Table Of ContentCHINA AND THE
GLOBAL ECONOMY
National Champions, Industrial Policy
and the Big Business Revolution
Peter Nolan
A Critical History of Economics
Also by John Mills
America’s Soluble Problems
Europe’s Economic Dilemma
Growth and Welfare: A New Policy for Britain
Managing the World Economy
Monetarism or Prosperity? (with Bryan Gould and Shaun Stewart)
Tackling Britain’s False Economy
A Critical History of
Economics
John Mills
© John Mills 2002
Softcover reprint of the hardcover 1st edition 2002 978-0-333-97130-7
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Library of Congress Cataloging-in-Publication Data
Mills, John, 1938–
A critical history of economics/John Mills.
p. cm.
Includes bibliographical references and index.
1. Economics–History. 2. Economic history. I. Title.
HB75 .M535 2002
330’.01–dc21
2002074994
10 9 8 7 6 5 4 3 2 1
11 10 09 08 07 06 05 04 03 02
Contents
Preface vii
1. Introduction 1
Lost Opportunities 7
2. Economic Theory 13
Economic Growth 14
Full Employment 23
Inflation 26
The Relief of Poverty 32
Sustainability 36
3. The Pre-Industrial World 40
The Ancient World 42
The Medieval Church 47
Mercantilism 51
The Physiocrats 55
4. Classical Economics 59
The Reaction against Mercantilism 60
Adam Smith 63
Say, Malthus and Ricardo 69
Classical Economics in Transition 76
The Classical Economic Tradition 80
5. Dissent 83
Early Socialist Thought 86
Karl Marx 90
Lenin, Imperialism and Revolution 94
Welfare Reform 100
The Contribution of the Left to Economics 106
6. Technical Development 109
The Marginal Revolution 110
Mainstream Neo-Classicism 115
Dissident Voices 121
Developing Techniques 125
7. The Keynesian Revolution 132
Precursors to Keynes 133
John Maynard Keynes 137
Spreading the Word 143
The Keynesian Legacy 147
v
vi Contents
8. Hard Money 152
The Austrian and Chicago Schools 156
Milton Friedman 160
The Monetarist Legacy 166
The Contribution of the Right to Economics 171
9. Economics and the Future 175
Late Twentieth Century Economists 177
Nobel Economics Prize Winners 185
Conclusion 187
Notes 193
Bibliography 214
Index 220
Preface
In 1960, John F. Kennedy ran for president of the USA on a promise of 5%
per annum growth in the American economy.1This was even higher than
the 4% promised during the British general election of 1964 by both the
major parties, but especially by Harold Wilson, whose Labour Party won.
While for both the USA and Britain these targets were ambitious in relation
to previous records they had achieved, they appeared by no means out-
landish. During the 1950s and 1960s, the economies of continental Europe
had managed to achieve cumulative growth rates of about 5% per annum.
Japan was doing even better, with almost 10%.2
The results actually achieved, however, fell short of the promises. During
the 1960s, the cumulative growth rate was nevertheless a reasonably
respectable 4.2% in the USA and a rather more disappointing 2.9% in
Britain. These growth rates, however, looked spectacularly successful com-
pared to what happened over the decades to follow. Between 1973 and
1994, the growth rate in the USA, despite a large increase in the popula-
tion, fell to 2.5%, and in Britain to a miserable 1.7%.3 Nor, over these
decades, was the position in continental Europe significantly better. There,
the 5% and 6% average growth rates of the 1950s and 1960s sank to just
under 2.5% per annum.4Expansion in Japan continued over this period,
albeit at a slower rate than previously, but even there, by the 1990s, growth
had almost disappeared.5
These depressing figures, however, mask a remarkable phenomenon. While
for the vast bulk of the population in all these countries lower growth rates
betokened more sluggish or – in many cases – non-existent increases or even
falling living standards, for the well off across the Western world, no such
thing happened. For them, the pledges made by President Kennedy and Prime
Minister Harold Wilson came close to being fulfilled. Their real incomes – and
wealth – rose exponentially. Across the whole of the Western developed
world, credit creation was used to a much greater extent than previously to
finance the purchase of existing capital assets, as price inflation pushed up
their value, rather than paying for new investment.6As a result of a combina-
tion of disproportionately high increases in salaries, reductions in taxation,
and rises in the value of real assets such as equity shares and property, those
who were already rich became far better off. In the USA, between 1970 and
1998, the average increase in income, before tax, for the most wealthy 5% of
the population rose cumulatively by 3.2% per annum,7 pushing up their
revenues to almost two and a half times their level in 1970, while reductions
in taxation on the most well off probably pushed the total up to nearly 4%
net of tax. In the European Union (EU), much the same occurred.
