Many people know Sylvia Nasar from her book, A Beautiful Mind, which narrates the life story of John Forbes Nash, Jr., a mathematician who suffered from schizophrenia for three decades only to recover and win the Nobel Prize in Economics. Nasar follows up with a second book called Grand Pursuit: The Story of Economic Genius, in which she examines the work and lives of important economists whose ideas helped humanity gain control over its material circumstances. Currently, Nasar teaches business journalism at Columbia University. She speaks to Arabic Knowledge at Wharton about her exploration of economic history and the lessons that can be applied to the Middle East today.
An edited transcript of the conversation follows.
Arabic Knowledge at Wharton: In a chapter about Alfred Marshall, the father of modern economics, Marshall makes a comparison between England and America in regards to "moral education." Do you think political economies vary greatly in terms of cultural and historical contexts?
Sylvia Nasar: Well, political economy was more of a Scotch invention but certainly it came out of the Anglo-Saxon tradition. Therefore, it was originally seen as part of moral philosophy. The big issue is breaking away from the moral philosophy part and turning it into a science, which is really what Marshall did without eliminating the moral incentive and interest in economics, which was pretty universal. Most of the characters in Grand Pursuit don’t start off as economists. They’re mathematicians, debutantes, and physicists. They’re drawn to economics because at some point of their lives, for whatever reason, they see economics as the center of political and moral problems that interest them.
Arabic Knowledge at Wharton: How do Western countries compare to such Eastern countries like China and India, as you discuss in the last chapter of the book, in terms of economic philosophies?
Nasar: The reason the narrative in the book travels geographically as well as through time is to suggest the idea that countries could control its economic, its material circumstances, was clearly born in specific time, which was mid-Victorian England, and specific place — London, which was the capital of the world. But by the time the last character sets on stage, [Indian-born economist] Amartya Sen, it’s become universal. There are obviously places that turn their backs on the mainstream of economic thought, but they are incredible exceptions [such as] Burma and North Korea.
Arabic Knowledge at Wharton: How do political economies differ in Muslim countries? I understand you lived in Turkey for a while.
Nasar: Well, here’s the thing. It’s obvious that there’s a huge local condition, which include local institutions and habits and points of view, [that play] a big role in economics. If you think of Sweden and the United States, one of them has a big welfare state. The other one doesn’t. Yet Sweden and the United States are, in all senses, equally successful. They’ve had the highest rate of average productivity growth, which is key to raising living standards, of virtually any country in the world in over 150 years. They have two of the best performing stock markets over the period. Obviously, economic success doesn’t require uniformity of institutions.
What it does seem to require is, and this is basically [the economist Joseph] Schumpeter’s insight. It has to be an environment favorable to businesses and entrepreneurs in general. What Sweden and the United States have in common are both have extremely competitive and vibrant private sectors.
If we’re just looking at the countries in the Middle East, contrast Israel and its neighbors. Clearly, there’s something going on at the local level that either promotes or inhibits economic success. It’s particularly striking because when Schumpeter goes to Egypt in 1907, Egypt is the emerging economy. Everyone wants to invest there. It’s growing like gangbusters. It looks like it’s going to take off. A century later, Egypt is one of the poorer countries on the globe. Something happened, and something on the local level, that blighted that early promise.
Arabic Knowledge at Wharton: The Cambridge University economist Alfred Marshall also talked about "education as a weapon in the struggle against social injustice," meaning it was a way for individuals to bring themselves out of poverty and rise to a level in society where they would have choices and opportunities. In many ways, he could use himself as an example since you explain in the book that both his father and grandfather were penniless orphans. He said this statement in the mid-1800s but this tenet seems to stand true today. Why was he one of the first economists to propose this idea?
Nasar: His great insight was to see the connection between productivity growth and real wages, and therefore average living standards. And to see the corporation or the business firms would be the primary engine lifting the average standards of living because competition both compelled managers and owners to constantly look for ways to do more with the same resources. At the same time, they were competing for labor, particularly with more skills and more efficient, educated labor, that competition also guaranteed that the gains from productivity advances would be shared widely.
That’s why after 18 centuries of living standards absolutely going nowhere, [people are] being stuck, mainly at subsistence levels for the bottom 95% of the population. All of a sudden in the mid-19th century, you see this incredible rocket-like takeoff that has never stopped.
