Subscribe to Inc. magazine

Making Economics Easy To Understand

In a stimulating text, two prominent economists tell how we got into this mess and look for ways out.
Advertisement

An economist explaining in simple language how capital systems operate is like a conductor lecturing on Beethoven's Ninth by whistling. The basic concepts get through, but the subtle richness of interaction -- how one theme affects another -- is necessarily missing.

But even bare-bones instruction may help us exorcise the economic woes that already are diminishing our quality of life. Anyway, that's the intent of Five Economic Challenges, by Robert Heilbroner and Lester Thurow -- two articulate teachers capable of convincing the layman that, armed with a little knowledge, he can control his destiny.

Despite their somber titles -- "Coping with Inflation," "Overcoming Recession," "Understanding Government Spending and taxing," "Defending the Dollar," and "Living with Less Energy" -- the five pieces in this book make economics seem as simple to fathom and as fun to play as a game of Monopoly. Indeed, the two professors maintain that the reasons we are involved in such predicaments lie not so much in economic theory, which is clear enough, but in an understandable reluctance of those who put it into practice to choose hard-nosed ways out.

With a facts-and-figures textbook cadence occasionally interrupted by flights of admonishment, each entry reviews the history of the problem, patiently describes its dimensions, and weights the possible cures -- at least as two now-out-of-the-mainstream scholars see them. Inflation, they maintain, was not bothersome within the capitalist system until the advent of cost-of-living adjustments. Because it trains people not to implement or expect lower wages or prices, income indexing doesn't allow the economy to fall back down in a "natural" inflation-recession cycle. And since, as they point out, the average American actually is better off than he was 10 years ago (real per capita disposable income rose 28% from 1969 to 1979), they suggest that inflation is largely psychological and selffeeding.While we may feel that our standard of living is being whittled away and that our financial well-being is teetering, the real penalty that inflation exacts on an economy is under-achievement and unemployment -- "not only the unemployment that stems from high interest rates and lessened investment," the two insist, "but the unemployment that governments deliberately tolerate or encourage in order to prevent inflation from getting worse, or in the hope of making it better." Couldn't we find a more equitable means of sharing the burden, they ask rhetorically; they leave finding the means to others.

For a price, we can whip inflation now, they declare. They outline five strategies: balancing the budget, tightening money, allowing a major recession to run its course, encouraging voluntary controls (through tax incentives, for instance), and, finally, imposing mandatory wage and price controls. None of them is new, to be sure, but seldom has this roll call been so concisely argued for lay consumption.

In their brief study of falling into and climbing back out of recessions, they blame most of our foundering productivity on shrinking capital investment, inefficient research and development expenditures, and excessive defense spending. Again, the cure is political and unsavory. "All sorts of special interests will seek assistance from the government in the name of productivity... Identifying the target of raising productivity is a safe and simple economic exercise. Carrying it out is a hard political struggle."

More disruptive to our society is the unemployment caused by the decreased demand on output of a recession. But, the authors lament, the nation so far lacks a "willingness to place employment at the very head of all benefits that we expect from our economy, a willingness to bend every effort to achieve the right to work for all."

When problems arise in the market process, Heilbroner and Thurow go on to say in chapter three, "there is no -- we repeat, no -- way of coping with these problems other than by government." Yet government's role in a free economy is misperceived by the public, and thus its ability to provide a remedy is clouded. They conclude that government spending, distasteful as it is becoming to conservative convention, is necessary in a democracy to bridge the resource-allocation gaps in market mechanisms.

Their examination of a defense of the dollar in chapter four takes a decided technical turn. But the authors' spare explanations of how supply and demand for the dollar fluctuates according to capital exigencies is a brilliant short course on complicated fiscal relationships in which a falling dollar ultimately can lead to a failing world economy. They reject a number of cures: import embargoes, legislation against U.S. companies, acquiring foreign assets, raising interest rates to attract foreign currencies, and Federal Reserve support. In the end they offer three tentative proposals: Replace the dollar with another currency as the world's reserve vehicle; let gold act as a standard in the open market; and adopt the inventive Special Drawing Rights -- the International Monetary Fund's "paper gold" -- for settling international payments. However, these involve political and economic problems that will "impinge on our lives for a long time to come."

In the final chapter, the authors mourn the coming of OPEC and the passing of the Age of Oil. And here the prospect to limitless growth that has been fodder to economic thought comes to a startling halt. The Age of Spaceship Earth, when both Western and Eastern expansionist designs give way to a program of common ecological preservation, is still an alarmingly long way off. Until then, what?

Heilbroner and Thurow do not have all the answers. Invariably, they regret that politics sets the limit for economics, and leave it at that. But undoubtedly at the same time somewhere in Washington there is a government official who regrets that economics sets the limits for politics. The scary thing is that, between the two, nothing is being done.

Last updated: Jun 1, 1981




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: