MAMMON &MAMMON &MORALITYMORALITY

Before it was a social science, economics was as a branch of moral philosophy. Economics was invested to be atool to ascertain justice, promote happiness, challenge traditional authority, and promote human cooperation:it was not about making money. Modern economics aspire to be a descriptive science of human behavior --focused on the positive “is,” instead of the normative “ought.” However, many of the original moral judgmentsand value-laden vocabulary persist in economic analysis. This opening chapter seeks to provide a basicbackground in economic thought to allow the reader to identify the “moral squint” of economics as youbecome familiar with its theory and applications.

While some economic ideas have long pedigrees, economics as a discipline developed in parallel with the riseof capitalism. As a result, one can read much of economic analysis as a commentary on the morality, immoralityand amorality of capitalism. Due to capitalism’s protean nature, views of capitalism have evolved over time anddeveloped differently in different contexts. In short, there is no “pure” capitalism to be discovered, but differentcapitalisms in different places at different times. We can view the development of economic thought andanalysis as a conversation aiming to provide an ever more complete judgment on the value and operation ofcapitalism since 1800. This is an ongoing conversation, in part, because there is a fundamental tension --contradiction -- in economic thought. Economic journalist David Warsh has framed this as the battle betweenAdam Smith’s parables of the Pin Factory (Division of Labor / increasing returns) and the Invisible Hand(competitive market / constant returns) in the Wealth of Nations. Logically, these ideas exclude each other, butthey exist side-by-side. The conversation about them has no resolution, because the balancing of these ideasmust be done in each specific application.

1.0 ECONOMICS’ TWO GREAT INSIGHTS1.0 ECONOMICS’ TWO GREAT INSIGHTS

Economics has two great insights. The first is being good (virtuous) is the same as being happy. The second isthat the public interest is not simply the sum of its component individual interests. In economics, the firstprinciple is more often known as the “no free lunch” principle. Prior to economics, it was widely held thatgoodness and happiness went hand-in-hand: only a good person could be happy and happy people were good.Goodness involved qualities such as honesty, charity, and honor that required individuals to sacrifice individualbenefit. For example, a good person, seeing someone suffering, would try to alleviate the suffering, i.e., byoffering them a “free lunch.” Economics noted that there was no “free lunch” -- every charitable action cameat the expense of someone, even if it only was some “forgotten man.” There was always a tradeoff. Therefore,doing things conventionally thought good would result in less happiness for someone, somewhere even if theidentity of that person was not immediately obvious. As a result, one could not be good and happy. Ultimately,there was only so much to go around, virtuous action simply redistributed the pie.

The second principle holds that the whole is either greater or less than the sum of its parts. Prior to economics,thinkers presumed that there was no inherent contradiction between individual interest and the social, orpublic, interest. To take the extreme case, it was “sweet and proper to die for one’s country” because defendingthe community on which you depended was ipso facto good for the individual. Family, society, or the politywas the thing and each person was only a part of the larger entity. To make a medical analogy, each organ issimply part of a an organism and what is good for the organism is good for the organ. In terms of ecology, nospecies is more important than the ecosystem and what is good for the ecosystem is good for the species, evenif they are the prey for some predator. Aligned with the first insight, early economists imported this equation,but rather than see the individual as a part of a larger whole, it preached methodological and normativeindividualism. Only individuals make decisions and social welfare was the simple sum of the individualwelfare: what was not good for the individual could not be good for the group. Later economists showed thatthere are many instances, however, when the whole is not the sum of the parts whether due to the aggregativeprocesses, the role of money, increasing and decreasing return to scale, or the presence of positive and negativeexternalities.

MAMMON & MORALITYMAMMON & MORALITY

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1.1 FRAMEWORK1.1 FRAMEWORK

One may classify economic thinkers by their answers to two basicquestions. The first, represented by the horizontal axis on thechart to your right, is which insight of the two insights listedabove is more fundamental. Those that embrace the first insight-- the “no free lunch” principle -- tend to view economics as astudy of equilibrium; the economy, left to its own devices, is inbalance. Broadly speaking, this includes the Classical School(and its modern scions, the Neo-Classical and RationalExpectations Schools) and also Libertarian economicphilosophies. Those that favor the second insight -- the whole isgreater/less than sum of its parts -- stress the possibility ofdisequilibrium, such as theories of over - and underconsumption,general “gluts” and the persistence of market failure due tonegative externalities. Keynesian economists, as well aseconomists who take a historical or institutional approach toeconomics. The vertical axis divides those economists who are mainly concerned with the economicconsequences of individual decisions and economic activity from those who are primarily concerned with thepolitical consequences. Some economic thinkers focus on the efficient economic operation of the economicsystem. Namely, they ask if factors -- labor, land and capital -- are employed and if they are employed mostefficiently. Others note the power implications of different distributions of resources. For example, a libertarianeconomist would prefer a decentralized system, even if efficient, to a centralized economy that used resourcesefficiently because it maximized the political value of freedom. In contrast, an institutional economist mighthave a problem with power-differences in production or consumption, even if resources are used efficiently,because it is inequitable.

If we look at the boxes, we find the major schools of economic thought. In the upper right quadrant, we findthe Classical school who, through doctrines such as Say’s Law and the Law of One Price -- exemplify the beliefthat the economic system tends toward equilibrium and the confidence that the stable equilibrium is also themost efficient equilibrium. In the upper left, we find the Keynesian (and proto-Keynesian) economists. Theyshare the Classical school’s concern with economic efficiency -- and therefore share similar aims -- but disagreeabout the market’s ability to reach efficient equilibria without assistance. Keynesian are keen to note marketfailures, but suggest economic solutions (i.e., working through economic processes) to these problems by “fine-tuning” the economy through fiscal and monetary policy, “completing markets” or providing public goods.

In the lower left, there are Institutional economists that include the diverse perspectives of Marx, Veblen, andSchumpeter. They differ from Keynesian economists because they all put a priority on the distributionalconsequences of political and economic policies and processes. Marx’s theories put class conflict at the centerof his analysis; Veblen is famous for his description of conspicuous consumption of the “leisure class” and thebalance of power within corporations; Schumpeter on the transformative role of entrepreneurs. All emphasizethe role of history and institutions in shaping economic behavior and all focus on some imbalance driving theevolution of economic activity. For Marx, it was the accumulation of capital, while Veblen it wasunderconsumption driven by the displacement of “engineers” by managers in corporations. Schumpeter notedthe dynamic “creative destruction” of entrepreneurs driving unbalanced economic development. Finally, in thelower right quadrant are the pure laissez-faire perspectives of libertarian (Austrian) economists who oftencombine their economic analyses with a stress on the market’s role in preserving individual freedom, especiallyfrom centralized state planning. They emphasize the role of markets as information processing mechanisms.While they hold different political values, they share the emphasis with Institutionalists on the implications ofeconomics for preserving or undermining political values.

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2.0 ECONOMIC MORALITY2.0 ECONOMIC MORALITY

Economics began as moral philosophy and is still used to make moral judgments. We praise individuals fortheir work ethic, we elude judgment because “it’s business, not personal,” we praise frugality and gratitude(gratis = free, a price), we ration goods, services, and amenities by wealth, and use credit ratings to determinewhether a person will make a good employee or not. “Debt” has not lost its historical association with theconcept of “sin” and the phrase “debt forgiveness” echoes this connection. “Worthy” has the dual meaning ofhaving economic value and deserving. Economic decisions balance “equity” with “efficiency.” We eschewproviding assistance to the economic disadvantaged due to concerns about “moral hazard” and economicefficiency. Capitalism, more so than democracy, is America’s cardinal value of its public philosophy. Somecircles view inflation and taxes as theft and divide individuals into “makers” and “moochers.” We ask everyoneto “pay their fair share” of taxes, and if they do not, consider them “free-riders.” We call those without integrity“sell-outs” and remark that “I’m not buying it” when we do not believe something to be true. We criticizethings for being “commercialized” and people for being “materialistic.” In the trinity of political goals, the“pursuit of happiness” (Jefferson’s formulation) is often substituted with “property” (Locke’s formulation).Religious texts remind us that the “pursuit of money is the root of all evil,” “blessed are the poor,” that the richto enter heaven is like a “camel through the eye of a needle,” and and attachment to material things is thecause of human suffering.

Some argue that “normative” analysis should be separated from “positive” analysis; what “ought” is not thesame as “what is.” However, many purely descriptive and analytical concepts and vocabulary are rife withmoral valences and connotations. Therefore, it helpful to interrogate these assumptions and flush out theirorigins and implications.

2.1 ASSUMPTIONS OF ECONOMICS2.1 ASSUMPTIONS OF ECONOMICS

As a largely deductive science, economics is fond of making assumptions, including that all decision makersare rational, utility maximizing individuals with perfect information operating in fully competitive and liquidmarkets where all resources are fully employed. While many of these assumptions are empirically ridiculous,they are often explicitly stated and can make the analysis of complex systems tractable. However, as Nobellaureate Gunnar Myrdal observed, there are “hidden assumptions” in economic analysis that prejudge thepredicates drawn from the analysis. Myrdal identified three core assumptions in economics: the idea of value,the idea of freedom and the idea of collective housekeeping. Briefly, the idea of value refers to how economistsinfer “real” or “natural” value apart from actual economic transactions; the idea of freedom is the belief thateconomic processes are uncoerced -- free -- and therefore natural, while the results of political processes entailthe use of power and are therefore, unfree and unnatural; the idea of collective housekeeping portrays thenational economy as the operations of a personified household that aims to maximize general welfare and usesa unified budget.

2.1.1 THE IDEA OF VALUE2.1.1 THE IDEA OF VALUE

The problem of value is captured in the saying, “beauty is in the eye of the beholder.”We can easily intuit that different individuals place a range of valuations on the same object. For practicalpurposes, this is not a problem; we can accept that there are “different strokes for different folks” or “one’smileage may vary.” However, for economics to make valid generalizations about economic behavior, it must beable to infer real, or absolute, value and not rely on a subjective valuations. There must be some anchor for therelative valuations of individual economic products; there must be a common numeraire. In practice, thisnumeraire is money and we can compare unlike items in terms of their monetary value. However, this begs thequestion: what anchors the value of money? Economists have sought, unsuccessfully, to identify the source of

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value, since the creation of value is the justification for economic reward. For Adam Smith, the source of valuewas human labor; for David Ricardo, it was the price of “corn” (grain = food); for goldbugs new and ancient,it has been the gold standard. Later, more quantitative economists, such as John Bates Clark, devised theconcepts of the marginal product of the factors -- land, labor and capital -- of production. However, this runsinto problems when one tries to parse the value of the hammer (capital) from the value of the carpenter (labor).In addition, like bodily organs, the absence of one factor reduces the productivity of other factors to zero. Thehammer has zero productivity in the absence of the carpenter and the carpenter has zero productivity in theabsence of the hammer.

The problem with each of this formulations is that they are inherently arbitrary and reflect the values andpriorities of specific interests and not objective gauges of “real value.” When pressed, it is clear that eachstandard of “real value” reflects the perspective of a certain subjective standards of value. The gold standard ismuch more favorable to those holding financial assets than those earning wage income. Most formulations ofmarginal factor productivities justify returns to capital at the expense of returns to labor. In short, theaccounting for “real value” is not a neutral description of what generates value or who has a valid claim oneconomic income.

2.1.2 THE IDEA OF FREEDOM2.1.2 THE IDEA OF FREEDOM

Economics is replete with the idea of freedom: free markets, freedom of contract, free enterprise, free lunch,free-riding, free labor, free exchange, free trade, liberalization, deregulation, self-governance and self-regulation. It is no accident that noted Nobel Prize-winning economist Milton Friedman titled his economicmanifesto as Free to Choose. The close association of economic analysis and the political value of freedom isin part historical, in part analytical and in part philosophical. Economics developed in concert with thedevelopment of democracy and constitutional government. The economic arguments for the “invisible hand”of the market and the advantages of free trade came in response to the economic regulation of Mercantilismand the limits it placed on economic activity. In addition, it developed in the wake of in the wake of theEnglish Civil Wars that gave rise to the social contract theories of John Locke and Thomas Hobbes and theframework of “possessive individualism” -- the notion that the ability to control and dispose private propertyis the essence of individual freedom. In this milieu, it seemed obvious to the first generation of economists thatlimiting government and maximizing individual freedom would be conducive to increasing economic welfare.

However, equally important was the construct of “the state of nature” in the social contract theories. Whetherhuman relations were seen as cooperative (Locke) or conflictual (Hobbes), free individuals would formeffective communities in their “natural” state. Economics discovered “natural laws” that pre-existed societyand governments and freedom was the natural condition of individuals in this state. As a result, economicactivity and processes are inherent in human nature and efforts to interfere with their operation, unnatural.This appeal to natural law confers a legitimacy to economic processes and outcomes even if they offend oursense of justice and equity.

On a second level, the idea of freedom is analytically necessary. Most of economic concepts derive from thenotion of individual choice. Therefore, economists must explain economic outcomes as the result of individualchoices, or methodological individualism. Social welfare is simply the aggregation of individual values andcultures and institutions simply patterns of individual choices. In addition, many of the noted conclusions ofeconomics depend on the assumption that there are large numbers of small, independent buyers and sellers.If their choices are correlated, there are limits to arbitrage and competition rendering markets inefficient andsuboptimal. In addition, as Marx (and others) astutely observed, capitalism requires the “double-freedom” ofworkers being free to sell their labor and free of feudal obligations to function. While some, such as AmartyaSen, argue that it is impossible to be a “Paretian liberal” because free choice is logically inconsistent withmaximizing social welfare, most equilibrium theories presume free and independent decision makers.

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The third dimension is philosophical. Economic systems appear to be free of explicit coercion. The key toAdam Smith’s “invisible hand” is that it is “invisible.” This allows us to view economic activities are free ofconsiderations about power or force. All transactions are freely entered and therefore no one has a legitimatecomplaint about outcomes, regardless of misfortune or inequity.

The problems with the idea of freedom in economics are threefold. The first is that individual choice may beinconsistent with maximizing welfare. Given the freedom to choose, students may pursue less education thanis optimal, patients may demand less healthcare than maximizes their welfare, and individuals will save lessthan is necessary to support themselves in their retirement. In general, public goods such as crime protection,environmental quality and reliable information may be underprovided. In addition, without someinstitutional base or nudge, desirable markets may not form. Second, while there may not be explicit coercion,buyers and sellers are subject substantial pressures (and unwanted) pressures to their economic choices.Advertising may be more powerful than some suppose and poverty may create situations that force undesirablechoices. For example, a poor person is more likely to consider the sale of an organ or the purchase of a lotteryticket than one who is wealthy. Structural, institutional and historical factors circumscribe the “menu” of ourchoices: one cannot be a knight-errant in the 21st century or be a democratically elected president in anauthoritarian government. The structure and sequence of our choices can influence our decisions. Finally,choice itself may be a disutility; choosing itself can be a burden, cognitively and psychologically.

2.1.2 THE IDEA OF COLLECTIVE HOUSEKEEPING2.1.2 THE IDEA OF COLLECTIVE HOUSEKEEPING

The word economics was coined from the Greek word for “household management.” In this incarnation,economics was simply personal finance: balancing the checkbook, organizing household production, andpurchasing the necessities for the household’s lifestyle, etc. all under the supervision of the household head.The household is the only economic unit that most people experience directly. As a result,we often use it as ananalogy for the operation of the larger economy. Although our decisions and actions influence them, and theyinfluence us, we cannot observe directly “the market,” “inflation,” “capital accumulation,” “economicgrowth,” “debt” or “supply and demand.” As a result, it is common for us to think of corporate CEOs orpresidents as “stewards” of the economic performance of their organization or nation and responsible for itssuccess or failure. In addition, we tend to look at collective measures of economic welfare and performance,such as the competitiveness (and wages) of American workers vis-a-vis Chinese workers, growth of GDP,performance of critical economic sectors such as education, healthcare, finance or automobiles, we look attrade and budget deficits as common obligations.

The first problem with this assumption it presume a harmony ofinterests and common purpose among its component parts. Forexample, opening an economy to foreign trade may increasecollective wealth of a nation, but it is not true that all will shareequally -- and many may lose -- in the gains from trade. Winnersdo not necessarily compensate losers. The chart to your right,showing age-specific survival rates, provides another example. Ingeneral, the US is an affluent country, and not surprisingly, haslow age-specific mortality across the life-span. This conforms tothe view that everyone is “lucky to be an American” and that thepoor in America are much better off than the poor elsewhere.However, if one parses the data by race, one sees that African-American men do worse than men in the poor countries of China(c. $1000/yr. per capita GDP, 2000) and the South Indian state of Kerala (c. $300/yr per capita GDP, 2000).Likewise, false analogies between national economies and firms lead to concerns about the state of economiccompetitiveness. One manifestation of this is the hand-wringing over American educational performance since

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the publication of A Nation at Risk in themid-1980s warned that it wouldundermine our economic prospects. As aresult, for the last thirty years there havebeen perennial calls for reformingAmerican education by introducing “21stcentury skills,” high-stakes testing, anddissolving teachers’ unions. However, asthe charts to the right indicate, the devilis in the details. Whites and Asiansattending suburban public schools scorenear the top of the world. The problemsare largely in the poor performance oflarge urban school systems whodisproportionately serve poor, ethnic andracial minority students. The model ofcollective housekeeping that looks only at“American Education” writ large ignoremore salient distributional patterns.Similarly, calls to “buy American,”subsidize American companies ormaintain a strong currency only makesense if one imposes a collective housekeeping framework. As Tonto replied to the Lone Ranger, “Who’s this‘we,’ Kemo Sabe?” The appeal to collective housekeeping appears most often when someone asks for “sharedsacrifice” to address an economic problem that primarily affects only one group.

The other area that the metaphor of collective housekeeping impacts economic analysis is in discussion ofpublic budgets and finance. In economic terms, one can view government in two ways. First, governments areproducers of non-rival, non-excludable public goods such as environmental quality, common defense, policeand fire protection, the administration of law and transportation and communication infrastructure. As aresult, we should all pay for the cost of maintaining these common services equally and expenditures shouldbe paid from a general revenue fund. The second view is that the government is the producer of a menu ofservices to citizens that can be “purchased” individually, such as hunting, fishing and driver’s licenses, grazingrights, postal service, education, health insurance and toll roads and bridges. Why should households withoutschool-age children finance the education of households that do? Why do school districts not chargehouseholds by the pupil? Why should middle-aged workers pay for the healthcare of the retired? What havefuture generations done for us that we should not saddle them with debt or forego the consumption of naturalresources? From the perspective of collective housekeeping, these are not problematic, just as one would carefor one’s elderly grandparents, provide for one’s children; they are social functions, socially provided. However,every public policy has distributional implications and the collective housekeeping metaphor sublimates them,although there is some evidence that democratic governments tend to levy taxes on a benefit basis, whereby byprogressive taxation supports national defense and regressive taxation supports social welfare and insurance.

3.0 PREMODERN PRECEDENTS3.0 PREMODERN PRECEDENTS

Although the modern observer finds it easy to understand why being good may not bring happiness, it wastaken for granted for most of human history for good reason. In ancient times, a good harvest meant a goodeconomy and a good harvest depended on the cooperation of nature to send the right amount of rain, sun, andsoil. If the people did not behave morally, god/nature would send drought, plague, pestilence, or make you

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wander in the desert for 40 years. To appease the gods and restore prosperity, people offered contrition in theform of human or animal sacrifices ("scapegoats"). Happiness depended on good harvests; good harvestsdepended upon good behavior. This is the logic behind the Chinese "mandate of heaven," the Hindu idea ofKarma, and Western notions of "suffering for sins." Most myths, fairy tales, and fables all end with the goodbeing rewarded and the bad being punished. An example of this logic can be found in the Biblical story ofJonah. Attempting to escape the will of God, Jonah boards a ship that finds itself in a powerful tempest. Hisshipmates quickly infer that there must be a “sinful” person among them and promptly investigate.Discovering Jonah’s intransigence, they quickly hurl him overboard, bring calm to the seas, but Jonah isswallowed by the whale. In short, bad things can only happen to bad people. If you ever thought that bad luckwas coming your way because you were mean to someone, thank your primordial ancestors for your guiltcomplex.

