Nat Dyer, "Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray" (Bristol UP, 2024)
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Welcome to the new Books Network.

Hello everyone, welcome to another episode of NewBooks Network. This is your host Moiteza Hajizadeh from Critical Theory Channel.

Today I'm very excited. We have a very, very interesting book and with me to discuss the book I've got the author, Nat Dyer. The book that we're going to discuss today is called Ricardo's Dream: How Economists Forgot the Real World and Led Us Astray. And the book was published just recently by Bristol University Press. Ricardo's Dream is a fascinating story about David Ricardo, Adam Smith's only rival as the founder of economics.

The wealthiest stock trader of his day, Ricciardo introduced the study of abstract models to economics. He also developed a theory of trade that underpinned globalization and hides

behind its mathematical facade, a history of power, empire and slavery. Nat has written this wonderful book. Nat Durari is a writer and researcher specializing in global political economy. He's a fellow at Schumacher Institute and the Royal Institute of Arts. Nat, welcome to New Books Network.

Thank you so much, Morteza. Pleased to be here. I can't tell you how excited I was when I came across the title of the book. I think I came across it on Twitter. I follow all those publishers. How economists forgot the real world and let us always thought about why economists are obsessed with numbers and they just don't talk to people enough. Anyhow, and then somebody wrote a book about it. So thank you very much for accepting this invitation.

Looking forward to it. Can you, before we start, tell us how the idea of this book came to you? Why did you decide to write this book? Where did you get that idea? Yeah. So I have a background in working for different NGOs. I was an anti-corruption activist.

researcher and investigator for quite a while. So I was digging around in some of the darker areas of 21st century capitalism related to offshore finance, the reasons why some of the poorest countries in the world, like the Democratic Republic of Congo, are sitting on immense mineral resources, but their people are some of the least healthy and economically privileged people on the planet.

And I was kind of interested in following those stories upstream and finding out some of the some of the reasons, some of the sort of ideas that helped to justify this this bad behavior. So I ended up working for another small organization called PEP or Promoting Economic Pluralism. And I.

I was doing more and more writing and I came across actually an article by Matthew Watson, who's an academic at Warwick University. And he'd written about, you know, Ricardo's, which we'll get into sort of, you know, most famous example of why international trade is always win-win and positive.

And he contrasted the theory with the historical reality. And I thought, wow, if I can write this up with some color, with some, you know, if I can flesh it out, if I can make it into a story, this might really neatly demonstrate some of the weaknesses and problems of mainstream economic discourse. So, yeah, that's where the spark of the idea came from. And it took longer than I anticipated. It took three or four years, but I'm very pleased that it's now out into the world. Yeah.

And it's a highly accessible book as well. I'm not an economist. I think I told it before. But when I was reading the book, the part that described economic theories, to me, they were really accessible. And a lot of people are... Unfortunately, some people, the general public may not read university titles, university published titles. But this one I found, like I said, quite accessible. But I have another question as well. This...

Ricardo's dream. So people might think that this is a kind of a history book about 300 years of... You do cover kind of a 300 years of history. You go all the way back to 1690s. But you also describe it as very much relevant to our current situation. And I'm guessing with all these trade wars between America and all its allies, it used to be only America and China, it's even becoming more relevant.

Can you talk to us, tell us why do you think this book is also relevant to what's happening right now in the world? Sure. Yeah. No, thank you. Yeah. I mean, part of the reason is that economics for the last few decades has been known as, you know, the queen of the of the social sciences. Some people refer to it. There's a great book by New York Times called.

economics writer, Benjamin Applebaum called The Economist's Hour. And he sort of describes this period from the late 1960s to about 2008 as being the time when economics had unprecedented influence, not just within university walls, but especially with government, especially with with with the US government.

And so the knowledge and the stories and the sort of accepted facts that economics brings has shaped so many different aspects of our world. And that's not just related to finance and trade wars, but that's related to how we structure our societies, how we

engage with each other, how we exploit or not the natural world. And so, yes, so this does cover a 300 year history. And I see it as sort of the birth, death and then rebirth of this idea of founding economics on unrealistic assumptions. So I see that this idea sort of started with Ricardo and I think

mention how it was born and then i talk about how it was challenged by thinkers who are more attuned to history and institutions and how it died essentially and then how it was reborn in the post-war america in the 50s and 60s and some of the damage that it's done to um

the damage it's done in recent years so so yes so it's um yeah i'm as i said this book took a few years to um to produce so i didn't know that just a couple of months after it came out trump would you know completely well i didn't know he'd be re-elected and i didn't know that he would completely upend the global trading order but um yeah some people have told me that i've got um

Very good timing, but it's sort of luck as much as anything else. Yeah, well, the timing of luck, anyway, couldn't have been much better. And David, the first time I myself, again, I'm just repeating it, I'm not really an economist or I'm not an economic historian. The first time I came across the name was a few years ago. I was reading a book about the history of

capitalism and even the the the the roots of the world capitalism which started in france and it was used to finance war um i think it was called capitalism the hidden history of word

Okay. Yeah. And that's where I came across his name. Oh, no, sorry. It wasn't even more than that. There was a book about the statistics. I was reading statistics in Victorian England. But anyhow, and then I had to go and check it because I did not know him. Well, of course, everybody knows Adam Smith. And as you mentioned in the book, he was Adam Smith's only rival. I'm interested to know for me and also for the uninitiated, let's say,

Who was he? What was his... We're going to get into more details, but maybe just to set the scene. A broad introduction to him. And is he really the first economist who came up with these abstract models? Sure. Yeah. So, no, you're completely right. For people who know a little bit about economics, Adam Smith is known as, you know, the founding father of economics and is... But...

when it comes to sort of international economics, Ricardo is known as the sort of founder of international economics. And it has been sort of accepted wisdom for a while that Smith, you know, Smith's theories were okay, but they only took it to a certain way. And then Ricardo's theories really were the foundation stone for later ideas.

I, yeah, I would, I describe Ricardo as one of the most successful men who's ever lived. And I say that because he was both financially extremely successful. He was one of the richest men

men of his day. He was roughly a contemporary of the fictional character Mr. Darcy from Pride and Prejudice. And I calculate that he was three or four times richer than Mr. Darcy. And he bought country estates throughout England, including one

where he lived, which is currently owned by the late Queen Elizabeth's daughter, Princess Anne. But he was also very successful intellectually, and his ideas have influenced capitalists, socialists, critics of capitalism, etc.

And so, yeah, so who was he? He was born in 1772. He died in 1823. So his adult life was kind of when England was fighting France, led by Napoleon. He was a stockbroker from the age of 14. And then he left that and he became an economist or political economist, as it was called then. And he also became a politician. He was a member of parliament. And

And yes, I describe him as the other founding father of economics. There are, you know, as you can imagine, many contenders for the person who first came up with simple models in economics. So you could argue that it was, you know, the French physiocrats. You could argue that it was people a generation later than Ricardo. But yeah, I make the case that...

that David Ricardo was the person who is most responsible for it. And we're happy to talk more about that as we go on. I really like that comparison with Mr. Dossier. I guess it puts it into perspective. And I could be wrong, but I guess Mr. Dossier also had a lot of wealth coming from plantations. I don't remember which Jane Austen novel was that. Did David Ricardo have...

I mean, like Adam Smith, he also benefited from slavery. And Dr. Boyd, did David Ricardo also have any financial gain from slavery or international? Yeah, I don't believe that he had any direct holdings. He was sort of active in his adult life in the few decades between the end of...

when Britain had outlawed the slave trade, but slavery was still legal in the empire. So that's between 1807 to 1833, I believe. But he did hold stock in the East India Company, which during his adult life was transforming India from a producer of

Cotton's the world's largest producer of textiles into a producer of raw materials. And sort of Ricardo, I mentioned at some point, defended the East India Company and defended British commerce, despite the fact he didn't seem to really know much about it. Let's talk about his economic contributions. One of the theories he discussed in the book is the theory of comparative advantages, which

What is that? Can you explain what it means and perhaps give us an example? Because there's an example in the book, the trade of cloth and wine between England and Portugal as an example of this model working, but you consider it to be flawed. I'm asking too many questions here, I guess. So maybe you could tell us what it is. Give us an example and why that, let's say, famous example seems to be flawed. Sure. Yeah. So essentially, yeah.

There's always a bit of a difference between what Ricardo himself wrote and then what later economists have pulled out of Ricardo and put into models and taught to generations of students. But it's probably easier to go with the second. Essentially, the story that has been taken, the conclusion that's been taken from Ricardo is,

which is something he did himself defend often, is that international trade is always win-win, that it is mutually beneficial. And it said that Adam Smith argued that

something called absolute advantage so that if he showed that if another country can produce something cheaper than you can produce, then it's worthwhile both countries trading. And he had, you know, a really good example. He said, you know, in the Scotland of his day, we can...

erect greenhouses and we can maybe you know make some grapes and we can make some wine but that might cost us 30 times more making wine in scotland than it would for france um to to make wine so it makes sense us uh doing what we do best and uh france do what they do best and we'll exchange and we'll we'll both be mutually benefited but um ricardo took it a step further

produced a sort of simple model, a proto-model, that argued that even if one country does everything

everything worse or everything better than another country, it's still in both of their interests to exchange. And the example he used is England and Portugal. And we have to differentiate here between what I might call the model world and the real world. But if we stick with the model world to begin with, in Ricardo's model world, it's a simple world of England and Portugal exchanging cloth and wine.

And in his model world, England is worse at doing both things. Portugal can produce both cloth and wine with fewer men. He talked about, you know, women didn't have a role in Ricardo's theoretical world. And so essentially,

Portugal was more efficient at both. But using some simple numbers, he showed that despite this, if each country focuses on what they are best at or what they're least worst at, it still makes sense for England to...

specialize in cloth and Portugal to specialize in wine and they exchange and you do some simple sums and this is a counterintuitive result that generations of economists have marveled at and taught students. It makes sense that each individual

country can have greater consumption and the world consumption can grow. So that is the essential story. And it's about 200 years old, but it has been built on and generalized by other ideas. And it was often used in

in the 1990s and the 2000s during the real sort of boosterism of globalization to say this is incredibly relevant, this is true, and this shows why we need the world trade organization or we need this new free trade deal or whatever. Now if we leave the model world and go to the real world, and this was part of the story as I mentioned at the top that I heard from Matthew Watson at Warwick University and that I

talk more about in the book um there was a booming trade in cloth and wine between england and portugal um for about 100 years before ricardo wrote in the early 1800s and um england did indeed export lots of cloth to portugal and portugal exported lots of wine um

But Portugal never exported enough wine to England to make up for the huge amounts of cloth. In that time, cloth was the premier manufactured good. And just the value of it didn't match up. So for decades and decades, Portugal had this huge trade deficit with England and later Britain. How did they make up for it? Well, essentially, they...

through gold discovered in their South American colony of Brazil. There was a massive gold boom, which started in the 1690s and lasted most of the 18th century, sort of doubled global production of gold. And two thirds of that ended up in London.

And that gold was largely dug by enslaved Africans who were taken from often from Angola, from Congo, from West Africa, from some of Portugal's holdings and also other European countries holdings in West Africa.

transferred across the Atlantic in order to dig for gold. And Brazil tops many of the statistics for the transatlantic slave trade. We often think of slavery related to America, but actually 10 times as many enslaved peoples were landed in Brazil than they were in the US. Not all of them for gold, many of them for sugar plantations and other later for coffee. But

Essentially, the reason I tell this story is to say that in the model world, it's win-win, everyone benefits. But underneath that, there is...

a different history, which is rarely told, of exploitation, of slavery, of colonialism. And so I argue that Ricardo was only giving us a little slice of the history and that we need this global colonial context to explain how things actually were working.

