In The New Republic, Nobel-prize winning growth theorist Robert Solow has an excellent and interesting review/criticism of Sylvia Nassar’s Grand Pursuit: The Story of Economic Genius. Solow takes Nassar to task for misleading the reader into thinking her book will actually cover the economic ideas of various geniuses – Marshall, Samuelson, etc. – rather than just gossipy details of their lives. Having not read Nassar’s book, I won’t comment on Solow’s reading of it. I do, however, quibble with Solow’s reading of economics before Keynes (B.K.?). Specifically, Solow parrots’ Keynes (somewhat self-serving, in the way a typical lit review is self-serving) version of the history of economic thought, one that has been picked up by pop histories of economics (the Econ 101 textbook version) but one that does not represent the actual state of economics in the interwar period.
Here’s Solow on the rise of Keynes:
There are still learned arguments about “what Keynes really meant.” I want to emphasize two of its themes, because they seem to be central to his place in the story of economic genius, and because they point directly to the reason why Keynesian economics, born in the 1930s, has become dramatically relevant again today. Back then, serious thinking about the general state of the economy was dominated by the notion that prices moved, market by market, to make supply equal to demand. Every act of production, anywhere, generates income and potential demand somewhere, and the price system would sort it all out so that supply and demand for every good would balance. Make no mistake: this is a very deep and valuable idea. Many excellent minds have worked to refine it. Much of the time it gives a good account of economic life. But Keynes saw that there would be occasions, in a complicated industrial capitalist economy, when this account of how things work would break down.
I suppose it all depends on the meaning of “serious thinking,” but to me, Solow’s account is painfully inaccurate. The interwar period, in the United States at least, was the high point of the institutional economics movement in the United States*. Institutional economists did not accept Say’s Law (that supply creates its own demand), nor the idea that prices automatically coordinated supply and demand. Wesley Mitchell’s foundational work on business cycles was premised on repeated, patterned disequilibria in the market system. Later institutionalists, like Gardiner Means**, developed theories of monopoly or oligopoly and so-called “administered prices”, the antithesis of an automatically equilibrating supply-demand system.
Institutionalist economists were important in both academic and policy circles. Roosevelt’s brain trust included institutionalist economists (like Gardiner Means), and these advisors advocated for stimulus-like programs well before Keynes’ 1936 General Theory. They also pushed for other policies, like the National Industrial Recovery Act, which fared poorly, but were based on an understanding of the economic system quite far from the neoclassical world of perfect markets. Alan Brinkley’s The End of Reform does a nice job of changing the shifting economic rationales within the Roosevelt administration, as Keynes’ work influenced policy following the 1937 crash, but mostly by serving as a new rationale for policies that some economists had been pushing for several years.
The systematic forgetting of institutional economics is more than just a battle to lionize Keynes at the expense of his contemporaries. It’s also, as Yonay and Rutherford document, an attempt to define certain kinds of theory and certain kinds of work as (in Solow’s words) “serious thinkings”, while the institutionalists provided merely “measurement without theory” (as Koopman’s famous 1947 critique put it). So, while institutionalists are (at least partly) responsible for such indispensable tools as national income statistics (Kuznets was a student of Mitchell, and his pioneering work for the federal government followed from his work under Mitchell at NBER), their contributions are denigrated as mere data work.
There are two problems for me here. The first is the idea that measurement is a-theoretical. As eminent sociologist Arthur Stinchcombe noted, “measurement is scientific theory in action for a specific purpose.” (1987: 43) Or, as Paul Edwards put it more recently, “Without models, there are no data.” (2010) The debates over how to conceptualize and measure national income cut to the core of how we define growth and the economy, and institutionalists play a key role in those debates (though they did not exactly have the final word).
Second, theories such as administered pricing were important in the 1930s, and structured both policy-making and economic debates. While Keynes ignored or cast aside much of this work*** in order to frame his contributions, the same cannot be said of FDR. If we forget about these past economic theories, we risk misunderstanding our history and abandoning alternative modes of theorizing just as the current economic situation has once again pushed economists to pursue alternatives to the standard models.
* On institutional economics, see Yuval Yonay’s excellent The Struggle over the Soul of Economics:
Institutionalist and Neoclassical Economists in America between the Wars, and the brand new and likely definitive work by Malcolm Rutherford, The Institutionalist Movement in American Economics, 1918-1947: Science and Social Control.
** Co-author with Adolph Berle of one of the most influential texts on corporate governance, The Modern Corporation and Private Property, which offered a strong empirical case that the ownership and control of large corporations had become separated.
*** Though not the measurements – Keynes was intimately involved in creating the British national accounts, and also corresponded with Kuznets about the US data for use in The General Theory.