Happy Birthday, Smith v. Keynes : The Indicator from Planet Money June marks the birthday of two of the most famous economists of all time: Adam Smith and John Maynard Keynes. Whose ideas are most relevant today? Stacey and Cardiff duke it out.

Happy Birthday, Smith v. Keynes

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Hey, everyone, it's Cardiff and Stacey at THE INDICATOR. You might not know that two of our famous dead economists, Adam Smith and John Maynard Keynes, both have birthdays in June. And to celebrate, we thought we would do another episode of Dueling Indicators.


Dueling Indicators.

GARCIA: Yes. One of us is going to defend Adam Smith as the still most relevant economist from the past who can help inform our understanding of the modern world. And the other one is going to defend John Maynard Keynes. Stacey, you've got a quarter. Please, do the honors.


VANEK SMITH: I got Keynes.

GARCIA: I got Smith.

VANEK SMITH: Let's go.

GARCIA: Right after the break.


VANEK SMITH: All right. Cardiff Garcia, you've got Adam Smith.

GARCIA: Yes. Adam Smith - Scottish, lived in the 1700s. He witnessed the birth of the Industrial Revolution, which had a big impact on his thinking. He's considered, like, the founder of economics - especially because of a book he recalled "The Wealth of Nations." And we need him now more than ever, Stacey, because he saves us from some of our worst impulses - the impulse to overreact or to react badly to something that's gone horribly wrong. And also he reminds us that we should stay humble about the wisdom of trying to steer the future and our ability to do that rather than letting it unfold as it should.

And specifically, the economy over time in the United States, and in other rich countries, has gone from being very manufacturing-based to one that's more services-based. And what's happened in the aftermath of the financial crisis is that you're seeing a lot of governments want to take it back in time - to when the U.S. and the U.K. were like manufacturing powerhouses. You see that in some of the protectionism that we've witnessed in the last few years. And Smith reminds us that that is a bad idea. And I called Linda Yueh. She's the author of this amazing new book called "What Would The Great Economists Do?" which I think you and I both warmly recommend.


GARCIA: And I asked her, you know, what she would have made of all this.

LINDA YUEH: So he observed the way the path to wealth, which is what happened in England when the Industrial Revolution took hold, was through the private sector determining what to produce and demand from consumers - determining the price at which they would buy those goods. And so Adam Smith, I think, would be very suspicious of any attempt by the government to rebalance the economy, to move it away from what the - where the market had led it.

GARCIA: And it's understandable why this happens. Manufacturing is tangible. You can see a car. You can kick the tires. Services sound kind of, like, abstract. They're a little harder to measure. All of this just kind of leads us to underestimate the dangers of letting the government try to dictate what the economy should look like.

YUEH: Getting it wrong, promoting the wrong industries - government's track record of picking industrial winners generally is probably not that great. So that's the main danger - that, in trying to rebalance the economy, the government could just end up distorting the manufacturing sector and the services sector even more.

GARCIA: And it's not just about underestimating the dangers of trying to pick and choose which sectors should become important and which should fall. It's also that we underestimate the benefits of the services sector.

YUEH: One of the things about services is that it is very labor-intensive. So I mentioned there that manufacturing - even manufacturing that's returning to American shores is mostly done by automation. Robotics are a big part of it. But services employs a lot of people. So unlike manufacturing, which relies on physical capital, services relies on human capital - on people. You have high-end services. You have low-end services. Even the person who makes you coffee, the quality of your coffee has improved over the last few years because the skills of the barista is higher. Services, I think, has created - has contributed to a very high standard of living.

VANEK SMITH: Sure, services.

GARCIA: That's why Adam Smith is the most still relevant economist from the past.

VANEK SMITH: OK, sure. I hear you saying that it's very hard to measure parts of our economy. The government should just keep out of it because it doesn't really know what's going on. And how you doing?

GARCIA: I'm doing great. How are you doing?

VANEK SMITH: Yeah? Good.

GARCIA: Yeah, I'm doing what I love to do.

VANEK SMITH: Enjoying your...

GARCIA: I'm in the studio. I'm hanging out with you. I'm winning this debate. It's awesome.

VANEK SMITH: Good, good. You're enjoying the office?

GARCIA: What's going on?

VANEK SMITH: Liking having a roof over your head?

GARCIA: My eyebrow is, like, super high up right now.

VANEK SMITH: Did you have breakfast this morning?

