Knowledge and the Wealth of Nations: A Story of Economic Discovery [Paperback]

David Warsh (Author)

Book Description

Publication Date: May 17, 2007

"What The Double Helix did for biology, David Warsh's Knowledge and the Wealth of Nations does for economics."—Boston Globe

A stimulating and inviting tour of modern economics centered on the story of one of its most important breakthroughs. In 1980, the twenty-four-year-old graduate student Paul Romer tackled one of the oldest puzzles in economics. Eight years later he solved it. This book tells the story of what has come to be called the new growth theory: the paradox identified by Adam Smith more than two hundred years earlier, its disappearance and occasional resurfacing in the nineteenth century, the development of new technical tools in the twentieth century, and finally the student who could see further than his teachers.

Fascinating in its own right, new growth theory helps to explain dominant first-mover firms like IBM or Microsoft, underscores the value of intellectual property, and provides essential advice to those concerned with the expansion of the economy. Like James Gleick's Chaos or Brian Greene's The Elegant Universe, this revealing book takes us to the frontlines of scientific research; not since Robert Heilbroner's classic work The Worldly Philosophers have we had as attractive a glimpse of the essential science of economics.

Editorial Reviews

From Publishers Weekly

Starred Review.In this shrewd piece of intellectual history, former Boston Globe columnist Warsh shows how two contradictory concepts of Adam Smith-the invisible hand and the division of labor (famously, at a pin factory)-took on lives of their own after their 1776 publication in The Wealth of Nations, and then finally converged in the work of late 20th century economist Paul Romer. In the first half of this book, Warsh gives an entertaining and precise history of economic thought from Smith forward, through the lens of what have come to be two of his key constructs. Warsh's treatment of difficult economic concepts like value is brief but clear and accurate, and he gives equal weight to personalities, institutions and broader social forces. In the second half of the book, Warsh advances the claim that in the 1970s and 80s, when Romer divided economics into people, ideas and things, instead of labor, capital and land, he touched off a revolution in the field, one that is still playing out in now-dominant "New Growth Theory" economics. Warsh does not focus narrowly on Romer's work, but describes the social and institutional framework of modern professional economics: how ideas percolate, how papers are published, how careers advance and how meetings and societies are organized. The book brings sophisticated ideas into a complex story without losing the thread, or the reader's interest.
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved. --This text refers to the Hardcover edition.

From Booklist

Warsh, who had a long-running economics column in theBoston Globe, here journeys through the discipline's history en route to an analysis of an influential 1990 technical paper. Written by Paul Romer, "Endogenous Technological Change" is described by Warsh as mathematically formidable, which is the way modern economists like their fare, begging the question of why its story would be of general interest. First, hundreds of thousands annually enroll in university-level economics courses; second, Romer's paper, pertinent to the information revolution that is our zeitgeist, is clearly explained by Warsh; and third, Warsh reveals the occupation of economics to the benefit of those who aspire to it. After historical exegesis of Adam Smith and his successors, Warsh depicts post-1945 schools of thought, biographically summarizing figures such as monetarist Milton Friedman and Keynesian Robert Solow, and those of Romer's generation now in their career primes. Appraising the intellectual lineage and gestation of Romer's paper, Warsh imparts in a comprehensible way the engagement many have with economic thought. Gilbert Taylor
Copyright © American Library Association. All rights reserved --This text refers to the Hardcover edition.

See all Editorial Reviews

Product Details

• Paperback: 464 pages
• Publisher: W. W. Norton & Company (May 17, 2007)
• Language: English
• ISBN-10: 0393329887
• ISBN-13: 978-0393329889
• Product Dimensions: 5.6 x 1.2 x 8.2 inches
• Shipping Weight: 14.9 ounces (View shipping rates and policies)
• Average Customer Review: 4.1 out of 5 stars  See all reviews (42 customer reviews)
• Amazon Best Sellers Rank: #401,357 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

69 of 74 people found the following review helpful

5.0 out of 5 stars A Theory of Knowledge and Increasing Returns June 22, 2006

By Izaak VanGaalen

Format:Hardcover

David Warsh has written a lively history of economic thought from the time of Adam Smith to the present. His narrative begins in 1776 with the publication of "The Wealth of Nations" and the central contradiction that has puzzled economists for centuries: namely, the parable of the pin factory and the invisible hand.

According to Smith, the pin factory demonstrated how economies of scale produced increasing returns by lowering the costs of production. What Smith didn't follow up on was that increasing returns enabled a few players or a single player to drive smaller firms out of business and create oligopolies or monopolies. Smith's other theorem, which ran counter to the example of the pin factory was the theorem of the invisible hand. The invisible hand required that many players compete in the marketplace in order for the market to function properly so that no one firm or group of firms could become dominant.

Economists since then have favored the theorem of the invisible hand over the pin factory, not only because it was ideologically correct, but that it lent itself more readily to economic modelling. Yet things were happening economically that indicated that the invisible hand - which argued that rising costs and diminishing returns were inevitable - was no longer adequate in describing what was has been taking place over the last thirty years.

In 1990, a young economist named Paul Romer published a paper entitled "Endogenous Technological Change." Romer noticed that economic growth was accelerating in rich countries where the standard of living was diverging rapidly from poorer countries. This was contradicting the law of diminishing returns and, indeed, indicated increasing returns....

