| <h1 id="sigil_toc_id_2" title="I. The Subject-Matter of Economics">CHAPTER I</h1> | <> | <h1 title="I. The Subject-Matter of Economics">CHAPTER I</h1> |
| <p>And, at first sight, it must be admitted, it certainly does appear as if we have here a definition which for practical purposes describes the object of our interest. In ordinary speech there is unquestionably a sense in which the word “economic” is used as equivalent to “material”. One has only to reflect upon its signification to the layman in such phrases as “Economic History”,<a href="#fn10" id="ft10"><sup>10</sup></a> or “a conflict between economic and political advantage”, to realise the extreme plausibility of this interpretation. No doubt there are some matters falling outside this definition which seem to fall within the scope of Economics, but these may very well seem to be of the order of marginal cases inevitable with every definition.</p> | <> | <p>And, at first sight, it must be admitted, it certainly does appear as if we have here a definition which for practical purposes describes the object of our interest. In ordinary speech there is unquestionably a sense in which the word “economic” is used as equivalent to “material”. One has only to reflect upon its signification to the layman in such phrases as “Economic History”,<a href="#fn10" id="ft10"><sup>10</sup></a> or “a conflict between economic and political advantage”, to realise the extreme plausibility of this interpretation. No doubt there are some matters falling outside this definition which seem to fall within the scope of Economics, but at first sight these may very well seem to be of the order of marginal cases inevitable with every definition.</p> |
| <p>Nor is the situation saved if we turn from the work for which wages are paid to the things on which wages are spent. It might be urged that it is not because what the wage-earner produces is conducive to other people’s material welfare that the Theory of Wages may be subsumed under the description, but because what he gets is conducive to his own. But this does not bear examination for an instant. The wage-earner may buy bread with his earnings. But he may buy a seat at the theatre. A theory of wages which ignored all those sums which were paid for “immaterial” services or spent on “immaterial” ends would be intolerable. The circle of exchange would be hopelessly ruptured. The whole process of static analysis could never be employed. It is impossible to conceive significant generalisations about a field thus arbitrarily delimited.</p> | <> | <p>Nor is the situation saved if we turn from the work for which wages are paid to the things on which wages are spent. It might be urged that it is not because what the wage-earner produces is conducive to other people’s material welfare that the theory of wages may be subsumed under the description, but because what he gets is conducive to his own. But this does not bear examination for an instant. The wage-earner may buy bread with his earnings. But he may buy a seat at the theatre. A theory of wages which ignored all those sums which were paid for “immaterial” services or spent on “immaterial” ends would be intolerable. The circle of exchange would be hopelessly ruptured. The whole process of general analysis could never be employed. It is impossible to conceive significant generalisations about a field thus arbitrarily delimited.</p> |
| <p>It is improbable that any serious economist has attempted to delimit Wage Theory in this manner, however much he may have attempted thus to delimit the whole body of generalisations of which Wage Theory is a part. But attempts have certainly been made to deny the applicability of economic analysis to the examination of the achievement of ends other than material welfare. No less an economist than Professor Cannan has urged that the Political Economy of War is “a contradiction in terms”,<a href="#fn12" id="ft12"><sup>12</sup></a> apparently on the ground that, since Economics is concerned with the causes of material welfare, and since war is not a cause of material welfare, war cannot be part of the subject-matter of Economics. As a moral judgment on the uses to which abstract knowledge should be put, Professor Cannan’s strictures may be accepted. But it is abundantly clear, as Professor Cannan’s own practice has shown, that, so far from Economics having no light to throw on the successful prosecution of modern warfare, it is highly doubtful whether the organisers of war can possibly do without it. It is a curious paradox that Professor Cannan’s pronouncement on this matter should occur in a work which, more than any other published in our language, uses the apparatus of economic analysis to illuminate many of the most urgent and the most intricate problems of a community organised for war.</p> | <> | <p>It is improbable that any serious economist has attempted to delimit the theory of wages in this manner, however much he may have attempted thus to delimit the whole body of generalisations of which the theory of wages is a part. But attempts have certainly been made to deny the applicability of economic analysis to the examination of the achievement of ends other than material welfare. No less an economist than Professor Cannan has urged that the political economy of war is “a contradiction in terms”,<a href="#fn12" id="ft12"><sup>12</sup></a> apparently on the ground that, since Economics is concerned with the causes of material welfare, and since war is not a cause of material welfare, war cannot be part of the subject-matter of Economics. As a moral judgment on the uses to which abstract knowledge should be put, Professor Cannan’s strictures may be accepted. But it is abundantly clear, as Professor Cannan’s own practice has shown, that, so far from Economics having no light to throw on the successful prosecution of modern warfare, it is highly doubtful whether the organisers of war can possibly do without it. It is a curious paradox that Professor Cannan’s pronouncement on this matter should occur in a work which, more than any other published in our language, uses the apparatus of economic analysis to illuminate many of the most urgent and the most intricate problems of a community organised for war.</p> |
