THE SHORTEST HISTORY OF ECONOMICS

In his latest book The Shortest History of Economics, The Hon Dr Andrew Leigh MP, Assistant Minister for Competition, Charities & Treasury & Assistant Minister for Employment tackles a big subject in a compact form – examining the financial forces that shaped our existence as humans. From ancient times to the modern world, Leigh explores the economic forces behind war, innovation and social transformation. Answering questions such as how did capitalism and the market system emerge, and what and who were the key ideas and people who shaped the discipline of economics? To discuss the essence of his book, Andrew Leigh joined in a conversation with Gerard Henderson on Wednesday 10 April 2024 at The Sydney Institute. What follows is an edited transcript of the discussion.

THE SHORTEST HISTORY OF ECONOMICS

ANDREW LEIGH

Gerard Henderson: Thanks for coming along tonight, folks, where Dr Andrew Leigh makes a welcome return to The Sydney Institute. I think it’s the third occasion he has been here. I’ll introduce him briefly. Of course, Andrew Leigh the member for Fenner, which it is named now, but he was originally elected to the House of Representatives in 2010 as the member for Fraser. He was a parliamentary secretary to the prime minister for a period in the previous government. And of course, now is the Assistant Minister for Competition, Charities and Treasury, and also the Assistant Minister for Employment. But beyond that, he was a professor of economics at the ANU, holds a PhD in public policy from Harvard, and is the author of several previous books. And it says on blurb of his book, The Shortest History of Economics, which we’re talking about tonight, he’s a keen triathlete, and a marathon runner. There you go. So, Andrew, thanks for doing this tonight.

Andrew Leigh: It’s a pleasure, thanks for having me along. And I acknowledge the Gadigal people on whose lands we’re meeting tonight.

Gerard Henderson: At your request, tonight’s function will commence with me in discussion with you, and then we will do a Q&A segment with the audience. Now, it’s great book, I read it at the weekend. And it’s a huge amount of work. So, we’re trying to cover everything from, well, before BC, up to pretty well yesterday, or last Saturday when you ran the marathon. Okay. So, I’ll start off with the book.

You write, at the end of your book that it aimed to do three things. Tell the story of how capitalism and the market system emerged, discuss the key issues and the people who shaped the discipline of economics and outline how economic forces have affected world history. Let’s discuss all of them in turn.

You say you’re a congenital optimist and that this small book tells a big story – the story of capitalism. Some of your colleagues in the Labour movement didn’t like capitalism much in the old days. So, what’s happening here?

Andrew Leigh: The new breed of Labor politicians I would describe as pro-growth progressives. We are people who understand that the market system is incredibly powerful for generating wealth, but that it doesn’t necessarily generate a fair distribution of outcomes. Into that space, there’s an important role for government.

The welfare state is partly set up to deal with the vicissitudes of luck – somebody falls ill, and they don’t have many savings; the luck of a bright kid being born to poor parents; the bad luck that happens when disaster strikes. Part of The Shortest History of Economics is telling the story of how, steadily and over the course of the past couple of centuries, institutions have emerged that help people manage risk.

So, one conception of government you might have is that government plays the role of risk manager. Many in my party would look askance at the view that somehow governments can do a better job in making the initial allocation decisions. If you look at the difference in income between East and West Germany, the drop in income after the Russian revolution in 1917, the rise in income after the private property reforms in China of 1978 – all of that points to the power of capitalism for growing total living standards.

Gerard Henderson: You make a lot of the concept of luck in your book. It doesn’t take up many pages, but it comes out quite strongly. Economics is not supposed to be about luck, is it? It’s supposed to be about something else. You make this point about Thomas Carlyle who referred to economics as a dismal science, and presumably he would have regarded you as a dismal man. Tell us what you really think of him.

Andrew Leigh: Carlyle would have regarded all of us as a bit dismal because he was a racist who believed that slavery should be reintroduced. The “dismal” view to which he was referring was the dismal view that all people are equal regardless of the colour of their skin. So, I bear the badge of dismal science quite proudly, as do many of my economist colleagues.

Gerard Henderson: Let’s move away for a minute, because you’ve got these various breakout themes and you talk in your book about religion and, in an economic sense, it’s relation to competition – talking about the great religions of Judaism, Christianity and Islam. What’s religion and competition all about?