Ancient philosophy did little better than religion. In Plato's most famous book, The Republic, he has Socratesarguing that a virtuous person can only be found in a virtuous city and virtuous cities had only virtuouspeople. A just person could not exist in an unjust world, nor an unjust world exist when people acted justly.Aristotle, in his books Eudaimean & Nicomachean Ethics argued that only a virtuous person could be happy.Aristotle also observed that happiness is an activity, not an object. One could "be happy," but one could not"have happiness." Having possessions or money could not make one happy, one must be able to love or behappy first and this depended on being just and virtuous. The Stoics argued virtue and happiness were united,so that even someone wracked with a disease or tortured on the rack could be happy as long as they remainedvirtuous. Others could take your possessions, but they could not take your virtue. Epicureans argued thatvirtue was to avoid pain and pursue pleasure was virtuous; if it made you feel good, it could not be wrong.

3.1 BOOK OF JOB3.1 BOOK OF JOB

A critical break in this line of thinking is the Book of Job. Even if you are not religious, this story is worthreading and knowing because it is among the first "modern" stories. It tries to explain why bad things canhappen to good people and why bad things exist in a world that was created by a just, all-knowing, all-powerfulgod, or, for our purposes, why can bad things happen to good economies.

The story begins with the devil, having travelled the world, plopping down on god's couch in heaven. God asksthe devil if he had seen his good servant Job on his journeys. In a modern setting, I visualize this as the devilas some stoner-slacker who comes home after curfew to be confronted by an impatient parent, played by god.

So god and the devil make a bet. The devil can do anything he wants to Job except kill him and if Job cursesgod, the devil wins. So the devil afflicts Job with disease and sores, destroys all his flocks and fields, and haslightning strike his mansion killing all his family inside. Act II shows Job as a homeless beggar living off thestreets. His remaining friends come to visit him and urge him to repent, thinking like all early people that badluck resulted form bad behavior. He must have done something really, really, really wrong for god to have sentthis much bad luck his way. Job argues that he has nothing for which to apologize.

Act III has Job, unaware of the wager between god and the devil, a little fed up with god and begins to questionthe divine wisdom and justice. God replies, like many parents do when teenagers think the world is unfair,

Devil: "I'm home"God: "Why can't you behave like your older brother, Job?"Devil: "Dude . . . why you bustin' my cabbage patch?** . . . Job only does what you want because you gave him the keys to theAudi, the latest model Blackberry, and tickets to the Warped Tour, not to mention that no-limit credit card. If you took those awayI don't think Mr. Goody-Goody Two-Shoes would act so nice."God: "I don't think so . . ."Devil: "Wanna put your money where you mouth is?"God: "Deal"

**An homage to the movie Chasing Amy

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"I brought you in this world, I can take you out. Who are you to question my judgment?" The story ends withthe devil losing the bet and God restoring Job's possessions.

Meanwhile, in Greece, similar stories like Oedipus, Agamemnon,and Medea give rise to the Tragedy ("goat songs") which also try toexplain why bad things happen to good/great people -- althoughthese also usually identified an original sin (often, pride -- hubris) asthe impetus for the tragic storyline. In a famous book titled TheBirth of Tragedy, the scholar-philosopher Friedrich Nietzsche -- whoplays a major role in creating the modern world we live in -- explainsas the combination of the orderly world of Apollo where virtue andhappiness are united with the chaotic, irrational world of Dionysius.Meanwhile, Plato writes Euthyphro asking the impertinent question

of whether god likes good behavior because it is good, or, is it good behavior because God likes it?

While Job’s story has little to do directly with economics, it doesrepresent a break in how humans thought about morality in practice:acting virtuously was no guarantee of material welfare and misfortunewas no indicator of personal virtue. Once the two are separated, theinvestigation of practical -- “economic” -- human behavior, such as,“How can I increase my household’s income?” becomes thinkable. It alsosubjects god (nature) to the “rationality” test: god is god because he isuber-rational. In the earliest myths, legends, and religious texts, gods areemotional and impulsive: they play tricks on humans, they have tempertantrums (like flooding the world when they are displeased), and aremoody and fickle, but from the Axial Age on, the “rationality” was thelitmus test. This elevated rationality into a cardinal virtue and the rationality assumption in economics is anintellectual descendant of this view: the more rational you are, the more you are like god, the more you are likegod, the more virtuous you are. In addition, the standard economic assumptions that humans are omniscient(“perfect information”) and instrumentally rational (“efficient”), can be re-read as “if humans were more likegod, the economy would behave . . .” In addition, if god is rational, rationality becomes the measure of ethicalbehavior: “Sure I would like to help the poor, but the policy is inefficient, so ‘no can do.’”

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3.2 MODERN MORALITY3.2 MODERN MORALITY

The Middle Ages saw the rise of what is known today as a "moral economy." In bad times, Lords took less fromtheir serfs and vassals, people should receive a "just and fair wage," and it was immoral to lend money withinterest ("usury"). The contemporary arguments that criticize Wall Street because they do not produceanything tangible, or fault companies for shipping jobs overseas to exploit workers in the 3rd World anddestroy the environment are modern versions of this way of thinking. Economic relationships were embeddedin moral and ethical relationships. Virtue and Happiness were again one.

However, beginning with the Renaissance, various thinkers began todoubt this conventional wisdom. Machiavelli famously argued that the"end justifies the means," suggesting that virtue was unimportant aslong as the result was good. For example, if everyone in a class receivedan "A" provided one person received a "F" Machiavelli would say thatthe collective benefit justified the injustice to a single person. Inaddition, some have argued that torture is acceptable as long as theinformation saved lives. Whether one is Machiavellian or not,Machiavelli's point was thatvirtue and happiness areseparable and must becalculated separately. Later,French social critic Bernardde Mandeville wrote a longpoem entitled the Fable ofthe Bees that described a hive

of selfish and immoral bees who were nonetheless better off becauseeach pursued their own self-interest. When an outsider tries toimpose morality on the hive, they soon find themselves in penury.The formula of "privates vices, public virtues" became a commontheme of the Enlightenment. Finally, the social contract theoristssuch as Locke, Hobbes, and Rousseau countered the conventionalwisdom supporting the divine right of kings. God appointed theKing and so the King's interests were also the public interest whichwas also the best interest of the King's subjects. The idea of a socialcontract, where the people could replace an unjust or incompetentking, implied that the public interest and the private interest werenot the same.

These ideas matter to economics because until one can distinguish happiness from moral behavior, economicchoices are the same as moral choices. Just do what you are told. Similarly, until one can distinguish the publicinterest from the private interests of individuals, there is no reason why one should not listen to a wisephilosopher-king or government planner instead of your own determination.

4.0 CAPITALISM: ADAM SMITH’S GREAT LITTLE IDEA4.0 CAPITALISM: ADAM SMITH’S GREAT LITTLE IDEA

Many credit Adam Smith as the founder of modern economics and his 1776 book, The Wealth of Nations,outlined the main features that would define of the modern world. The Wealth of Nations is a classic -- a bookthat everyone refers to and few have actually read. Most of the "good stuff" is found in the first few chapterswhere he identifies three key elements of modern capitalism: the Division of Labor, the "Invisible Hand," andthe "Labor Theory of Value" (LTV). Capitalism is an economic, not political, system and is consistent withboth large and small, strong and weak, democratic and undemocratic governments. While Smith criticized

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Mercantilists for equating the national welfare with the balance of trade,Smith provides many instances where regulation is beneficial and necessaryto promote economic welfare. However, first we should explain the three legsof the capitalism’s “stool.”

4.1 DIVISION OF LABOR4.1 DIVISION OF LABOR

Smith argued that gains in economic productivitywere the result of the division of labor, akin to the ideaof teamwork. One player cannot do everything, even ifthey are the best in every area. Each player must playtheir role in order for the team to succeed. Eachproduction process is broken down into manydifferent tasks and each worker specializes in that task. For example, if the job wasassembling a bike, one worker would put on the wheels, another would apply the chain,another would cast the frame, another provides the raw materials, and so on. Eachworker improves their skill at their given task. No one loses time changing from one task

to another and every one uses the specific technology to accomplish their task (a screwdriver can be used as ahammer, but it is much better used as a screwdriver). Workers organized by a division of labor are much moreproductive than each would be alone (Economic Insight # 2: The whole is not the sum of the parts).

The advantages of the division of labor can be seen if we compare the modern industrial mode of productionwith the way things were done previously. Before theIndustrial Revolution, most people wereindependent farmers living in small, but self-sufficient, villages. They not only grew their ownfood, but they also made their own clothes, builttheir own houses, provided their own entertainment,and make their own furniture. While premodernindividuals were no doubt more skilled andintelligent than their modern counterparts -- a pointmade by Jared Diamond’s book Guns, Germs, andSteel -- the reason that Europeans "have more cargo"is that while it is difficult to be a good farmer, cook,carpenter, seamstress and entertainer, it is muchmore difficult to be proficient at all at the same time.

It is critical to note how revolutionary Smith’ssuggestion that the “wealth of nations” lay in theorganization of production. Previously, Physiocratsheld that a nation’s wealth in its natural endowmentsand particularly its ability to maintain foodproduction. Others thought the accumulation ofprecious metals, particularly gold, was the key toriches. Still others, such as Montesquieu, pointed tocultural values (and implicitly race) as the source ofwealth through the mechanisms of governmentunder the influence of varying climates andgeographic circumstance. In short, wealth and welfare were not under human control, but Smith proposed thatthey were: anyone could adopt the division of labor, regardless of resources, culture, or monetary wealth.