| <p>Professor Cannan does not pause to ask whether his distinction is very helpful in the analysis of an exchange economy—though, after all, it is here that economic generalisations have the greatest practical utility. Instead, he proceeds forthwith to consider the “fundamental conditions of wealth” for society considered as a whole. And here again his definition becomes plausible: once more the aggregate of social activities can be sorted out into the twofold classification it implies. Some activities are devoted to the pursuit of material welfare: some are not. We think, for instance, of the executive of a communist society, deciding to spend so much labour-time on the provision of bread, so much on the provision of circuses.</p> | <> | <p>Professor Cannan does not pause to ask whether his distinction is very helpful in the analysis of an exchange economy—though, after all, it is here that economic generalisations have the greatest practical utility. Instead, he proceeds forthwith to consider the “fundamental conditions of wealth” for society considered as a whole irrespective of whether it is organised on the basis of private property and free exchanges or not. And here again his definition becomes plausible: once more the aggregate of social activities can be sorted out into the twofold classification it implies. Some activities are devoted to the pursuit of material welfare: some are not. We think, for instance, of the executive of a communist society, deciding to spend so much labour-time on the provision of bread, so much on the provision of circuses.</p> |
| <p>But even here and in the earlier case of the Crusoe Economy, the procedure is open to what is surely a crushing objection. Let us accept Professor Cannan’s use of the terms “economic” and “non-economic” as being equivalent to conducive to material and non-material welfare respectively. Then we may say with him that the wealth of society will be greater the greater proportion of time which is devoted to material ends, the less the proportion which is devoted to immaterial ends. We may say this. But we must also admit that, using the word “economic” in a perfectly normal sense, there still remains an economic problem, both for society and for the individual, of choosing between these two kinds of activity—a problem of how, given the relative valuations of product and leisure and the opportunities of production, the fixed supply of twenty-four hours in the day is to be divided between them. <span class="italics">There is still an economic problem of deciding between the</span> “<span class="italics">economic</span>” <span class="italics">and the “non-economic</span>”. One of the main problems of the Theory of Production lies half outside Professor Cannan’s definition.</p> | <> | <p>But even here and in the earlier case of the Crusoe Economy, the procedure is open to what is surely a crushing objection. Let us accept Professor Cannan’s use of the terms “economic” and “non-economic” as being equivalent to conducive to material and non-material welfare respectively. Then we may say with him that the wealth of society will be greater the greater proportion of time which is devoted to material ends, the less the proportion which is devoted to immaterial ends. We may say this. But we must also admit that, using the word “economic” in a perfectly normal sense, there still remains an economic problem, both for society and for the individual, of choosing between these two kinds of activity—a problem of how, given the relative valuations of product and leisure and the opportunities of production, the fixed supply of twenty-four hours in the day is to be divided between them. <span class="italics">There is still an economic problem of deciding between the “economic”and the “non-economic”</span>. One of the main problems of the Theory of Production lies half outside Professor Cannan’s definition.</p> |
| <p>Let us turn back to the simplest case in which we found Professor Cannan’s terminology inappropriate—the case of isolated man dividing his time between the production of real income and the enjoyment of leisure. We have just seen that such a division may legitimately be said to have an economic aspect. Wherein does this aspect consist?</p> | <> | <p>Let us turn back to the simplest case in which we found this definition inappropriate—the case of isolated man dividing his time between the production of real income and the enjoyment of leisure. We have just seen that such a division may legitimately be said to have an economic aspect. Wherein does this aspect consist?</p> |