So by putting productivity at the heart of the engine that’s driving living standards, Marshall opened up wages and therefore, living standards, to a variety of influences. In other words, maybe it was true that people that ran businesses had the most direct effect but the worker could accept his children’s future income would come by investing in schooling. So that also opened doors for the government to step in, especially among very poor people, who no matter what the economic incentive was, were just too poor to respond to them. That opened the door for all kinds of intervention and activism on the part of the individual, as well as on the part of the state, to do things that would have a beneficial effect on the productivity of individual workers.
That obviously led straight to Beatrice Webb’s idea for the national minimum and the rationale for the welfare state, which was very different from the one advanced by [Otto van] Bismarck, (a German-Prussian conservative politician who helped unify Germany in the 1800s) who was not [based] in a democracy and had much closer ties to the feudal notion.
Webb justified taxing the productive members of society to better feed, educate and preserve the health of the poor. Her argument was "this is really an investment." The increase in productivity by making the members of society who were not productive members of society to being more productive will more than offset the negative effect of taxing people with higher incomes.
The point is before Marshall, it was about what economics couldn’t do. And after Marshall, it was about what economics could do. That basic insight about productivity opened all these doors to possible ways that individuals, governments, communities, as well as businesses could affect the general standard of living. It just changed the whole tenor of economics. It turned it from basically dreary and resigned field into a very hopeful and active one.
Arabic Knowledge at Wharton: You discuss Beatrice Potter Webb, the socialite heiress who managed to break into the old boy’s club of academic economists at Cambridge. She outlined the modern welfare state. Can you talk more about Webbs’ ideas?
Nasar: One of the things I discovered, which was a real eye-opener for me, was that the welfare state was not a product of the Great Depression or a product of World War II. It was a product of incredible such rampant expansion in national wealth that living standards were rising for the first time. And it was framed, not only as alleviating suffering, but also of advancing economic growth.
That was Beatrice Webb’s genius. She built on Marshall’s basic insights and developed it further. Marshall is a supporter of public education for the poor, which was a very controversial idea at the time. But she went far beyond that. She talked about government guaranteeing a minimum standard of living to all of its citizens, which again, was a very radical idea to both the Left and the Right. They all said it couldn’t work. And clearly now, it’s universal. There is no democratic government that does not make that guarantee to its citizens.
Arabic Knowledge at Wharton: The U.S. offered the G.I. Bill instead to help give soldiers access to higher education and homeownership. It seems that governments can’t sustain economies that require a lot of looking-after of its citizens. How did the European governments plan on sustaining welfare societies after World War II when countries all over the world were developing plans to have a viable economy in peacetime where factories were no longer churning out tanks, guns, and other wartime necessities?
Arabic Knowledge at Wharton: The G.I. Bill was a very American phenomenon. At the end of World War II, nobody else had enough high school graduates to have a G.I. Bill make sense. The thing is even though the English and the Europeans pioneered the welfare state, they were always about 25 years behind the Americans in terms of the fraction of the relevant age group who finished high school. You couldn’t have a G.I. Bill anywhere else because there weren’t enough high school graduates. The British G.I.s perhaps finished middle school by then. It’s the same idea.
I’m not saying that the welfare state wasn’t greatly expanded but I’m just saying the ideas and the foundations that were developed were not out of a crisis but rather out of the desire to make this remarkable period of growth even better. In other words, it’s much more deeply rooted than the Right imagine. You can look at any platform, the Tea Party for instance, that is remotely relevant to an election. People are talking about restraining growth and shifting more burdens to localities and individuals. But nobody is talking about dismantling it. That’s a complete chimera.
Arabic Knowledge at Wharton: Also, what would Beatrice Potter Webb say about protests in Arab World due to unemployment and totalitarian governments since she was so moved by the London protests?
Nasar: The problems in the Arab World are, at some level, comparable to the problems of the Soviet Union before the 1990s and in China before the 1970s. In other words, they have embraced an economic modus operandi that just doesn’t work. Now, the model of doling out oil wealth — that’s not the same as economic development or economic opportunity, much less the basis for economic democracy. What they’re doing has not worked.
