Is Economics About Everything? A Review of ‘How Economics Explains the World'

Can we view everything though an economic lens?

If you’re going to try to tell the story of humanity in a little book, there’s no better place to start than with economics understood broadly. Sigmund Freud segmented our lives into love, work, and play.³ Of these, work is the most time-consuming and is the origin point of economic analysis, which is the study of human beings in their role as producers and consumers: How might we make a living? What is the best way to organize that task, taking into account the varied skills and endowments of the other people around us? And, having produced a good or service that we can sell, what we should buy with the proceeds to maximize our utility or enjoyment?

These fundamental questions intrigued thinkers as far back as Aristotle. His word for the management of the household, οικονομία (oikonomía), evolved into our “economics” in the eighteenth century, long after the field of study had spilled over into domains much bigger than just one family. Inquiry into these issues led to the discovery of principles of economics as we understand them today: supply, demand, scarcity, growth, the universality of trade-offs, the power of incentives, the law of unintended consequences, and the balance between the costs and benefits of an action.

The late University of Chicago economist Gary Becker famously drew the connections between economics as it was traditionally understood and the much broader applications to which he put it: love, family dynamics, birth rates, crime and punishment, addiction, racial discrimination, and the concept of human capital. Because such traditionally noneconomic matters are now almost universally treated as amenable to economic analysis, most of today’s economists today labor in Becker’s shadow.

In “How Economics Explains the World,” Leigh adopts Becker’s view that economics really is about everything.⁴ It’s the right framing for what the book tries to do, which is to show how all of human action involves economic logic, whether the actor knows it or not.

Let there be (cheap) light

To illustrate how the story of humanity is an economic one, Leigh begins in prehistory.

He notes that “to produce as much light as a regular household light bulb now gives off in an hour would have taken our prehistoric ancestors 58 hours of foraging for timber.”

Things got better, at first grindingly slowly (“a Babylonian worker in around 1750 BCE would have had to work for 41 hours”) and then much faster (“by the early 1900s, it took just minutes of work to buy an hour of light”). Today, the labor price of an hour of lighting is less than one second. This is a 300,000-to-1 improvement.⁵

But how did things get better? Economists define “betterment” as a decline in the “real” prices of things you want or need. In this context, the real price is not the inflation-adjusted price but the amount of effort required to make enough money to afford something. Real prices, thus defined, have fallen so much because workers have become radically more productive.

This productivity increase has taken place mostly through changes in technology but also by means of social evolution: “Where prehistoric people had to do everything,” Leigh explains, “modern workers specialize in what... [each] do[es] best. Markets allow us to exchange our output with that of other people.” This is first-day-of-economics-class stuff, yet it needs to be repeated multiple times, using examples from varied aspects of life, for people to “get” it.

Leigh is wise to begin at the very beginning of economic reasoning. Today’s public discourse would be much more productive if everyone involved had a deep intuitive understanding of this and the other basic economic principles that Leigh teaches in his “short history of humanity.”

Specialization and trade grow up

The incredible productivity of today’s world economy depends, of course, on specialization that is much more granular than the basic division of labor between the butcher, baker, and blacksmith in a primitive village. Leigh goes into some remarkable detail:

Some Chinese cities have become expert in making a single kind of product. Yiwu produces most of the world's Christmas decorations. Huludao makes a quarter of the world’s swimwear. Danyang is known as ‘spectacles city’. Taizhou, which has long specialized in bathroom products, has now become a global center for innovation in intelligent toilets.

(Half the world’s population is still waiting for its first unintelligent toilet, but never mind.⁶)

A slightly different flavor of specialization is the wild variety of places where the parts of a single product, in this case the Boeing 787 Dreamliner, come from. According to Leigh,

[It] includes batteries from Japan, wing tips from South Korea, floor beams from India, horizontal stabilizers from Italy, landing gear from France, cargo doors from Sweden and thrust reversers from Mexico.⁷

I can’t imagine how throwing sand in the gears of this vigorous world trading system could cause any harm, — can you? Our latest cadre of policymakers should read “How Economics Explains the World” before doing anything.