| <p>The answer is to be found in the formulation of the exact conditions which make such division necessary. They are three. In the first place, isolated man wants both real income and leisure. Secondly, he has not enough of either fully to satisfy his want of each. Thirdly, he can spend his time in augmenting his real income or he can spend it in taking more leisure. Therefore he has to choose. He has to economise. Whether he chooses with deliberation or not, his behaviour has the form of choice. The disposition of his time and his resources has a relationship to his system of wants. It has an economic aspect.</p> | <> | <p>The answer is to be found in the formulation of the exact conditions which make such division necessary. They are four. In the first place, isolated man wants both real income and leisure. Secondly, he has not enough of either fully to satisfy his want of each. Thirdly, he can spend his time in augmenting his real income or he can spend it in taking more leisure. Fourthly, it may be presumed that, save in most exceptional cases, his want for the different constituents of real income and leisure will be different. Therefore he has to choose. He has to economise. The disposition of his time and his resources has a relationship to his system of wants. It has an economic aspect.</p> |
| <p>This example is typical of the whole field of Economic Studies. From the point of view of the economist, the conditions of human existence exhibit three fundamental characteristics. The ends<a href="#fn19" id="ft19"><sup>19</sup></a> are various. The time and the means for achieving these ends are at once limited and capable of alternative application. Here we are, sentient creatures with bundles of desires and aspirations, with masses of instinctive tendencies all urging us in different ways to action. But the time in which these tendencies can be expressed is limited. The external world does not offer full opportunities for their complete achievement. Life is short. Nature is niggardly. Our fellows have other objectives. Yet we can use our lives for doing different things, our materials and the services of others for achieving different objectives.</p> | <> | <p>This example is typical of the whole field of economic studies. From the point of view of the economist, the conditions of human existence exhibit four fundamental characteristics. The ends are various. The time and the means for achieving these ends are limited and capable of alternative application. At the same time the ends have different importance. Here we are, sentient creatures with bundles of desires and aspirations, with masses of instinctive tendencies all urging us in different ways to action. But the time in which these tendencies can be expressed is limited. The external world does not offer full opportunities for their complete achievement. Life is short. Nature is niggardly. Our fellows have other objectives. Yet we can use our lives for doing different things, our materials and the services of others for achieving different objectives.</p> |
| <p>Nor is the mere limitation of means <span class="italics">by itself</span> sufficient to give rise to economic phenomena. If means of satisfaction have no alternative use, then they may be scarce, but they cannot be economised. The Manna which fell from heaven may have been scarce, but, if it was impossible to exchange it for something else or to postpone its use, it was not the subject of any activity with an economic aspect.</p> | <> | <p>Nor is the mere limitation of means <span class="italics">by itself</span> sufficient to give rise to economic phenomena. If means of satisfaction have no alternative use, then they may be scarce, but they cannot be economised. The Manna which fell from heaven may have been scarce, but, if it was impossible to exchange it for something else or to postpone its use,<a href="#fn19" id="ft19"><sup>19</sup></a> it was not the object of any activity with an economic aspect.</p> |
| -+ | <p>Nor again is the alternative applicability of scarce means a complete condition of the existence of the kind of phenomena we are analysing. If the economic subject has two ends and one means of satisfying them, and the two ends are of equal importance, his position will be like the position of the ass in the fable, paralysed halfway between the two equally attractive bundles of hay.<a href="#fn20" id="ft20"><sup>20</sup></a></p> | |
| <p>But when time and the means for achieving ends are limited <span class="italics">and</span> capable of alternative application, then behaviour necessarily assumes the form of choice. Every act which involves time and scarce means for the achievement of one end involves the relinquishment of their use for the achievement of another. It has an economic aspect.<a href="#fn20" id="ft20"><sup>20</sup></a> If I want bread and sleep, and in the time at my disposal I cannot have all I want of both, then some part of my wants of bread and sleep must go unsatisfied. If, in a limited lifetime, I would wish to be both a philosopher and a mathematician, but my rate of acquisition of knowledge is such that I cannot do both completely, then some part of my wish for philosophical or mathematical competence or both must be relinquished.</p> | <> | <p>But when time and the means for achieving ends are limited <span class="italics">and</span> capable of alternative application, <span class="italics">and</span> the ends are capable of being distinguished in order of importance, then behaviour necessarily assumes the form of choice. Every act which involves time and scarce means for the achievement of one end involves the relinquishment of their use for the achievement of another. It has an economic aspect.<a href="#fn21" id="ft21"><sup>21</sup></a> If I want bread and sleep, and in the time at my disposal I cannot have all I want of both, then some part of my wants of bread and sleep must go unsatisfied. If, in a limited lifetime, I would wish to be both a philosopher and a mathematician, but my rate of acquisition of knowledge is such that I cannot do both completely, then some part of my wish for philosophical or mathematical competence or both must be relinquished.</p> |