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4.2 THE INVISIBLE HAND4.2 THE INVISIBLE HAND

Even if the division of labor makes us much more productive, we still may produce too much of something wedo not want, like pollution and too little of something we do want, like underwear. Don't laugh, in the 1980s,there was a high level economic meeting in the Soviet Union to discuss the production of women's nylonstockings. If too many people make cars and not enough people make food, the consequences could be dire.After the Great Leap Forward (1950s), 20 to 30 million Chinese died of hunger because farmers were givenorders to operate small iron furnaces instead of growing food. The Great Leap Forward made China much moreproductive, but not in the things people wanted or needed in the proper proportion. Additionally, if peoplecan choose what they want to do, what is to prevent too many people becoming doctors and teachers and notenough becoming engineers or nurses?

In the past, most people did not have to worry aboutthese decisions; they just did what they were told.Under the caste system, you did what your parentsdid and most other places did the same because ofcustom and tradition. Under European feudalism,vassals and serfs did what they were commanded todo by their lords. Most societies placed a high moraland ethical value on performing one's given role:Warriors should be Warriors; Bakers should beBakers; Farmers should be Farmers -- and thesedivisions were enforced by dress codes, manners ofspeaking, and guild restrictions. Pity the Farmer whohad the temerity to wear purple! While thesemechanisms were adequate for simple, agriculturalsocieties, they probably were inadequate for complex,industrial societies.

Adam Smith argued that the organization ofeconomic society was coordinated by a price system,the "Invisible Hand." Individuals did not providegoods and services because they were running acharity operation, or serving a social function, ordriven by a moral or ethical code, or following anauthority’s orders. They did it because they pursuedtheir own self-interest. The Brewer, Baker, andButcher did not provide us food because we are

hungry, but to increase their own wealth. They do not wait for direct orders to produce: cattle ranchers inOklahoma do not call New York restaurants to see how many prime rib steaks they require. They plan viasignals of the price system. The hungrier I am, the more I am willing to pay for food, raising the price of foodand signaling the profitable opportunity to producers. If the price becomes to high, I will buy less and the pricedeclines. No one told me to consume more or less or the farmers to produce more or less, we were all guidedby the "Invisible Hand" to serve our common interests.

To have reliable prices, markets are necessary, where our "natural propensity to truck, barter, and trade" allowsmutually beneficial exchanges. In addition, because we bear the full costs and benefits of producing andconsuming, we will all make better decisions about how to use our limited resources to satisfy some of ourunlimited wants (Economics Insight # 1: There is no such thing as a free lunch).

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4.3 THE LABOR THEORY OF VALUE4.3 THE LABOR THEORY OF VALUE

The third element of Smith's model of capitalism is the Labor Theory of Value. In short, he argued that thevalue of any item was equal to the amount of work that went into producing it. For example, the value of woodis not its intrinsic usefulness; it has no value until a person chops down the tree and carries it to market. Labor,measured in time, determines value. The relative value of two items could be found in the ratio of labor usedto produce them. For example, if an ounce of gold took 40 hours to mine while a bushel of corn took only 1hour to harvest, then one ounce of gold should purchase 40 bushels of corn. For Smith, and most earlyeconomists, value derived from input costs. If a worker was more productive, they commanded higher wages.This does not mean that everyone's time was equal and not everyone produces tangible commodities (i.e.,teachers, inventors, doctors). Part of production costs is time spent in training and education. In this manner,Smith's thinking was entirely conventional for a late 18th century Scot. John Locke (although not a Scot) hadwritten about the creation of property resulting from the admixture of labor with natural resources, hencegovernments existed to protect "life, liberty, and property."

However, Smith had a problem. In 1776, it was all tooclear that many individuals did not have control overtheir own labor. Slavery persisted in most WesternEuropean countries and their overseas colonies. InEastern Europe, serfs had yet to be emancipated. As aresult, it was common for early advocates of capitalismto be strident abolitionists. Perhaps the greatestexample of this was the support of the Manchester andLiverpool textile workers for the Union during theAmerican Civil War. They were adversely affected by thecotton embargo of the South, but they realized thatworkers could not be free anywhere unless slavery wasabolished everywhere. In addition, many historiansview the American Civil War as a conflict between theindustrial, capitalist North and the agricultural, semi-feudal South and not about slavery, union, etc. commonly discussed in American history textbooks.

The LTV is usually contrasted with market (scarcity) and "adding-up" theories of economic value. In markettheories, prices (and therefore value) are set by the "Laws of Supply and Demand" where the intersection ofthe supply and demand set prices. Marginal analysis and the use of supply and demand curves were notavailable to Smith. The "adding-up" theory argued that an item's value equaled factor inputs: land (a.k.a.natural resources), labor, and capital (machines, technology & money). Sum the inputs is the cost of the newcommodity. There are problems: just because an item took more raw materials, more labor, greater investmentand craftsmanship does not mean empirically or normatively that their compensation will be commensurate.The other key implication of the labor theory of value is the need for property rights. Individuals must havecontrol over their labor for them to deploy it well. Therefore, there must exist a political and legal system thatdefines rights and obligations (rental contracts, wage agreements, titles, leases, etc.) otherwise, productiveexchange and use of the factors of production will be impossible. This position has been most forcefully arguedrecently by Peruvian economist, Hernando de Soto in his book, The Mystery of Capital. He argues that themain difference between the developed and developing world is the strength of property rights.

5.0 CLASSICAL ECONOMICS: VICE AS VIRTUE5.0 CLASSICAL ECONOMICS: VICE AS VIRTUE

While earlier thinkers argued mainly that virtue was irrelevant -- there was no relationship -- the Classical

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economists went even further. Not only was vice permissible, it was downright desirable. Previously, good endscould come from bad means. This was not a case for vice. None insisted on greed or dishonesty or violence;they only noted that methods must be evaluated by their goals. However, the Classical economists of the early19th century England began to make the case that vice was virtuous and behaviors and decisions that wouldnormally be beyond the pale were not only acceptable, but praiseworthy. This analysis all derived from the "nosuch thing as a free lunch"notion. If you did something charitable, like give a hungry person a meal, you weretaking food away from someone else. If you gave one student a grade better than their performance or abilitiesyou were harming some other student who should have received that mark. Poverty was good because it taughtself-reliance; misery and war were good because they checked population growth. While not the full-GordonGekko, many of the contrarian notions about self-interest, selfishness and greed being positive values havetheir origins in the conclusions of the Classical economists. Economics turned the standard of morality from“love thy neighbor” to the “forgotten man.”

5.1 MALTHUS & THE DISMAL SCIENCE5.1 MALTHUS & THE DISMAL SCIENCE

The first of the these classic economists was Thomas Malthus, who wrote his Essayon Population in 1798. Since we will cover Malthus in detail later, a few words herewill suffice. Malthus observed that resources (i.e., food) grew arithmetically, whilepopulation grows geometrically (exponentially, think bunnies). Eventually, wewould overshoot the earth's capacity to provide our sustenance. Malthus hadnoticed that while England had, due to the Industrial Revolution, quickly becamethe richest nation in the world was also witnessing widespread penury. At the time,there were generous poor laws that provided food and shelter for the unemployed.Malthus argued that this policy was mistaken. If individuals could not provide forthemselves, they should not receive assistance from others or the government. Thisfood was only coming from someone else's table. Plus, it would invite "moral

hazard," i.e. if you give someone food for free, they have no incentive to work for their own food. This wouldlead to less food being produced, more mouths to feed -- a sure recipe for environmental degradation anddisaster. All modern environmentalists from Paul Ehrlich to Donella Meadows owe Malthus a great deal oftheir view to his analysis. Anyone who uses the word "sustainability" conjures the ghost of Malthus.Ultimately, our unlimited desires would run afoul of our limited resources. Therefore, we must be willing tobe heartless now to save millions later.

5.2 RICARDO & ECONOMIC NATIONALISM5.2 RICARDO & ECONOMIC NATIONALISM

Another classical economist was David Ricardo, who took many of Adam Smith'sinsights and expressed them in mathematical terms, examined the problem of tradeand specialization. At the time, England placed high tariffs, called the "CornLaws," on foreign food because the powerful English nobles owned most of theland and stood to benefit from forcing English workers to buy food grown on theirlarge estates (think of Irish peasants subsisting on potatoes leading to the GreatIrish Famine). Politicians called upon Englishmen to "Buy British" and not buycheaply produced French and American grain. This lead to high food costs and highwages to pay for basic necessities. This is similar to current policies that urge use to"Buy American" and not cheaply made Chinese goods, however, the best currentexample are the high Japanese tariffs on imported rice. A 5 lb. bag of rice in Japancan cost $50 to $60, while it costs less than $5 in the US. Japanese politicians claim that the Japanese have"unique" stomachs that cannot digest foreign grown rice. Above and beyond these claims, these policies protectdomestic workers and most people would rather protect the jobs of their countrymen than foreigners.

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However, Ricardo argued that countries should not keep out foreign goods. If the English could buy cheapforeign grain they would have more money to spend on other things made by English industries. This may bebad for the landed English nobility, but it would be good for England. The video below gives a brief overviewof Ricardo's ideas.

6.0 MARX ATTACKS 6.0 MARX ATTACKS

The greatest critique of Classic economics was by a German journalist and political activist, Karl Marx. By thetime that Marx wrote his major works in the 1840s and 1850s, the Industrial Revolution was in full swing.Marx, at the time, spent a lot of time in the British Museum’s reading room reading the works of Smith,Malthus, and Ricardo and concluded that, for the most part, they were all wrong.

