At some point in the 1840s, a French liberal thinker called Frédéric Bastiat made a trip to his capital city and had an epiphany:
On entering Paris, which I had come to visit, I said to myself— here are a million human beings who would all die in a short time if provisions of every kind ceased to flow toward this great metropolis. Imagination is baffled when it tries to appreciate the vast multiplicity of commodities that must enter tomorrow through the barriers in order to preserve the inhabitants from falling a prey to the convulsions of famine, rebellion and pillage. And yet all sleep at this moment, and their peaceful slumbers are not disturbed for a single instant by the prospect of such a frightful catastrophe. On the other hand, eighty departments have been laboring today, without concert, without any mutual understanding, for the provisioning of Paris. How does each succeeding day bring what is wanted, nothing more, nothing less, to so gigantic a market? What, then, is the ingenious and secret power that governs the astonishing regularity of movements so complicated, a regularity in which everybody has implicit faith, although happiness and life itself are at stake?
His answer: the free market. This was a lightbulb moment for Bastiat, a glimpse of the complexity that can develop from a simple starting point. All those fundamental needs supplied, all those goods bought and sold, all those provisions transported at the expense of cash and effort and ingenuity, all those transactions made, and all of it constituting a mechanism that functions so effectively that the good citizens of Paris don’t even notice how dependent they are on it—and the whole mechanism created just by allowing people to trade freely with each other. Economists have a shorthand reference to this epiphanic insight into the power of markets: they call it “Who feeds Paris?”
For most people with an interest in economics, there’s a revelatory moment resembling Bastiat’s. The bravura opening of Adam Smith’s The Wealth of Nations, the founding text of economics, has a description of a pin-making factory that is very like Bastiat’s moment of awakening in Paris. The eureka moment isn’t always to do with the power of markets, though that’s a pretty good starting point, since the balance of wants and needs manifested in a functioning market is an extraordinary thing: the contents of Aladdin’s cave, all on sale at an ordinary store near you, and brought there by nothing more than market forces. Or it can be some form of change that prompts the thought, a change to do with the kind of people who live in a place, or who do a certain kind of job, or something more fundamental, like the disappearance of an entire industry or the change in character of an entire city, an entire country. The forces at work behind these changes are economic. A curiosity about these forces is the starting point of economics.
The subject begins with the way people behave, and moves to the question of “why”: economics is, in the words of Alfred Marshall, one of the great modern founders of the subject, “the study of mankind in the ordinary business of life.” That sounds lofty, and suspiciously broad—which is exactly what it is. The most famous tag ever given the field of economics was Thomas Carlyle’s magnificent put-down, “the dismal science.” That’s a good zinger, but it isn’t fair. For one thing, it isn’t at all clear that economics actually is a science—many people in the field like the idea that it’s a science, and refer to it as a science, but that’s more a claim than a statement of fact. The conservative philosopher Michael Oakeshott wrote about the main areas of the humanities as “conversations”: poetry, history, and philosophy were conversations that humankind had had with itself, and that anyone could join in, just by paying attention and studying and thinking. Economics, it seems to me, is a conversation in that Oakeshottian sense, rather than a science like the hard physical sciences. That said, there are areas of economics that come very close to science, in which experiments are made and can be measured and repeated. These experiments are largely in the field of microeconomics, which is the study and analysis of how people behave. Microeconomists look at things like the way in which people consume free supermarket samples of jam, or rate wine in blind tastings, or use online dating services. A lot of what they find is useful, even entertaining, even fun, in its way. And that’s the other reason Carlyle was wrong. Economics isn’t dismal. It has dismal bits to be sure, and the whole idea of reducing the complexity and diversity of human behavior to shared underlying principles can sound joyless. In public life, economists are often to be found playing the role of people who explain why something is unaffordable, or why some group of people have lost their jobs, or why some other group has to work longer for less pay. But that’s an accidental manifestation of what economics really is: the study of human behavior in all its forms, and the attempt to discern principles and rules underlying the chaotic multiplicity of all the things we do. Psychology looks at people from the inside. Economics looks at them from the outside. Human beings aren’t dismal, and neither is economics.
