The Economist
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Meet Sir William Petty, the man who invented economics
Dec 21st 2013 | From the print edition
WILLIAM PETTY was an innovation machine. He designed an early form of catamaran, conceived of a mechanical grain planter, proposed attaching engines to boats and patented a “double-writing” instrument (it produced an extra copy of whatever a writer put down on paper). Petty, who died at Christmas in 1687, was also an innovator in the world of theories. By tinkering with data and simple models, this little-known Englishman came up with many of the ideas—how to measure GDP, why the money supply and banks matter, how lasting unemployment affects the economy—that form the bedrock of modern economics.
Born in 1623, the young Petty showed an early interest in clockmaking and joinery but did not enter either trade. His hometown, Romsey, is close to the sea and he left home on a ship, as a cabin boy, aged 14. That brought the first of two mishaps that changed the course of his life. After breaking his leg in a nautical accident he was put ashore for treatment in Normandy. As the injury healed he enrolled in a Jesuit college in Caen and developed an interest in anatomy, which he went on to study in Amsterdam and Paris. In Paris he met and worked for Thomas Hobbes, whose empiricism was a deep influence. Collecting data and making real-world observations became central to his work.
Back in England from 1646, Petty continued his medical studies at Oxford, rising to become professor of anatomy at Brasenose College by the time he was 27. Then came the second upheaval. After witnessing a bungled hanging Petty appeared to bring the criminal, a woman, back to life. She was pardoned, his reputation soared and he received a lucrative post, as physician general, in Ireland. His travels explain why Petty’s economics are full of international comparisons: stagnant Ireland, more prosperous England and its great rival at the time, the Netherlands.
Success in Ireland meant Petty was granted an estate. He puzzled over how to value it. He first calculated its benefits: if cattle grazing in a field put on a certain amount of weight each year, the market price of the extra meat was a logical measure. Next he needed to work out how many years’ income to tally. Men cared about their children and grandchildren, he reasoned, but concerns for the future were finite. Using data on the extent to which generations overlapped, Petty reckoned 21 years was right. He had jumped from a blank sheet of paper to an embryonic version of the “present value” calculation at the heart of modern finance.
Petty’s landholding also provided the spur for his most important invention, GDP. England fought the Dutch three times between 1652 and 1674, and landowners faced high taxes. Petty thought this unjust and, to explain why, he set out the first set of national accounts for England and Wales. First, he asserted that total income must equal total spending. Since 4.5 pence a day was needed for food, housing, clothing and “all other necessities”, and the population was 6m, spending was £40m a year. Next he tallied the income from a long list of assets—land, houses in London, ships—for a sum of £15m. If £15m of the £40m in spending was income from assets, the remaining £25m must be wages. The tax burden, he argued, should be shifted accordingly.
Other ideas were less self-serving. Out of concern that high interest rates were holding back trade in Ireland, Petty developed a sophisticated monetary theory, according to James Ullmer of Western Carolina University. He calculated the cash needed for all the transactions in Ireland each year, and how quickly it circulated, to derive an estimate of the amount of money needed to keep a lid on interest rates. This “quantity theory of money” is core to monetary economics, and Petty’s version of it came a century before the one published by David Hume in 1752 that is usually credited as the first proper treatment.
Petty’s monetary theories prompted him to contest criticism of England’s fledgling banking system. Take, he argued, the problem of an economy that needs a money supply of £100,000 but has only £60,000 in cash. It could keep £20,000 as currency, with £40,000 put into banks. Because banks could lend the money out, loans and deposits would run close to £80,000. Add back the coins, and you have £100,000. Since such “fractional reserve” banking could help multiply money, Petty was a supporter: banks could help England compete with the Dutch.
Pyramid schemer
Petty also drew conclusions from his national accounts, which pointed to the importance of income from labour. He worried that unemployment would reduce men’s facility to work—precisely the job-market scarring or “hysteresis” modern economists fret about. He pre-empted a rhetorical proposal made centuries later by John Maynard Keynes: since pointless work was better than none, the unemployed could be paid to build a pyramid on Salisbury Plains, or transport Stonehenge to London. Petty’s real point was that deficient demand was a threat, and that in times of slump public investment could help offset it.
Various hues of academic snobbery explain why Petty is little known. That he included data with everything he wrote put him at risk: later studies found different results. In the century after his death his data-first approach fell out of favour; it seemed purer to construct theories first, then test them against data. Worse, Petty did not seek an all-encompassing theory of the world; because he lacked a model that joined up all markets, he was labelled an “anticipator”, but not a founder, of economics.
Today these complaints seem flimsy. The economists toiling in central banks have ditched their overarching models and now run lots of little ones. At firms like Google and eBay data mining is no longer a sin but a lucrative skill. Petty’s economics have triumphed again. Like his catamaran, his motorboat and his proto-photocopier, his economic ideas have stood the test of time.
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From the print edition: Finance and economics
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