While it is common today to portray Marx as a revolutionary tryingoverthrow the status quo, but his criticism of capitalism and economics wasquite traditional. Marx is often misquoted and misunderstood and many ofthe statements attributed to him come from either a) that few today readMarx because his prose is dense and his vocabulary opaque and b) willfulmisreadings. Perhaps the most common misinterpretation is the slogan of“from each according to his means and to each according to needs”suggesting radical equality and redistribution. What this quotation oftenleaves out is that Marx wrote in his Critique of the Gotha Programme that“our banner SHOULD NOT read from each according . . .” [emphasisadded]. Marx appreciated the need to concentrate capital and invest, anddespite his reputation, saw capitalism as a progressive force in world history.In the end, Marx was a first-rate journalist, a first-rate political scientist, asecond-rate economist, and fourth-rate revolutionary. Many themes swirlingin the winds today have their provenance in Marx’s ideas such as globalization, materialism, the growth of thestate/public sector, and the socialization of risk and investment. To appreciate Marx’s perspective, it is necessaryto separate him from the 20th century revolutionary movements that employed his economic (not political)theories, from Marx the observer of mid-19th century capitalism and his critique of Classical economics.

Marx attacked the foundations of modern capitalism -- the division of labor, the "invisible hand" marketsystem, and the labor theory of value -- laid out by Adam Smith. Marx thought modern capitalism was a "starkutopia". It was a utopia because it would enable humans to produce more than ever thought possible and wecould escape persistent poverty and penury, but it was "stark" because while we could make paradise, we wouldnever be able to enjoy it. Unlike Smith, who was writing at the beginning of the Industrial Revolution in thelate 18th century, Marx was able to witness the growth of industrialization and urbanization and itsimmiseration of workers. Capitalism, in Marx's view, would turn us into cogs of a machine and eliminate ourhumanity by either turning us into brutish beats or soulless Naz-gul, not to mention it would probably destroyour planet, invite war and social conflict, and many other bad things in the process.

7.2 DIVISION OF LABOR v. ALIENATION7.2 DIVISION OF LABOR v. ALIENATION

Smith praised the division of labor because its ability to make human societies more productive. Marx,however, thought it would produce alienation. Marx observed that under the division of labor no one wouldactually make anything. We would only be a part of the process. We could not look at our work and be proudof it because we could not claim it as our own. For example, as a teacher, our "work" are students, but eachindividual teacher only produces a "part" of the student's education. We cannot claim the finished product asour own. We would become "alienated" from our work, merely replaceable cogs in a machine that capitalistmanagers would toss away and replace when they became worn out.

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The larger social problem would be that we would create an "autistic" society of social morons who onlyunderstood our specific tasks, but could not relate to others, except through anti-social behavior. Think PinkFloyd's "Another Brick in the Wall," Green Day's "Longview" or The Who's "Quadrophenia" as examples ofwhere Marx thought we were going. We can relate to things, but not people. We would only care about our littlecorner of the world, but unable to see the world as a whole.

Later writers would extend this idea, in part, to the sphere of moral and political accountability, most famouslyby Hannah Arendt in her commentary on the Adolf Eichmann trial. Arendt worried that “evil” had becomebanal. Eichmann, the Nazi bureaucrat responsible for making the railroad timetables that sent Jews and othersto concentration camps, had eluded capture after WWII. However, in the 1960s, he was captured by Israeliagents and put on trial in Jerusalem. His defense was that he was merely “following orders” and doing his jobto coordinate rail traffic; he was not a war criminal, he was merely part of the “division of labor” thatengineered the Shoah. Eichmann, according to Eichmann, did not think about the consequences of his actions;it did not matter if it was people or cattle, railroad schedules were railroad schedules. The problem of moralresponsibility in a capitalist economy with an advanced division of labor is twofold. First, individuals nolonger feel responsible for their actions, no matter how heinous. While some advocates call attention to theseissues, most do not consider how their casual drug use leads to gang violence and poverty in Latin America,care whether their food or lifestyle is environmentally responsible, whether their clothing is produced withchild labor or not or the civilian casualties of war. We are alienated from our actions and can plausibly claimthat “it is not our fault” even to ourselves. George Orwell noted the problem in one of his essays:

It also makes it more difficult to hold individuals responsible because responsibility has become diffuse. Undera division of labor, everyone is responsible and therefore, no one is. The best example is the 2008 FinancialCrisis: great harm was done to a wide spectrum of innocent people, but there have been few prosecutions andwidespread, multidirectional fingerpointing. In short, everyone: homeowners who took out large mortgagesand purchased properties they could not afford, banks and financial institutions that took advantage of theirclients, government regulators who looked the other way, legislators willingly under the thrall of lobbyists andspecial interests, developed nations with export-oriented currency manipulation, the “lapdog” media, andacademics in relevant fields sold their expertise for money or did not speak up could be held partly responsible,but few have been held to account, wholly or in part. As a result, people direct blame at anonymous,amorphous entities: corporations, government, unions, or banks, instead of individuals. Although later writersquestioned Arendt’s details of the Eichmann case, experiments such as Milgram’s “obedience to authority” andthe Stanford prison experiment indicate that the point may still be generalized.

Another aspect is the social impact of meaningless work. While the Division of Labor solves the “economicproblem” of scarce resources, it spawned new sets of need, described by Maslow as “self-actualization.” The“identity politics” that began in the late 1960s and flourished in the “me” generation fo the 1970s ranging fromreligious fundamentalism, the women’s movement, LGBT liberation, the environmental movement,multiculturalism, the sexual revolution, new age spirituality all reflect the desire to assert and affirm personalidentity against social pressures to conformity and uniformity of the previous postwar decades. In addition,the rise of the internet allows individuals to form self-selected identity communities that foster “bonding”social capital at the expense of “bridging” social capital. The concern raised by sociologist Emile Durkheimabout the anomie of modern social life under the division of labor remains relevant.

7.3 INVISIBLE HAND vs. EXPLOITATION7.3 INVISIBLE HAND vs. EXPLOITATION

Marx’s second group of criticisms regarded Smith's "invisible hand." Smith, as was common amongphilosophers of the Scottish Enlightenment, believed in the natural harmony of human interests. The invisiblehand coordinated individual self-interest to produce the common interest. For Marx, raised in the Hegelian

As I write, highly civilized human beings are flying overhead, trying to kill me. They do not feel any enmity against me as anindividual, nor I against them. They are ‘only doing their duty’, as the saying goes. Most of them, I have no doubt, are kind-heartedlaw-abiding men who would never dream of committing murder in private life.

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dialectic, saw history as the result of class struggles. There were always havesand have nots and one group exploiting another. The class who controlledthe “means of production” In the Ancient World, it was masters over slaves;in the Middle Ages, lords exploited serfs, and now capitalists, who ownedthe factories would exploit workers. Applying the LTV, Marx inferred thatsocial inequities under capitalism were due to the extraction of workers'surplus value through the circulation of capital. Therefore, workers did notreap the full compensation for their value added to production. Marx didnot see this process of “evil” capitalists, but the product of historical lawsof economics and class struggles. Marx believed that the capitalists wouldbe their own “grave diggers” because the process of capital accumulationwould lead to a decreasing efficiency of investment causing more hoardingof capital and less investment and growth. In this way, Marx shared thepessimism of later Classical economists such as Ricardo and Malthus, even while criticizing them in otherways. The key insight of Marx was to note that the terms of exchange between workers and the capital werenot equal. It could not simply be analyzed as a technical question of production, but the power relationshipsinherent in economic activities and the structure of the economy should be scrutinized. To paraphrase E.E.Schattschneider, the flaw in the capitalist heaven is that the “heavenly chorus sings with a strong upper-classaccent.” The debate over capitalism stills turns on whether its power to increase production raises more out ofabsolute poverty outweighs the social inequities generated by the capitalist organization of the economy.

The second issue for Marx was the distinctionbetween use values and exchange values ofcommodities. The use value is the intrinsic value anitem has when "in use," i.e., the value of a hammeris its ability to drive nails. The exchange value is theprice it commands in a market. The best examplethis is the demand for branded or designermerchandise. It has the same "use value" as genericmerchandise, but individuals put a higher"exchange value" on the item because of itsassociation with a brand. Marx thought this woulda) fundamentally gum up the operation of thesystem because there was no objective system ofdetermining value, and b) it would make us allmaterialistic or engage in “commodity fetishism.”If exchange values became the basis for economicvaluations, price, rather than reflecting theunderlying use value of commodities, wouldbecome the insecure anchor of economictransactions. Ultimately, we would treat everythinglike an economic commodity -- instrumentally --including human affection and human themselves.Labor would simply become one of many costs of

production instead of the purpose of the production itself, resulting in a warped social morality.

7.4 FREE LABOR vs. WAGE SLAVERY7.4 FREE LABOR vs. WAGE SLAVERY

The final axis of Marx's attack was on the LTV and the classical defense of free labor. Yes, Marx wrote, theinstitutions of slavery and serfdom had dissolved, but only to be reconstituted in capitalists exploiting wage

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laborers. The form had changed, but the pattern of class conflict recurred. A famous study called Time on aCross by Nobel Laureate Robert Fogel found that the nutritional level of Irish-American wage laborers inBoston was lower than for African-American slaves in the South before the American Civil War. This does notmean that slavery was not abhorrent, but that factory wage-laborers also did poorly and not sharing in thebenefits of capitalism. For the capitalist factory owner, worker were disposable inputs, to be used to exhaustionand then replaced: there was no need to maintain the worker above subsistence. In contrast, a slave was aproductive asset to the Southern plantation owner and maintaining this asset -- by feeding them well, forexample -- made more economic sense.