GARCIA: I'm curious to know what's going on.

VANEK SMITH: Did you get a good breakfast?


VANEK SMITH: Well, then I have something for you. Here it is.

GARCIA: OK. It's an envelope. OK. And it says (reading) thank you for saving the economy.

VANEK SMITH: That is the letter that you should be sending to John Maynard Keynes for having breakfast in your stomach and a roof over your head and looking out the window and not seeing scorched earth outside because John Maynard Keynes saved our economy ten years ago.

GARCIA: Convince me.

VANEK SMITH: All right.

GARCIA: And if you do, then I'll send that letter to whoever it is that I should be sending it to because Keynes is dead.

VANEK SMITH: All right, so John Maynard Keynes, he was born in the 1880s. And at that time, it was in the middle of a really terrible depression, known as the Long Depression. It went from the late 1870s. And it went for about ten years. It was global. In the U.S., unemployment got up to 25 percent. It was terrible. And, you know, at this time, according to Linda Yueh, who I also spoke with.


VANEK SMITH: Yeah. I mean, come on.

GARCIA: Playing both sides.

VANEK SMITH: Well, so I asked her about this. And, you know, she's like all of the Smithians are just sitting around saying, like, just wait. The invisible hand is on its way any day now. Don't worry. In the long-run, the economy will right itself.

YUEH: And Keynes famously said, in the long-run, we're all dead. So rather than waiting for the economy to right itself, there is a role for government to play to reduce unemployment - to try and boost the economy through greater government spending when the private sector, households and firms, were not spending because of the Great Depression. So his work really focused on the short-run and gave government intervention a place that really I think changed the way we thought about economics and what the role of government should be.

VANEK SMITH: Keynes' most famous work was called "The General Theory Of Employment, Interest And Money." And he talked a lot about the government's role in the economy - that in times of distress it should intervene to help with employment, to help secure the economy. And in fact, it was Keynes that the U.S. turned to - that the Obama administration turned to, that Ben Bernanke turned to - in 2008 when the economy was collapsing and thankfully intervened and, you know, stabilized the banking sector, stabilized the economy.

GARCIA: OK. So Stacey, I'm going to see your letter. And I'm just going - I wrote something on the back of it.


GARCIA: And I'm going to pass it right back. And then you can send it to the descendants of Adam Smith. How about that?

VANEK SMITH: (Reading) I'm sorry.

GARCIA: Yes, yes - because it's not Adam Smith's fault that people are against government intervention when there's a downturn, right? Smith was talking about picking and choosing sectors within the economy. Services are the name of the game now. And he would have appreciated that.

VANEK SMITH: The whole reason we even have a manufacturing or a services sector is because of Keynes. I mean, this is like a Keynesian world that we are living in right now. I mean, listen. There are no foxhole Smithians. Let's be clear. When the crisis is - when crises happen, everybody wants help. And thank goodness the government did intervene. In fact, you know, I actually asked Linda, who knows a great deal about both of these economists, like - you know, listen - which of these economists...

GARCIA: Who wins?

VANEK SMITH: Who wins? Yeah.

So it sounds like, you know, Keynes is right. And maybe Smith is not right.

YUEH: (Laughter) I think...

VANEK SMITH: Just putting this out there.

YUEH: (Laughter) Nothing to do with the debate that you're having with Cardiff, of course.

VANEK SMITH: No, no. I'm just making an observation.

YUEH: Modern macroeconomics, it's a blend a new Keynesians, new classicists and monetarists. So in other words, in modern macro...

VANEK SMITH: Oh, so it's a blend of Smith and Keynes. This is terrible news.


YUEH: No, it's the best of what they have to offer and mixes it all up and looks at the evidence and says, this is what we should be doing to help the economy.

VANEK SMITH: Ugh, it's a tie.


VANEK SMITH: Isn't that terrible?

GARCIA: Actually, you know what we can do?


GARCIA: We can kick it to the audience. And in the meantime, while they're turning over in their heads which economist is the most still relevant, we can sing all the dead economists happy birthday.

VANEK SMITH: Let us eat cake, yes.


VANEK SMITH: OK, I have a little cake here and a candle.



GARCIA: (Singing) Happy birthday to Adam Smith.

VANEK SMITH: (Singing) Happy birthday to John Maynard Keynes. Happy birthday to dead economists. Happy birthday to you.


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