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if i may ask about you you mentioned that this became his theory despite the the difference between the beautiful world of theory and the harsh world of reality being different but it was kind of celebrated and uh lauded in the in in 2000 early 2000. i'm just curious to know

I live in Australia. Australia doesn't really have a big manufacturing industry. It used to have, but not anymore. And they have exported everything, like many other countries, to China because it's cheaper to produce there. And it has turned into a service economy. And it benefits, obviously, the person who owns a business or an industry because it's cheaper. They can make more money. It makes sense for them to produce things in China. What...

So Donald Trump, you know, with all these tariffs, trying to bring back manufacturing sector to America and a lot of politicians also talking about bringing back manufacturing to Australia as well. That's where I live. Although they just I guess it's just a lip service. They don't because the cost would be huge to produce something in Australia.

Do you think it's kind of a legacy, even if they don't, they might not directly know about David Ricardo, but is that general understanding is a legacy of that, the David Ricardo's theory of comparative advantages? Yeah, I think, I think there was quite a, now looking back, it can be seen as quite a naive belief in the 1990s and the 2000s that, you

Globalisation was a tide that was going to lift all boats, essentially that it was win-win for individual countries. Yes, there was an idea that there might be, you know, winners and losers within developed countries. But a couple of things. It was thought that essentially a lot of the assumptions of economists supporting globalisation

unfettered, unregulated trade was that if the winners gained more than the losers, they could theoretically compensate the losers. And that was a separate political question. And that rarely happened, especially in countries with weak welfare states. But that was enough for... That was often sort of sidelined in the debate. And...

As I say, that's now seen as something that was very naive. I should say at the time there were many people, sometimes it's called the anti-globalization movement, but I prefer to call it the outer globalization movement at the time was saying, you know, this is just going to lead to a bonanza of corporate profits and a looting of the natural world.

And this is actually not just about international trade, but the agreements that governments are signing up to, whether that be the World Trade Organization or whether that be regional bilateral deals, often fall.

obliged developed countries to change their own national laws, whether that be laws about patents or laws about environmental and social standards. And so it had this sort of downward pressure, which is, you know, referred to as a race to the bottom somehow, sometimes. So

Yeah, so I definitely think Ricardo certainly rhetorically was very important during those debates. And it was often used to say, essentially, if you argue against

free trade if you argue against this one you're ignorant you don't know anything um you know uh paul krugman back in his day he sort of evolved in his view somewhat um the nobel prize winning economist and um until recently new york times uh um uh columnist he said well you know

Those who disbelieve in free trade and comparative advantage, he compared them to creationists and evolutionary deniers. You know, this is, you know, this this is science. This is truth. You're just ignorant if you if you disagree. He's now said that he made some mistakes in in in his pro globalization boosting.

But yeah, I think a lot of the problems and ructions that we're seeing around the world can be related to this. But the Ricardo story allowed economists to say, look, this is 200 years. If you argue against this, you're arguing against 200 years of economic wisdom. And what I'm trying to do in the book is break that down a little bit and show that that is not the case.

And I really like the term you use. This is science and you're against that. But we'll talk about the science of economics towards the end of the interview. Let's go back. I'm kind of jumping back and forth between Ricardo's and today's science. Let's go back to David Ricardo. So he came up with this theory of...

comparative advantages. Let's talk about the reception of the theory or maybe who were its proponents or opponents. I'm interested to know how that theory influenced or how it was received during industrial revolution where in England you were seeing great boost in economy, but for certain people, who are the main beneficiaries of this theory?

Yeah, I think what Ricardo gave to his contemporaries was a simple story that brought together a lot of different aspects of the economy and told them how they interrelated.

And he was part of, for the rising merchant and manufacturing class, the rising middle class in Britain, it was a great...

story that told them that they were the motor of progress and that the more profits that they made, they were the ones pushing society forward. And it was the old feudal aristocracy, the landowners who were holding things back, but also the workers, the poor who were asking for higher wages, they were also potentially holding things back. So I describe Ricardo's system as it punched up against the

But it also punched down against the workers. And so, yes, so it was very influential, both on an intellectual level. It had a certain logic and appeal, but it was also...

politically attuned to the moment when, as I said, most of his adult life, Britain was fighting against the French in the aftermath of the French Revolution. And when Britain essentially defeated Napoleonic armies in 1815 at the Battle of Waterloo, Britain had unprecedented dominance, naval dominance and military dominance. And

it was able to use that in order to boost its trade and empire globally. And so Ricardo's theories gave a rationale and an explanation for why that was a good thing. And before his theories, did economists mainly rely on historical data? Did it become, let's say, mainstream fairly quickly or there was backlash against it by other countries?

other of his contemporaries or maybe later economists. I mean, almost the, you know, the separate sphere of something called economics or political economy didn't really exist, you know, and Ricardo helped to bring that into play. And also, even in Ricardo's time, it was not a university discipline. They were largely people who were outside university. When Adam Smith, who inspired Ricardo, Ricardo was...

on a trip with his wife who was convalescing and he picked up a copy of Adam Smith's Wealth of Nations and he read it and that was the spark that led him later to write Economics. When Adam Smith wrote

He wrote as a moral and social philosopher, and he saw economics as intimately linked to politics, to human ethics, to morality. Ricardo had a different vision, which essentially cut the ties of political economy to politics and to ethics. And...