Andrew Leigh: One of the striking things you notice is that in the United States, which has a plethora of competition for religions, religiosity is higher than it is in some of the Scandinavian countries which have a state church. That accords with what many economists believe about monopolies, which is that they tend to drive down total consumption by driving up total prices. A competitive atmosphere was also what prevailed at the time of the emergence of the Abrahamic religions. That competition between different religions increases the total religiosity in a society, somewhat to the surprise of some of those who believe that monopolies would increase the take up of religion; the reverse seems to be true.

Gerard Henderson: You also make the point that in areas where religions compete, religion is stronger.

Andrew Leigh: That’s right. So, it’s a healthy thing for religiosity as a whole to have that competition, just as it’s healthy for the economy as a whole to have competition. Each individual business wants to be a monopolist. As much as The Sydney Institute might want to be the only think tank in town – in fact, The Sydney Institute benefits from the competition of ideas and from other think tanks in the market. The same is true whether you’re talking about banking, baby food or even beer.

Gerard Henderson: You start off talking about the agricultural revolution, then you go onto the industrial revolution, and here you pick up the world wars, the Great Depression coming in at the end of that. How did the agricultural revolution start and what did it lead to?

Andrew Leigh: The agricultural revolution kicks off somewhere between 10,000 and 8000 BCE. It emerges in the Fertile Crescent, a region where regular flooding improved the quality of the soils and where a number of different crops, known as the eight founder crops, turned out to be quite easily domesticable. Not every crop is easily planted, but that region had good quality soil and crops which made it amenable to farming.

As farming emerges, you also see the way in which it shapes norms. So, in certain parts of the world, plow-based agriculture emerged and, in other parts, people farmed largely with digging sticks. The thing about the plow was that it required quite a bit of upper body strength, and so it tended to favour the men in that society and lead to greater gender roles and segregation. What’s surprising is that, now, thousands of years on, you can still see that difference between countries where plow-based agriculture prevailed and countries where digging stick agriculture prevailed. There’s more sexism and traditional gender roles in places where the plow first emerged.

Gerard Henderson: You also maintain that the Great Plague – the Black Death – killed feudalism. How did that happen?

Andrew Leigh: The Black Death wiped out around a third of the population of Europe and, as a result, changed the balance between capital and labour. Before the Black Death, labour was fairly plentiful and therefore it was easy to maintain feudalism and the control it embodied. After the Black Death, you see workers become scarcer, that labour scarcity drives up wages, and it allows workers in some cases to break free of their feudal shackles. Not that feudalism would have lasted for much longer without it. But the Black Death put the final nails in the coffin of feudalism, as it changed relative prices through Europe.

Gerard Henderson: Before we get onto the industrial revolution, you talk about the Protestant Reformation, and you say some unkind things about the Catholic Church. You make the point that the Lutherans in Germany, having different belief systems, worked a lot harder than, say, the Irish in Ireland. What is it that drove the success of the Protestant nations of northern Europe, as distinct from the primarily Catholic nations of southern Europe after the Reformation?

Andrew Leigh: Some of the best work on this is done by German scholars, such as Ludger Wößmann, who has looked at variation within Germany, or Prussia as it then was, and seen that in places which first saw the Protestant Reformation, you saw a significant increase in Bible reading. That then drove literacy, which was an incredibly productive skill at a time where more and more books were being printed. So, Protestants benefited from being part of a religion that encouraged them to read – and therefore effectively taught them a highly productive skill at a time in world history where being able to read and write really mattered.

Gerard Henderson: That’s because the Lutherans and the Calvinists where invited to have their own interpretation of the Bible, whereas for the Catholics, the interpretation of the Bible came from the Pope and those below him.

Andrew Leigh: That’s right. Ludger Wößmann is sceptical of theories of this which are focussed around values and the idea that Protestantism somehow encouraged people to work harder than Catholicism. He falls back on a more standard economic explanation, which is that Protestantism bestowed on its adherents a really important skill. It’s as though you set up a new religion which had at its heart that you had to learn advanced mathematics. You might not be surprised to discover that those who are part of that religion went on to earn more in the labour market, because they had more of a skill that really mattered in the economy.