Yet Leigh’s book is not a fully satisfying introduction to economics; in 240 pages, with no equations and almost no data graphics, it can’t be. (Economics lessons don’t need equations, but if you agree, as I do, with Deirdre McCloskey that economics is storytelling,⁸ a data graphic can be worth thousands of words.)

Let’s now review Leigh’s outline of history as he takes us from the beginning of civilization to modern times, noting — as I said earlier — how his coverage weakens in the last century or so, a fault that is not so much his as the world’s, because the world got so much more complicated that it isn’t really amenable to “little book” treatment any more.

From antiquity to the 20th century: A world of enterprise & productivity emerges

Leigh’s rendition of the human journey starts, as you’d expect, in prehistoric Africa, but moves quickly to the Middle East around 10,000 BC, where agriculture is taking root. There are echoes of Jared Diamond and Yuval Noah Harari in Leigh’s narrative:

Farming marked the turning point for the world economy because it allowed communities to build up a surplus. Storing food enabled people to eat well all year round. It also provided an early form of insurance against famine if the harvest failed.

Thus, one could begin saving for the future, a prerequisite of economic life. During the agricultural revolution of the Neolithic era, it became meaningful to speak of a society and a civilization, not just people trying to survive.

Leigh reminds us that we moderns tend to take for granted inventions and practices that emerged in the distant past as though they had always existed or were a gift of nature. For example, we may picture early farmers ploughing their fields. But someone invented the plough. That person probably contributed more to human flourishing than anyone before or, possibly, since:

Early Egyptian ploughs were scratch plows, akin to a stick being pulled through the earth. [Later], Chinese farmers developed the turn plow, which turns the soil upside down, creating furrows. Settled agriculture was five or six times more productive than foraging. The plough brought the end of a society in which everyone's occupation was effectively “food finder.” Indeed, one historian has argued that the entire modern world is the result of the plough.

This tone, immensely helpful to learners, although a little elementary, is Leigh at his best. He uses comparable language to introduce us — adding economic insights at each point — to the medieval European city, the printing press, “sea paths to everywhere” (Daniel Boorstin’s evocative phrase describing the Age of Sail),⁹ and finally the Industrial Revolution. Like many historians, Leigh links the Industrial Revolution to the new philosophy of free markets as well as the founding of institutions, such as central banks and stock exchanges, that lubricated the emerging world economy.

Leigh concludes the pre-20th-century part of the book — the best part — with chapters on the explosion of world trade and travel, the burst of new technology in the late 1800s, and the emergence of the factory system. This last trend, which (as almost everyone knows) was based on the assembly line, also has curious origins:

Peter Martin, an executive at Ford, [who] proposed the idea of an assembly line..., got the idea from visiting a Chicago slaughterhouse, where carcasses moved between workers, who each sliced off a standard cut of meat.

And why were all 1910 Model T Fords, and perhaps some later models, black?

[V]ehicles came off the [assembly] line so speedily that Ford decided it could no longer allow customers to choose the color of their cars. It turned out that black paint dried fastest. Accordingly, Henry Ford decided that a customer “can have a car painted any color that he wants so long as it is black.”

Thus does historical knowledge improve our understanding of things we think we already know!

Modern life is harder to explain

Around July 28, 1914, the book takes a wrong turn. That’s the day World War I began. Leigh code-switches from the voice of a historian — artfully weaving together changes in technology, social organization, and business practices to show “how economics explains the world” — to that of an economic journalist commenting on current events. Up to this point, the author can be forgiven for calling the book a short history of humanity; after that, not so much.

By covering world events rather than the “structures of everyday life”¹⁰ that the peerless French historian Fernand Braudel regarded as the backbone of history, and on which Leigh focuses in the early chapters, Leigh cheapens economics rather than enriching it. His approach starting in 1914 resembles that of a high school history teacher who takes too literally John Dewey’s comment that students only learn when the material is “relevant.”¹¹ Dewey wasn’t wrong; the teacher’s job, however, is not to pander but to draw in students who don’t intuitively know why history is relevant, and bring them around to a more sophisticated understanding.