I think we would be better off if we went back to a more sort of Smithian point of view. But yeah, you've asked about whether it was challenged. Definitely. I mean, I lay out, I think it's fair to say Ricardo has always split opinions. So there's some people, you know, who say, you know, thou art the man, you know, you have, you have...

you have created, no, you have revealed the eternal laws of the economy for all time. And there's others who say, you know, these are crude and premature theories. You know, Ricardo was accused of having dropped from another planet. And, you know,

So, yeah, so he definitely split opinion. And I would say that the historical and institutional economists actually sprung up in...

in response to Ricardo. So I talk about, I mean, interestingly enough, you said we'll talk about science. One of the people, you know, in just the decades after he died who opposed him was a guy called William Hewell. And Hewell, he was the...

master of Trinity College, Cambridge for a while. He was known for his mathematics and his tides research, but he was also the person who coined the term scientist. But he disliked Ricardo because he thought Ricardo was promoting a type of knowledge, a type of science that actually went against the historical pattern of progress in the sciences. And he worked with someone called

Richard Jones, who was possibly one of the first historical economists who went and gathered documents and spoke to people in order to confront Ricardo's model world with the real world and showed some of the reasons why his theories didn't hold.

I think one of the people who responded to his theories was the, well, whom I call the infamous Thomas Malthus, right? I came across his theories when I was doing my research, his theories on population. And you briefly mentioned, God, I'm forgetting all the names, Mary Sheen's father, Godwin, William Godwin, I guess, who kind of rejected Thomas Malthus' ideas. Yes, yes. How did Malthus respond?

Yeah, great question. So, yeah, Ricardo started publishing about economics in sort of 1810, 1811, and he quickly became friends with Malthus. Malthus sort of read his pieces, got in touch, and the two became great friends. His wife,

Ricardo's wife once described Ricardo and Malfa staying up till three in the morning to discuss the definition of rent. You know, they had they had these, you know, long intellectual conversations and they, you know, they swapped letters and they went to each other's families for Christmas. And, you know, they had a genuine friendship and they started off that exchange of letters by saying, let us try to sort out our differences in private so they don't.

come out in public. But essentially, I argue, although they remain friends, that that failed. And so a few years after Ricardo produced his book, which was called The Principles of Political Economy, Malthus produced a book with identical title that basically talked about many of the problems with Ricardo's point of view. But somewhat ironically, Ricardo got a lot of his ideas from Malthus, too. And

And so Ricardo completely bought into the population principle. Ricardo got his idea of rent, which we can talk about, if you like, from Malthus. But ultimately, Malthus was trying to...

trying to confront ricardo with the fact that his theories didn't stack up to reality and uh ricardo responded once saying well actually you know you've said about this objection but that is a question of fact not a question of science um which is very uh strange about what you know what does ricardo mean by science if if it doesn't align with facts um so yeah um

Malthus' population principle, I'm not an expert in it, but it has its own long history. And what's interesting about it is that in the 20th century, it was largely seen as something that is related to the environment and overpopulation. But actually in his day, it was more about why the poor are responsible for their own poverty. And his theory is,

was attacked across the board because it argued that if you try and help poorer people, you're actually hurting them. And so it sort of led to the workhouse and some of the other horrors of industrial Britain in the 19th century. Yeah.

And yeah, I was doing my research on environmental humanities, and that's why I came across this book. And I think when Malthus published his book, it also changed. It was influential in changing the British poor laws in England as well. Yeah. Yeah, no, definitely. Yeah. Yeah. They changed in the 1830s, I think. And another important person you talk, you discuss in the book, but this guy defended him, John Stuart Mill.

How did he approach the book and how did he, let's say, defend Ricardo's ideas?

Yeah, I mean, Mill is a wonderful thinker, wonderful writer. He had an evolving vision. So, you know, by the end of his life, Mill is broken with some of Ricardo's ideas. But he did play a key role in sort of helping to transmit them and solidify them. And it's a family story as well. So Mill's father, James Mill, was Ricardo's best friend, essentially. Yeah.

Another writer who helped push Ricardo to in many aspects of his life, including becoming a politician and writing his book. And when John Stuart Mill was young, he met Ricardo and liked Ricardo. And yeah, I mean, Mill's story is also I don't know if you know about Mill's mental breakdown that sort of thing in his in his early 20s. I know I don't know much about that would be great if you could.

discussed um so essentially he had this incredibly you know hothouse education in which he was taught greek at three he was taught latin at eight um at the age of 12 or 13 his dad made him uh read ricardo's new work and then uh give him a summary that he had to write and rewrite every day um which eventually turned into a textbook called the elements of

political economy. And so Mill was sort of, you know, drilled with, with Ricardo's work, but then, yeah, in his, I believe it was his early twenties, he essentially had a nervous breakdown and talks about, you know,

being rudderless and being a mere reasoning machine and how his education had completely ignored his emotions. And so John Stuart Mill broke with his father, but actually even after that, he stayed quite true to a lot of his father's ideas and Ricardo's ideas. And so, yeah, Mill produced a number of essays and then also a book in 1848 that,

that essentially defended Ricardo's theories. And he was aware that some of Ricardo's theories didn't match up to what was actually happening.

But he made a distinction between he thought that those were just temporary aberrations and that Ricardo's theoretical world was actually the permanent world that was behind everything. And these sort of temporary aberrations were temporary.

were just passing phenomena. And so, yeah, without going into it in any more depth. And, yeah, and I guess one more point about John Stuart Mill is he produced a very influential essay about how to do economics, which essentially defended Ricardo's, you might call it, a priori deductive method, the fact that

of reasoning from assumptions which may not be correct. And so whereas Ricardo did economics in that way, he didn't really talk about the methodology. John Stuart Mill was more explicit. And yeah, he's a beautiful writer. He's very interesting. But I think at least related to Ricardo, he has been shown to be wrong in many aspects. Yeah.

