For any economist needing to be re-enthused about their subject there can be few better prescriptions than to read Warsh’s tour through the story of the economics of growth. Starting with Adam Smith and tracing the development of economic thought via Ricardo, Marshall, Samuelson, Solow and the rest this book has as its destination the new endogenous growth theory of Paul Romer and the central role of knowledge in explaining growth.

Warsh brings an infectious enthusiasm and easy journalistic style to his explanations of how economists struggled with, or more frequently ignored, the core question of what drives growth and the observable fact of increasing returns. The book is wonderfully brought to life through lively descriptions of the personalities and intellectual journeys of the economists whose work built the path from Smith to Romer. But this is a serious endeavour which not only provides a compelling explanation of what economists now understand about growth, and how the profession got there, but also offers a thoughtful analysis of the role and methodology of economics.

The simple failure of the core of the profession to grapple seriously with the issue of growth for so long is the most startling part of the story. In Warsh’s anlaysis this failure took two forms. The largest was simply to ignore it – to focus on other things, to use assumptions of diminishing returns unquestioningly. The second was to treat what we now think of as the key driver of increasing returns, and the central part of Romer’s story, knowledge, as exogenous.

Mill stated the case clearly – the state of knowledge is a suitable issue not for economics but only “for the physical sciences and the arts founded on them.” Solow’s famous growth model saw the accumulation of knowledge as exogenous to the economic system. Warsh calls this “the economists’ it’s-not-my-table tradition of exogenous growth.”

And yet economists were not wholly unaware of this gap. Warsh refers to the “underground river” of work on growth that would occasionally surface but not gain a clear place in the mainstream until Romer’s work (the key paper published in 1990). And the reason for this? From Allyn Young in his 1928 paper ‘Increasing returns and Economic Progress’ through Schumpeter’s work on creative destruction, those who most clearly saw the importance of the issues were not able to formulate what they had to say in the models and precise mathematical language that has come to comprise modern economics. So their ideas never became part of the corpus of modern economics.

Warsh though is no curmudgeon about the technical route that economics has taken. Whilst recognising its limitations he celebrates it as the core of the science of economics. Indeed it is crucial to his story of the uneven and uncertain path that the profession has taken. But he does rightly worry about the narrowing of the subject that is implied. His vivid analogy is of the way that maps of Africa developed. Once precise mapping techniques were developed any information which didn’t conform to those precise techniques was excluded from the maps – so for a period maps came to contain less, not more, information. So it has been with economics. To use a quote from Paul Krugman which appears in the book “I suddenly realised the remarkable extent to which the methodology of economics creates blind spots. We just don’t see what we can’t model.”

The book ends not just with a description of Romer’s theory, the importance of the non-rivalrous characteristics of knowledge and, crucially, the ubiquity and central role of monopolistic competition, but follows through with some fascinating empirical examples including a great chapter on the Microsoft.

I wish I could have read this book a long time ago. There are few books on economics that are as enjoyable and as educational as this one.

Paul Johnson

Frontier Economics