Gerard Henderson: I think that was a theory that Max Weber, the German sociologist in the twentieth century, had.

Andrew Leigh: That’s right. Wößmann’s paper is titled “Was Weber right?”, and it concludes, yes, Weber was right, but not for the reasons that he thought.

Gerard Henderson: Let’s talk a bit about the slave trade, because I was surprised to read that the worst slavers, or the nations most into slavery, were the Portuguese, the Spanish, the French and the Dutch. The Brits aren’t in there. What was so significant in Portuguese running slavery?

Andrew Leigh: The Brits are earlier abolitionists than some of the other countries. Although, historians recently have been pointing out that there was a significant role for British financiers in financing the movement of slaves in vessels run by other countries. Particularly Spain and Portugal that held a number of those key Latin American colonies and really drove a large portion of the slave trade. They had colonies where agriculture was particularly human intensive. So, if you’re looking at cotton or sugar, for example, they’re crops where having a large labour force is particularly useful. In the colonies such as Cuba or Brazil, slaves are ubiquitous, and the huge of volume of enslaved people who were trafficked across the Atlantic at that period by those countries really transforms economics.

Gerard Henderson: Towards the end of the book, you express concern about climate change or what the United Nations call “global boiling”. But what about the colder period where you make the point that the witches, and witchcraft, got badly treated in days of global freezing.

Andrew Leigh: This is a lovely finding by Emily Oster which illustrates the way in which people look to blame others for their misfortune. Emily Oster gets a series of historical accounts of witch burning through Europe and correlates that with climate data. She finds that the little ice age coincided with a significant upturn in witch burning. Effectively, you can think of these as societies where things are going wrong, things are failing, people are hungry, and they’re looking for scapegoats. They find them in single, older women in their communities. Through superstition, they end up blaming those women – who might have lived, had the climate been more amenable during that period. It’s a reminder of the way in which humans can often look for an outside force to blame. I was thinking as we were watching the scenes of the solar eclipse coming across the United States yesterday – how much past solar eclipses must have led people to think that something was going deeply wrong with the world and someone needed to be blamed for it.

Gerard Henderson: Moving to the industrial revolution, you talk about that revolution leading to an urban revolution. But you also make points about war; the First World War, the Second World War, the Napoleonic wars, the American Civil War. You make the point that those nations, or parts of nations, that were wealthier tended to win because they had more weapons. Could you explain the impact of the economy of wars, or the impact of wars on the economy?

Andrew Leigh: The striking thing about both the US Civil War and World War II is the huge imbalance of resources between the two sides at the outset of the war. Both the north in the US Civil War and the allies in World War II had vastly more resources, vastly larger economies, vastly stronger manufacturing sectors and armament sectors. Yet their adversaries, the south of the United States and the Nazis, were far better tacticians on the battlefields. So, these wars which, in principle, should have ended in half the time that they did, ended up being longer because the side which had more material resources was far less effective at deploying those resources. Hitler’s generals win all of those early battles through far better tactics. And Lincoln is left bemoaning in the White House that he can’t find himself a general who will take the fight up to the South. But, ultimately, economics prevails and the side that begins with more material resources is the side that’s victorious in the end.

Gerard Henderson: Talk to us a bit about of the economists. I was a bit disappointed. You name a Frenchman as the most influential economist; Frédéric Bastiat, which is not what I wanted to read. But also, you talk about Alfred Marshall, a Brit. Tell us about those two.

Andrew Leigh: Bastiat is a remarkable Frenchman who teased those asking for government subsidies by writing a mock petition on behalf of candlemakers, complaining that they face unfair competition from the sun. Alfred Marshall is much more of an establishment figure. He is responsible for the Marshallian Cross, the first proper depiction of supply and demand diagrams that you see depicted in every first-year economics class. It’s striking that Marshall has only come along at the turn of the twentieth century, laying out the principles of supply and demand. The Ancient Egyptians knew trigonometry when they were building the pyramids, yet it takes until just a little over a century ago before some of these key economic principles are laid down.

