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Adam Smith, Henry Thornton, and Ludwig von Mises

A recent article in Econ Journal Watch surveying the favorite dead and living economists of 299 respondents caught my eye. It is also tangentially relevant to Brad’s question about the free banking classics. As you would have expected, Adam Smith was the respondents’ favorite economist before the 20th century, while John Maynard Keyes was the favorite dead economist of the 20th century.

Smith was the founder of modern economics in the sense that his Inquiry into the Nature and Causes of the Wealth of Nations made such an impression that thereafter it was impossible to ignore economic reasoning in debates about human society. Smith was also perhaps the first prominent advocate of free banking. In the last paragraph of book II, chapter 2 of the Wealth of Nations, he claimed that “If bankers are restrained from issuing any circulating bank notes, or notes payable to the bearer, for less than a certain sum, and if they are subjected to the obligation of an immediate and unconditional payment of such bank notes as soon as presented, their trade may, with safety to the public, be rendered in all other respects perfectly free.” In a later post I will return to the reasons for Smith’s proviso regarding small-denomination notes, but for now the important point is that he thought of regulation as the exception in banking, not the rule.

It surprised me that Henry Thornton got no votes.  Thornton is not as well known as Smith, but he almost deserves to be. His 1802 Enquiry into the Nature and Effects of the Paper Credit of Great Britain (link is to a 1935 reprint edited by Friedrich Hayek) is, as its title suggests, a kind of reply to Smith’s book. Thornton can be said to be the (neglected) founder of macroeconomics.  He integrated ideas on money, banking, interest rates, and business cycles with insight that had no equal for a century, and consequently he was too far ahead of  his time to be properly appreciated. One aspect of Thornton’s criticism of Smith is that Thornton advocated central banking. His argument included ideas that were independently rediscovered 70 years later by Walter Bagehot, whose 1873 book Lombard Street is considered the intellectual foundation of modern central banking. Bagehot seems to have been unaware that he was on a path Thornton had already blazed.  The same applies to Knut Wicksell and his rediscovery of the idea of the natural rate of interest a century after Thornton. Thornton remains worth reading today. Economists today know much more about many individual topics than Thornton did, but I think we have not yet surpassed him in integrating those ideas into a coherent macroeconomic theory.

Thornton was a man of overflowing talents. He was a banker in the City of London, a member of the British Parliament, and the major financier of the movement to abolish the slave trade in the British Empire.  (The 2006 movie Amazing Grace, about the abolitionist movement, has Thornton, played by Nicholas Farrell, in a number of scenes.) His involvement in the abolitionist movement sprang from his deep religious faith: he was an important member of the Evangelical movement of the Church of England. Several books of his religious writings and prayers, published after his death, have remained almost continuously available in print, unlike his economic writings.

Moving on to the 20th century, it surprised me that Ludwig von Mises received so few votes in the poll. The big economic question of the century was whether central planning worked better than the market economy. It was such a big question that roughly 100 million souls perished in China, Russia, and other communist countries proving that the answer was “no.” Mises’s book Socialism (1922), written at a still early stage of the debate, proved to be magnificently right. He should have received more recognition for being 70 years ahead of mainstream opinion. Mises placed 14th in the poll, whereas his student Friedrich Hayek was fourth. In later posts I will have more to say about Mises’s views on free banking and other aspects of monetary theory.