Wednesday, February 3, 2016

Edwin Cannan: A Voice for Free Markets and Global Posperity

By Richard Ebeling

Today is British economist, Edwin Cannan’s, birthday. Born on February 3, 1861, Cannan died on April 8, 1935. A professor at the London School of Economics from 1895 to 1926, he influenced an entire generation of British economists to be critical of any unreflective advocacy of socialism, nationalism and interventionism. While not an advocate of laissez-faire, he strongly emphasized the importance and superiority of the competitive, free market, and drew attention to the power of markets to bring about a global system of peace and prosperity.

Cannan was a master of the history of economic thought. His two major works, “A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848” (1898) and “A Review of Economic Theory” (1929) have long been considered penetrating critical studies of, especially, the “classical” labor theory of value and its conclusions, from Adam Smith through John Stuart Mill.

His 1904 edition of Adam Smith’s “Wealth of Nations” has long been considered to be an outstanding version of that work for the interested and scholarly reader.

What stands out in Edwin Cannan’s writings is a simplicity and clarity in explaining the “miracle” of the market in a global encompassing division of labor that connects multitudes of people for mutual improvement and peaceful cultural gains. His style, therefore, makes his volume, “Wealth” (1914; third ed. 1928) an entertaining pleasure to read as his takes the reader through the various facets of the working and elements of the market order.

He also was an early contributor to applying the logic of marginal analysis to the theory of money, in his book on “Money” (1918; eighth edition, 1935) and in “Modern Currency and the Regulation of Its Value” (1931), and especially in his article, ‘The Application of the Theoretical Apparatus of Supply and Demand to Units of Currency’ in the “Economic Journal” (1921).

He was an insightful and often biting critic of the collectivist fads and fashions of his day. Some of his best articles on these themes are to be found in his volume, “The Economic Outlook” (1912), especially in my opinion, ‘Economics and Socialism,’ ‘The Economic Ideal and Its Application to Countries or Nations,’ and ‘The Incompatibility of Socialism and Nationalism.’ And he could be a devastatingly sarcastic reviewer, as is seen in his highly amusing book review of Georg Friedrich Knapp’s “The State Theory of Money,” in “Economica” (June 1925).

A truly superb essay in “The Economic Outlook” is his 1902 presidential address before the British Association on, ‘The Practical Utility of Economic Science.’ He demonstrates how the basic and commonsense insights of economics easily can be applied to challenge and refute many of the most absurd economic policy proposals in the context of appreciating the wondrous workings of a market order that integrates and coordinates the actions of millions of people without central direction or command.

We find the same emphasis on the power of economic ideas, but one, Cannan argues, that can get lost with an over-development and excessive reliance on narrow technical tools of economic analysis that obscure the real-world application of economic reasoning in his presidential address before the Royal Economic Society, ‘The Need for Simpler Economics,’ published in the “Economic Journal” (September 1933).

Cannan explained the essential nature of the market order and its superiority over socialism and central planning: “Modern civilization, nearly all civilization, is based on the principle of making things pleasant for those who please the market and unpleasant for those who fail to do so, and whatever defects this principle may have, it is better than none,” and all without the use of governmental force or its threat. (Preface to his 1927 collection of essays “An Economist’s Protest.”)

Finally, he was a strong and articulate defender of Say’s Law of Markets, and that if idle resources and unemployed workers widely exist in society it is not due to a deficiency in “aggregate demand,” but is due to wrong (or disequilibrium) pricing of goods and factors of production. His analysis of the problem of economy-wide unemployment may be found in his 1932 presidential address, ‘The Demand for Labor,’ before the Royal Economic Society, published in the “Economic Journal” (September 1932), and reprinted in his collection of essays, “Economic Scares” (1933) under the changed title of ‘Not Enough Work for All’ (which he proves is never the case for labor and all other factors of production when they are rightly priced in the market).

Cannan also pointed out the perverse effects from unemployment insurance in creating disincentives for the unemployed to search for new and gainful employments; and the need for flexible labor markets in terms of both wage adjustments and worker mobility to shift into employments consistent with changing market demand patterns to assure full employment. He argued all this his article, ‘The Post-War Unemployment Problem,’ in the “Economic Journal” (March 1930).

At the London School of Economics, Edwin Cannan inspired an entire generation of economists in the immediate post-World War I era, many of whom became prominent figures in the economics profession and often strong proponents of the market order. This included, Allen G. B. Fisher, W. H. Hutt, Arnold Plant, and Lionel Robbins, among others.

One of his students and later colleagues at the London School of Economics, the monetary theorist, Theodore E. Gregory, recalled Cannan the man and teacher in his recollection shortly after Cannan’s death, in his article, ‘Edwin Cannan: A Personal Impression’ in “Economica” (Nov. 1935):

“I first heard Edwin Cannan lecture in the Autumn term of 1910 . . . Cannan was then already nearly fifty . . . My main recollection, since I have lost what must have been exceedingly bad notes, is that of a small stocky man with a black beard, a habit of propping up a leg upon the large chair which stood upon the platform, a very difficult delivery and a habit of looking over our heads into a distant corner of the room, so that much of what he said was altogether missed by us, in both senses of the word . . .

“However that may be, by the end of the two years we were all – specialists and non-specialists alike – sworn disciples . . . I doubt if any teacher of the last few decades has performed a greater service than did Cannan in all the years that he was the [London] School [of Economics] in ‘debunking’ vague language and vaguer ideas by his use of the Socratic method. The question was put without the slightest arrogance of voice or manner: we felt we were being ‘put through it’ because were young and ignorant: indeed, I doubt whether any great scholar has ever shown himself more willing and eager to encourage the slightest sign of originality on the part of his students.

“But the originality had to be genuine: Cannan had throughout the whole of the twenty-five years that I knew him a contempt for displays of cleverness for its own sake, which in itself was a healthy discipline for those brought into intimate contact with him. No use trying to impress him by intellectual fireworks! There would be a pause, the black beard would shoot up at an angle, and then came the inevitable query that would bring the whole house of cards tumbling down.

“The process of getting to know Cannan was made very much easier by the fact that the discussion classes of those days were very much smaller than they are at present, so that one simply had to say something. Cannan was never afraid of silences, and the whole atmosphere was absolutely free of hero-worship – it was all very simple and informal.”

In my opinion, even 80 years after his death, many, if not almost all, of Edwin Cannan’s writings remain timely and valuable for anyone wishing to make themselves a better economist and general thinker about the nature of economics and the workings of the market order.

 Richard Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina.

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