| <p>Now not all the means for achieving human ends are limited. There are things in the external world which are present in such comparative abundance that the use of particular units for one thing does not involve going without other units for others. The air which we breathe, for instance, is such a “free” commodity. Save in very special circumstances, the fact that we need air imposes no sacrifice of time or resources. The loss of one cubic foot of air implies no sacrifice of alternatives. Units of air have no specific significance for conduct. And it is conceivable that living creatures may exist whose “ends” are so limited that all goods for them are “free” goods, that no goods have specific significance.</p> | <> | <p>Now not all the means for achieving human ends are limited. There are things in the external world which are present in such comparative abundance that the use of particular units for one thing does not involve going without other units for others. The air which we breathe, for instance, is such a “free” commodity. Save in very special circumstances, the fact that we need air imposes no sacrifice of time or resources. The loss of one cubic foot of air implies no sacrifice of alternatives. Units of air have no specific significance for conduct. And it is conceivable that living creatures might exist whose “ends” were so limited that all goods for them were “free” goods, that no goods had specific significance.</p> |
| <p>But, in general, human activity with its multiplicity of objectives has not this independence of time or specific resources. The time at our disposal is limited. There are only twenty-four hours in the day. We have to choose between the different uses to which they may be put.<a href="#fn21" id="ft21"><sup>21</sup></a> The services which others put at our disposal are limited. The material means of achieving ends are limited. We have been turned out of Paradise. We have neither eternal life nor unlimited means of gratification. Everywhere we turn, if we choose one thing we must relinquish others which, in different circumstances, we would wish not to have relinquished. Scarcity of means to satisfy given ends is an almost ubiquitous condition of human behaviour.</p> | <> | <p>But, in general, human activity with its multiplicity of objectives has not this independence of time or specific resources. The time at our disposal is limited. There are only twenty-four hours in the day. We have to choose between the different uses to which they may be put. The services which others put at our disposal are limited. The material means of achieving ends are limited. We have been turned out of Paradise. We have neither eternal life nor unlimited means of gratification. Everywhere we turn, if we choose one thing we must relinquish others which, in different circumstances, we would wish not to have relinquished. Scarcity of means to satisfy ends of varying importance is an almost ubiquitous condition of human behaviour.<a href="#fn22" id="ft22"><sup>22</sup></a></p> |
| <p>Here, then, is the unity of subject of Economic Science, the forms assumed by human behaviour in disposing of scarce means. The examples we have discussed already harmonise perfectly with this conception. Both the services of cooks and the services of opera dancers are limited in relation to demand and can be put to alternative uses. The Theory of Wages in its entirety is covered by our present definition. So, too, is the Political Economy of War. The waging of war necessarily involves the withdrawal of scarce goods and services from other uses if it is to be satisfactorily achieved. It has therefore an economic aspect. The economist studies the disposal of scarce means. He is interested in the way different degrees of scarcity of different goods give rise to different ratios of valuation between them, and he is interested in the way in which changes in conditions of scarcity, whether coming from changes in ends or changes in means—from the demand side or the supply side—affect these ratios. Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.<a href="#fn22" id="ft22"><sup>22</sup></a></p> | <> | <p>Here, then, is the unity of subject of Economic Science, the forms assumed by human behaviour in disposing of scarce means. The examples we have discussed already harmonise perfectly with this conception. Both the services of cooks and the services of opera dancers are limited in relation to demand and can be put to alternative uses. The theory of wages in its entirety is covered by our present definition. So, too, is the political economy of war. The waging of war necessarily involves the withdrawal of scarce goods and services from other uses, if it is to be satisfactorily achieved. It has therefore an economic aspect. The economist studies the disposal of scarce means. He is interested in the way different degrees of scarcity of different goods give rise to different ratios of valuation between them, and he is interested in the way in which changes in conditions of scarcity, whether coming from changes in ends or changes in means—from the demand side or the supply side—affect these ratios. Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.<a href="#fn23" id="ft23"><sup>23</sup></a></p> |
