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Knowledge and the Wealth of Nations: A Story of Economic Discovery
A stimulating and inviting tour of modern economics centered on the story of one of its most important breakthroughs.
In 1980, the twenty-four-year-old graduate student Paul Romer tackled one of the oldest puzzles in economics. Eight years later he solved it. This book tells the story of what has come to be called the new growth the paradox identified by Adam Smith more than two hundred years earlier, its disappearance and occasional resurfacing in the nineteenth century, the development of new technical tools in the twentieth century, and finally the student who could see further than his teachers.
Fascinating in its own right, new growth theory helps to explain dominant first-mover firms like IBM or Microsoft, underscores the value of intellectual property, and provides essential advice to those concerned with the expansion of the economy. Like James Gleick's Chaos or Brian Greene's The Elegant Universe , this revealing book takes us to the frontlines of scientific research; not since Robert Heilbroner's classic work The Worldly Philosophers have we had as attractive a glimpse of the essential science of economics.
In 1980, the twenty-four-year-old graduate student Paul Romer tackled one of the oldest puzzles in economics. Eight years later he solved it. This book tells the story of what has come to be called the new growth the paradox identified by Adam Smith more than two hundred years earlier, its disappearance and occasional resurfacing in the nineteenth century, the development of new technical tools in the twentieth century, and finally the student who could see further than his teachers.
Fascinating in its own right, new growth theory helps to explain dominant first-mover firms like IBM or Microsoft, underscores the value of intellectual property, and provides essential advice to those concerned with the expansion of the economy. Like James Gleick's Chaos or Brian Greene's The Elegant Universe , this revealing book takes us to the frontlines of scientific research; not since Robert Heilbroner's classic work The Worldly Philosophers have we had as attractive a glimpse of the essential science of economics.
410 pages, Hardcover
First published January 1, 2006
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April 9, 2018
الكتاب رقم 77 لعام 2018 ورفيق 8 رحلات بالقطار بين القاهرة و المنصورة.
يتحدث الكاتب عن تطور الأفكار الأساسية في علم الاقتصاد وكيف أسهمت العقول التي انتجت تلك المعرفة في الواقع وتفاعلاتها فيما بينها وبينها وبين واقع اقتصاد الشعول.
رحلة ممتعة تبدأ من البداية مع عمدة الاقتصاد ادم سميث حتي علم الاقتصاد الاكاديمي الحديث والنيبوليبرالية الاقتصادية وتبعاتها الوخيمة علي حياتنا.
December 14, 2018
Paul Romer shared half of the 2018 Economics Nobel for his work on endogenous growth theory, so I figured I'd pick up this 2006 look at his work to learn a bit more about what that was and why it matters (his co-Nobelist William Nordhaus' work on environmental economics is also given an all-too-brief mention). Popular works dedicated to technical theoretical economics of that sort aren't exactly common, so I was pleasantly surprised by what a good job David Warsh did of clearly explaining Romer's role in showing how Adam Smith's metaphor of the Pin Factory in The Wealth of Nations contained a fundamental tension between forces that increase concentration of economic activity, like increasing returns and falling costs, and forces that decrease it, like knowledge spillovers and competition, and how an improvement in mathematical modeling of traditional economic narratives both resolved that conceptual tension as well as advanced economics as a field, giving us a better explanation for how economic growth happens, especially in a "knowledge economy". There's some inside baseball in terms of how the economics profession is structured, so there are sections that can be skimmed if you're not interested in the conference circuit, the politics of academia, the structure of professional economics organizations, or the market for textbooks, but if you have an interest in the history of economic thought at the high level then this is a great explainer, and it provides a lot of excellent secondary reading if you then want to go back and read the debates firsthand themselves. It's always good to be reminded that discovery is an ongoing project, on important questions, between real people, still happening right now.
Paul Krugman, whose work on trade and economic geography comes up frequently in this book, once wrote a really interesting and directly relevant essay in 1996 that somehow wasn't cited here. Titled "Ricardo's Difficult Idea", its main subject is the idea of comparative advantage, and why such a simple economic concept is so hard for most people to internalize and then apply. He grounds that difficulty in the observation that there are two very different ways of thinking about the world: literary/narrative and mathematical/model-based, which don't always agree (this is perhaps for deep-seated cognitive-evolutionary reasons). When most people, even many professional economists, think about economic issues the default is to view issues in terms of simple zero-sum stories. For example, if Chinese companies are outcompeting American companies, then by imposing trade tariffs on China, American companies will be stronger, and hence America as a whole will be richer. Simple! This story has sounded very plausible for essentially all of human history, but explaining exactly why tariffs do not have the intended effects, and exactly how all sides become poorer from trade wars, requires an essentially mathematical understanding of economic logic that just does not come naturally to most people. Mathematical models by necessity make many simplifications of reality, but you can show how tariff revenue will almost certainly be smaller than costs to consumers in a simple diagram with just a few lines on paper, whereas forgoing the math means reverting to lengthy and complex expositions of concepts like deadweight loss, import/export price ratios, and currency exchange rates that sound plainly wrong to the uninitiated: what do you mean that making foreign products more expensive won't make us any richer?
Adam Smith faced precisely this difficulty in The Wealth of Nations, which is why it's so long and tedious to read today. Back then, the logic of specialization and division of labor had never really been laid out before, so Smith had to answer all the what-ifs and how-abouts at great length, just to be able to say that a pin factory can make more pins if each of the workers has specific steps of the pin-making process to perform. We can sum up in just a few neat equations what took him chapters to laboriously explicate, and another advantage of math is that it's easier to see when an idea has unexamined implications or hidden assumptions that lead to further problems. In the case of the pins, what sounds like a neat story about how a pin factory sees increasing returns from specialization, thereby creating economic growth, becomes more complicated when you consider multiple pin factories. Here the infamous invisible hand, acting as it does to increase competition and therefore decrease returns, should encourage competing pin factories to jump into the market until the total economic profit in the pin industry nears zero (or else you could increase economic growth forever by building endless pin factories, video game-style). But any theory of increasing returns should logically grant the first pin factory an insurmountable advantage until they come to monopolize the pin market, so how is it that most markets we see, while individual companies might come and go, are not in fact dominated by monopolies? One force rewards the most efficient pin maker, the other rewards their competitors, and it took until the advent of mathematical modeling for economists to get a real handle on how specific markets could work in any sort of equilibrium even as the total economy grew.
Ironically that's where Warsh's storytelling comes in so handy, as the progression of economics from a narrative discipline to a mathematical discipline is itself better-presented as a narrative. I'm sure there are people who would prefer that concepts like the effect that the size of the market has on specialization (why big cities have so many more and different high-skill and high-paying jobs than small towns) be directly conveyed to the reader in terms of the equations alone, but Warsh devotes a chapter to a single presentation in 1985, Robert Lucas' "On the Mechanics of Economic Development", with a quote showing what that would look like:
"Suppose there are N workers in total, with skill levels h ranging from 0 to infinity. Let there be N(h) workers with skill level h, so that N = N(h)dh. Suppose a worker with skill h devotes a fraction u(h) of his non-leisure time to current production, and the remaining 1–u(h) to human capital accumulation. Then the effective workforce in production - the analogue to N(t) in equation (2) - is the sum Ne = the indefinite integral of u(h)N(h)hdh of the skill-weighted manhours devoted to current production. Thus if output is a function of total capital K and effective labor Ne is F(K,Ne), the hourly wage of a worker at skill h is Fn(K,Ne)h and his total earnings are Fn(K,Ne)hu(h)."
It's perfectly readable if you have a math or econ background, but since economics is about human actions, the human context is important too. So while you do get some discussion of non-convexities and hyperplanes and other mathematical objects of interest, Warsh presents the slow accretion of various ideas into endogenous growth theory via the stories of the economists themselves trying to fit all the pieces of the puzzle together. It might seem faintly condescending to praise economists for being able to turn statements like "knowledge is important for economic growth", "when one person has an idea it doesn't take away from anyone else", or "you can sell more things when there are more people" into equations, like so many toddlers stacking brightly colored blocks into towers, but again: economics is full of deeply counterintuitive ideas, and things that make sense at one level often need to be refined or modified at another level. Building a model that captures enough about the real world to be insightful, yet simple enough to be tractable, is really hard, especially when you're also trying to explain why lasting growth occurs in some places but not others, and the reduction of such a broad concept as "innovation" into a system of equations necessarily involves a short-term loss of subtlety in exchange for longer-term power and insight. It's one thing to theorize that cities grow based on industrial concentration, intense competition, or economic diversity, it's another to use real data and formal models as Ed Glaeser did, to see which theories actually hold up.
This is where Paul Romer's two papers come in: 1986's "Increasing Returns and Long Run Growth", and 1990's "Endogenous Technological Change". "Increasing Returns" integrates knowledge into a model of economic growth, focusing on the positive externalities of new ideas, the increasing returns to the production of goods, and the decreasing returns to scientific research. Whereas previous models had lacked a way to account for creativity, implicitly assuming that innovation happens "outside" the economy, Romer was able to show how firms innovate, how those innovations can leave a market in equilibrium while society overall experiences growth, and how strategic interventions by the government can move markets from low equilibria to higher ones through the strategic strategic diffusion of knowledge (for example, via anti-trust actions against monopolies, public funding for research, or liberalizing adjustments to copyright laws). "Endogenous Technological Change" relates knowledge to growth slightly differently, crediting knowledge accumulation for capital accumulation and productivity growth, formalizing how market forces encourage technological change (though with the important caveat that much "pure research" is insulated from direct market forces, as at universities), and better defining the non-rivalrous and incompletely excludable nature of how innovations can be shared at zero marginal cost. These are important clarifications, because as societies accumulate more knowledge and human capital, forces which apply less or differently to traditional physical capital, like network effects, public goods, indivisibilities, and property rights, become much more important. Public policy becomes vital to ensuring that the simple ingredients of capital, labor, human capital, and the level of technological progress are combined in a way that allows for competitive markets and stable growth.
A vivid example of this comes from Romer's own career, when he provided expert testimony during the infamous Microsoft monopoly trials of the 1990s. The history of the internet is a case study in knowledge spillovers, increasing returns, and literal network effects, and Microsoft's attempts to maintain its dominance in crucial junctures of the industry, modeled as "monopolistic competition", demonstrate the incentives produced by particular attitudes towards intellectual property rights in a world of free reproduction of software. These philosophical differences between the proprietary model and open source model were famously pondered over in essays like "The Cathedral and The Bazaar" and "In the Beginning Was the Command Line", but from a practical perspective, the court system was attempting to decide whether a judicious intervention into the market would diffuse this non-rival knowledge and hence improve economic growth, or whether Microsoft's strategy of using its trade secrets and large scale to dominate the market were all in the game and hence just another example of a successful firm. The decision to break up the company was never implemented, but amusingly enough, in 2005 Microsoft reorganized itself into functional divisions that closely resembled the antitrust experts and the judge's recommendation of how to break up the company AT&T-style.