Gerard Henderson: You also mention Joan Robinson, the British woman who was a bit of a favourite of the left in Australian, Colin Clark, who was a conservative who came to live in Australia and Sadie Alexander whom you write about. Joan Robinson you speak of quite well in relation to her economic work, but you’re very critical of Mao’s China. Before she died, Robinson was an unequivocal supporter of Mao Zedong’s China and the dictatorship in North Korea. Tell us a bit about her and tell us a bit about Colin Clark, who came from Cambridge and ended up in Queensland and has relatives here, and Sadie Alexander.

Andrew Leigh: Joan Robinson was a complex woman. She was incredibly bold in challenging Alfred Marshall, who was a firm believer that women did not have an important role to play within the Cambridge economics department. She challenged him, not only through her gender but also through her work and arguing that markets operated less perfectly than Marshall would have you believe. She also coined the term monopsony which is highly relevant in a time when we’re thinking about the power of Australia’s supermarkets, not only over their consumers, but also over the people supplying to them. Monopsony is an upstream monopoly power, if you like. During her later life, Joan Robinson did all kind of surprising things; she critiqued her own work and had very different views on some of those communist regimes than most economists would have.

Sadie Alexander was the first African American woman to win a PhD in economics. She did really important work looking at low wage households in the United States – understanding how they managed to make ends meet and looking at the challenge of not being able to buy in bulk as being a particular tax on low-income Americans. Yet, she wasn’t able to get an academic position and ended up working at her husband’s law firm.

Colin Clark ran unsuccessfully as a Labour candidate in Britain before he came out to Australia, then he came here and was crucial in the building of national account statistics. So, Australia effectively became a pioneer thanks to Colin Clark’s leadership in the building of national statistics. The first job was “Can we measure the output of the economy?” The next job was “Can we do it year to year and find out how much the thing is growing?” It was no surprise that a lot of this work kicked off in the 1930s where the question wasn’t just how much the economy was growing, but how much it was shrinking.

Gerard Henderson: As you may or may not know, Colin Clark became an economic adviser to Bob Santamaria, and was much disliked by Bob Hawke because he wouldn’t supervise his thesis at Oxford because Clark thought it wasn’t serious enough. Clark thought a thesis on the Australian trade union movement didn’t quite fit Oxford University. Bob Hawke never forgave him.

Andrew Leigh: It does all make you wonder how that world would have been different if Colin Clark had gotten over the line and gotten elected as a Labour MP.

Gerard Henderson: Or if he’d advised Bob Hawke on economics. So, you cover Bretton Woods; tell us about Bretton Woods after the end of World War II.

Andrew Leigh: After World War I, there was a move into autarky. The immigration barriers went up, the trade barriers went up, foreign investment dropped. After World War II, there was a sense among many economists that they need to get it right this time. They needed to use the opportunity of the peace in order to bring countries together and build stronger connections. So, Bretton Woods built the World Bank and the International Monetary Fund, providing a sense of connection between countries, but also a commitment to a set of institutions that would provide loans and grants and encourage financial stability around the world.  And it works remarkably well. You see the trade barriers steadily come down through those successive trade negotiating rounds all the way through to the Uruguay Round in 1993, where suddenly trade liberalisation begins to stall. We now find ourselves in a world in which, if we can stop global tariffs from rising, we feel we’re doing well.

Gerard Henderson: Paul Erhlich, the American economist, was a great hero. He came to Australia in the 1960s and 1970s. Whenever he’s here, he’s interviewed by Phillip Adams, and when he’s not here, he’s interviewed by Phillip Adams overseas. You compare him to Malthus because, as you point out and as we know, he made predictions about population growth which were massively false, over 20-30 years. Yet he remains – not in your book – a respected economist.

Andrew Leigh: I’m pretty down on the Erhlichs because of the approach that they took towards Africa and towards population growth in Africa. They advocated for ceasing food aid to developing countries – not just Africa but also India – and believed that global famine was inevitable. They didn’t anticipate that population growth would naturally tail off as communities developed social security schemes and people felt that falling infant mortality meant they didn’t have to have more children just in order to see an increasing number of children through to childhood. Those views on population were Malthusian and, fundamentally, history has shown them to be too pessimistic.

