The Economists’ Conceit

IT IS NOT OFTEN that one sees the statue of an economist in a prominent public place. So, it was a pleasant surprise to encounter Adam Smith standing tall on Edinburgh’s famous Royal Mile. Months earlier, one was equally surprised to see Karl Marx sculpted in conversation with Friedrich Engels in a prominent park in the city of Bishkek in Kyrgyzstan. Economists are rarely figures of history. But Messrs Smith and Marx, both of whom would have considered themselves philosophers more than economists, most certainly are.

Ironically enough, while Adam Smith’s ideas had the greater endurance and success, Karl Marx has had the greater share of statues. The Adam Smith statue in Edinburgh—he was born just outside the Scottish capital and baptised three hundred years ago in 1723—is perhaps the first major public monument in his honour and was installed as recently as 2008, just a month before capitalism, Smith’s outstanding contribution to history and humankind, faced its gravest crisis in seven decades.

The world is in a constant churn. Nations rise and fall. But big ideas endure. Adam Smith wrote his most famous treatise An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. In it he laid the foundations of modern economics and, indeed, modern economies. In an era when explanations for various phenomena still centred round acts of God, Smith dared to suggest that human beings acting in self-interest would produce the best economic outcomes. He wrote about the importance of competition, division of labour, and essentially enunciated the merits of a free-market economy when feudalism was still dominant.

Of course, Smith’s own country, Britain, was the biggest beneficiary of his ideas as it became a first-mover in industrialisation and acquired great wealth and power that were to set the stage for its global empire. But beyond Britain, it is also a fact that the spread of capitalism and industrialisation from the 19th century into the 20th century and now the 21st century has created more wealth and prosperity in the world than at any time prior in history.

Needless to say, capitalism is not without flaws, none more controversial than inequality. Karl Marx was born almost 100 years after Adam Smith, in 1818, and wrote his most famous work, Das Kapital, a critique of capitalism in 1867, almost 100 years after The Wealth of Nations. Marx’s big idea revolved around the “exploitation” of labour by capital and the need for the state (on behalf of the people/workers) to play a major role in economic activity. Marx’s ideas were put into practice by the Bolsheviks after the Russian Revolution. They also found resonance in China and other parts of the world.

Most successful economies lean towards Smith’s idea of the free market but with inequalities remaining a fact of life, Marx’s critique of capitalism retains its power

Share this on

Much of the 20th century saw the emergence of and battle between two superpowers, the US and the Soviet Union, the former powered by the ideas of Smith, the latter by the ideas of Marx.

Marxist economics met its Waterloo with the tearing down of the Berlin Wall and the dissolution of the Soviet Union. In the end, as the foundation of an economic system, human beings acting in self-interest worked better than bureaucrats working in enlightened interest/for the greater good. The latter, when coupled with a complete absence of basic freedoms (all communist systems were totalitarian and brutal) was a recipe for failure. Self-interest, combined with democracy, also ran into crises but retained an ability to self-correct and endure, as after the Great Depression and the 2008 Global Financial Crisis.

That said, there remains a constant debate on the merits of the free market versus state intervention. Most successful economies lean towards Smith’s idea of the free market but with inequalities remaining a fact of life, Marx’s critique of capitalism retains its power, even if no one is seriously looking at implementing communism any longer.

Perhaps the most unique feat of all has been achieved by the Chinese Communist Party which continues to read Marx but follow Smith. For that, it owes Deng Xiaoping. Their present leader, Xi Jinping, may yet change that.

Economists rarely make history. One can think of only two other than Adam Smith and Karl Marx. John Maynard Keynes and Milton Friedman. Contemporary economists, in their frenzied quest to make economics as close to a natural science as possible, are not likely to add to that list. They are more likely to be gods of small things, worthy of Nobels, but not purveyors of big ideas whose influence lasts centuries, with or without statues.

About The Author

Dhiraj Nayyar

Dhiraj Nayyar is chief economist, Vedanta Ltd, and the author of Modi and Markets: Arguments for Transformation

•