Really gross domestic product

The Real Meaning of Money - Frozen Desire
December 26, 1997

Money is central to the practical life of almost everyone in the world. Both these books claim to offer insights into its role in human affairs. Dorothy Rowe's book goes very much further, purporting to tell us nothing less than the "real meaning" of money. The subtitle of James Buchan's book is more modest, offering simply an "inquiry into the meaning" of money. But despite the apparent similarities between them, and a degree of overlap in the issues they address, they are in many ways two completely different books.

Rowe does show a passing, if usually mistaken, acquaintance with economic theory. She even quotes approvingly and at length from one of this reviewer's own books, which makes it somewhat embarrassing to have to say that The Real Meaning of Money is a very bad book indeed.

The whole book is based on the premise laid out in the preface: "Things are bad and are going to get worse". One can readily identify the Four Horsemen who Rowe believes are responsible for this supposed sorry state of the world. They are men, money, the capitalist mode of production and, running a slightly distant fourth, the British Conservative Party.

The fundamental problem is that Rowe really does appear to think that the overall living standards of most people in the West are now no better than they have been for much of human history, and that they are going to get worse. This theme dominates the book. For example, our earliest ancestors of two million years ago are praised on the grounds that they had "stable economies", in which tool-makers "kept to the models they had designed and seem not to have needed to create a new model axe-head every spring".

This is a small part of the considerable effort devoted to criticising the economic accounting concept of gross domestic product. As it happens, all the sensible points which Rowe makes in this particular discussion have been known to economists for many years, such as the fact that GDP excludes the value of housework. What has escaped Rowe's attention is that, for all its imperfections, GDP can be a good indicator of the overall quality of life of a country. Real GDP per head in the United Kingdom, for example, is estimated to be around ten times higher than in 1820. One may well quibble about the precise order of magnitude, but living standards are enormously better now than they were nearly two centuries ago.

The systems of market economies in the West have proved to be by far the most successful form of economic organisation in the history of the world. To say this is neither to deny the possibility that a superior form might emerge at some time in the future, nor to believe that all the various manifestations of capitalism are of equal merit. But, to date, capitalism is the only type of economic system that has been able to generate consistent growth in material wealth. For much of human history, societies both could and did suffer reversals in their prosperity which persisted for centuries. And when growth did occur, it was slow and hesitant. As a broad generalisation, it appears that the western economies grew more in percentage terms between 1950 and 1970 than they did in the millennium between AD 500 and 1500, while the absolute increase in wealth in the postwar period was of course enormously higher.

In his last chapter, Buchan allows the sort of disdain for capitalism which pervades Rowe's writing to peep through. But for the most part, his is a completely different book. Essentially, it is a history of money, from the early middle eastern civilisations to the Wall Street of the 1990s. But it is as far removed from a dry, conventional chronicle as one can imagine.

Buchan is enormously well read, in literature, art, philosophy and history, and an engaging feature of the book is that he is not afraid to display his knowledge. Some of his anecdotes are highly amusing. For example, the 17th-century thinker Sir William Petty was challenged to a duel. Despite being almost blind, he accepted with alacrity. When asked to choose the place and weapons for the combat, he replied "an hatchet or an axe in a darke cellar". For economists at least, these stories are capped by the complaint of Marx's mother on his birthday in 1868: "It's a pity little Karl didn't make some capital instead of just writing about it."

Buchan is strikingly original and as a result the book is difficult to characterise. In many ways, it reads like a carefully constructed novel, with the history of money as the main theme, interspersed with innumerable subplots. Anyone who savours the spectacle of an erudite literary craftsman displaying his skills will enjoy this book. But, except in its passing references and throwaway remarks, it is not really about the discipline of economics.

Despite the substantial differences in style and content of the two books, there are several general themes which connect them. Money is identified by both Rowe and Buchan as being the principal cause of our problems. Inequalities in the world, for example, are attributed to money, so that Rowe solemnly informs us that famine in Africa is an "outcome of the wealth created in the developed world". In this vision of the world, money itself seems possessed with power and authority.