Romer's theory was that the accumulation and the deepening of knowledge in a society was the source of increasing returns. In classical economics, the fundamental factors of production were always labor, capital, and land (natural resources). Knowledge was always exogenous. Romer looked at the knowledge factor more carefully and deemed it an endogenous factor that economists had hitherto failed to take fully into account. Factoring in knowledge - creating new economic models of knowledge accumulation - has basically revolutionized the fields of industrial organization, international trade, urbanization, development and many other areas of social science. Although this development is still in its infancy it holds many exciting possiblilies for the future of economic growth. (And the growth of the economics profession.)

Warsh does an excellent job of portraying the key figures in economics and their rivalries as this drama unfolds. If you like intellectual history, you won't be disappointed with this book. Read more ›

53 of 57 people found the following review helpful

2.0 out of 5 stars Disappointment February 16, 2007

By wj2007

Format:Hardcover

Most of the reviewers of this book apparently found it to be impressive. Sadly I did not.

Too little time is devoted to offering adequate clear explanations of the economic ideas and theories being addressed, too much time is devoted to irrelevant social asides. The non-economist reader seeking to understand the economics as opposed to learning a great amount of academic gossip and politics will probably be disappointed. I wanted to understand growth theory. I did not and do not care that the reason why Paul Romer left Chicago for the Bay Area was that his wife had a disagreement with her lab manager or that Paul Romer has developed software to teach economics. I found such digressions to be unnecessary and distracting.

To cite just two of the book's specific limitations:

(1) The book lacks referential footnotes and a bibliography. Readers not already familiar with the subject wishing to pursue a topic further will be at a loss.

(2) The book lacks a glossary. Throughout the book numerous technical terms are introduced and, at best, briefly described. It would have been nice to have all of these key terms explained in one place for easy reference.

Small efforts on the part of the author would have remedied both of these deficiencies.

35 of 40 people found the following review helpful

5.0 out of 5 stars Impressive history of economic thought June 6, 2006

By S. Park

Format:Hardcover

Adam Smith's Wealth of Nations supposedly explains the effects of two opposing economic forces, one being the force of the famous "invisible hand" (the economy of diminishing returns) and the other behind the success of the "Pin factory" model (the economy of increasing returns, or, growth theory). The book is a history of economic thought from the time of Smith to the present from the vantage point of this growth theory. The economist Paul Romer is the hero of the story. Romer is the one who was finally able to explain growth by correctly incorporating knowledge into his economic/mathematical model, according to Warsh.

Technicalities aside, the book is a fascinating depiction of intellectual history. The author deftly manages to capture the entire economics "scene" in impressive details -- from economics' major academic journals and institutions, its division of schools and universities, the major players, their work and personalities, and even to the happenings at important conferences. Warsh's depiction is so lively as to give one the impression that he had been present through all the historical events, engaging personally with all the economists described.

Students in economics will benefit from this book for the perspective it provides. Readers interested in economics culture in general, or those who seek to catch up on the trends of economic thought leading up to the last decade also won't be disappointed. One would be hard pressed to find an account of recent intellectual history as rich as this for any academic discipline.

10 of 10 people found the following review helpful

2.0 out of 5 stars Pretentious May 25, 2008

By Declan Trott

Format:Paperback

Despite its name, this book will not tell you very much about the wealth of nations. It is a history of economic thought rather than an economic history; specifically, the story of how English language theoretical economics came to develop mathematically tractable models of increasing returns to scale, as exemplified by Paul [edit: not David!] Romer and his 1990 paper "Endogenous Technological Change".

Within these narrower limits, the story is told well. Romer's intellectual journey is explored thoroughly, and attention is paid to his antecedents, both those who approached the topic intuitively (eg the "big push" theorists of the 50s) and those neoclassical economists who started down the same path as early as 1965 but were deterred by their elders (Uzawa, Shell, Akerlof, Stiglitz and Nordhaus, some of whom still bear grudges to this day). There are some fascinating asides on Nordhaus' work on the historical cost of lighting, and the fact that Bill Gates took a microeconomics course (focusing on patent races) under Michael Spence before dropping out of Harvard. (One wonders if this should count as a negative on the scorecard of economics education!)

Warsh is less successful at explaining why the general reader should care. "So there is a new economics of knowledge. What has changed as a result? . . . not much, at least not yet." Yet he is still willing to proclaim that this new economics is an "indispensable guide to the modern world", and even get up on a soapbox himself: while "by all means" we should fix intellectual property, "first rebuild the education system . . . in ways that emphasise the new reality of international competition".

This is meaningless drivel. What exactly are these "ways" and why does this system need "rebuilding" in the first place?... Obviously if high school graduates are functionally illiterate this is a problem, but it is hard to see what the new growth theory adds to the subject. And what does "international competition" have to do with anything? Even if there was a one world government, or if the United States was transplanted to another planet, the importance of education would be the same. Indeed, it would be greater since there would no longer be any hope of free riding off other countries' innovations or stealing their educated labour.

The big question remains, though: Should anyone who can't understand the original paper care? Warsh borrows Krugman's analogy with the map of Africa in the 18th and 19th centuries - getting emptier as vague rumors and hearsay were expunged, before it was filled up again with more accurate data. This does not seem valid. The newer maps illustrated with greater precision things that were actually there. The new growth models are simply mental constructs, better than unaided intuition at checking logical consistency, but in the end only useful if they illuminate aspects of reality previously hidden. It is hard to see education and intellectual property as previously hidden. And the "precision" of theoretical parameters estimated by fancy econometric techniques has yet to translate into reliable control of economies, to put it mildly.

If this book was just called "The Genealogy of Romer 1990" or something similar, I would have given it three or even four stars. But "The Wealth of Nations" is not a title to be claimed lightly. Read more ›