Much of the book is devoted to Paul Romer's life story, which is interesting if you pay attention to the econ blogosphere or have some familiarity with the field since many prominent names appear at key junctures. His work on the pricing of so-called "club goods" like ski-lift tickets or Disneyland passes, where he accidentally retread the same ground as James Buchanan, is a funny demonstration of how difficult it can be for knowledge to stick within a profession. His attempts to break into the textbook market, and his founding of a company specializing in online test administration, show how rare it is for academic economists to have practical business experience, how that affects their research, and how there might still be room for innovation in the ancient world of teaching. William Nordhaus, who shared the other half of the 2018 Economics Nobel, gets a brief discussion of his 1993 paper "Do Real Income and Real Wage Measures Capture Reality? The History of Lighting Suggests Not", which is a fascinating attempt to track the true price of light throughout human history. Based on his estimates, the shifts in energy sources from wood to coal to oil and so on from prehistory to the present has brought the price of light, measured in the number of labor-hours required to produce an hour of light, from 40 man-hours per lumen-hour in 2000 BC to .0001 man-hours per lumen-hour in 2000 AD, which represents a hundreds of thousands-fold drop in costs. This works as both a great critique of attempts to measure price inflation and a practical, objective measure of technological progress at the same time. I wish there had been more discussion of Nordhaus' research in environmental economics, but a single book can only cover so many things, and as the book itself shows, a loss of specialization would mean a loss in total consumer satisfaction. Warsh produced an excellent account of how knowledge is actually accumulated.
Paul Krugman, whose work on trade and economic geography comes up frequently in this book, once wrote a really interesting and directly relevant essay in 1996 that somehow wasn't cited here. Titled "Ricardo's Difficult Idea", its main subject is the idea of comparative advantage, and why such a simple economic concept is so hard for most people to internalize and then apply. He grounds that difficulty in the observation that there are two very different ways of thinking about the world: literary/narrative and mathematical/model-based, which don't always agree (this is perhaps for deep-seated cognitive-evolutionary reasons). When most people, even many professional economists, think about economic issues the default is to view issues in terms of simple zero-sum stories. For example, if Chinese companies are outcompeting American companies, then by imposing trade tariffs on China, American companies will be stronger, and hence America as a whole will be richer. Simple! This story has sounded very plausible for essentially all of human history, but explaining exactly why tariffs do not have the intended effects, and exactly how all sides become poorer from trade wars, requires an essentially mathematical understanding of economic logic that just does not come naturally to most people. Mathematical models by necessity make many simplifications of reality, but you can show how tariff revenue will almost certainly be smaller than costs to consumers in a simple diagram with just a few lines on paper, whereas forgoing the math means reverting to lengthy and complex expositions of concepts like deadweight loss, import/export price ratios, and currency exchange rates that sound plainly wrong to the uninitiated: what do you mean that making foreign products more expensive won't make us any richer?
Adam Smith faced precisely this difficulty in The Wealth of Nations, which is why it's so long and tedious to read today. Back then, the logic of specialization and division of labor had never really been laid out before, so Smith had to answer all the what-ifs and how-abouts at great length, just to be able to say that a pin factory can make more pins if each of the workers has specific steps of the pin-making process to perform. We can sum up in just a few neat equations what took him chapters to laboriously explicate, and another advantage of math is that it's easier to see when an idea has unexamined implications or hidden assumptions that lead to further problems. In the case of the pins, what sounds like a neat story about how a pin factory sees increasing returns from specialization, thereby creating economic growth, becomes more complicated when you consider multiple pin factories. Here the infamous invisible hand, acting as it does to increase competition and therefore decrease returns, should encourage competing pin factories to jump into the market until the total economic profit in the pin industry nears zero (or else you could increase economic growth forever by building endless pin factories, video game-style). But any theory of increasing returns should logically grant the first pin factory an insurmountable advantage until they come to monopolize the pin market, so how is it that most markets we see, while individual companies might come and go, are not in fact dominated by monopolies? One force rewards the most efficient pin maker, the other rewards their competitors, and it took until the advent of mathematical modeling for economists to get a real handle on how specific markets could work in any sort of equilibrium even as the total economy grew.
Ironically that's where Warsh's storytelling comes in so handy, as the progression of economics from a narrative discipline to a mathematical discipline is itself better-presented as a narrative. I'm sure there are people who would prefer that concepts like the effect that the size of the market has on specialization (why big cities have so many more and different high-skill and high-paying jobs than small towns) be directly conveyed to the reader in terms of the equations alone, but Warsh devotes a chapter to a single presentation in 1985, Robert Lucas' "On the Mechanics of Economic Development", with a quote showing what that would look like:
"Suppose there are N workers in total, with skill levels h ranging from 0 to infinity. Let there be N(h) workers with skill level h, so that N = N(h)dh. Suppose a worker with skill h devotes a fraction u(h) of his non-leisure time to current production, and the remaining 1–u(h) to human capital accumulation. Then the effective workforce in production - the analogue to N(t) in equation (2) - is the sum Ne = the indefinite integral of u(h)N(h)hdh of the skill-weighted manhours devoted to current production. Thus if output is a function of total capital K and effective labor Ne is F(K,Ne), the hourly wage of a worker at skill h is Fn(K,Ne)h and his total earnings are Fn(K,Ne)hu(h)."
It's perfectly readable if you have a math or econ background, but since economics is about human actions, the human context is important too. So while you do get some discussion of non-convexities and hyperplanes and other mathematical objects of interest, Warsh presents the slow accretion of various ideas into endogenous growth theory via the stories of the economists themselves trying to fit all the pieces of the puzzle together. It might seem faintly condescending to praise economists for being able to turn statements like "knowledge is important for economic growth", "when one person has an idea it doesn't take away from anyone else", or "you can sell more things when there are more people" into equations, like so many toddlers stacking brightly colored blocks into towers, but again: economics is full of deeply counterintuitive ideas, and things that make sense at one level often need to be refined or modified at another level. Building a model that captures enough about the real world to be insightful, yet simple enough to be tractable, is really hard, especially when you're also trying to explain why lasting growth occurs in some places but not others, and the reduction of such a broad concept as "innovation" into a system of equations necessarily involves a short-term loss of subtlety in exchange for longer-term power and insight. It's one thing to theorize that cities grow based on industrial concentration, intense competition, or economic diversity, it's another to use real data and formal models as Ed Glaeser did, to see which theories actually hold up.
This is where Paul Romer's two papers come in: 1986's "Increasing Returns and Long Run Growth", and 1990's "Endogenous Technological Change". "Increasing Returns" integrates knowledge into a model of economic growth, focusing on the positive externalities of new ideas, the increasing returns to the production of goods, and the decreasing returns to scientific research. Whereas previous models had lacked a way to account for creativity, implicitly assuming that innovation happens "outside" the economy, Romer was able to show how firms innovate, how those innovations can leave a market in equilibrium while society overall experiences growth, and how strategic interventions by the government can move markets from low equilibria to higher ones through the strategic strategic diffusion of knowledge (for example, via anti-trust actions against monopolies, public funding for research, or liberalizing adjustments to copyright laws). "Endogenous Technological Change" relates knowledge to growth slightly differently, crediting knowledge accumulation for capital accumulation and productivity growth, formalizing how market forces encourage technological change (though with the important caveat that much "pure research" is insulated from direct market forces, as at universities), and better defining the non-rivalrous and incompletely excludable nature of how innovations can be shared at zero marginal cost. These are important clarifications, because as societies accumulate more knowledge and human capital, forces which apply less or differently to traditional physical capital, like network effects, public goods, indivisibilities, and property rights, become much more important. Public policy becomes vital to ensuring that the simple ingredients of capital, labor, human capital, and the level of technological progress are combined in a way that allows for competitive markets and stable growth.
A vivid example of this comes from Romer's own career, when he provided expert testimony during the infamous Microsoft monopoly trials of the 1990s. The history of the internet is a case study in knowledge spillovers, increasing returns, and literal network effects, and Microsoft's attempts to maintain its dominance in crucial junctures of the industry, modeled as "monopolistic competition", demonstrate the incentives produced by particular attitudes towards intellectual property rights in a world of free reproduction of software. These philosophical differences between the proprietary model and open source model were famously pondered over in essays like "The Cathedral and The Bazaar" and "In the Beginning Was the Command Line", but from a practical perspective, the court system was attempting to decide whether a judicious intervention into the market would diffuse this non-rival knowledge and hence improve economic growth, or whether Microsoft's strategy of using its trade secrets and large scale to dominate the market were all in the game and hence just another example of a successful firm. The decision to break up the company was never implemented, but amusingly enough, in 2005 Microsoft reorganized itself into functional divisions that closely resembled the antitrust experts and the judge's recommendation of how to break up the company AT&T-style.
Much of the book is devoted to Paul Romer's life story, which is interesting if you pay attention to the econ blogosphere or have some familiarity with the field since many prominent names appear at key junctures. His work on the pricing of so-called "club goods" like ski-lift tickets or Disneyland passes, where he accidentally retread the same ground as James Buchanan, is a funny demonstration of how difficult it can be for knowledge to stick within a profession. His attempts to break into the textbook market, and his founding of a company specializing in online test administration, show how rare it is for academic economists to have practical business experience, how that affects their research, and how there might still be room for innovation in the ancient world of teaching. William Nordhaus, who shared the other half of the 2018 Economics Nobel, gets a brief discussion of his 1993 paper "Do Real Income and Real Wage Measures Capture Reality? The History of Lighting Suggests Not", which is a fascinating attempt to track the true price of light throughout human history. Based on his estimates, the shifts in energy sources from wood to coal to oil and so on from prehistory to the present has brought the price of light, measured in the number of labor-hours required to produce an hour of light, from 40 man-hours per lumen-hour in 2000 BC to .0001 man-hours per lumen-hour in 2000 AD, which represents a hundreds of thousands-fold drop in costs. This works as both a great critique of attempts to measure price inflation and a practical, objective measure of technological progress at the same time. I wish there had been more discussion of Nordhaus' research in environmental economics, but a single book can only cover so many things, and as the book itself shows, a loss of specialization would mean a loss in total consumer satisfaction. Warsh produced an excellent account of how knowledge is actually accumulated.
November 2, 2018
David Warsh's "Knowledge and the wealth of nations" can best be described as a non-technical introduction to the history of economic thinking about growth, with an emphasis on the "new growth theory" that was initiated by Paul Romer, one the 2018 Nobel Laureates in Economics.
In order to avoid wasting your time with this review, I will be very clear that, even if the book is non-technical, I doubt it can be read fruitfully if you do not already have a basic understanding of the subject; my assessment is that intermediate courses in micro- and macro-economics are the absolute minimum.
The book succeeds in covering an extraordinary range of economic thinkers in a bit less than 400 pages. It starts with the "founding father" of economics, Adam Smith, and a little-noticed inconsistency in his thinking: one the one hand, the emphasis on the benefits of competition, and, on the other hand, the observation that the size of the market is the only limit on the division of labour (the famous example of the pin factory in the opening chapter) - which implies the existence of economies of scale, which are not compatible with competitive markets. Warsh then goes on with Ricardo and Malthus, and the centrality of "diminishing returns" (mainly due to the constraints imposed by natural resources) in their "dismal" thinking.
The main theme is how, until economists succeeded in integrating increasing returns in models of growth and trade in the 1970/80s, increasing returns led a hidden life in economic thinking, occasionally popping up but quickly relegated to footnotes when it turned out that the economists' modeling toolbox couldn't cope with them. And, then in the 1950s, Robert Solow developed his seminal work on economic growth - assuming decreasing returns and exogenous technological change. It was Romer's key contribution to solve the conundrum created by Solow's observation that most economic growth was caused by technological progress - which was left unexplained in his growth model. Romer "endogenized" technological progress as a "club good": a good that is non-rival in its consumption (my consumption of knowledge doesn't decrease yours) but excludable (with patents, I can prevent you from using freely the knowledge I created). As such, technological progress takes an intermediate place between purely private goods (such as bread, whose consumption is rival and excludable) and purely public goods (such as defense, whose consumption is neither rival nor excludable).
Of course, professionals economists didn't need to read Warsh's book to know this. So why do I think this book is such a great read, and that especially aspiring research economists should read it?
The best way to clarify this is to refer to what I see as the three main sources through which students learn about economic thinking.
First, most of what we learn about the "old" thinking (say, before Samuelson wrote his "Foundations of economic analysis" in the 1930-40s) comes from the courses on the "history of economic though" (I have heard that this course is increasingly disappearing from the curriculum, and I think this is a fundamental mistake). In my case, the handbook we used was Mark Blaug's imposing "Economic theory in retrospect". Of course, you can find everything Warsh wrote about Smith, Ricardo, Malthus, Marx, Marshall, Chamberlin etc in Blaug's book as well. But, precisely because Blaug is so comprehensive, one can easily get lost in the technical details. Warsh does not have such ambition: his book is about how economists think about increasing returns and technical progress, and so he limits himself to those discussions that are relevant for this topic. The result is that the differences between the great classical authors become much more clearer than they are in Blaug's magnum opus. It's actually quite enlightening to see that the "free market" economists such as Ricardo and Mathus were fundamentally pessimistic about the prospects for long term growth (precisely because of diminishing return), while Marx was much more optimistic, as he saw the potential for technological progress to improve lives.
Other economists may differ, but I also think that the personal anecdotes are not just entertaining, but also shed a new light on some developments. For instance, it is often said that the economists's predilection for mathematical modeling results from "physics envy" - but it was actually a professor of physics who, in the 1930s, argued that the natural sciences should second their scholars to economics departments in order to improve the scientific rigor of economics.
Thus, Warsh's book would already be a really meritorious short introduction to the history of economic thought without what comes next. And it's there that it becomes really interesting.
Indeed, the second key source of learning for budding economists are of course the textbooks.
Now, when I look back at the graduate textbook in micro-economics that was the standard until the mid-1990s (Hal Varian's "Microeconomic analysis"), it's striking how "clean" the analysis is. Everything is build logically from basic "axioms", and one almost gets the feeling that "the knowledge" always existed and somehow fell out of the sky (one also often wonders what the point of this all is, but that's a different issue). Of course, reality was rather different. When one starts reading the history behind the concept in the textbook, one immediately sees the analogy with Star Wars: most of the latter plot developments seem to make perfect sense when one sees the final product, but they were actually not envisaged at all when the first episode came out. And so, in Varian's textbook, the application of the principle of Le Chatelier to economics is discussed as if it has almost always existed. In reality, one learns in Warsh that it was almost per accident that Samuelson understood during a lecture on thermodynamics that the principle could also be applied to economics (well, ok, in the case of Samuelson, the "accident" was of course "genius"). So what Warsh confronts us with is that the beautiful grown-up textbook once was an adolescent with growing pains and internal conflicts.
Some may object that this mainly reflects that the foundations of micro-economics are not very controversial, and that macro-economic handbooks do reflect conflicts between different schools of thought. This is of course true, but even there the conflict remains highly stylized. To be honest, I don't know if my technical understanding of macro-economics has improved by learning about Milton Friedman's discomfort with the presence of the Cowles Foundation in his own building. But it certainly helped understanding that the actual growth of knowledge is not without its doses of human drama.
Which bring us to the final point: at some stage, the main source of new knowledge for aspiring economists are no longer the textbooks but the journal papers, the seminars and the conferences. And, of course, gradually, one's own work. Everybody who has gone through the process can testify how messy it is. A lot of papers appear to be discussing things with limited or purely theoretical relevance, it is really difficult to separate the wheat from chaff in the endless stream of information, most research directions (including one own's) appear to be dead-ends...
This is precisely why the discussion of the gestation of the work of Romer (and, even though it receives much less attention, of Krugman's) is so enlightening (and hopefully a source of inspiration for young scholars). The book makes you feel their pain and anguishes. You witness how, for years, they feel they are on the brink on developing something really important, but know there's still something not quite right in their analysis. It shows how even the greatest economists can become the victims of one of our deepest fears (that what we are doing has actually already been done by someone else 40 years ago, without us knowing), and how even Nobel-prize winning stuff can be at least in part the result of serendipity. It follows the superstars during lonely years where nothing seems to work, where most observers think they have been "one-hit wonders"...
So, another way to summarize the book is to say that Warsh has shown how, behind the mathematics, advanced economics is still a very human endeavor. It is his merit that he has done so without trivializing the subject.
In order to avoid wasting your time with this review, I will be very clear that, even if the book is non-technical, I doubt it can be read fruitfully if you do not already have a basic understanding of the subject; my assessment is that intermediate courses in micro- and macro-economics are the absolute minimum.
The book succeeds in covering an extraordinary range of economic thinkers in a bit less than 400 pages. It starts with the "founding father" of economics, Adam Smith, and a little-noticed inconsistency in his thinking: one the one hand, the emphasis on the benefits of competition, and, on the other hand, the observation that the size of the market is the only limit on the division of labour (the famous example of the pin factory in the opening chapter) - which implies the existence of economies of scale, which are not compatible with competitive markets. Warsh then goes on with Ricardo and Malthus, and the centrality of "diminishing returns" (mainly due to the constraints imposed by natural resources) in their "dismal" thinking.
The main theme is how, until economists succeeded in integrating increasing returns in models of growth and trade in the 1970/80s, increasing returns led a hidden life in economic thinking, occasionally popping up but quickly relegated to footnotes when it turned out that the economists' modeling toolbox couldn't cope with them. And, then in the 1950s, Robert Solow developed his seminal work on economic growth - assuming decreasing returns and exogenous technological change. It was Romer's key contribution to solve the conundrum created by Solow's observation that most economic growth was caused by technological progress - which was left unexplained in his growth model. Romer "endogenized" technological progress as a "club good": a good that is non-rival in its consumption (my consumption of knowledge doesn't decrease yours) but excludable (with patents, I can prevent you from using freely the knowledge I created). As such, technological progress takes an intermediate place between purely private goods (such as bread, whose consumption is rival and excludable) and purely public goods (such as defense, whose consumption is neither rival nor excludable).
Of course, professionals economists didn't need to read Warsh's book to know this. So why do I think this book is such a great read, and that especially aspiring research economists should read it?
The best way to clarify this is to refer to what I see as the three main sources through which students learn about economic thinking.
First, most of what we learn about the "old" thinking (say, before Samuelson wrote his "Foundations of economic analysis" in the 1930-40s) comes from the courses on the "history of economic though" (I have heard that this course is increasingly disappearing from the curriculum, and I think this is a fundamental mistake). In my case, the handbook we used was Mark Blaug's imposing "Economic theory in retrospect". Of course, you can find everything Warsh wrote about Smith, Ricardo, Malthus, Marx, Marshall, Chamberlin etc in Blaug's book as well. But, precisely because Blaug is so comprehensive, one can easily get lost in the technical details. Warsh does not have such ambition: his book is about how economists think about increasing returns and technical progress, and so he limits himself to those discussions that are relevant for this topic. The result is that the differences between the great classical authors become much more clearer than they are in Blaug's magnum opus. It's actually quite enlightening to see that the "free market" economists such as Ricardo and Mathus were fundamentally pessimistic about the prospects for long term growth (precisely because of diminishing return), while Marx was much more optimistic, as he saw the potential for technological progress to improve lives.
Other economists may differ, but I also think that the personal anecdotes are not just entertaining, but also shed a new light on some developments. For instance, it is often said that the economists's predilection for mathematical modeling results from "physics envy" - but it was actually a professor of physics who, in the 1930s, argued that the natural sciences should second their scholars to economics departments in order to improve the scientific rigor of economics.
Thus, Warsh's book would already be a really meritorious short introduction to the history of economic thought without what comes next. And it's there that it becomes really interesting.
Indeed, the second key source of learning for budding economists are of course the textbooks.
Now, when I look back at the graduate textbook in micro-economics that was the standard until the mid-1990s (Hal Varian's "Microeconomic analysis"), it's striking how "clean" the analysis is. Everything is build logically from basic "axioms", and one almost gets the feeling that "the knowledge" always existed and somehow fell out of the sky (one also often wonders what the point of this all is, but that's a different issue). Of course, reality was rather different. When one starts reading the history behind the concept in the textbook, one immediately sees the analogy with Star Wars: most of the latter plot developments seem to make perfect sense when one sees the final product, but they were actually not envisaged at all when the first episode came out. And so, in Varian's textbook, the application of the principle of Le Chatelier to economics is discussed as if it has almost always existed. In reality, one learns in Warsh that it was almost per accident that Samuelson understood during a lecture on thermodynamics that the principle could also be applied to economics (well, ok, in the case of Samuelson, the "accident" was of course "genius"). So what Warsh confronts us with is that the beautiful grown-up textbook once was an adolescent with growing pains and internal conflicts.
Some may object that this mainly reflects that the foundations of micro-economics are not very controversial, and that macro-economic handbooks do reflect conflicts between different schools of thought. This is of course true, but even there the conflict remains highly stylized. To be honest, I don't know if my technical understanding of macro-economics has improved by learning about Milton Friedman's discomfort with the presence of the Cowles Foundation in his own building. But it certainly helped understanding that the actual growth of knowledge is not without its doses of human drama.
Which bring us to the final point: at some stage, the main source of new knowledge for aspiring economists are no longer the textbooks but the journal papers, the seminars and the conferences. And, of course, gradually, one's own work. Everybody who has gone through the process can testify how messy it is. A lot of papers appear to be discussing things with limited or purely theoretical relevance, it is really difficult to separate the wheat from chaff in the endless stream of information, most research directions (including one own's) appear to be dead-ends...
This is precisely why the discussion of the gestation of the work of Romer (and, even though it receives much less attention, of Krugman's) is so enlightening (and hopefully a source of inspiration for young scholars). The book makes you feel their pain and anguishes. You witness how, for years, they feel they are on the brink on developing something really important, but know there's still something not quite right in their analysis. It shows how even the greatest economists can become the victims of one of our deepest fears (that what we are doing has actually already been done by someone else 40 years ago, without us knowing), and how even Nobel-prize winning stuff can be at least in part the result of serendipity. It follows the superstars during lonely years where nothing seems to work, where most observers think they have been "one-hit wonders"...
So, another way to summarize the book is to say that Warsh has shown how, behind the mathematics, advanced economics is still a very human endeavor. It is his merit that he has done so without trivializing the subject.
January 4, 2022
hot gossip van mainstream economen in de tweede helft van de 19e eeuw.
October 2, 2024
The Skinny: A history of economic theory with a ton of useful information that requires attention and patience to read.
The Good: Very informative historical summary of different theories. All the big hitters are covered and seeing how they all tie together is interesting and useful. It is also a look into the economics profession for aspiring real or armchair economists. It is also inspiring in that it reminds us to focus on education, knowledge, entrepreneurship, and innovation to drive future growth in perpetuity.
The Bad: It covers a lot of information. 200+ years of economists, theories, and interactions are covered before focusing more on endogenous growth theory. If the subject matter truly interests you, it will probably be a fun, fast read but if not it will go by real slow.
The Good: Very informative historical summary of different theories. All the big hitters are covered and seeing how they all tie together is interesting and useful. It is also a look into the economics profession for aspiring real or armchair economists. It is also inspiring in that it reminds us to focus on education, knowledge, entrepreneurship, and innovation to drive future growth in perpetuity.
The Bad: It covers a lot of information. 200+ years of economists, theories, and interactions are covered before focusing more on endogenous growth theory. If the subject matter truly interests you, it will probably be a fun, fast read but if not it will go by real slow.
May 25, 2020
As exciting as economics can get, I think. Warsh describes this field with such zeal that I almost started looking up PhD programs. For someone whose knowledge of economics only proceeds as far as a high school macro class and hobbyist reading, this book remained accessible throughout explaining familiar and unfamiliar concepts. The only pitfall to me was that each new concept's connection to fresh or saltwater economics was often glossed over or assumed. The rivalry becomes pretty central in the second half of the book, and given Warsh's painstaking clarity in building up concepts such as supply and demand, those connections seemed easy enough to write in.
Hopefully this book inspires me to venture in more technical works - it's an amazing introduction.
Hopefully this book inspires me to venture in more technical works - it's an amazing introduction.
September 10, 2023
David Warsh’s “The Knowledge and Wealth of Nations: A Story of Economic Discovery” (2006) is a rather odd book. How societies grow over time and why some nations are richer than other nations are fundamental economic questions. Warsh’s book is a mix of how economists have addressed these questions (i.e., history of economic thought) and economic history. The book involves a heavy focus on Paul Romer’s work on the economics of technological change. I don’t know quite the audience for this book. A non-economist would have difficulty following the arguments in the book. Most economists would be put off by Warsh’s mistakes in describing the work of the central economic figures. Not recommended.
November 3, 2019
One of the best book I read about economics. I usually don't like the tendency of journalists writing books on a scientic subject of focusing so much on the life of the scientists. But in this case, Warsh focuses on a few selected people, and since in macroeconomics, theory often get very ideologic/dogmatic, it is very useful to know who is supporting which idea.
The first half of the book gives an overview of the major theories (Smith, Ricardo, a little on Marx, Arrow, Solow). Then it focuses more on Romer on the development and consequences of his incorporation of knowledge in economics model, and how it can explain the sustained growth we have seen in Western countries.
The first half of the book gives an overview of the major theories (Smith, Ricardo, a little on Marx, Arrow, Solow). Then it focuses more on Romer on the development and consequences of his incorporation of knowledge in economics model, and how it can explain the sustained growth we have seen in Western countries.
March 7, 2021
If you're an economist and/or love the history of economics, ignore my review because you'll probably enjoy this book. I love reading about economics but this book is simply boring. Warsh doesn't follow a rigid chronology and it makes the pace of the book rather slow. There are a lot of details about non-important characters that don't progress the story and bog down the important part of the narrative. What this amounts to is essentially a story of white men who wound up being wrong and whose ideas were replaced by new white men.
June 30, 2024
This is a beautiful book about the history of one of the most important (yet deeply neglected) ideas in economics: increasing returns to scale, which is the key to prosperity, progress, and the possibility we have to escape the Malthusian traps of scarcity. The book traces the history of this idea from Smith's pin factory, passing through Allyn Young's key 1928 paper all the way to Romer's 1990 classic paper about the growth of knowledge. This is a highly recommended book for those interested in economic growth, intellectual history and economics. A great read!
January 1, 2025
The econmic history portion of the book was superb. The thesis... not so much. Borderline out of touch.
But hey hindsight is 100% so maybe I should give this 4 stars.
This "review" came from the 2nd reading which was in Nov. First reading was during my high school days and I was probably just impressed and ate up every single word.
But hey hindsight is 100% so maybe I should give this 4 stars.
This "review" came from the 2nd reading which was in Nov. First reading was during my high school days and I was probably just impressed and ate up every single word.
August 20, 2021
“The hard sciences are good for topics like the hydrogen atom or the optic nerve. But most topics in economics are far more complex than these. Economic history is like the history of the natural world as interpreted by geology.”
July 12, 2022
Dense but enjoyable
Want to read
October 26, 2007In October 1990, Paul Romer, a 36-year-old University of Chicago economist, published a 32-page article, ‘Endogenous technological change’ in the Journal of Political Economy. Now, here is a whole book about that paper: Knowledge and the Wealth of Nations by David Warsh ( www.landmarkonthenet.com ).
The first paragraph of Romer’s paper had this sentence: “The distinguishing feature of… technology as an input is that it is neither a conventional good nor a public good; it is a non-rival, partially excludable good…” A sentence that initiated a far-reaching conceptual rearrangement in economics, writes Warsh.
For starters, governments usually supply ‘public’ goods, while the market participants provide ‘private’ goods. The rival-nonrival distinction is about “goods whose corporeality makes possible their absolute possession and limited sharing (an ice-cream cone, a house, a job, a Treasury bond), and goods whose essence can be written down and stored in a computer as a string of bits and shared equally by many persons at the same time practically without limit (a holy book, a language, the calculus, the principles of design of a bicycle).” Rival goods are objects, while the non-rival ones are ideas, existing as atoms and bits. Where you can control the access to goods, they become excludable.
To Warsh, the paper by Romer had won a race of sorts: “A race within the community of university-based research economists to make sense of the process of globalisation at the end of the twentieth century, and to say something practical and new about how to encourage economic development in places where it had failed to occur.”
As a consequence, we now have a new economics of knowledge, concludes Warsh. Governments have understood that it is in their interest ‘to subsidise the production and diffusion of knowledge, to support the useful arts, to extend education, to protect intellectual property, and to promote free trade’.
For instance, the German central bank decided to ‘sell much of its gold and invest the money in German universities’; the UK government ‘offered a large contract to the successful developer of a malaria vaccine, much as once it had offered a substantial prize for the invention of a reliable means of finding longitude at sea’; in Singapore, ‘higher education is practically a state religion’; and ‘in India and China university systems are training engineers and PhDs at a furious rate and thinking rigorously about how to improve their universities to a point at which they too can compete for international students’…
Exciting economics.
February 15, 2016
This book is about how economics is done using the journey to publication and impact of David Romer's 1990 paper 'Endogenous Technological Change' as its vehicle.