Let's go back. Let's go to 20th century, early 20th century. So my question is two parts. First, was where his ideas sort of forgotten in the maybe second half of 19th century and then

You talk about this really famous economist Alfred Marshall, who, if I'm not mistaken, he was responsible for establishing economics properly in university as a discipline. And his role in sort of bringing back his ideas and you talk about how he kind of tacitly defends Ricardo's ideas as well. Can you talk about Alfred Marshall and his role in sort of reviving Ricardo's ideas?

Sure. Yeah. No. Yeah. I wouldn't say Ricardo's ideas were so much forgotten, but they were quite widely discredited. And thinkers across the board essentially argued that the type of sort of laissez-faire economics that Ricardo was pushing didn't have answers to the economic and social problems of industrializing Britain.

And it became much more fashionable to base economic knowledge on historical research rather than the sort of abstract theories that Ricardo had pushed.

And so I talk about how, you know, even the Encyclopedia Britannica in the, you know, the late 19th century said, you know, even Ricardo's supporters will say that his theories are just hypothetical.

And it was a time of deep challenge to the field of political economy as it was known. And Alfred Marshall came along and he did a couple of things. As you said, he helped establish it at Cambridge and elsewhere as a field. He's also partly responsible for changing the name from political economy to economics. And I used to think that was the time when the subject lost its...

realization that an economy was deeply political, that it was embedded in the sort of social and natural world. But actually, um,

I've now seen Ricardo political economy could be very, you know, abstract and disconnected like that. And I've actually seen it more as a rebranding exercise of there are lots of negative associations around the term political economy. Let's call it economist, just like you have scientist or physicist. And that allowed Marshall to sort of, in some ways, clean the slate. So Marshall did he

He tried to pull together these different strands. So he tried to pull together the classical economics of Ricardo. He tried to pull together the historical economists and he tried to pull together a new generation of theorists who are now known as the marginalists. So people like Jevons and sort of tried to bring it together in one in one coherent whole. And for Ricardo, he basically.

you know, accepted some of the criticisms of Ricardo, but also downplayed it. And he changed the focus away from Ricardo's theories on a national level. So as we were talking about, you know, Ricardo had defended Malthus's population principle. He, he,

put more of the focus on Ricardo as an international economic thinker, which is how he's come down to us today. Um, and yeah, Marshall also tried to redefine, um,

Ricardo's method. So we tend to think of, and it's probably too much to go in depth, but the general difference is shown between induction, which is looking at a wide range of facts and then working up to generalizations, compare that to deduction,

which is going from certain principles or assumptions and then following the logic onwards. And Marshall helped to sort of, although he did have some criticism of deduction, he helped to define, redefine deduction and combine it with induction. That might be a little bit abstract, but yeah, essentially Malthus helped to keep, rehabilitate Ricardo to some degree. This episode is brought to you by Peloton.

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But before I ask you about Milton Friedman, I have something else to ask. So Ricardus is associated with coming up with these models, economic models. And in your book, you consider these economic models to be, just quoting, weapons of mass distraction. Why do you think these models are weapons of mass distraction? And then I'll have a question about Milton Friedman, but I'll let you address this first before going to Milton Friedman. Yeah, so...

Yeah, thank you. Yeah, I make the analogy that models, they can be exceptionally useful. And in the physical realm or in the digital realm, the modern world as we have it wouldn't work without these models. But that has led to great enthusiasm to see predictable behavior and laws and models everywhere. And I think that has led us astray.

I describe models a bit like spotlights in the theatre.

And if they are pointed to the main action, to the person at the centre of the stage, it can really sharpen your understanding of what's happening and your focus. But imagine the model is actually, or the spotlight is actually focused on a secondary character, not speaking on the side of the stage. What happens with a theatre, with a spotlight in the theatre, is the bright light tends to plunge the rest of the stage into darkness. And that kind of happens with models too.

there's actually a great deal of choice with the modeler or the economist about what gets included or excluded from the model. And if the, you know,

If the right things are included in the model, it can sharpen your focus. But if the wrong things are included in the model or excluded, then they can be weapons of mass destruction. So we'll probably get on to it later in the podcast. But I argue that related to finance, related to trade, related to climate, too often we have excluded essential elements of finance

first importance in the real world. And because they have not made it into the model, because they have not been quantified, they have effectively been ignored. And some people have said they don't exist. And that has been not just a distraction, but in some ways a delusion. And that's my question. I think that's a perfect segue to my question about Milton Friedman, because he also emphasized that predictive powers of

models and argued for the minimal intervention of the government. Let's say maybe, again, he selectively used Adam Smith's ideas. I mean, the whole neoliberals did. And they came up with the whole idea of neoliberal, sorry, the invisible hand of the market, which is completely different from what Adam Smith meant. But what was his role, again, in reviving

reviving, let's say, these abstract models and emphasizing their predictive power. Milton Friedman, I'm asking about him, but then probably could also address the more dominant economic mode, which was neoliberalism. Did it also provide, did it, let's say, further drive us away from the real world by only emphasizing on the power of markets and how markets can regulate themselves?

Yeah, these are big questions. So I have to say you probably have to, you know, there's many, many books written about it, but also maybe read my read my book for the listeners for people who really want to dig into it. But just yeah, just a few high level terms. I tend I tend to use the phrase raw capitalism rather than neoliberalism in the book, just because I think that may

maybe is slightly more understandable but no I think you're completely right in the fact that Friedman cherry-picked what he wanted from Adam Smith and in some ways the same was done from Ricardo and used certain elements to argue that oh this is what people have known for 200 years and

and ignored the rest. One of the real, I mean, Friedman was one of the great polemicists of, you know, the post-war world. And he's an extremely effective public speaker and arguer if you read or listen to him.

his work but when you start digging under the surface then you can see all the different sorts of assumptions that he smuggles in and one of his main

impacts on economics was an essay from 1953 on methodology. And essentially what I argue, I said at the beginning that I talked about the birth of the idea of founding economics on unrealistic assumptions, the death, and then the rebirth. And I see Friedman's 1953 essay

article as effectively the rebirth. And even people like Danny Roddick, who's a Harvard economist, will say, you know, that Friedman's argument gave economists the liberty to produce models wildly at variance with what was happening in the real world. And Friedman actually went as far as to argue that the more unrealistic assumption, the better the theory, which is quite a kind of wild idea. And what I...