The attempt to study human behavior on this scale is a large undertaking, and it follows that economics is a large field. There are lots of different tribes within it. Nothing annoys economists more than the assumption that they are all essentially the same. An economist working as a risk analyst for an investment bank is very different from an academic economist whose main interest is the developing world and whose PhD thesis was, say, a study of water wells in Nigeria; a number cruncher poring over industrial output data at the Treasury is doing something very different from a microeconomist trying to design an experiment that studies cognitive mistakes in people’s filling out of insurance claim forms. More generally, economists get very annoyed at the widely held thought that they are all macroeconomists; that’s a view that’s held even by people who don’t know exactly what a macroeconomist is or does. Macroeconomists are the guys whose field was born out of the study of the Great Depression, and the attempt not to repeat it: they look at whole economies, up to and including the planetary level. They’re the people who are often seen as being at fault in not having predicted the credit crunch and the Great Recession that followed. The queen’s famously good question at the London School of Economics (LSE)—“Why did nobody see it coming?”—is a macroeconomic question. But that’s by no means what most economists do and are.
I should point out that just as most economists aren’t macroeconomists, quite a lot of them have absolutely no interest in money. I don’t mean at the personal level: I mean they have no interest in money as a subject. In large parts of the discipline, or disciplines, of economics, money had come to be seen as no longer interesting at a theoretical level. Money had been solved. It was a way of keeping score of things being exchanged, but the real points of interest lay beyond and through it: it could be regarded as transparent, as safely ignorable. That seems pretty amazing now, with the benefit of hindsight, when we have seen a convulsion inside the function of money that took the entire global financial system to the edge of the abyss, with consequences that are bitterly present in many of our lives more than half a decade later. You could even say that large parts of the economic profession resembled the British defenses at Singapore, with their guns pointed in the wrong direction.
There’s no consensus inside economics about the importance of money. There’s no consensus about anything, really, not even on how important the credit crunch and subsequent Great Recession were. “Who cares?” an academic economist at the LSE said to me, apropos exactly this point. “What happens to hundreds of millions of very poor people in South Asia and sub-Saharan Africa is a lot more important. So we in the West are going to have a difficult decade or two—so what?”
This lack of consensus doesn’t just apply to the overall conclusions that people reach; it also touches on the very subjects of discussion, the terms of debate themselves. Economists and people who speak money argue all the time about things like inflation, not just in terms of what to do about it and its practical consequences but actually in terms of the very essence of what it is and how it works and how best to define it.
Money itself is a subject of immense difficulty, again not just on the practical level but in its essence and nature. There’s a standard definition of money in economics, or at least of the uses of money, as serving a triple function: a store of value, a medium of exchange, and a unit of account. But the real uses of money are more mysterious than this makes them sound, and its evolution is more mysterious too. There are sometimes arguments in science about whether specific breakthroughs are better defined as discoveries or as inventions: are the findings of mathematics discoveries of entities that preexist, or are they creations of the human imagination? Or both? Money is like that too. Did we invent it, or is it somehow inherent in transactions between people—implying that there is a “moneyness” in exchanges, which money then abstracts and turns into an exchangeable thing-in-itself? (The popularity of this view was one of the reasons many economists had stopped being interested in money: the transactions were more interesting than the tool through which they were transacted.)
Even once we learn that the standard economists’ account of how money came to be is wrong (they say first we invent bartering, then money, then credit, but anthropological evidence reveals that credit comes first, then money, with bartering vastly less common) we still haven’t come close to capturing the deep weirdness of money in its modern manifestation, as digital bits moving from screen to screen that combine complete ephemerality with total power over us. As Steve Jobs once said, all computers do is shuffle numbers about. But these digital ones and zeros measure the value of our labor and define a large part of our being, not just externally in terms of the work we do and where we live and what we own, but in terms of what we think, how we see our interests, with whom we identify, how we define our goals and ambitions, and often, perhaps too often, even what we think of ourselves in our deepest and innermost private being. And yet they’re just ones and zeros. And these ones and zeros are willed into being by governments, which can create more of them just by running a printing press; in fact, thanks to the miracle of quantitative easing, they don’t even need to do that, but instead can merely announce that there is now more electronic money. We’re inclined to think of money as a physical thing, an object, but that’s not really what it is. Modern money is mainly an act of faith—an act of credit, of belief.