I was interested in some of the interviews in Tahrir Square. The first time around, the protestors were saying, "What we really want is economic opportunity." I think it’s very comparable to the former Soviet Union. These regimes and how they’ve organized themselves, they can’t deliver. In today’s world, the political repression, economic backwardness, and heavy-handed state interference don’t work.
Why? Because if you look next door: Israel doesn’t have a lot of resources and doesn’t have a lot of land. It seems to be proof that it’s not how much oil you have in the ground; it’s what you do with it. That was not a stable equilibrium. That could not last, any more than the Soviet Union could last in a prosperous world.
That’s probably an extreme way of putting it but it gets the basic idea across. It’s not rocket science; learning from experience, it’s the private sector that mainly raises productivity. And if you don’t have a thriving private sector, you’re not going to have a great welfare state either. A lot of countries have gone from being very, very poor and very underdeveloped to being rather affluent. It’s not confined to the North Atlantic.
In that circumstance, people have got to look at their own elite and their own leadership and saying, what’s going on here? Why are we out in the cold?
It’s interesting because of all the complaining about Israel being there, Israel is thriving there. While other regimes that have so many more resources couldn’t get to first base, that must be a powerful, destabilizing force.
Arabic Knowledge at Wharton: Beatrice Webb and her husband, economist Sidney Webb, founded the London School of Economics as "a training ground for a new class of social engineers." Can you explain why she thought such a school was so important?
Nasar: They were the ones who leveraged one of their protégés, [who] developed the Labour Party program [in the United Kingdom] implemented in 1945. That was the cradle-to-grave [welfare society], national health [insurance], housing, etc.
That obviously became a cropper in the 1970s. England became an example that no rich country wanted to be. But I will point out that Germany and Sweden had welfare states [and have done] fine.
So it’s not just the welfare state vs. U.S.-style, which is very much decentralized. It was something about the British welfare state. There’s a long list of things, though I’m not an expert on that period. Public ownership didn’t work out very well; labor unions really became a big problem; the fact that monetary policy was dominated by the need to keep dying industries in business. All those things were not insurance features of the welfare state. They were very destructive.
And I would guess that Beatrice would not have been too happy. She was pretty pragmatic. When it didn’t work, it didn’t work. She envisioned something much more basic, although radical, when she was formulating her ideas, but her core idea was the national minimum, which is what Milton Freidman embraced in his negative income tax proposal in the 1970s. That idea was that there would be a minimum income. He saw it as an alternative to intrusive social-work welfare state.
Arabic Knowledge at Wharton: After World War II, John Maynard Keynes said, "No peace based on such economic foundations could possibly last," when he was helping to shape economic policy after the war ended. Keynes was one of the primary architects of the post-war financial system. How does this statement remain true in respect to the wars and uprisings in the Middle East?
Nasar: Those things are very different scales. The problems in the Middle East are not primarily one of a sudden collapse. [It’s not that] when you restore the conditions for revival, things will pick up briskly. Keynes is talking about the recession and depression that afflict even the most successful societies. The problems in the Middle East are not just the problem of managing short-term fluctuations. It’s the problem of long-term stagnation.
It’s the problem that India had [as well as the countries coming] out of the Communist bloc. That the government so screwed up every sector of the economy. The fact that there was a big cash cow — oil — and combine that with an extremely corrupt, economically illiterate government, [those factors have] basically led to long-term stagnation. That’s a different problem. On average in the world, living standards have risen tenfold. [Arab Spring] countries have had the problem of stagnation. Part of it is related to their policies toward women. Part of it is their horrible economic policies.
If you take a look at Norway on how they’ve handled its oil wealth, it’s very different. It’s because it was a developed economy before they discovered the oil. Anyway, [the] problem [in the Middle East] is long-term stagnation.
That was the problem in the former Soviet Union and China. China is the best example because it went from stagnation to incredible growth from one year to the next after 1970. All that happened is they just stopped doing some of the disastrous things they had been doing, like totally repressing every bit of initiative and economic freedom. That’s what actually happened to Egypt before World War I when it became a protectorate: Mere restraint by the local ruling class, which was incompetent and kleptocratic, [prevented the country from] getting their government finances in order. The hope now is that a new democratically elected government will create conditions that favor individual freedom and economic growth. There’s no reason these countries can’t have that same experience as all the other nations that have escaped poverty.