What is potentially new in my book is that I show how some other big beasts of the economics world, like Paul Samuelson or Herbert Simon, fiercely criticised this idea. They said this is like founding economics on the principle of unreality, or this is a monstrous perversion of science. Or they say simplicity is a vice, not a virtue of science. Yes, we need some simplicity, but you can't go all the way. So, yeah.

Yeah, I do think that that argument has got increasingly ropey and Friedman had a very crucial role to play. And you mentioned Paul Samuelson. And you also talk about different other economists in your book who kind of made economics more

Math based or more Ricardian if you can say that can come up with it. So can you talk about Paul Samuelson? He's and he's let's say his use of Ricardo theories to make economics more mathematical.

Yeah, I mean, Samuelson is another one of these, you know, probably tying with Friedman to the most influential economist in post-war, certainly within universities. And he sort of made his name by trying to make economics more mathematical. At the same time, he signed up to the ideas of John Maynard Keynes, to Keynesianism, which

But he's him and others sort of interpreted Keynes in a certain way that sort of tied down a lot of his ideas within mathematics and then and then ignored the parts of Keynes's general theory that didn't that didn't fit within it. So I describe Samuelson as almost having a foot in both camps. He realized that the classical theorists work. He even says in his in one of his first books, this only works in a Euclidean world. This only works in a in in a

in a world where which works just like Euclid's geometry. And we don't live in that world. So therefore, we can learn these theories, but then we need to be very careful at translating them and making them

making policy based on them. That quick transfer of abstract model to policy is known as the Ricardian vice. And Samuelson was aware of this. But at the same time, he also defended Ricardo's comparative advantage as one of the pinnacles of economic science, as a beautiful proof

And Samuelson, along with Friedman, was actually responsible for the birth of financial economics as we came to know it, which I argue in the book has led us to ignore the power of Wall Street and to ignore the fact that a lot of

financial trading is actually gambling. It was seen not as gambling but efficient pricing and this sort of

is, you know, Friedman died about a year, a couple of years before the financial crisis. Samuelson lived just a year past the 2008 financial crisis. And at the end of his life in his 90s, he said, you know, this crisis was created by, I think he said, fiendish Frankenstein monsters created by people like me at MIT. And so he was, you know, he was

He was a person with his foot in both camps. He realized some of the problems, but at the same time, he helped promote a type of economics that I think leads to ignoring the real world in many aspects. And you mentioned that a lot of free trade is based on gambling and

In an economic sense, of course. And I'm guessing these are some of the aspects that have been ignored or neglected when we are obsessed with all these abstract models. You use the analogy of a theater and spotlight, which plunges the stage into darkness or other things around the stage. I guess these are some of the aspects that you mentioned these economies got wrong or ignored in the real world. Am I right? Yeah.

Yeah, so I have a line towards the end of the book saying that, you know, we've looked at financial models with no crashes, global trade models with no state power, anti-monopoly models with no corporate power, climate models with no climate and all kinds of...

economic models with no humans in them. So that's kind of my attempt to summarize some of the major, major aspects of reality, which have been largely plunged into darkness and

through this sort of very narrow, precise. And I think that, you know, the problem that it gets you and it's been called many different names. Some people call it bogus quantification. Some people call it illusionary precision. I like to think of it as like a quantified fantasy. A lot of the numbers that come out of some of these models, they are essentially quantified.

They're essentially fantasy often, but they look like very hard numbers. But when you dig into where the numbers come from, you realize that they're often based on assumptions or they're based on sort of very, you know, simple guesses. And so, yes, it does give you this illusion of sort of hard science when often that's not the case. Yeah.

I really want to talk about climate, but let me ask you one more question before we go to that. Heart science. We have used this word several times throughout this interview. And so, like I told you, I studied English and in English more recently, maybe in the past 10 years, there has been this push to climate.

uh and it part of it comes from the fact from the disenchantment with post-modernism now whatever that means they want to make literary studies more scientific rather than just coming up with literary theories so a lot of uh

literary critics use sometimes they use economic theories especially in the Victorian England when they talk about gothic novels they use a lot of economic theories to describe for example how it impacted people's lives and you know the whole idea of a monster or Dracula it's this specter is a specter of capital more recently they have used ideas of evolutionary biology and they have the call it literary Darwinism and the claim is that it is scientific they don't really believe in

difference in different cultures. It's all regulated by genes and the manifestation of that is what you see in fictions. Anyhow, but there has been mathematical and statistical readings of literary works, but the Corpus study, they do these big data analysis of large numbers of fiction to come up to find trends and they call it, it's a science now. It hasn't been hugely successful, but

I guess it has been more successful in other disciplines such as economics, such as even psychology. Again, I've read some more recent books on psychology about bias or political psychology. They use a lot of surveys and numbers to come up with these theories, but they don't really hold water when you start scrutinizing them.

With economics, I think it has become like a religion. If you go to a department of economics and say it's not really a science, you're lucky if you don't get killed or shot by them. But is it a science? Is that that, let's say, crisis in the discipline of economics to make it more science-based, based on these models or maths? And is that part of the crisis that you're also discussing, that they have kind of forgotten the real world?