vii
viii Preface
Inevitably, the increasingly greater proportion of the national income
absorbed by the most wealthy was reflected in much harsher experiences
for everyone else. In the USA, over the same three decades from 1970 to
1998, real wages per hour across the whole of the labour force, far from
increasing, actually fell marginally,8 an outcome which, in 1960, would
have been dismissed as being off the spectrum of probabilities. For those
out of work, the position was worse still, especially during the Reagan and
Bush eras. Between 1980 and 1992 the real incomes of those in the lowest
20% of the US population fell by 6%.9 In Europe, the same trends were
mirrored in a rather different way. There, the standard of living for hourly
paid workers, provided they had jobs, broadly speaking kept pace with the
rise in national Gross Domestic Product, while the huge transfer of real
income to those who were best off came from a major fall in living
standards sustained by those who ceased working. In 1973, almost every-
one in Western Europe who wanted a job had one. By the mid-1990s,
average registered unemployment in the EU was 11%,10though even this
figure hugely underestimated the real problem. International Labour
Organisation figures show that in 1998 the total number of people in the
EU who were not registered as unemployed but who would have been
willing to work if suitable jobs had been available, if counted in, would
have added about another 50% to the unemployment total.11
Nor are these trends ones which operated only within countries. They
also occurred between them and, in particular, between different cat-
egories of countries in varying parts of the world. There were some great
success stories, particularly the Tiger economies of Hong Kong, Singapore,
South Korea and Taiwan. Around much of the Pacific Rim, including
China, and only excluding Japan in the 1990s, huge growth rates were
achieved throughout the period, when the economies of the West were
doing so relatively poorly. At the other end of the spectrum, however,
there were some desperate failures. Much of Africa, especially south of the
Sahara Desert, saw no advance at all in living standards, as whatever rises
in national income were achieved were more than swallowed up by
exceptionally high increases in the size of the population.
Why did all this happen? Why did growth rates falter to the extra-
ordinary extent that they did right across the Western, developed world?
Why did unemployment in many countries become such a major problem?
Why is there still an obsession with inflation, even though price rises are
currently so low? Why has the distribution of both income and wealth
across the world become so much more uneven? This book, like others I
have written, sets out to explain how and why these developments were
allowed to occur. It also suggests what should have been done instead in
the past, and what needs to be done in the future, to stop the same trends
continuing to materialise. My previous books have concentrated on economic
history, using it to provide a context in which to explain why events and
Preface ix
trends developed in the way they did. This book tackles the same agenda,
but from a different angle. This time the concentration is not so much on
events, but on ideas. Its objective is not so much to chronicle what actu-
ally happened, but to describe and to analyse, within the changing and
varying framework of beliefs and concepts in which judgements were
formed, what was happening to ideas about economics. How did informed
opinion view what was going on? How did the participants come to
believe that particular policies ought to be pursued? Why did they think
that these policies, rather than others, were desirable, important and likely
to be effective?
The chapters which follow therefore consist of a history of economic
ideas, but within a critical context. Every attempt is made to express as
fairly as possible the views set out by all those whose thinking has had a
major impact on the development of economics as a discipline, but to do
so in a way which does not just assess the impact each of these thinkers
and writers achieved. There is also an evaluation as to whether, in the long
sweep of history, what each of them – and especially the more major and
influential figures – had to say has turned out to be right or wrong, judged
by the particular criteria I believe should be used. These criteria are clearly
central to the whole of the thesis which follows, and therefore need to be
explained.
The starting point is that in very important respects, in my view, eco-
nomics, as a discipline, is not in good shape. While having, inevitably,
much to say about detailed matters, this book argues that they ought not
to be its major focus. On the contrary, the principal role of economics
ought to be to provide answers to the central questions faced by policy-
makers on growth, employment and inflation, the alleviation of poverty,
and making sure that there is a sustainable future. How do you achieve
whatever rate of economic growth is decided to be desirable? How is full
employment to be maintained? How, if the first two objectives are attained,
is inflation to be held within acceptable bounds? How is the incidence of
poverty and destitution to be kept at bay? How can we arrange matters so
that the world economy has a viable future? The plain fact is that economics,
as presently studied and taught, does not answer these questions, and
never has done. Though the issues thus raised have been of great import-
ance to most of those who have heavily influenced the way in which eco-
nomics has evolved, no generally accepted theory embracing how to
achieve all these goals together has been developed. Because – as this book
will also explain – I believe that there should be ways to achieve all of them
together, the criteria for judging the way in which economic thinking has
developed fall into place. The test to be applied is the extent to which the
contributions made by all those who have played a major part in the way
in which economics has developed has brought us closer to finding
answers to the core questions listed above.
