S+B: John Maynard Keynes, who plays a large role in your book, once observed that “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” Would you agree?
NASAR: It’s true to an extent, but where people tend to go astray is when they are slaves of an economist outside the mainstream, or, worse yet, of a noneconomist. When you look at the ideas that distinguish successful economies from unsuccessful ones, it’s not the difference between, for instance, Paul Samuelson and Milton Friedman, or even Keynes and Hayek. It’s the difference between any of them and something or someone whose ideas are completely dysfunctional. Marx would be an example.
If you look around the world today, it’s the difference between Venezuela and Chile. Venezuela is rich in resources, with some of the world’s biggest oil reserves, and once was one of the region’s most prosperous nations. But over the last dozen years, the average standard of living has been declining. Chile is also a big commodity producer, and certainly has lots of problems, but on the other hand, the standard of living there has been rising steadily since 1970. That’s the kind of dramatic difference that really adds up over time. It’s the difference between a society where living standards are rising, thanks to a growing business sector and rising productivity — as well as greater attention to law and to alleviating poverty — and a society that is teetering on the brink of collapse.
S+B: So what’s important is whether or not the ideas influencing a leader’s policies or a nation’s policies are within the economic consensus?
NASAR: It’s that the big insights from the best economists, over time, have become the consensus. Take the idea that the key to rising living standards is productivity gains. Today that seems elementary; it’s something you learn in your first economics class. But it took many decades of intense debate by really smart people before it was accepted. That meant realizing the difference between the kind of world that existed before the Industrial Revolution and the one that became possible as a result of it. From the beginning of civilization to the 19th century, 90 percent of humanity was stuck in place, even if their country did comparatively well. Average people lived like livestock — they didn’t go anywhere, read anything, or wear much; they ate bad food and didn’t live a very long time. Today, in an increasing number of places in the world, the majority of people have escaped poverty and have some measure of control over their lives.
The gulf that separates successful economies from the real basket cases today is almost as big as the gulf that separates the modern standard of living from the one in Jane Austen’s time. And that suggests that even in a globally integrated economy, what your country does locally still matters the most.
And what determines that? Well, it doesn’t seem that it’s whether you have oil or whether you have a big population or a big territory — all those things that in the early 19th century were thought to be the source of the wealth of nations. It also doesn’t seem to be whether you have a large government or a smaller one. Look at two of the most successful economies today, the United States and Sweden. The U.S. has traditionally had a much smaller government than Sweden’s — different institutions, a very different philosophy. And yet if you rank countries by the rate of growth of their productivity and living standards, it’s really Sweden and the United States, over a long period of time, that come out on top, even though they would seem to be on opposite ends of the spectrum.