Yeah, thank you. Yeah, it's interesting to hear about what's going on in English and not something I've come across, but I've seen similar things related to politics and international politics and the prestige that comes through what might be called rational choice models or sort of, you know, aping the economics method often

gives you quite a lot of heft and prestige. What I would like to sort of say is that a lot of what I talk about in the book, although I am not an economist myself, a lot of what I see in the book is debates within economics. And there have been people on both sides of this debate for 200 years. And it's essentially the debate between whether, you know,

highly unrealistic assumptions are a vice or a virtue when it comes to theory and there's strong proponents and um uh on each side and i try to break that apart um but yeah you've you've asked a really fascinating question about science you know um

There's a phrase that gets banded around sometimes talk about how economists have physics envy, which is looking up to the precision and, you know, the, you know, the manifest usefulness and the manifest correct predictive ability of physics in order to, you know, blast a rocket to the, you know, to the moon and have it arrive at the right place and wanting to do something similar in the social world. And, you know,

For that reason, I begin and end the book with the figure of Isaac Newton as one of the inspirations. And some economists have said, you know, we need to get to the Newton stage where we find similar laws in the social world that we have in the physical world. And even Ricardo himself defended some of his laws as certain as the principle of gravitation. So there's certainly that sort of, you know, imagination, that attempt.

And then I think you can see other disciplines looking up to economics is almost like a sort of pecking order and who are the real scientists. And that's bound up with the whole prestige of what a science is. And what I'd say about that is that it's a very old story.

for a very common story for disciplines to call themselves a science in order to try and gain more prestige. You've seen it with eugenics. You've seen it with Freudianism. You've seen it with Marxism. You've seen it with, you know, I would argue with, with, with economics. It's, it's almost like it's, it's, it's a very common route. And so there's nothing particularly new about that. Yeah.

Yeah, and it's as if the knowledge that is created through that scientific method, it's proper knowledge and wisdom, but whatever that is produced through science

psychology or when I say psychology I don't mean quantitative psychology or even literary studies it's not really knowledge there was a book called The Humanist Reason that I read some time ago and the book starts with a fascinating analogy the writer says that he was listening in lecture was listening to this economist talking about how he discovered this rule that if I'm not sure about the details but it was about

depending on geographical features of a territory, the transfer of technology is dependent on the geographical features and how much you're connected to other areas. And then the guy who wrote the book, who is himself a literary critic, says, well, historians have been talking about it for 300 or 400 years. So what is new about your theory? Is it just because you've come up with some numbers that makes it the proper knowledge? And then he was told off by the economists. Apparently it was a real encounter. But that's

I guess you're right. If it's something associated with scientific method, it has this prestige of being called truth, the big T, or science. And other things are kind of discarded or kind of looked down as just assumptions. And I guess we have seen this impact, at least in the world of economics. And I don't remember the guy who came up with the famous quote. I don't remember the quote, but basically was saying,

Depending on the policies of politicians, economists change their theories to match what they want. And I think he used the word prostitute in that quotation. I don't remember exactly what the quote was. We'll try to find it and send it to you. It was basically saying Reagan wanted to save costs, so he hired some economists with theories to justify what he said.

And you see it in most governments anyhow. And in Australia that I live right now, it's speaking about numbers. So there's an election in two weeks. Both main parties are coming up with numbers and the stats to defend their policies. And the funny thing is that in some sense, a part of it is true, but it's not the big truth. It's not the real. And they're just very selective about the stats they provide to people to promote their policies.

Let me just ask you one, a couple of more questions. And I'm really interested to know about climate change. And I really like that quote in your book that we have created all these models, you know, climate without, climate without, don't remember the quote exactly. Climate, yeah, they're climate economics models with no climate in it. With no climate in it, yeah. How, again, with the climate science, I guess we are using a lot of these models to predict

prove that global warming is a real thing that is happening, but also a lot of people use the same stats to say, well, look, the science can't provide a definitive answer. Can you talk about these models in climate science as well? At Sierra, discover great deals on top-brand workout gear, like high-quality walking shoes, which might lead to another discovery. 40,000 steps, baby!

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economics, like a drunk uses a lamppost, not for illumination, but for support. And so it doesn't really matter what light it shows. It's just it needs to hold up your position. And I do think that there is a vast role of imagination, even within the hard sciences and even within economics.

quantified mathematical economics that is often ignored and downplayed. And so I wanted to bring that to the fore. And the problem often with this idea that you have science is that it leads to hubris and hubris, you know, pride before a fall. And I think what we have seen is that these models have been followed and that they have led to problems.

I have not myself looked... I used to work on climate change and attend climate change summits in a sort of former career, but I've not myself looked into climate models. I have a friend and fellow author, a woman called Erica Thompson, who wrote a book called...

Escape from Model Land, where she does talk about some of the weaknesses and uncertainty related to climate models themselves. So I'd suggest that people should look her up. What I have looked at is the economic models that have tried to quantify what the impacts of climate change would be on the economy. So I can talk to that if you'd like. Yeah, absolutely.

So I guess the most influential figure in this, and he won the Nobel Memorial Prize in economic sciences, which, as most people know, is not a real Nobel, but is often seen as one. So his name is William Nordhaus. He's a Yale professor professor.

And he's actually was a protege of Paul Samuelson and a co-author of his textbooks. And since the 70s and then again, you know, very strongly since the 90s, Nordhaus has been looking at the relationship between economics and the natural world. But he's produced a whole slew of books.

and numbers that have, you know, he acknowledges climate change and he says it's a real problem, but he tends to downplay the impact it will have. So in the 90s, he was saying, oh, yeah, maybe in 50 to 75 years, it might shave half a percent of GDP of the US. And so you can think of this as, you know,

you know, a relatively minor problem. But if you actually dig into the ways in which these numbers have been created, and in this I rely, you know, I cite many people in the book, but I was first...

