Paragraphs to Ponder
By Arnold Kling
From John Mackey, the CEO of Whole Foods, in an essay in Be the Solution, p. 79:
the classical economists became enchanted with the efficiency and the productivity of the industrial enterprises that they studied. Industrial and machine metaphors became the primary metaphors used to explain how the world really worked since this reflected the Newtonian scientific world-view that came to dominate the consciousness of the age. Every business was seen as a type of machine with various inputs and profits being the output.
…at the beginning of the Industrial Revolution, capital was quite scarce. The ability of successful enterprises to accumulate profits and the redirection of accumulated capital by the entrepreneirs and investors into new and promising opportunities was largely unprecedented in history. Therefore, it wasn’t too surprising that classical economists became enamored with the importance of profits, because profits had historically been very rare and they were essential to the continued improvement and progress of society. Industrial Age entrepreneurs had discovered a form of a “perpetual motion machine”–enterprises organized to maximize profits and through the reinvestment of these profits, the promise of indefinite continued growth.
What struck me about the first paragraph was the natural inclination of an economics discipline that was formed during the Industrial Revolution to view businesses and economies as machines. You think of a machine as something that should work most of the time, and if it is not working it needs to be fixed or re-designed altogether. You think of a machine as operating according to precise mathematical laws. I am reminded of the Obama Administration economists using a multiplier of 1.54 for government spending. At some level, they have to know that this is baloney. But there is enough comfort with using the machine metaphor that people are willing to talk about multipliers with this sort of false precision.
Also, textbook economics views businesses as machines for transforming inputs into outputs, which is why it is almost impossible for them to explain what entrepreneurs do.
The second paragraph speaks to the importance of profits and capital accumulation in classical economics. I think of Karl Marx as the ultimate example of this, but so is neoclassical growth theory.
My sense is that economics is straining to get out of the machine-metaphor straitjacket. Perhaps it will manage to escape some time in the next twenty years.