One of the lessons of the credit crunch was that this credit, this belief, can be vulnerable. A moment came when it wasn’t clear, even to people at the heart of the system—the high priesthood of money itself—that the ones and zeros were worth what they were supposed to be worth. If people and companies couldn’t pay their debts, then all the accumulated credits in the financial system weren’t worth their nominal value; and if that was the case, then, as George W. Bush so eloquently put it, “this sucker could go down.” Even after the financial system recovered from its near-death experience, it has proved hard to forget that moment of noncredit, and to let go of that sense of appalled wonder. Andy Haldane, director of stability at the Bank of England (great job title: perhaps each and every one of us should have a personal director of stability), made a study of modern derivative transactions and found that some of them involve up to a billion lines of computer code. That is beyond comprehension, not in a metaphorical way, but as a plain fact: no human can understand and parse a financial instrument of that complexity. None of us really understands how the labor of humans and the movement of goods and exchange of services can be turned into purely financial transactions that involve a “black box” financial instrument a billion lines long. We just have to take it on credit. One of the best books written about money is a history of it by the economist and economic historian John Kenneth Galbraith. It begins with a wonderfully bracing line: “The reader should proceed in these pages in the knowledge that money is nothing more or less than what he or she always thought it was—what is commonly offered or received for the purchase or sale of goods, services, or other things.”7 That, by refusing to engage with the problem, is a potent acknowledgment of its scale. In effect the great man is saying, “Money? I’ve no idea what that stuff really is.”
This, I think, is an important part of what is interesting about the language of money, and about the field of economics, and maybe even about people. There’s so much we don’t know, not just on a superficial level but at the deepest levels too. That is why the language is so useful, and so important: it delineates the thing we’re talking about, in order to leave us clear to agree or disagree, to make up our minds or to fail to make them up, and come to the conclusion that while we can see the problem, we don’t entirely know what we think about it. At the present moment, economic news hasn’t been far from the front pages for more than about forty-eight hours anywhere in the Western world at any point in the last six years. The subject has dominated politics and loomed over ordinary lives; the specifics of what policies to follow have been at the subject of extensive analysis everywhere, from the news media to international summits to the blogosphere to the kitchen table. The subject under discussion, economics, purports to be a science. It is an extremely well-staffed and well-funded field of study, employing tens of thousands of people in both the private and the public sectors; it has extensive experience of precedents and an incomparably greater amount of data than was available to any previous students of economic problems.* And yet, as Anatole Kaletsky wrote in the London Times on 4 April 2013, all the main questions remain open:
In a recession, should governments reduce budget deficits or increase them? Do zero-interest rates stimulate economic recovery or suppress it? Should welfare benefits be maintained or cut in response to high unemployment? Should depositors in failed banks be protected or face big losses? Does economic inequality damage or encourage economic growth? . . . What all these important questions have in common is that economists cannot answer them.
This is an amazing state of affairs. For some, it is the moment to give up on economics as a discipline, to throw up the hands and announce that the whole subject is bollix. (And maybe to throw open the window too, and announce, “I’m as mad as hell and I’m not going to take it anymore.”) This impulse is easy to understand, and has given birth to some good polemics, such as Steve Keen’s Debunking Economics: The Naked Emperor of the Social Sciences. And indeed, there are times when faced by an institutional arrogance among some economists—a semi-autistic refusal to see the human context of their own subject, a blindness to their own shortcomings and the limits to their own knowledge—when it’s tempting to go along with the refuseniks. But it’s more tempting still, I would suggest, to swap perspectives on the question. The lack of definitive conclusions isn’t a weakness in the field; it’s what’s interesting about it. The chaotic lack of consensus arises because economics is “the study of mankind in the ordinary business of life.” When is anyone going to reach any final verdicts about that? The nature of the difficulty was touched on by Keynes, quoting a remark made to him by Max Planck, the German scientist and theoretician who made the intellectual breakthrough that led to the birth of quantum physics. That means Planck was one of the most brilliant mathematician-physicists the world has ever seen.
Professor Planck of Berlin, the famous originator of the Quantum Theory, once remarked to me that in early life he had thought of studying economics, but had found it too difficult! Professor Planck could easily master the whole corpus of mathematical economics in a few days. He did not mean that! But the amalgam of logic and intuition and the wide knowledge of facts, most of which are not precise, which is required for economic interpretation in its highest form, is, quite truly, overwhelmingly difficult for those whose gift mainly consists in the power to imagine and pursue to their furthest points the implications and prior conditions of comparatively simple facts which are known with a high degree of precision.
Keynes’s point—which was also Planck’s point—is that in economics, the mathematics can’t be relied on to do all the work. The “amalgam of logic and intuition and the wide knowledge of facts, most of which are not precise,” makes the field one requiring an unusual mix of aptitudes. This of course is what is fascinating about it: the fact that its complexity derives from the variety of human lives. We’re not simple, so why should economics be?
Excerpted from "How to Speak Money: What the Money People Say and What It Really Means" by John Lanchester. Published by W.W. Norton and Co. Copyright 2014 by John Lanchester. Reprinted with permission of the publisher. All rights reserved.
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