It is certainly true that in most human societies, wealth usually conveys social and political power. But the medium of exchange - money - simply reflects inequalities in economic and social relationships, and of itself is of no consequence. Indeed, it is easy to point to examples of societies in which power relationships were not expressed through the medium of money at all. As a financier once remarked about the Deutschmark: "It may be a strong currency now, but if the Russian tanks ever roll, it's Kleenex". And in a scene of chilling and unforgettable horror, Primo Levi describes the reactions of a group of rich German Jews after arrival at Auschwitz. On realising the true nature of power in that place, they simply destroy the currency they are carrying, for it is of no value to them at all. Examples such as these suggest that, contrary to the arguments of Buchan and Rowe, societies in which inequalities have been expressed through money, whatever their faults, seem preferable to those which have used alternative channels.

A second point in common is that both books show how difficult it is for non-economists to grapple with and confront economic theory. At a straightforward level, this is reflected in simple misunderstandings. For the most part, these are absent from Buchan's work, and he permits himself tantalising remarks about economics which leave a sense of regret that these were not expanded. For example, he characterises most of Britain's postwar history as a being a process of gradual liquidation of the debts of the war.

In common with many people, however, he misinterprets Keynes's famous phrase "in the long run we are all dead", describing it as being both flippant and severe. But Keynes used it as an argument against the conventional economic theory which holds, then as now, that in the long run the price mechanism will ensure that supply will balance demand in all markets. At a time of massive unemployment in the 1930s, when the supply of labour greatly exceeded the demand, Keynes used the phrase to call for immediate action, whatever the theoretical niceties of the long run might be.

Rowe's lack of appreciation of much economic theory is apparent throughout the book. A simple illustration of the point will suffice. She commends the Nobel prize committee for rewarding "those economists who are as much concerned with real life as with theory", citing as a shining example Robert Lucas of Chicago for his work on rational expectations. Yet Lucas and his highly theoretical work on rational expectations are at the very core of modern free-market economics.

Both authors have difficulty with the concept of markets, and why and how they exist. Rowe, for example, attacks free marketeers on the grounds that they do "not realise that no two people give 'value for money' the same meaning". Whatever the faults of free market theory, this is not one of them, for an important reason why markets exist is precisely because people have different tastes and preferences.

Buchan makes a subtler error, arguing that "a market cannot operate by laws, for the laws would be discovered, and it would cease to be a market". Alan Kirman's work on interacting agents in financial markets springs to mind here. Kirman postulates that laws governing the movements of a market, based on the behaviour of individual agents, can be written down in a few deceptively simple equations. But they can hardly be discovered purely from observing any realised outcome of the market over time. Indeed, even if the underlying laws could be detected, their stochastic nature means that one would not be able to take a position to profit from this knowledge. Understanding laws, particularly stochastic ones, does not mean eliminating them.

One of the great propaganda triumphs of conventional economic theory has been, through an elision of meaning, to conflate the terms "free market theory" with the actual "free market economies" of the West. Partly because of the imprecision of language and partly encouraged by the bulk of the economics profession, it is easy to draw the conclusion that "free market" theory is the theory of how the "market" economies actually behave in practice. But this is exactly what orthodox economics is not. It does not give a good account of how the western economies behave at the overall level.

Both Buchan and Rowe, to varying extents, subscribe to this error. When attacking market economics and capitalism, they imagine they are attacking economic theory, and vice versa. But, on the contrary, it is precisely the enormous success of the western economies, and their liberation of millions upon millions of people from lives of unremitting toil and drudgery, which makes it all the more important to obtain a better understanding of how they do actually operate.

For all its faults, orthodox economic theory is a serious and formidable intellectual construct, with certain insights which have stood the test of time, and criticisms need to be made at the appropriate level. Both these books are, in this respect, unhelpful. Mainstream economists will find them all too easy to dismiss. In so doing, they will simply be reinforced in their current position and prejudices.

Paul Ormerod is chairman, Post-Orthodox Economics.

The Real Meaning of Money

Author - Dorothy Rowe
ISBN - 0 00 255329 5
Publisher - HarperCollins
Price - £20.00
Pages - 453

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