house is the most expensive thing they ever buy, and entails assuming the biggest debt they ever take on. Having got on the housing ladder, homeowners stand to gain from rising house prices. Tight planning laws and limits on credit push prices up still further. Governments rake in a lot of taxes from housing transactions and so encourage this situation to continue. The trouble is, housing forms a huge part of the stock of wealth of society, and periodic gyrations in the market therefore have a massive effect on the economy; the recent financial crisis had its origins in reckless mortgage lending, and central banks have often had to hike interest rates to choke off previous housing booms, triggering recessions. It is no wonder we keep seeing booms and busts with this crazy situation. This chapter examines housing and the impact it has on lifestyles and the wider economy itself.

Key theories and topics covered

Demand and supply of housing; housing as privatized welfare; planning laws and restrictions; housing and construction in the wider economy; new forms of homeownership.

Economics of the housing market

Housing has always been a critical part of the economy and is central to most people’s lives. It is not merely a place to live but also, for those who take the plunge and buy their own home, a massively important asset. Housing is probably the only major type of wealth holding that a majority of people have access to in their lives. It is easily the biggest thing they ever buy, entailing taking out the biggest loan they will ever manage, and, if all goes well, it can provide them with a significant asset that they can realize in their old age and possibly pass on to their children in the form of an inheritance.