At the time, many debated the real difference between “renting” oneself for a wage and “selling” oneself intoslavery or indentured servitude. While this may seem apparent today, it was not for many in the 19th century.In addition, while many nations modernized their labor laws and institutions due to the social revolutions ofthe 19th century in Europe, the US maintained the English common law framework that enshrined the “lord-servant” and “master-apprentice” relationships from the Middle Ages in contemporary labor law. At least inthe US, this questions the reality of “free labor” and “freedom of contract.” In particular, Marx commentedon the “double-freedom” that enabled modern capitalism. Workers had to be “free” from feudal obligations topurse the most productive and profitable occupations and they had to be “free” of the means of production(capital) to compel them to sell their labor -- and only their labor -- to those that did. Marx describes theinherent tension in his chapter, “The Working Day.” The capitalist, having “purchased” the labor, had aninterest in maximizing the amount of work and therefore pushed for a longer “working day” and viewed“breaks” as theft or breach of contract. Workers, knowing that these conditions would shorten their “workinglife” argued that this would reduce the quantity of the good they could “sell” in the labor market. Both thecapitalist and the worker’s claims are just in economic terms, the “tie” is broken by power of social relations.

Before the Industrial Revolution, most households were self-sufficient: they grew their own food, built theirhouses, and made their own clothes. Now, crammed into small tenement apartments in cities, they dependedupon earning money by working for someone else to provide for the basic necessities of life. They lived to workand did not work to live. Like animals raised for slaughter, capitalism condemned many to work 18 to 20 hourdays, six or seven days-a-week simply to stay alive. In the end, Marx observed, this is not a humane way toorganize society or the economy. In addition, workers were more dependent on wages than before. They couldnot, as they had as farmer-peasants, grow their own food, make their own clothing, build their own shelter, butdepended on earning a wage from another to support themselves with the basic necessities of life.

8.1 RELIGION & THE MORAL ECONOMY8.1 RELIGION & THE MORAL ECONOMY

Marx was an atheist and famously described religion as the "opiate of the masses." However, many religionsshared his critique of capitalism. Most religions preach a version of communism, sans atheism. Most religionscommand us to share with the “widow and orphan,” to care for the less fortunate, and remind us of theemptiness of material riches (Sic transit gloria mundi). For example, one of the Islam’s pillars is zakat: the dutyto give money to charitable causes and from Christianity there are norms of noblesse oblige, i.e. that rich peopleare responsible for providing for those less fortunate than themselves. Andrew Carnegie, the famous robberbaron, wrote a tract called The Gospel of Wealth where he expressed his belief that someone who died rich hadfailed. For most of the Middle Ages, as dramatized by Shakespeare in The Merchant of Venice, usury, or lendingmoney out at interest, was a sin. In Ancient Judaism, there was the year of jubilee that occurred every 40 years( = one generation) where all land would be pooled and redivided equally so that inequities would not grow orbe permanent. In most Asian religions, there is a decided indifference to wealth and merchants (and theirfamily) were held in low esteem. Buddhism taught that attachment to material things (including wealth) wasthe cause of all suffering and Westerners chimed in with the notion that money was the root of all evil.Religious clergy in both the East and West tooks vows of poverty.

For purposes of illustration consider these following passages from the Judaeo-Christian-Islamic Tradition:

8.1 WEBER, THE PROTESTANT ETHIC & CAPITALISM8.1 WEBER, THE PROTESTANT ETHIC & CAPITALISM

However, something happened on the way to the rapture.Beginning with the Protestant Reformation (and the riseof the heterodox Mohist sects in China and whatsociologist Robert Bellah called "Tokugawa Religion" inJapan), the relationship between the eternal and theeconomic changed. Instead of stunting economicdevelopment, certain strands of Protestantism seemed toencourage profit-seeking behavior. This theory,popularized by famous German sociologist andeconomic historian Max Weber, argued that the tenets ofCalvinism (a.k.a. Pilgrims and Puritans) was particularly conducive to the development of capitalism. In astudy titled The Protestant Ethic and the Spirit of Capitalism, Weber argued that the Calvinist belief inpredestination made them desperate for signs that they were among the elect. They could not change the finaloutcome, but they could find evidence to “read god’s mind” in their material prosperity. Those that Godfavored would enjoy earthly success as well. As a result, these new age religionists equated work with prayer,taking the Benedictine Rule “laborare est orare” – work is prayer – to its logical extreme and secularizing it.They wanted to earn money, but not spend it, leading to capital accumulation. In addition, because thefoundation of faith was a human text and not the clerisy, it required a literate population, also a preconditionfor Smith’s division of labor.

Finally, obsessed as they were with their own salvation, they became compulsive calculators – “time is money”and “idle hands make for the devil’s work.” They pioneered the mechanical clocks that made it possible tomeasure time – and hence effort – to the smallest increment. Before the Protestant Reformation, religiousbuildings had bell towers, or minarets in the Islamic world, but afterward clock towers replaced the

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"It is easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of heaven.""Blessed are the poor, theirs is the Kingdom of God.""Hearken to this, you who swallow up the needy and cut off the poor of the land. You who purchase the poor with money and theneedy in order to inherit them and the refuse of the grain we will see. The Lord swore . . . I will never forget any of their deeds.Shall not the land quake and its inhabitants be destroyed? yea, it shall rise up wholly like the rain cloud and it shall sink like theriver of Egypt."

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approximate time keeping of bell towers and minarets. Clocks are important to the development of the moderneconomy for two reasons. First, clocks are the epitome of the mechanical engineering and clockmakingcultures, such as the Netherlands, Switzerland, and Japan, will likely have the mechanical aptitude to developthe machines and machine tools needed for industrial production. It is not accidental that the only Westerngood the Chinese Qing Empire showed interest in were cuckoo clocks. Second, mechanical clocks allow peopleto measure labor in terms of time, enabling the compensation of labor based on time duration.

Although later scholarschallenged the specificempirical case made byWeber, there is someevidence for Weber’sbroader theory linkingcultural values andeconomic development.Areas strong in CalvinistProtestantism were at thefore of the IndustrialRevolution: Scotland,Switzerland, and the Huguenots, the Pilgrims/Puritans/ Congregationalists of the New World were alldescendants of this strict form of Protestant Christianity. So, instead of religion being a barrier to economicdevelopment, it became a midwife.

9.1 LAISSEZ-FAIRE & SOCIAL DARWINISM9.1 LAISSEZ-FAIRE & SOCIAL DARWINISM

The latter half of the 19th century witnessed the rise of Darwinian biology, Victorian social mores, theexpansion of Western overseas empires, and laissez-faire economics. These are not unrelated developments.Although laissez-faire economics has its origins in Classical economics, the late 19th century saw the additionof an element absent in previous formulations: competition. For the Classical economists, markets wereprimarily informational mechanisms that conveyed messages to producers and consumers. The presumptionwas that there is a harmony of interests and the market acted primarily as a coordination device to facilitatethe pursuit of mutual or common interests. The Darwinian concepts of “natural selection” and “survival of thefittest” provided a different gloss to the operation of markets. Instead of coordination and communication,markets were selection mechanisms that winnowed the “random mutations” of good choices and productsfrom the bad, allowing only the “fittest” to survive. Markets worked due to the dynamics of competition. Inaddition, emphasis from placed on the progressive nature of social evolution. Competition was necessary forsocieties to grow by selected only those who were best adapted to survive and reproduce. The biological basisof Darwin’s theories also supported the notion that competition was the natural state.

Any “unfair advantage” distorted the process of social evolution produced by markets, and therefore,governments should not intervene -- laissez-faire -- in the economy to help those who could not compete. Ifone removed the artificial supports that enabled weaker elements of society to survive, society as a whole wouldhave better traits and qualities passed on to the next generation promoting social evolution. Social Darwinismdiffered from Classical economics in another key respect. For the Classical economists, the consequence ofintervention was a misallocation of resources -- waste, inefficiency, but for the Social Darwinists, the harm wasthe misalignment of incentives: the wrong people, products, and processes would be “selected” and socialprogress would be retarded. In their own view, the advocates of Social Darwinism were agents of progress.Trust and monopolies were engines of progress because they rationalized production processes; imperialismbrought civilization to “unenlightened” peoples; war and trade were tests of a nation’s mettle.

Of course, who received an “unfair” advantage through government policy and what traits were “best fitted”

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depends on one’s perspective. During this period, the US pursued incredibly protectionist policies and hightariffs to protect manufacturing and granted railroads enormous land subsidies and devised the modernlimited liability corporation to shield business owners from certain risks. Few advocated a consistent laissez-faire or Social Darwinist policy. What interests were protected, which risks were protected, and what classesbenefited from government policy shaped the nature of capitalism in different developed nations.

9.2 POLITICO-ECONOMIC ORIGINS OF WELFARE STATES9.2 POLITICO-ECONOMIC ORIGINS OF WELFARE STATES

Despite the dominance of laissez-faire economic doctrines, welfare states and social insurance systemsemerged from social contracts forged during this period. While all reacted to the twin developments ofdemocratization and industrialization, the balance of interests differed from country to country. There arethree basic economic factors: land, labor, and capital that also represent three social and political interests. Asa factors of production, “Land” are natural resources, real estate, and quasi-rents, “Labor” is the time andefforts of workers, and “Capital” are tools, including money, necessary for production. Labor represents theinterest of wage-earners. Land is the interests of farmers and rentiers including landlords, bondholders, andprimary economic sectors such as agriculture and mining. Capital stands in for the interests of the investingclass, including banks but also the owners of firms. Any economic product can be thought of as differentproportions of these factors.At any time, one of the three factors is relatively scarce, allowing it to extract ahigher return for its contribution. In response, the other two factors mobilize politically to balance thepolitical influence and economic power of the scarce factor.

