Big The Three in Economics OTHER ACADEMIC BOOKS BY MARK SKOUSEN The Structure of Production Economics on Trial Dissent on Keynes (editor) The Investor’s Bible: Mark Skousen’s Principles of Investment Puzzles and Paradoxes in Economics (co-authored with Kenna C. Taylor) Economic Logic The Power of Economic Thinking Vienna and Chicago, Friends or Foes? The Compleated Autobiography by Benjamin Franklin (editor and compiler) Big The Three in Economics Adam Smith Karl Marx and John Maynard Keynes Mark Skousen M .E.Sharpe Armonk, New York London, England Copyright 2007 by Mark Skousen All rights reserved. No part of this book may be reproduced in any form without written permission from the publisher, M.E. Sharpe, Inc., 80 Business Park Drive, Armonk, New York 10504. Library of Congress Cataloging-in-Publication Data Skousen, Mark. The big three in economics : Adam Smith, Karl Marx, and John Maynard Keynes / Mark Skousen. p. cm. Includes bibliographical references and index. ISBN-10: 0-7656-1694-7 (cloth : alk. paper) ISBN-13: 978-0-7656-1694-4 (cloth : alk. paper) 1. Economists—History. 2. Economics—Philosophy. 3. Economists—Biography. 4. Smith, Adam, 1723–1790. 5. Marx, Karl, 1818–1883. 6. Keynes, John Maynard, 1883–1946. I. Title. HB76.S58 2007 330.15092’2--dc22 2006020466 Printed in the United States of America The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper for Printed Library Materials, ANSI Z 39.48-1984. ~ BM (c) 10 9 8 7 6 5 4 3 2 1 Dedicated to The Big Three in my life, My editor, my friend, and my wife, Jo Ann Skousen Contents Introduction ix Photos follow page 104 Chapter 1. Adam Smith Declares an Economic Revolution in 1776 3 Chapter 2. From Smith to Marx: The Rise and Fall of Classical Economics 46 Chapter 3. Karl Marx Leads a Revolt Against Capitalism 64 Chapter 4. From Marx to Keynes: Scientific Economics Comes of Age 105 Chapter 5. John Maynard Keynes: Capitalism Faces Its Greatest Challenge 133 Chapter 6. A Turning Point in Twentieth-Century Economics 163 Chapter 7. Conclusion: Has Adam Smith Triumphed Over Marx and Keynes? 191 Bibliography 219 Index 231 About the Author 243 vii Introduction During the past three centuries, three economists stand out as archetypes, symbols of three distinct approaches to economic philosophy. In the eighteenth century, Adam Smith, a student of the Scottish Enlighten- ment, expounded a “system of natural liberty” (what we might term a liberal democratic order consisting of an unfettered market and limited government), and elucidated how a nation flourishes and advances the standard of living of its citizens. In the nineteenth century, the German philosopher Karl Marx attracted and inspired workers and intellectuals who felt disenfranchised by industrial capitalism and sought radical so- lutions to inequality, alienation, and exploitation of the underprivileged. Finally, in the twentieth century, the British economist John Maynard Keynes sought to stabilize a crisis-prone market system through activist fiscal and monetary government policies. The Pendulum and the Totem Pole The stories and ideas of these Big Three economists are told in context of a larger history I have described in greater detail in The Making of Modern Economics. In the introduction to that work, I describe two possible approaches to writing about the lives and ideas of economists, what I term the spectral versus the hierarchal approach. The most popular method of analysis I describe as a pendulum, by which historians place each economist somewhere along a political spectrum, from extreme left to extreme right. Figure A illustrates the pendulum approach used in many economics textbooks. The Pendulum Approach to Competing Economic Theories Simple though it is, I see several problems with the spectral ap- proach. First, it treats Karl Marx and Adam Smith as coequals, that is, ix