Gerard Henderson: You just mentioned India. You make the point in your book that India never had a famine when it was a democracy. You also make the point about the famine in the Soviet Union in the 1920s and the so-called Great Leap Forward in China in the late 1950s and early 1960s, which led to the estimated death of about 45 million Chinese due to forced famine. What’s this point about democracy?

Andrew Leigh: This is Amartya Sen’s point that democracy provides a sense of accountability which lets you forestall a famine. He is very much influenced by the Bengal famine of 1943, and seeing the human catastrophe that unfolded in a country in which it’s not possible for people to reach out to their leaders. Let’s hope that the rule continues to hold. It is certainly one of the side benefits of democracy. We do know that, empirically, democracies tend to have higher levels of living standards, higher levels of education. People in democracies tend to live longer. It is not the case that every democracy outperforms every autocracy. But on average, you’d rather be living in a democracy. Even if all that you cared about was your material standards of living.

Gerard Henderson: Unlike many commentators, you make the very strong point – although it doesn’t take up a large part of your book – about China’s greenhouse emissions, and that if countries like China and other countries whose economies aren’t as strong as China, if they don’t do something about global emissions, they’re not going to be reduced. China’s not reducing much, is it?

Andrew Leigh: China’s greenhouse emissions are not accelerating. We’re hoping that they’re going to flatten off. But, clearly, that’s one of the big questions for reducing carbon emissions: encouraging countries like China to follow a lower emissions path than the advanced countries followed before them. So, that technology transfer is really important. China is building huge amounts of renewable infrastructure across the country. They’re also building vast numbers of electric cars. The rest of us need to be encouraging that process because the world doesn’t care where a tonne of carbon is produced, it has the same impact on global climate change.

Gerard Henderson: But China’s also building coal fired power stations, isn’t it?

Andrew Leigh: It is. And so, part of it is encouraging more renewables and fewer coal fired power stations. That’s a transition that they’re on. Everything that we can do to encourage that transition is important. China’s emissions are massive, as you say.

Gerard Henderson: You’re no longer an academic economist.

Andrew Leigh: But I get to play one at The Sydney Institute.

Gerard Henderson: And you get to write a readable book that we can understand. There’s only one paragraph I couldn’t understand. It’s got a lot of mathematics in it. Talking about mathematics, you’re a model sort of guy. You’re into economic modelling.

Andrew Leigh: If you look at why economics has tended to make contributions to other social sciences or ‘colonise’ other social sciences if you want to be pejorative about it, it does have to do with two big things. One is being able to come up with rigorous models which are generalisable. The other is the facility of economists with big data. So, yes, I’m a fan of models.

Gerard Henderson: But you also say that conflicts, pandemics, famines, defaults, trade wars are often missed by economic models. So, what’s point if they miss all that, how good are they?

Andrew Leigh: Models aren’t very good at finding turning points, which sometimes arise either because there’s a non-linearity in the system – for example, the US builds up a whole lot of subprime mortgages. It’s fine when the stock of subprime mortgages is at x, but suddenly it goes to 2x and the system blows up. It’s also sometimes the case that models can’t predict outside influences. So, all of our models for economic growth in 2019 were working fine until suddenly a pandemic turned up in Wuhan and blew all of our predictions for the world economy out of the water.

Gerard Henderson: I started off by quoting you as a congenital optimist. Then you come to artificial intelligence, and you say it’s a catastrophe risk to humanity. And you say that climate change is bad and could get very bad indeed. That doesn’t sound like an optimist to me, that sounds more like someone who thinks things are bad and will invariably get worse.

Andrew Leigh: I still think that an optimist can put on their seatbelt when they get into their car and can buy home insurance. In the case of artificial intelligence or nuclear catastrophe, I do think we could be doing a little bit more to buy insurance. I’m concerned around the potential of AI models to get out of control. There’s no other technology I know about where 5 per cent of those working on it think that it could spell the end of humanity. That’s the share of AI researchers that think that once the system’s capacity exceeds that of humanity, that we’re in for catastrophe. You want to bring that probability down from 5 per cent to 1 per cent. That’s got a huge payoff in expected value terms. Likewise, to reduce the chance of nuclear catastrophe, taking weapons off hair trigger alert. All of that is like buying a car with air bags. You don’t expect to use them, but if they’re in there, you feel a little safer, and, in expectation, you’re living a longer life.