| <p>4. It is important at once to notice certain implications of this conception. The conception we have rejected, the conception of Economics as the study of the causes of material welfare, was what may be called a <span class="italics">classificatory</span> conception. It marks off certain kinds of human behaviour, behaviour directed to the procuring of material welfare, and designates these as the subject-matter of Economics. Other kinds of conduct lie outside the scope of its investigations. The conception we have adopted may be described as <span class="italics">analytical</span>. It does not attempt to pick out certain <span class="italics">kinds</span> of behaviour, but focuses attention on a particular <span class="italics">aspect</span> of behaviour, the form imposed by the influence of scarcity.<a href="#fn23" id="ft23"><sup>23</sup></a> It follows from this, therefore, that in so far as it offers this aspect, any kind of human behaviour falls within the scope of Economic Generalisations. We do not say that the production of potatoes is economic activity and the production of philosophy is not. We say rather that, in so far as either kind of activity involves the relinquishment of other desired alternatives, it has its economic aspect. There are no limitations on the subject-matter of Economic Science save this.</p> | <> | <p>4. It is important at once to notice certain implications of this conception. The conception we have rejected, the conception of Economics as the study of the causes of material welfare, was what may be called a <span class="italics">classificatory</span> conception. It marks off certain kinds of human behaviour, behaviour directed to the procuring of material welfare, and designates these as the subject-matter of Economics. Other kinds of conduct lie outside the scope of its investigations. The conception we have adopted may be described as <span class="italics">analytical</span>. It does not attempt to pick out certain <span class="italics">kinds</span> of behaviour, but focuses attention on a particular <span class="italics">aspect</span> of behaviour, the form imposed by the influence of scarcity.<a href="#fn24" id="ft24"><sup>24</sup></a> It follows from this, therefore, that in so far as it presents this aspect, any kind of human behaviour falls within the scope of economic generalisations. We do not say that the production of potatoes is economic activity and the production of philosophy is not. We say rather that, in so far as either kind of activity involves the relinquishment of other desired alternatives, it has its economic aspect. There are no limitations on the subject-matter of Economic Science save this.</p> |
| <p>Certain writers, however, while rejecting the conception of Economics as concerned with material welfare, have sought to impose on its scope a restriction of another nature: They have urged that the behaviour with which Economics is concerned is essentially a certain type of social behaviour, the behaviour implied by the institutions of the Individualist Exchange Economy. On this view, that kind of behaviour which is not specifically social in this definite sense is not the subject-matter of Economics. Professor Amonn in particular has devoted almost infinite pains to elaborating this conception.<a href="#fn24" id="ft24"><sup>24</sup></a></p> | <> | <p>Certain writers, however, while rejecting the conception of Economics as concerned with material welfare, have sought to impose on its scope a restriction of another nature: They have urged that the behaviour with which Economics is concerned is essentially a certain type of social behaviour, the behaviour implied by the institutions of the Individualist Exchange Economy. On this view, that kind of behaviour which is not specifically social in this definite sense is not the subject-matter of Economics, Professor Amonn in particular has devoted almost infinite pains to elaborating this conception.<a href="#fn25" id="ft25"><sup>25</sup></a></p> |
| <p>Now it may be freely admitted that, within the wide field of our definition, the attention of economists is focussed chiefly on the complications of the Exchange Economy. The reason for this is one of interest. The activities of isolated man, equally with the activities of the exchange economy, are subject to the limitations we are contemplating. But, from the point of view of isolated man, economic analysis is unnecessary. The elements of the problem are given to unaided reflection. Examination of the behaviour of a Crusoe may be immensely illuminating as an aid to more advanced studies. But, from the point of view of Crusoe, it is obviously <span class="italics">extra-marginal</span>. So too in the case of a “closed” communistic society. Again, from the point of view of the economist, the comparison of the phenomena of such a society with those of the exchange economy may be very illuminating. But from the point of view of the members of the executive, the generalisations of Economics would be uninteresting. Their position would be analogous to Crusoe’s. For them the economic problem would be merely whether to apply productive power to this or to that. Now, as Professor Mises has shown, given central ownership and control of the means of production, the registering of individual pulls and resistances by a mechanism of prices and costs is excluded by definition. It follows therefore that the decisions of the executive must necessarily be “arbitrary”.