The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers (10 page)

Consider the verdict of Henry Varnum Poor, financier and cofounder of the rating agency Standard & Poor’s, one of the ratings agencies at the heart of the current crisis. Originally, Poor’s company informed investors about the conditions of the railroads, then the dominant U.S. industry. Poor described the standing of economics in the popular mind at the time:

I am aware that Political Economists have always been regarded as cold-blooded beings, devoid of the ordinary feelings of humanity,—little better, in fact, than vivisectionists. I believe that the general public would be happier in their minds for a little time, if Political Economy could be shown up as imposture, like the greater part of what is called “Spiritualism.”
⁴⁶

Francis Amasa Walker offered a similarly negative evaluation of the state of economics. Walker was the best-known U.S. economist of the last decade of the nineteenth century, whose resumé included positions as a general during the Civil War, head of the census in 1870 and 1880, president of MIT, and the president of the American Economic Association during its first seven years. Walker published a popular article in 1879, exploring, in the words of Robert Solow, a Nobel Laureate in Economics, “why economists seemed to be in bad odor among real people.”
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Walker lamented that Anglo-Saxon economics had turned its back on the continental tradition. He charged that economics had become so abstract that it had nothing to offer. Business people knew that this so-called science could not assist them in learning how to become
wealthy. Moreover, a dogmatic insistence on laissez-faire in labor markets caused economics “to forfeit all popular respect and sympathy for the science itself, especially on the part of the working classes.” Walker concluded that “a certain school of economists are undergoing a very serious crisis…. The interests of humanity are in no danger; the friends of the happiness of human beings have no reason to feel special anxiety or distress on that account.”
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Walker’s complaint illustrates how economists were challenged from all sides. Their critics accused them of being too abstract and remote from the concerns of the real world. Business people rebuked them for not offering practical advice, while workers understood that economists were siding with business in its struggle with labor.

Perhaps the cruelest blow came in 1877, when Sir Francis Galton proposed expelling political economy from the same British Association for the Advancement of Science that Jevons addressed a few years before. Into this hostile environment stepped Alfred Marshall, a central figure in formalizing modern economics in a way that excludes work, workers, and working conditions.

Economists’ Scientific Pretensions

At Cambridge University, where Marshall taught, “professors’ lectures were considered to be mainly ornamental.”
⁴⁹
When Marshall began teaching there, students of political economy took their examinations in either moral philosophy or history. Economics proper made up a relatively small fraction of the examinations. To add insult to injury, economics examinations lacked the prestige and prizes granted to the examinations in mathematics and the classics.
⁵⁰

To make matters worse, political economy was a broad field without defined disciplinary boundaries. Sir John Robert Seeley, the prime minister’s appointment to the Regius Professorship in Modern History, exemplified this problem when he used his Inaugural Lecture to emphasize the policy role of his chair, convinced that political economy fell within the scope of his discipline of history.
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At first,
Marshall embraced Seeley’s vision, immersing himself in historical research; however, by 1885, when Marshall gave his own Inaugural Lecture at Cambridge, he had undergone a conversion. Marshall became obsessed with winning prestige for the study of political economy. Key to this endeavor was to win university approval for the creation of a separate examination for students of the subject. By 1887, an English economist explained to American readers:

Professor Marshall’s personal and indirect influence has been even more wide-spread than his book. Half the economic chairs in the United Kingdom are occupied by his pupils, and the share taken by them in general economic instruction in England is even larger than this.
⁵²

Marshall launched a crusade to formalize the teaching of his subject. Toward this end, he tried to give political economy a scientific gloss by using a new term, economics, in the title of his 1879
The Economics of Industry
, written jointly with his wife. In this work, they partially explained their motive: “Political interests generally mean the interest of some part or parts of the nation” rather than the nation as a whole.
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The more scientific-sounding expression, “economics,” was also expected to convey an affinity with the science that economists had long sought to emulate—physics.

Marshall was not the first economist to use “economics” in a book title. Two long-forgotten authors of lesser known works had preceded him in this respect. The first of these writers, Julian M. Sturtevant (1877), president of Illinois College, seems to have written nothing else about economics and left no mark on the discipline.

The second was Henry Dunning Macleod (1887). None of the leading economists had much respect for Macleod’s work, the style of which was at once inconsistent, idiosyncratic, and bombastic.
⁵⁴
Although Macleod did some interesting work regarding credit and economic development, one somewhat sympathetic writer observed that Macleod “remained so completely outside of the pale of recognized economics.”
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Nonetheless, Macleod left an indelible mark on economics by giving the subject its name.

Marshall, however, seems to have taken the term economics from an earlier article by Macleod rather than from his book. The attraction of this article was that it set out to ground a science of economics in exchange rather than production, while, at the same time, linking the subject to physics. As Macleod explained in his book, “economics is a science which treats of the laws which govern relations of exchangeable quantities.”
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Macleod also stressed economists’ affinity with physics.