If economics is about everything, then there are, of course, economic lessons to be had in current events, especially the big ones on which Leigh concentrates. But the reader would have been better off if he had stuck to the more humanistic approach in the first six chapters.

How glorious were the Glorious 30 (Years)?

The post-1914 events or themes covered by Leigh are the two World Wars and the Great Depression, the “glorious 30” postwar years (to which he properly attaches a question mark), the spread of free-market policies in the late 20th century, the emergence of inflation and inequality as major issues, global warming, and COVID-19.

Let’s home in on one period in history — the glorious30 — and compare Leigh’s treatment of it with mine as published in my 2019 book “Fewer, Richer, Greener.” This period has become newsworthy because powerful forces in government and the people seem to wish to return to it, a goal that is both foolhardy and unachievable. (I offer my book excerpt not because it is a paragon of good economic analysis, but to indicate what I think about the topic without having to write about it twice. Lazy me.)

Leigh views the period with rose-tinted glasses, emphasizing the lessening of inequality, the rapid growth of incomes as the Western world recovered from war, and the benefits of strong labor unions. This view is partly justified; fast economic growth, no matter how low or high the starting point, is exhilarating, fills people with hope, and provides the sense (or illusion?) of everyone marching together toward a better life.

Leigh presents two hypotheses about why this 30-year period was, in his view, so fruitful. Condensing ideas set forth by Claudia Goldin and Evan Katz in their 2008 book, “The Race between Education and Technology,” Leigh writes:

One theory of inequality is that it depends on the relative growth in education and technology. If education stagnates while technology advances, society tends to become more unequal. When the level of education grows faster than new technologies emerge, society becomes more equal. The best way of reducing inequality, according to this theory, is by ensuring that everyone gets a great education.

I used to believe this, and I still think that an educated populace is a happier populace (for noneconomic reasons). But we’ve discovered that even a very advanced economy requires some people to perform jobs that are a poor fit to what we traditionally think of as “education.” It’s better to help people become more adaptable to unforeseen changes.

The other explanation for the glorious 30 that Leigh proposes is that of Thomas Piketty’s: inequality increases when r > g (the return on capital, r, exceeds the growth rate of the economy, g) but decreases when g > r. Leigh says the latter was the case in the postwar decades, resulting in the relative equality of the time. My critique of this batty theory is too long to include here, but suffice it to say that I disagree with Piketty’s analysis and I am in good company.¹²

My own view of the glorious 30 is more muted. In “Fewer, Richer, Greener,” I noted the low pay and job insecurity faced by many of those doing the heavy industrial labor of the period:

...[T]he high wages of some U.S. industrial workers in the 1950s and 1960s were not typical. Even while the party lasted, high-paying union jobs were generally reserved for white men...

Meanwhile...many industrial workers fared horribly. The...musician Sixto Rodriguez, featured in the Oscar-winning movie Searching for Sugar Man, was a nonunion laborer in Detroit; he and his family had to move 22 times while his children were growing up – not because he faced discrimination but because he couldn’t afford to pay the rent...

[W]e should not look back on the 1948-1973 period...as a halcyon time for all U.S. workers.

Work in factories, mills, and mines was also dangerous and so physically taxing that many factory workers were worn out at 50. For a great many people, it was not an easy time, nor should we long to return to it.

Conclusion

No matter how skilled the author, a little book purporting to tell the history of humanity is bound to omit a few things. Andrew Leigh is a very good storyteller, making “How Economics Explains the World” an easy and fun read. It is not a mind-altering experience. However, in the hands of someone unfamiliar with basic economic reasoning, it might lead them to pursue economics further.

Even if you’re farther along in your economic education, we almost always benefit from relearning things we already know, but in a new light. Every author who has tried to introduce economics to the curious general reader has done it in their own style. “How Economics Explains the World” is a valuable addition to this genre. Think of the six blind men feeling an elephant. One thinks it is a tree, another a fan, another a rope, and so on. Put the six men together and they figure out what an elephant really looks like.

For someone exploring the contours of economics with fresh eyes, “How Economics Explains the World” provides a view about equal to that of one of the men feeling the elephant. Add well-crafted perspectives from several additional angles, and you’ll get a fuller picture of what economics is and what it does and does not explain.

And, if you think you’ve already mastered the ideas in the book because it’s somewhat elementary, you’ll still benefit from the extra angle provided by Leigh. Spend an enjoyable Sunday afternoon with it.

Endnotes

¹ Originally published in 1936 in German: Eine kurze Weltgeschichte für junge Leser (a short world-history for young readers). I guess the American translator-publisher who took out “for young readers” thought it would also appeal to adults; he was right.

² Milton Friedman was another master of the art of making complicated ideas simple, having turned “Capitalism and Freedom” (1962) and “Free to Choose” (1980, with Rose Friedman) into bestsellers — but they aren’t quite “little books.” They still belong in any investor’s list of great accessible literature.

³ Freud left out food and sleep, which can also be analyzed using the tools of economics.

⁴ Economics also applies to nonhumans — animals and even plants. In an earlier book review, I draw the connections (hardly original to me) between economics and evolutionary biology, although that is not the only aspect of biology for which economics is explanatory. Ecology — the study of different kinds of organisms as they interact with each other and the physical environment — is deeply imbued with economic logic as well.

⁵ The decline in the money price and effort price (these are different matters) of lighting is covered in greater detail in Matt Ridley’s landmark 2010 book on human betterment, “The Rational Optimist” (pp. 20-22) and in my “Fewer, Richer, Greener” (2019, p. 149). Because the cost of lighting through history is well-documented, it is a good way to illustrate the principle of cost reduction over time generally.

⁶ According to UNICEF, 60% (i.e., more than half) of the world’s population “either have no toilet at home or one that doesn't safely manage human waste.” It is hard to square this fact with the World Bank’s estimate that, as of 2018, half the world’s population had achieved a middle-class standard of living. I don’t know who’s right.

⁷ This recounting leaves out the aircraft’s software and computer hardware components, which come from an almost completely different list of countries. For the trade relationships behind semiconductor chips, see my review of Ed Conway’s masterly book on materials science.

⁸ McCloskey, Deirdre Nansen. 1990. “If You’re So Smart: The Narrative of Economic Expertise.” Chicago: University of Chicago Press. A shorter and better essay on the same theme, by Donald N. McCloskey (her name before her transition), is accessible online at https://www.deirdremccloskey.com/docs/pdf/Article_125.pdf.

⁹ Boorstin, Daniel E. 1983. “The Discoverers: A History of Man’s Search to Know the World and Himself.” New York: Random House.

¹⁰ Braudel’s words, in Braudel, Fernand. 1979. “The Structures of Everyday Life: Civilization and Capitalism, 15th-18th Century,” vol. 1, New York: Harper & Row.

¹¹ A thoughtful retrospective on the great educational reformer is at https://www.neh.gov/article/john-dewey-portrait-progressive-thinker.

¹² See, for example, https://www.forbes.com/sites/jonhartley/2014/10/17/why-economists-disagree-with-pikettys-r-g-hypothesis-on-wealth-inequality/, which reports that over 81% of economists disagree with it. Short version of my disagreement: r is the total return on capital, but g is not a total return, so you can’t directly compare the two. g is analogous to the “capital gain” portion of the return on a capital asset and leaves out the “dividend.” The dividend, in this case, where what’s growing is the whole economy, is GDP itself, not the rate of change in GDP but the volume of goods and services produced. So r ,must exceed g for the system to equilibrate.

Laurence B. Siegel is the Gary P. Brinson director of research at the CFA Institute Research Foundation, economist and futurist at Vintage Quants LLC, the author of Fewer, Richer, Greener: Prospects for Humanity in an Age of Abundance, and an independent consultant and speaker. His latest book, On Progress and Prosperity, is a collection of essays, book reviews, and other writings created between 2019 and 2024, most of which appeared in Advisor Perspectives, and is a sequel to his previous collection, Unknown Knowns: On Economics, Investing, Progress, and Folly. He may be reached at [email protected]. His website is http://www.larrysiegel.org

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