<a href="#fn25" id="ft25"><sup>25</sup></a> That is to say, they must be based on <span class="italics">its</span> valuations—not on the valuations of consumers and producers. This at once simplifies the form of choice. Without the guidance of a price system, the organisation of production must depend on the valuations of the final organiser, just as the organisation of a patriarchal estate unconnected with a money economy must depend on the valuations of the patriarch.</p> | <> | <p>Now it may be freely admitted that, within the wide field of our definition, the attention of economists is focused chiefly on the complications of the Exchange Economy. The reason for this is one of interest. The activities of isolated man, equally with the activities of the exchange economy, are subject to the limitations we are contemplating. But, from the point of view of isolated man, economic analysis is unnecessary. The elements of the problem are given to unaided reflection. Examination of the behaviour of a Crusoe may be immensely illuminating as an aid to more advanced studies. But, from the point of view of Crusoe, it is obviously <span class="italics">extra-marginal</span>. So too in the case of a “closed” communistic society. Again, from the point of view of the economist, the comparison of the phenomena of such a society with those of the exchange economy may be very illuminating. But from the point of view of the members of the executive, the generalisations of Economics would be uninteresting. Their position would be analogous to Crusoe’s. For them the economic problem would be merely whether to apply productive power to this or to that. Now, as Professor Mises has emphasised, given central ownership and control of the means of production, the registering of individual pulls and resistances by a mechanism of prices and costs is excluded by definition. It follows therefore that the decisions of the executive must necessarily be “arbitrary”.<a href="#fn26" id="ft26"><sup>26</sup></a> That is to say, they must be based on <span class="italics">its</span> valuations—not on the valuations of consumers and producers. This at once simplifies the form of choice. Without the guidance of a price system, the organisation of production must depend on the valuations of the final organiser, just as the organisation of a patriarchal estate unconnected with a money economy must depend on the valuations of the patriarch.</p> |
| <p>But in the exchange economy the position is much more complicated. The implications of individual decisions reach beyond the repercussions on the individual. One may realise completely the implications for oneself of a decision to spend money in this way rather than in that way. But it is not so easy to trace the effects of this decision on the whole complex of “scarcity relationships”—on wages, on profits, on prices, on rates of capitalisation, and the organisation of production. On the contrary, the utmost effort of abstract thought is required to devise generalisations which enable us to grasp them. For this reason economic analysis has most utility in the exchange economy. It is unnecessary in the isolated economy. It is debarred from any but the simplest generalisations by the very <span class="italics">raison d’être</span> of a communist society. But where independent initiative in social relationships is permitted to the individual, there economic analysis comes into its own.</p> | <> | <p>But in the exchange economy the position is much more complicated. The implications of individual decisions reach beyond the repercussions on the individual. One may realise completely the implications for oneself of a decision to spend money in this way rather than in that way. But it is not so easy to trace the effects of this decision on the whole complex of “scarcity relationships”—on wages, on profits, on prices, on rates of capitalisation, and the organisation of production. On the contrary, the utmost effort of abstract thought is required to devise generalisations which enable us to grasp them. For this reason economic analysis has most utility in the exchange economy. It is unnecessary in the isolated economy. It is debarred from any but the simplest generalisations by the very <span class="italics">raison d’être</span> of a strictly communist society. But where independent initiative in social relationships is permitted to the individual, there economic analysis comes into its own.</p> |
| <p>But it is one thing to contend that economic analysis has <span class="italics">most interest and utility</span> in an exchange economy. It is another to contend that its subject-matter is <span class="italics">limited</span> to such phenomena. The unjustifiability of this latter contention may be shown conclusively by two considerations. In the first place, it is clear that behaviour outside the exchange economy is conditioned by the same limitation of means in relation to ends as behaviour within the economy, and is capable of being subsumed under the same fundamental categories.<a href="#fn26" id="ft26"><sup>26</sup></a> The generalisations of the Theory of Value are as applicable to the behaviour of isolated man or the executive authority of a communist society, as to the behaviour of man in an exchange economy—even if they are not so illuminating in such contexts. The exchange relationship is a <span class="italics">technical</span> incident, a technical incident indeed which gives rise to nearly all the interesting complications, but still, for all that, subsidiary to the main fact of scarcity.