Macleod wrote to the eminent physicist James Clerk Maxwell, about the commonality of physics and economics. Maxwell caustically replied, sarcasm dripping from his pen, “We are in the same boat…. Instead of reducing economics to physics, I endeavour to impress upon beginners in physics the principles of book keeping.”
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Macleod was not alone in reaching out to physicists. Already by the 1860s, the new physics of energy was becoming “the primary metaphor for the discussion of the physical world.”
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Economists quickly (mis)appropriated the mathematics of physics to economics. In the words of one critic of this effort, “To put it bluntly, the progenitors of neoclassicism copied down the physical equations and just changed the names attached to the variables.”
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Physicists found the economists’ work sadly lacking, partly because the economists’ model allowed for unlimited growth, while the physical system that they were emulating was restricted by such constraints as the conservation of matter and energy.
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Despite its lack of regard for Macleod as an economist, the discipline followed Marshall in accepting Macleod’s lead in recasting political economy as economics—the science of exchange. In the process, the subject matter gradually narrowed down to a study of how the amalgam of individual behaviors in the marketplace affected what we call the economy.

Rebranding Economics

Marshall’s success in rebranding political economy as economics was not immediate. In the final edition of his
Principles of Economics
, he still used the phrase “political economy”:

Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being.
⁶¹

Eventually, however, Marshall succeeded in transforming the teaching of economics.
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A book on Marshall’s influence in this regard concluded:

Marshall’s outstanding achievement was … his success—gained by tactical skill, eloquence and tenacity—in keeping his colleagues’ eyes on the goal of an economics whose range, precision and predictive reliability would compare with that of the natural sciences.
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This goal has obviously thus far eluded economists.

Marshall was ideally suited to revolutionize economics because he appeared so unrevolutionary. A later Cambridge economist observed, “Marshall certainly was a great moralizer but somehow the moral always came out that whatever is, is very nearly best.”
⁶⁴
Another commentator noted that Marshall rendered the new economics “safe and soothing,”
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especially because he attempted to demonstrate a continuity between the old and the new economics, as suggested by his reference to “Political Economy or Economics.” At the same time, Marshall’s presentation seemed to be able to make the subject more scientific, while answering both criticisms of the subject—that it was too abstract and too remote from people’s real concerns.

Marshall’s fuzziness served him well. His
Principles of Economics
contained no mathematical equations, yet still appeared “rigorous,” a word typically interpreted by economists as a synonym for a mathematical treatment. Even so, Marshall peppered his writings with contradictory remarks, expressing the importance of breaking out of the narrow perspective of economics.

Finally, Marshall stressed the need to keep people’s actual lives in mind, especially in the sense of a Victorian appeal for self-improvement
of the masses. For example, in a fragment published shortly after his death, Marshall observed:

Wealth exists only for the benefit of mankind. It cannot be measured adequately in yards, nor even as equivalent to so many ounces of gold; its true measure lies only in the contribution it makes to human well-being.
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Marshall’s legacy is rife with ironies. Shortly before his death, after dinner on Christmas Day 1923, Marshall said to his wife, “If I had to live my life over again, I should have devoted it to Psychology. Economics has too little to do with ideals.”
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Although Marshall may have been acutely aware of the importance of understanding economics in a broader social context, within a short time the mainstream of the discipline let that part of Marshall’s vision fall from view. Marshall’s own expressions of humanism shielded the Procrustean core of economics from closer inspection—in effect, making the handcuffs seem like a handshake. In this way, Marshall’s work was crucial for making economics into the arid, impersonal subject that it has become.

As a result, economists today no longer feel a need to consider abstractions such as human well-being or other ideals. Occasional lip service to humanitarian sentiments does nothing to undermine the position of Procrustean economics as the sole arbiter of human welfare. Instead, such words serve to reassure readers that accepting conventional economic analysis is almost a philanthropic duty.

In a final irony, during the 1960s and 1970s, Cambridge, the school where Marshall’s efforts were felt most strongly, became a vigorous center of some of the most influential challenges to the arid economics of the twentieth century.

Self-Congratulation of Economic Theorists

Economists are proud of the theoretical advance of their subject. They congratulate themselves that their discipline is more like a true science
than the other social sciences. In the process, they have managed to exorcize the ghost of Karl Marx. They also celebrate their success in proving the just nature of the economy—that we all get exactly what we deserve. They claim to have “proved” that the economy will work efficiently because business will offer products that satisfy the individual preferences of consumers.

The exclusion of labor was central to making the case that the system was just. Wages were treated as part of a voluntary transaction, just like any other. The disutility of the leisure that workers sacrificed to go to work must be lower than the utility of the money they earned. Otherwise, workers would not have been willing to accept the bargain that employers offered.

On closer inspection, most of economists’ claims of success do not hold up so well. Even accepting their unrealistic assumptions, economists still cannot prove that the market system is efficient in the way that most people understand efficiency. Instead, economists define an efficient economy to be one in which nobody can be made better off
without harming anybody else
. This restrictive definition rules out any consideration of redistribution. To take a dollar from the richest person in the world, who would hardly notice the loss, and give it to a starving person would not constitute an improvement by this standard. In contrast, a policy that would make this same rich person better off by $1 billion would represent an increase in efficiency, even if nobody else got anything. Because nobody else was made worse off, what could be the problem?

Lest you think that my example is fanciful, consider the verdict of Harvard economics professor Martin Feldstein, who was Ronald Reagan’s chief economic advisor and for decades controlled the National Bureau of Economic Research, an important economics organization that dates back to the early twentieth century. In an article titled “Reducing Poverty Not Inequality” Feldstein described the proper response to an imagined increase in inequality occurring because a small number of affluent people received $1,000 each at no cost to the rest of society.