No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seventeen: A Short History of Macroeconomics 424 next part is going to suffer. Think of a garden hose. If the hose springs a major leak or gets kinked, the output on the nozzle is going to be significantly curtailed. It would be up to the classical economists to more formally develop a theory of how the economy would break down. Adam Smith (our great economist from chapter 2) published his magnum opus The Wealth of Nations in the very early morning of the industrial revolution. What would be called “capitalism” had been growing since at least the eleventh century, in what has inappropriately been called the “dark ages. ” 2 Yet the upward economic progress would prove to be non-linear, with a decided uptake in the eighteenth century. Professor Boudreaux has an excellent summary here, watch this video: The Hockey Stick of Human Prosperity For Smith, we must recall that he was fighting the economic doctrine of mercantilism, which argued that the source of wealth for a nation was its gold stock, and therefore policies needed to support increasing that stock. Smith was very much concerned with economic growth, as growth was what enabled an increase of living standards that historically had hovered around subsistence wages . In rebutting mercantilism, Smith and the classical economists wanted to deny that money had a role in economic growth at all. In their long-run focus, money was just a veil and didn’t lead to additional production. Goods ultimately traded for goods, and money was just the essential lubricant to make that happen. Instead, the classical economists came up with real reasons for economic growth, such as labor and capital. It was obvious that economic growth required more production and more supply, but what caused supply to spring forth? For Smith and the classical economists, the source of growth was to abstain from current consumption—to save—and use those savings to invest. So saving was a very good thing for the economy. Yet other contemporary economists were not so sure. Economists such as Sismondi and especially T.R. Malthus thought that savings might outpace investment opportunities. If all savings were not invested, there might not be enough purchasing power to purchase all output, and we might find ourselves in a deep depression. And there were many cases of general slumps that had to be explained. GENERAL GLUT OR DISPROPORTIONALITY? Economists studying the question of business depressions often fell into one of two theoretical camps. The first could be called the “general glut” or “under-consumption” Subsistence wages: the lowest wage upon which a worker and his or her family can survive