</p> | <> | <p>But it is one thing to contend that economic analysis has <span class="italics">most interest and utility</span> in an exchange economy. It is another to contend that its subject-matter is <span class="italics">limited</span> to such phenomena. The unjustifiability of this latter contention may be shown conclusively by two considerations. In the first place, it is clear that behaviour outside the exchange economy is conditioned by the same limitation of means in relation to ends as behaviour within the economy, and is capable of being subsumed under the same fundamental categories.<a href="#fn27" id="ft27"><sup>27</sup></a> The generalisations of the theory of value are as applicable to the behaviour of isolated man or the executive authority of a communist society, as to the behaviour of man in an exchange economy—even if they are not so illuminating in such contexts. The exchange relationship is a <span class="italics">technical</span> incident, a technical incident indeed which gives rise to nearly all the interesting complications, but still, for all that, subsidiary to the main fact of scarcity.</p> |
| <p>In the second place, it is clear that the phenomena of the exchange economy itself can only be explained by <span class="italics">going behind</span> such relationships and invoking the operation of those laws of choice which are best seen when contemplating the behaviour of the isolated individual.<a href="#fn27" id="ft27"><sup>27</sup></a> Professor Amonn seems willing to admit that such a system of pure Economics may be useful as an auxiliary to Economic Science, but he precludes himself from making it the basis of the main system by postulating that the subject-matter of Economics must be defined in terms of the problems discussed by Ricardo. The view that a definition must describe an existing body of knowledge and not lay down arbitrary limits is admirable. But, it may legitimately be asked, why stop at Ricardo?<a href="#fn28" id="ft28"><sup>28</sup></a> Is it not clear that the imperfections of the Ricardian system were due to just this circumstance that it stopped at the valuations of the market and did not press through to the valuations of the individual? Surely it is the great achievement of the modern Theory of Value to have surmounted just this barrier?<a href="#fn29" id="ft29"><sup>29</sup></a></p> | <> | <p>In the second place, it is clear that the phenomena of the exchange economy itself can only be explained by <span class="italics">going behind</span> such relationships and invoking the operation of those laws of choice which are best seen when contemplating the behaviour of the isolated individual.<a href="#fn28" id="ft28"><sup>28</sup></a> Professor Amonn seems willing to admit that such a system of pure Economics may be useful as an auxiliary to Economic Science, but he precludes himself from making it the basis of the main system by postulating that the subject-matter of Economics must be defined in terms of the problems discussed by Ricardo. The view that a definition must describe an existing body of knowledge and not lay down arbitrary limits is admirable. But, it may legitimately be asked, why stop at Ricardo? Is it not clear that the imperfections of the Ricardian system were due to just this circumstance that it stopped at the valuations of the market and did not press through to the valuations of the individual? Surely it is the great achievement of the more recent theories of value to have surmounted just this barrier?<a href="#fn29" id="ft29"><sup>29</sup></a></p> |
| <p>At first sight, it is possible to underestimate the divergence between the two definitions. The one-regards the subject-matter of economics as human behaviour conceived as a relationship between ends and means, the other as the causes of material welfare. Scarcity of means and the causes of material welfare—are these not more or less the same thing?</p> | <> | <p>At first sight, it is possible to underestimate the divergence between the two definitions. The one regards the subject-matter of economics as human behaviour conceived as a relationship between ends and means, the other as the causes of material welfare. Scarcity of means and the causes of material welfare—are these not more or less the same thing?</p> |
| <p>Such a contention rests upon a very crude misconception. It is true that the scarcity of materials is one of the limitations of conduct. But the scarcity of our own time and the services of others is just as important. The scarcity of the services of the schoolmaster and the sewage man have each their economic aspect. Only by saying that services are material vibrations or the like can one stretch the definition to cover the whole field. But this is not only perverse, it is also misleading. In this form the definition may <span class="italics">cover</span> the field, but it does not describe it. For it is not the <span class="italics">materiality</span> of even material means of gratification which gives them their status as economic goods; it is their relation to valuations. It is their form rather than their substance which is significant. The “Materialist” conception of economics therefore misrepresents the science as we know it. But the <span class="italics">practice</span> of those who have adopted it fits in perfectly with our definition. There is no important generalisation in the whole range of Professor Cannan’s system which is incompatible with the definition we have chosen.