9.2.1 SOCIAL WELFARE & SOCIAL INSURANCE9.2.1 SOCIAL WELFARE & SOCIAL INSURANCE

Social insurance protects individuals against the risks of a modern economy. Farmers and miners face thenatural risks of bad harvests and fluctuating commodity prices. Workers face the risk of disability andunemployment, the need to attend to the care and raising of their children, and changes in the cost of living.Capitalists face the risks of competition from domestic and foreign firms, technological change, and runs onleveraged assets (bank runs). Welfare states provide insurance against these risks to facilitate the smoothoperation of the economy. In the United States, price supports for agricultural products, subsidies for mineraldiscovery and extraction, and guarantees for bond and pensions insure the major risks of landed and rentierinterests. For workers, unemployment insurance, Social Security, education and training programs, taxsubsidies for employer-based health insurance, and maternity leave policies protect against many of the risksfacing workers and their families. For investors and entrepreneurs, organizations like the FDIC insure depositsagainst bank runs, trade policies grant protection against unfair trade practices, and various regulatoryagencies protect businesses against unfair trade or business practices by their competitors. In addition,interventions in financial markets to preserve asset prices also provide insurance against inflationary anddeflationary risks.

9.2.2 TYPES OF SOCIAL INSURANCE9.2.2 TYPES OF SOCIAL INSURANCE

Although classifications vary, scholars generally divide welfare states into three broad categories: liberal,corporatist, and social democratic. Liberal states attempt to provide social welfare mostly through market-based policies, such as tax incentives, and the promotion of workforce skills, such as broad-based educationand job retraining programs. In addition, welfare policies tend to be means-tested, meaning that services, suchas Medicaid and unemployment insurance, are made available on a need-based criteria. Corporatist welfarestates operate by giving organized groups, such as labor unions, agricultural cooperatives and tradeassociations, guaranteed representation and control over policies that affect their welfare that allow them tonegotiate collectively for their groups interests. For example, German works councils provide laborrepresentation on the corporate boards of companies that employ their workers. Social Democratic welfare

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states aim at providing a minimum level of social welfare for all citizens through government programs withuniversal access. For example, they may provide longer maternity-leave, subsidized public and collegeeducation, and a guaranteed minimum and health insurance. They tend to be high tax states to support thesepublic programs.

9.3 ORIGINS9.3 ORIGINS

In the United States, the scarce factor was capital. Even inthe late 19th century, land was plentiful relative to thehuman and financial resources of the country. UnlikeEurope, there was not landed aristocracy that controlled theland. Labor was unorganized and low-skilled relative to itsEuropean counterparts. Open immigration further added tothe labor supply. Capital, however, was in scarce supply,with the House of Morgan funneling European capital intoAmerican businesses. In short, capital was scarce comparedto land and labor and the political battles were foughtmostly between the Populist coalition of farmers in theSouth and West with industrial workers in the large urbancenters and the financial and corporate interests of theNortheast and Midwest. This political division organizedpolitics in the US along economic lines posing the “haves”

versus the “have-nots.” It also enshrined laissez-faire and small government as governing principles, so thateven when the New Deal passed a raft of social legislation, it was never as generous or comprehensive as itsEuropean counterparts. This coalition also yoked labor to farmers and Progressive reformers who shared asomewhat different social policy vision and precluded the emergence of labor as an independent and organizedpolitical force. Social policies developed piecemeal, starting with pensions for Union War veterans, andallowed the rise of private insurance provision through fraternal organizations and mutual aid societies.

In central Europe, the scarce factor was labor, or morespecifically, skilled labor. Labor was highly organized andradicalized in the industrial cores of many Europeancountries. The unification of Germany was forged underBismarck’s coalition of “iron and rye” -- Ruhr industrialists(Capital) and Prussian Junkers (Land). In Japan, the MeijiRestoration was accomplished by an alliance of Osakamerchants (Capital) and Samurai / Imperial landlords(Land). In Italy, Piedmont-Lombard industrialists teamedup with Southern agricultural landlords held power duringthis period. To a lesser extent, these political coalitionsappeared in Latin America’s Southern Cone (Argentina &Brazil) with similar consequences. These politicalconstellations gave social policy a decidedly conservativecharacter. Many social welfare functions were left in thehands of religious and family institutions. It is also not accidental that many of these regimes lapsed intoFascism during the interwar period. However, they all faced powerful and rising trade-union movements andworker’s parties that challenged the status quo. Many of the social reforms, such as Bismarck’s social insurance(mimicked by Giolitti in Italy and Hara Kei in Japan) policies, were passed as measures by conservativepolitical elites to co-opt or appease political pressures created by these movements. Division between thepolitical and revolutionary wings of Socialist movements meant that they expanded their influence in both the

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workplace and the public sphere. As labor evolved into “status quo” political force, they were oftenincorporated into shared power arrangements that gave labor organizations a voice and role in politicaldecisions, but also preserved prerogatives and interests of conservative social and economic groups.

In the countries that developed into Social Democraticwelfare states, the scarce capital was often land. As smallisland nations (England) or near-Arctic climates(Scandinavia), arable land was in short supply, especiallyafter the population explosion attending the onset of theIndustrial Revolution. This land was often in the control ofaristocratic landlords who lived off the agricultural rents oftheir estates. These nobles often had disproportionatepolitical power and influence and used it to maintain theirposition and wealth by pursuing protectionist policiesagainst agricultural products. The debates over the EnglishCorn Laws is an example of these conflicts. High food pricesraise the living costs of industrial workers, created wagepressures that reduced the profit for new industrialcapitalists and entrepreneurs. Therefore, employers andworkers found common cause in opposing the interests of the landed elites. The alliance between the LabourParty and the more bourgeois Liberal Party prior to WWI showed the continued relationship. The unity of“good government” reformers from middle-class and professional backgrounds combined with working classvotes resulted in social policies that were more comprehensive, universal and publically administered than theirLiberal or Corporatist counterparts. Although Labour was a pillar of the governing coalition, it was a juniorpartner, and not the independent and institutionalized agent of workers as it was on the European continent.

While tensions remained between the interests of employers and workers, the political environment oftenmeant that employer concerns were incorporated into the design of policies and the adversarial relationshipfound in other countries is muted. A key aspect of Social Democratic welfare states is that the policies are astatement of social solidarity, a political commitment that all citizens, regardless of merit or means, is entitledto material resources required for a decent life. The passage of the British NHS after WWII reflected the senseof solidarity created by the shared sacrifice in the war effort. Similarly, the passage of welfare policies inScandinavia was intended to ameliorate underlying social conflicts. The “labor peace” and business-laborcollaboration in the WWII war effort in the US also laid the ground for social legislation. As a result, the valueof welfare state policies goes beyond its impact on economic outcomes alone.

10.0 NIETZSCHEAN ECONOMICS10.0 NIETZSCHEAN ECONOMICS

The philosopher and classicist Friedrich Nietzsche was not an economist,but his ideas had a significant impact on economic thinking through hisinfluence of economist Joseph Schumpeter on entrepreneurship and“creative destruction” and the novelist and philosopher Ayn Rand.Nietzsche’s philosophic worldview is complex and difficult to summarize,but his concepts of the “will to power,” “supermen” (ubermensch), and thedistinction between “master” and “slave” morality hold significantimplications for the intersection of ethics and economics. In addition,capitalism’s seeming unique protean ability to recreate itself gives it aNietzschean flavor. Nietzsche was less concerned with creating a newethical system or advocating a particular set of moral values as he wasinterested in the origins, or “genealogy,” of our moral and ethical ideas.

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He divided individuals into two groups: a small elite of “supermen” who created and lived by their ownstandard of morality and the larger “herd” who slavishly followed the ideas of others. The “supermen”possessed a “will to power”; they had a vision of the world and imposed their will on it; they did not accept theworld as it is, but blazed their own path (for others to follow) and reshaped the world as a result. These“supermen” are natural masters, while the “herd” are natural slaves. “Supermen” base their morality on“excellence” and “success” -- even excellence and success in immoral ways -- and not on “good” and “evil.” Forexample, Odysseus could be an “excellent liar” or a “superior pillager of cities” even though conventionalmorality sees lying and pillaging as immoral. It was more important to be original than to be ethical.

Nietzsche’s argued that the envy and resentment of the herd shamed those who possessed the “will to power”and subordinated their ethic to the Judaeo-Christian-Islamic ethic that emphasizes charity (Tzedekah, Zakat),pity, poverty (“blessed are the poor”), submission/obedience (Isaiah’s “suffering servant”; Muslim = “one whosubmits”), other-worldliness (“store up treasure in heaven”) and protecting the weak and vulnerable (“widowsand orphans”). Conventional morality imposes the ethics of the priestly class on the ruling warrior class. ForNietzsche, only “supermen” express “sentiment,” but the “herd” expressed “re-sentiment” bringing the strongdown. In the modern day, this is the purported “envy of success and wealth” or “haters gonna hate” idea. Interms of economics, the suspicion of wealth and success is rooted in the “slave-morality” of egalitarian ethics.In addition, the preference for the intelligence of experts over the “wisdom of the crowds” or “abstract” (book-learning) over “practical” (street-smarts) knowledge exemplifies the dichotomy Nietzsche draws.

10.1 SCHUMPETER & ENTREPRENEURSHIP10.1 SCHUMPETER & ENTREPRENEURSHIP

Despite its emphasis on individual freedom, particular individuals played little role in economic thought priorto Nietzsche. Abstractions and personifications such as “capital” and “labor” and “producers” and“consumers,” generalized preferences and behavior. Marx’s capitalists behaved like capitalists, not as AndrewCarnegie, John D. Rockefeller or Cornelius Vanderbilt. There was little explicit role for innovation, technology,(sometimes explicitly so), or entrepreneurship. The impersonal forces of “supply and demand” or the “invisiblehand” drove economic activity, not individual businesspersons or buyers.