I rely on the work of Steve Keen, who is a sort of heterodox economist on this. If you look into some of the ways in which Nordhaus has produced these numbers, they are extremely...

fragile, and very, very dependent on the assumptions that go into the models. This is known by, there's a Stanford professor called Paul Fladerer who hasn't written about climate, but he comes up with this lovely phrase, theoretical cherry picking. So if you choose the assumptions, then you can define the conclusions that you're going to get out of it.

But essentially, without going into the specifics, there's two main ways in which Nordhaus has done his climate models. And even people within the field have criticised him for essentially...

helping to postpone serious action on climate. He would disagree with that. He's consistently argued for higher carbon taxes, but carbon taxes have been politically very unpopular and generally a focus on just trying...

to fix things with the price system has meant that there has not been a whole of government approach. So ideas like the Green New Deal have been sidetracked because people say, oh, well, that's, you know, too expensive or too interventionist. We just need a carbon price. And yeah, Nordhaus has very consistently promoted this idea that the price system can deal with climate, which I think is a delusion. And I just want to add one final, ask one final question and

Whenever I talk about the economy or politics in these podcasts, it usually ends on something dark and gloom, but I don't want it to happen that way. You really like your chapter 14, New Hope.

And you talk about other economists such as Thomas Pickett, who has written several books on inequality, roots of or history of inequality, I guess was his latest book. It's a short read as opposed to his magnum opus, Capital in the 20th Century. I'm curious to know if you've seen...

Even those who are advocates of free markets have become a little bit more, I guess, aware of issues such as environment or issues of inequality. That might have been a consequence of these models. But I'm interested to know if you think there have been more recent economists who are having a different look

as at the discipline of economy and how it works in the real world. As I mentioned, you talked about Thomas Pickett in your book, others such as Joseph Stiglitz. Have you seen or noticed a shift or do you predict to be a shift in the way we look at how economics work and to bring it more closer or to make it more connected with the real world?

Definitely. No. And thanks. Thanks for ending on that. And I did I did want to give people, you know, a sense of hope that this is not all doom and gloom. And part of, you know, part of the reason of telling this story of the birth, the death and the rebirth is to say, look, we did have a time when mainstream economics was growing.

dominated by theories that I argue basically existed in a fantasy world, but that was overthrown. And if it happened before, it can happen again. And I do think there are situations

to say that we're moving in that direction. And I should also add that there are sort of, you know, the critics of the critics. So people like Diane Coyle, who's an economist from the UK, and she will say, look, you know, people keep on slinging mud at economics and, you know,

saying that it supports neoliberalism and that it wants to be like physics. That might have been true when I got my PhD in the 80s, she would say, but it's no longer true. And economics is soulful and more empirical and move forward. And I think in... So I think a couple of things. I think in many ways it has moved forward, but I think too many economists, and there are exceptions, have not properly...

uh fessed up to the uh problems and mistakes um the exceptions might be as i said um paul krugman has done that um angus dayton who's another nobel prize winner has recently come forward and said you know mia colpa hold up my hands in the 90s i thought you just needed to get rid of all this old regulation and let the economy rip and it would you know it would help everyone and

And that hasn't turned out to be the case. So I think that's really interesting. But yes, I definitely see signs of new hope. I think there's a newer generation generally of people who are sort of, I don't know,

who sort of came of age of adults at the end of the Cold War that didn't, you know, probably people who are sort of mid-40s and below who are looking at things in a different way. And I think Piketty had a really important point. And part of what he did, there was this curve which had been taught to generations of economists called the Kuznets curve, which argued that as economic progress

As an economy develops and industrialized, inequality will naturally come down, just like gravity pulling a projectile down. And Piketty showed that, you know, Kuznets was actually correct in showing that it did within a certain few decades in America come down. But that was not because of some universal natural law. That was because of a whole lot of politics and

a whole lot of social action and actually the idea that inequality reduces all the time was just a fairy tale and so he went to tax records and did much more robust empirical work to show sort of the famous uh u-shaped graph to show that you know in the 1920s you had incredibly high um

percentage of wealth held by the top 1%. And then it went down in the 50s and 60s, which he calls the great redistribution. And now it's sparked up again in recent decades to the same or some people say even higher levels than the 20s.

So, yeah, and I think you can see this, too, with the so-called new Brandeis movement, which is a movement, especially in the US, which challenges concentrated corporate power, whether that be big oil or big tech, etc.

And they have challenged the law and economics movement. And yeah, I guess I would argue to say that we need to go even further and that we desperately need new economics that is much more aware of humans as they are much more aware of human relationships. And because we have often been guided by

an economics that sees all trade as positive and beneficial and has closed its eyes to the negative aspects. And we need to face up to the real story and the real problems in order to overcome it. Yeah. And as you mentioned, yeah, there have been new economies, but we need more. And before another...

pandemic or climate you know before climate change wipes us all off the face of the earth it's just a matter of time i guess but i've seen maybe not in the mainstream economies but but yeah i've seen more and more people talking about these issues or how this unregulated deregulation the market wasn't really a good idea even um political scientists i think john gray was one of them yeah john gray who was a huge fan of uh privatization but he came up he came he came out and said look it didn't work

And yeah, there'll be more people criticizing these things. And I really hope to see more and more of them. Nat, I know that you've recently finished this book. You want to take a break, but is there another project you have in mind? Right now I'm concentrating on sort of writing some shorter articles and still doing, you know, some podcasts and events related to the book. I do have another idea on the back burner, which I'm...

looking into another sort of history of ideas related to, you know, humans and the natural world and evolution theory. But it's a bit too early to go into that right now. Well, hope to be able to speak to you about your future works on New Books Network. Thank you very much for your time. We really enjoyed reading the book and I strongly recommend it to our listeners. Ricardo's dream, how economists forgot the real world and led us astray. Thank you so much for your time. Thank you, Martez. It's been a pleasure.