Monday, October 22, 2007

An Excellent Post by David Warsh on Economic Principals

David Warsh, who writes the Blog, Economic Principals, has featured on Lost Legacy, usually in the critical section, in mild disputes over Adam Smith. This difference between us is not serious nor personal (and having met David Warsh and heard him lecture, he personifies the American gentleman) and if you read what he writes beyond Adam Smith there is always a great deal of interesting good sense.

This is seen in his typically excellent article, An Enormous Pearl, a Little Giant, a Vanishing Hand,(here).

Ignore the ‘vanishing hand’ allusion for the moment and concentrate on his history of the life of Henry Poor (1812-1905) and its relevance to the study of the emerging forms of corporate capitalism, in Poor’s case via the Union Pacific Railroad and others.

Poor’s role as a careful business journalist and student of American business is linked to that of his great-grandson, Alfred Chandler Jr. (1918-2007), whose academic work (MIT, John Hopkins and Harvard) mapped the emergence of the ‘the large multidivisional corporation, not in one industry, but in many’ in Strategy and Structure: Chapters in the History of the Industrial Enterprise (1962) and The Visible Hand: The Managerial Revolution in American Business ( 1977), and “Scale and Scope: The Dynamics of Industrial Enterprise -- A History 1880s-1940s (1990), "a comparative history of managerial capitalism in the United States, the United Kingdom and Germany”.

Chandler continued working from what Warsh calls his ‘intellectual curiosity’ on the evident new trends ‘towards renewed entrepreneurial activity and the disruption of long-established industries only accelerated in the '90s, as Chandler labored on two last works, lively histories of the chemical and electronics industries in the twentieth century. By the time he finished, outsourcing, downsizing, upspeeding, leasing and other such practices had become the norm even in these venerable businesses’.

David Warsh’s account takes in a short history of business oriented magazines, beginning with Forbes, founded by B.C. Forbes (1917), of which James W. Michaels (1921-2007) was editor for 40 years, followed by Barrons in 1919, the Kiplinger Washington Letter in 1923, Business Week in 1929, and Fortune in 1930.

Of what relevance or interest are these matters to economists and social scientists generally? A great deal as it happens, for these sources of information are the contemporary biographies of modern industrial history and a 20th-century version of what Adam Smith was doing in the 18th century.

Economics without ‘looking outside your window’ at what is happening in business organization is like studying the mathematics of ‘72 concentric spheres’ and not looking at the sky at night. David Warsh partly agrees in that economists should do both: ‘Ultimately, though, neither history nor journalism is a satisfactory substitute for penetrating economics.’ I would concur to the extent that the penetrating economics bears a close resemblance to the reality of the world we live in.

For example, modern economics was always dominated by David Ricardo’s ‘law of diminishing returns’, a conclusion drawn from thinking about agricultural imperatives, which overshadowed Adam Smith’s emphasis on the increasing returns in the ‘trifling’ example of pin making, and misdirected economic theory for about 150 years (Alan Young’s 1929 article notwithstanding). That a serious contender for a Nobel Prize is Paul Romer for re-discovering, or rather integrating into the mathematical dreamland of neoclassical economics, increasing returns outlined in Wealth Of Nations in 1776, is a testimony to how far economics has metamorphosed into a subject with limited contact with reality.

Incidentally, Bryan Caplan and Arnold Kling’s Blog (here) contains recent material tracking the increase in the output of pins worldwide, post 1800, to two plants producing all of Britain’s pins by the 1960s, in place of the hundreds in 1800, to a couple of plants in the US, where all ‘18’ operations of Smith’s time are undertaken by batteries of machines, supervised by one or two human operators.

David Wash’s Economic Principals (here)
performs a most useful role for keeping in touch with both the history of economics and the history of business organization. Which you choose to focus on is a matter of your predilection for theory or reality. Ignoring one at the expense of the other is not your best choice.

From ‘invisible hand’ to ‘visible hand’ to ‘vanishing hand’ in one post is an interesting progression. If it leads ultimately to studying markets, as Adam Smith did in Books I and II or Wealth Of Nations) and ignoring the monstrous edifice erected on a literary metaphor dropped into a sentence in Book IV, I shall be pleased.

Understanding how markets work is the first necessary task of economics students; that their tutors go on to mystify a perfectly understandable process with allusions to disembodied body parts, miraculous outcomes, and divine guidance, is regrettable. Pagan superstitions in science have no place.


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