Influenced by Nietzsche’s ideas, Joseph Schumpeter reversed this conventional wisdomabout economics and put the priority on entrepreneurship. It cannot be assumed simplybecause there is a need or opportunity that someone will fill it. Economic developmentrequires individuals with “vision” such as Ford, Jobs, or Morgan, to reorder economicactivity. Entrepreneurs see an opportunity, take risks, and make it happen. This is not moralor immoral, but simply successful or unsuccessful. These people are entrepreneurs. They donot simply seek conventional profits or maximize utility given existing economic structures,but revolutionize the economy through “creative destruction.” To “create” a renewable-energy economy, one must “destroy” the carbon-based one; to create “21st century education,” one mustdestroy traditional education. Entrepreneurs are the economic analog to Nietzsche’s “supermen”: they createtheir world, others just live in it. American economic vitality comes from “Yankee ingenuity,” pioneeringinnovation and entrepreneurship. While one may criticize the its economic inequities, its capacity for devisingand implementing new products and businesses make it an engine for economic growth and development.Schumpeter also argued that business cycles are driven by waves of innovation that lead to economicproductivity and growth. The chart below shows a stylized depiction of Schumpeter’s waves.

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10.2 AYN RAND & OBJECTIVISM10.2 AYN RAND & OBJECTIVISM

Like Nietzsche, the writer Ayn Rand also had a significant impacton economic through her novels Atlas Shrugged and TheFountainhead and their protagonists John Galt and HowardRoark. She was an acquaintance of long time Federal ReserveChair Alan Greenspan and has become an economic guru formany American conservatives. Rand believed that should live fortheir own interests and vision only and should not be required toput their talents and abilities at the service of others. Her novelspit self-made and talented individuals who face the pressures ofconformity and collectivism, usually personified in theirantagonists. The climax comes when the main character “goes Galt” and withholds his services and talents,collapsing the economy. The hero declares their independence and forces society to accept their terms for theircontribution. In short, Rand’s protagonists embody the Nietzschean “superman” ideal who cast off the “slavemorality” of their society. It divides the economy into two groups: the “makers” (“job creators”) and the“moochers” and implies that the makers are the dynamos of the economy and must be given special treatmentto do their essential work. In addition, they are makers of their own moral standards and cannot be judged bythose who depend on them for their economic welfare.

In her non-fiction works -- Capitalism: The Unknown Ideal and The Virtue of Selfishness -- Rand outlined herphilosophy of Objectivism. Objectivism argues that priority should be given to objective reality and thatrational self-interest trumps other moral claims, particularly those that urge social justice or egalitarianredistribution, especially at the direction of government. In Rand’s view only unfettered capitalism isconsistent with the preservation of individual egoism a prerequisite of rational thought. Rand’s influence isindisputable: in a 1990s survey by the Library of Congress, respondents rated Rand’s Atlas Shrugged as thesecond most influential book of all time after the Bible. As John Rogers wryly observed:

10.3 VEBLEN & THE INSTINCT OF WORKMANSHIP10.3 VEBLEN & THE INSTINCT OF WORKMANSHIP

Another key economic thinker influenced by Nietzsche, but who came to diametricallydifferent conclusions, was Thorstein Veblen. Like Nietzsche, Veblen tried to identify thehistorical basis of our ethical norms and instincts and found Victorian morality with itsemphasis on propriety and prudence unnatural and hypocritical. He also put his faithin a creative class of “engineers” as the drivers of human progress and economicdevelopment, but stopped short of equating material success with creativity or value. Inaddition, while also identifying a division of “master” and “slave” morality in humanhistory, he largely rejected Nietzsche’s endorsement of the master morality and foundmuch value in the feminine and nurturing dimensions of conventional morality. Inaddition, he questioned the value of a “work ethic” in isolation of other human goals.

Veblen believed that humans were driven by an “instinct of workmanship” and not simply economic interestsand incentives. In particular, engineers were not driven by profit or economic gain, but by the desire to “builda better mousetrap,” solve puzzles, and the ideal of craftsmanship. One did become more creative simplybecause one was paid more. In fact, the usefulness of work made it “irksome,” while individuals gladly wouldlabor in a unproductive pursuit. For example, many students find it difficult to memorize vocabulary forschool, even though they appreciate its necessity, but have little problem memorizing song lyrics.

There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childishfantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippledadulthood, unable to deal with the real world. The other, of course, involves orcs.

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Practically, Veblen was concerned about the new leadership of business enterprises and corporations. In thepast, businesses were run by individuals who created them and cared about the quality of goods produced.Generally speaking, these were practical individuals whose value came from understanding the firm’sproduction process. Broadly speaking, engineers. However, the rise of limited liability corporations run byprofessional managers (accountants and marketers) changed the nature of business operations. Instead offocusing on the quality of production, they emphasizing maximizing sales and profits. The result is businessesrun Dilbert-style, as shown in thecomic to the right. Veblen’s concerncan be illustrated by comparing afamily-owned restaurant and afranchise chain. In the case of theformer, the focus is on the quality ofthe food and service, irrespective ofcost, while the franchised restaurantlooks to maximize profit by usingcheaper ingredients, inventorycontrol and marketing. Veblen’sworkmanship instinct can becompared to professional ethicsthat impose economic costs onpractitioners. However, whendecisions are removed fromprofessional control, quality maydecline in return for economic gain.

Veblen would later lampoon the self-important pretensions of the “rich and famous” in his book Theory of theLeisure Class, reminding us that wealth and success is no good measure of intelligence, taste or economicimportance. As celebrity reality TV programs repeatedly attest, fame and wealth do not improve judgment oreconomic contribution. As Veblen warned, many of the wealthy are as likely to be parasites as producers.

11.0 KEYNESIAN REVOLUTIONS11.0 KEYNESIAN REVOLUTIONS

Two principles guided economic policy leading up to the Great Depression: prudence and pragmatism.Prudence meant “living within one’s means,” balancing one’s budget and never taking rash or recklessmeasures. In addition, prudence advised the adherence to “sound” money and finance, which in practice,meant preservation of the international gold standard, despite economic suffering. Pragmatism, the dominantpublic philosophy in America between the Civil War and the First World War, counseled that policies be judgedby their effectiveness and efficiency, eschewing dogmatic or ideological considerations: reform, do notrevolutionize. Both prudence and pragmatism made a virtue of moderation and prized cool, level-headed,”serious,” rational thought over emotion and extremism. In practice, this meant never straying too farfrom conventional wisdom as epitomized by Sinclair Lewis’ character of Babbitt. Whether Midwestern middle-class morality, “bourgeois virtues,” or Victorian morality, the acme of virtuous life was providing for one’sfamily, paying the mortgage, mind your own business, putting a little money away for a rainy day, and neverstraying too far from societal expectations in one’s private or public life.

The political calamity of WWI followed by the economic calamities of hyperinflation (for Germany) and theworldwide Great Depression shook the confidence both the public and elites in laissez-faire economic andsocial policy that dominated the previous century. In 1926, the economist J.M. Keynes would declare the “endof laissez-faire,” in 1939, noted management specialist Peter Drucker would attribute the rise of fascism to the“end of economic man,” and economic historian Karl Polanyi concurred, noting the collapse in faith in the

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pillars of the “Hundred Years’ Peace” (1814-1914): the gold standard, the self-regulating market, the balanceof power, and the liberal state paved the path for European fascism. Keynes summarized the view:

Still, when the Great Depression hit, many interpreted it as punishment for moral failing. As Herbert Hooverrecalls the view of his Treasury Secretary Andrew W. Mellon in his memoir:

Eminent economist Joseph Schumpeter remarked that, “a depression is for capitalism like a good, colddouche.” These views echo the pre-Book of Job view that economic hardship must be the consequence ofindividual and collective moral failing. The suffering of the Great Depression was a necessary corrective to the“irrational exuberance” and excess of the Roaring 20s. If we all tightened our belts and atoned for ourmisdeeds, the economy would be humming in no time. In short: no pain, no gain.

The economist J.M. Keynes challenged this view of economics. As a peripheral member of the libertineBloomsbury Group, he was well-positioned to challenge the received morality of Victorian England. Unlikeother economists of his time, Keynes saw the Depression as amenable to a technical fix -- a “dynamo” problem-- and not a case of self-flagellating belt-tightening. In short, economics was not a morality play. Keynes’analysis was also unique insofar as it was unconcerned about the causes of the Depression. The causes were nota roadmap to the solution as much as backing up would undo running over someone with a car.

The key innovation of Keynes’ was the “paradox of thrift.” Inordinary times, thrift -- savings -- is the essence of prudence.However, in a depressed economy, it reduces demand and fails toaccomplish the objective of increasing savings. At the economylevel, one person’s spending is another person’s revenue. Inordinary times, if one person decides to save, there is enoughdemand to mobilize this saving as investment withoutundercutting the aggregate demand for goods and services.However, when everyone tries to save more simultaneously, as isoften the case in a depressed economy, everyone’s incomedecreases, forcing all to pare down their saving balance to financecurrent consumption. As a result, not only does consumption decrease, but ultimately, savings and investmentalso decline, leading to a high-unemployment equilibrium. Additional suffering does not solve the problemnor does it provide incentive to avoid bad behavior. During normal times, concerns about waste, fraud andinefficiency govern whether private or public enterprises should be undertaken. However, when resources areunemployed, even “make work” projects. Keynes argued that paying half the workforce to bury dollars inmines and paying the other half to uncover them would increase wealth in a depressed economy. He observes.

The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. Itis not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn't deliver the goods.

The ‘leave-it-alone liquidationists’ headed by Secretary of the Treasury Mellon felt that government must keep its hands off and letthe slump liquidate itself. Mr. Mellon had only one formula: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate realestate’.He held that even panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. High costsof living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprisingpeople will pick up the wrecks from less competent people’

“Wasteful” loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars mayserve to increase wealth, if . . . classical economics stands in the way of anything better. It is curious how common sense . . . hasbeen apt to reach a preference for wholly “wasteful” forms . . . rather than for partly wasteful forms, which, because they are notwholly wasteful, tend to be judged on strict “business” principles. For example, unemployment relief financed by loans is morereadily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holesin the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world . . . is the mostacceptable of all solutions. If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmineswhich are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faireto dig the notes up again . . . there need be no more unemployment and . . . the real income of the community . . . would probablybecome a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are politicaland practical difficulties in the way of this, the above would be better than nothing. The analogy between this expedient and thegoldmines of the real world is complete.