The first half of the book is a decent if rambling history of economic thought on the question of why economies grow over time, especially considering that so much economics is based on the notion of diminishing returns. The second half of the book looks at how Romer sought to escape from diminishing returns. This half is equally rambling, with lots of detours and diversions which, ironically, given the subject of the book, run into diminishing returns themselves; one into the history of internet browser wars is particularly tedious.
When the book is on subject, however, it is a full and revealing look at the mechanics of professional economics.
The first half of the book is a decent if rambling history of economic thought on the question of why economies grow over time, especially considering that so much economics is based on the notion of diminishing returns. The second half of the book looks at how Romer sought to escape from diminishing returns. This half is equally rambling, with lots of detours and diversions which, ironically, given the subject of the book, run into diminishing returns themselves; one into the history of internet browser wars is particularly tedious.
When the book is on subject, however, it is a full and revealing look at the mechanics of professional economics.
June 23, 2014
Excellent book that gives a historical account of the evolution of economic thinking through Kuhnian "paradigms": one of equilibrium (neoclassical) and one of evolutionary progress. Conventional neoclassical economics has a hard time explaining innovation, and the production of wealth; this is clearly understood if one realizes how David Ricardo's misled emphasis on equilibrium and economic modelling "purity", sent economic science into a scientific "path dependence" that constrained queries about economic science around the examination of "the Invisible Hand" (how markets equilibrate), at the expense of sending Smith's more important reference, i.e. "the Division of Labor" into the background, almost falling into oblivion by the economics profession in the early 20th century.
July 12, 2007
I was really into this book as I was reading it, and it exposed me to ideas that have really changed the way I look at things.
For instance, the idea of prizes as incentives for invention working well (like $10B or however much for the cure for malaria), and the importance not only of technology, but also regulations and infrastructure on economic growth.
Also, I had never read any of those urban theory (e.g. Jane Jacobs) books, so the idea of the persistence of diverse cities over non-diverse (say, manufacturing) cities was new to me.
Also, I had no idea Krugman, who is mentioned quite a bit, was such a bad-ass economist before his Times gig.
For instance, the idea of prizes as incentives for invention working well (like $10B or however much for the cure for malaria), and the importance not only of technology, but also regulations and infrastructure on economic growth.
Also, I had never read any of those urban theory (e.g. Jane Jacobs) books, so the idea of the persistence of diverse cities over non-diverse (say, manufacturing) cities was new to me.
Also, I had no idea Krugman, who is mentioned quite a bit, was such a bad-ass economist before his Times gig.
August 28, 2016
This book isn't like any other book. It is a timeline of the economics profession, starting with the classical economists and ending with Romer. Those interested in reading this book should beware. As half the book is about Romer's life and work, a disproportionate amount of pages is spent on the last 40 years of the economics profession and the subject of endogenous economic growth. I would not recommend this book to just anyone. Some serious interest in economic science is really needed to complete this book and understand some central concepts.
January 15, 2008
Hard to believe, but Warsh, a journalist, really makes the stories of economists and their theories -- and arguments -- come alive. Truly a good story well told. I learned much about economists whose economics I knew -- Lester Thurow, Paul Krugman, Milton Friedman, John Maynard Keynes, etc. -- but knew nothing about the men (and a few women). Especially good on sorting out the theoretical roots of the more popular economists of our current times.
June 26, 2008
This is a pretty good read in two halves. The first is kind of a breezy history of economic thought from Smith going forward, including some dichotomies about specialization and increasing returns. The second is sort of soap operaish stuff from the economic profession talking about the evolution this notion of "endogenous" growth.
Some interesting stuff in here. The story of anti-Semitism pushing Milton Friedman getting run out of University of Wisconsin was kind of interesting.
Some interesting stuff in here. The story of anti-Semitism pushing Milton Friedman getting run out of University of Wisconsin was kind of interesting.
January 30, 2016
Not the best popular book on the history of economic thought (that title should go to Heilbroner's Worldly Philosophers), but the only one I know that tells in detail about the developments in the economics since 1940s. Story is focused on the ideas concerning economic growth and the role of knowledge and technology. Insider account on the workings of economics as a discipline, with its journals, annual meetings and textbook industry, was especially interesting.
September 20, 2008
This is the last book I expected to be a page turner, but Warsh made the excitement of economic history and discovery very real. Although some of the things were out of my grasp -infinite dimensional spreadsheets for example - it didn't seem to matter or affect my overall understanding of the book. Yay for the dismal science!
March 10, 2010
I learned that economists need to get out into the real world, the neighborhood right outside their doors, to find out how real people, not mathematical symbols, react. There is a key factor missing in econometrics, and we don't know enough yet about the human brain to make accurate predictions with that "unknown" in the formulas.
January 27, 2012
Knowledge and the Wealth Of Nations is a difficult book to read because it is highly philosophical in trying to explain how knowledge is the base of the assets that nations have. It is difficult because it leaves so many questions unanswered; such as what is exactly what they understand by knowledge and more important; how is it storaged so it can count as part of the wealth of a nation.
October 18, 2015
Recounting the history of the economics of growth and development, this book covers a very interesting topic, if heavy on the intellectual history and discipline politics. Nit was many interesting parts but as a whole is quite wide ranging and unfocused both at times throughout and in its overall conclusions (which are mostly ambiguous).
February 5, 2020
I hadn't read this again since it came out in 2006, but I just finished and found it as enjoyable the second time through - a truly engaging read about the history of increasing returns in economics as championed by Paul Romer who later became the 2018 Nobel co-winner (along with Bill Nordhaus) in economics for his work on the topic.
March 13, 2008
A book about Economics and the Economics profession. Outlines the development of a theory of how knowledge and invention lead to Economic growth, and the modern world that we live in. Great for anyone who has taken at least some undergraduate economics.
June 6, 2007
Traces an invisible college behind a body of work and how paradigm shifts take place..
Want to read
November 9, 2007interesting story indeed
February 8, 2008
Another on the revolution occurring in Economics
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