</p> | <> | <p>Such a contention, however, would rest upon a misconception. It is true that the scarcity of materials is one of the limitations of conduct. But the scarcity of our own time and the services of others is just as important. The scarcity of the services of the schoolmaster and the sewage man have each their economic aspect. Only by saying that services are material vibrations or the like can one stretch the definition to cover the whole field. But this is not only perverse, it is also misleading. In this form the definition may <span class="italics">cover</span> the field, but it does not describe it. For it is not the <span class="italics">materiality</span> of even material means of gratification which, gives them their status as economic goods; it is their relation to valuations. It is their relationship to given wants rather than their technical substance which is significant. The “materialist” definition of Economics therefore misrepresents the science as we know it. Even if it does not definitely mislead as to its scope, it necessarily fails to convey an adequate concept of its nature. There seems no valid argument against its rejection.</p> |
| -+ | <p>At the same time, it is important to realise that what is rejected is but a definition. We do not reject the body of knowledge which it was intended to describe. The practice of those who have adopted it fits in perfectly with the alternative definition which has been suggested. There is no important generalisation in the whole range of Professor Carman’s system, for instance, which is incompatible with the definition of the subject-matter of Economics in terms of the disposal of scarce means.</p> | |
| <p><span class="bold"><a href="#ft1" id="fn1"><sup>1</sup></a></span> Lest this should be thought an overstatement I subjoin below a few characteristic definitions. I have confined my choice to Anglo-Saxon literature because, as will be shown later on, a more satisfactory state of affairs is coming to prevail elsewhere. “Economics is a study of men earning a living” (Marshall, <span class="italics">Principles</span>, p. 1). “Economics is the science which treats phenomena from the standpoint of price” (Davenport, <span class="italics">Economics of Enterprise</span>, p. 25). “The aim of Political Economy is the explanation of the general causes on which the material welfare of human beings depends” (Cannan, <span class="italics">Elementary Political Economy</span>, p. 1). “It is too wide a definition to speak of Economics as the science of the material side of human welfare.” Economics is “the study of the general methods by which men co-operate to meet their material needs” (Beveridge, <span class="italics">Economics as a Liberal Education</span>, <span class="italics">Economica</span>, vol. i., p. 3). Economics, according to Professor Pigou, is the study of economic welfare, economic welfare being defined as “that part of welfare which can be brought directly or indirectly into relation with the measuring rod of money” (<span class="italics">Economics of Welfare</span>, 3rd edition, p. 1). The sequel will show how widely the implications of these definitions diverge from one another.</p> | <> | <p><a href="#ft1" id="fn1"><sup>1</sup></a> Lest this should be thought an overstatement I subjoin below a few characteristic definitions. I have confined my choice to Anglo-Saxon literature because, as will be shown later on, a more satisfactory state of affairs is coming to prevail elsewhere. “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being” (Marshall, <span class="italics">Principles</span>, p. 1). “Economics is the science which treats phenomena from the standpoint of price” (Davenport, <span class="italics">Economics of Enterprise</span>, p. 25). “The aim of Political. Economy is the explanation of the general causes on which the material welfare of human beings depends” (Cannan, <span class="italics">Elementary Political Economy</span>, p. 1) “It is too wide a definition to speak of Economics as the science of the material side of human welfare.” Economics is “the study of the general methods by which men co-operate to meet their material needs” (Beveridge, <span class="italics">Economics as a Liberal Education</span>, <span class="italics">Economica</span>, vol. i., p. 3). Economics, according to Professor Pigou, is the study of economic welfare, economic welfare being defined as “that part of welfare which can be brought directly or indirectly into relation with the measuring rod of money” (<span class="italics">Economics of Welfare</span>, 3rd edition, p. 1). The sequel will show how widely the implications of these definitions diverge from one another.</p> |
| <p><a href="#ft3" id="fn3"><sup>3</sup></a> “Nicht die ‘<span class="italics">sachlichen</span>’ Zusammenhänge der ‘Dinge’ sondern die <span class="italics">gedanklichen</span> Zusammenhänge der <span class="italics">Probleme</span> legen den Arbeitsgebieten der Wissenschaften zugrunde” (Max Weber, <span class="italics">Die Objectivität Sozialwissenschaftlicher und Sozialpolitischer Erkenntnis, Gesammelte Aufsätze zur Wissenschaftslehre</span>, p. 166).</p> | <> | <p><a href="#ft3" id="fn3"><sup>3</sup></a> “Nicht die ‘<span class="italics">sachlichen</span>’ Zusammenhänge der ‘Dinge’ sondern die <span class="italics">gedanklichen</span> Zusammenhänge der <span class="italics">Probleme</span> liegen den Arbeitsgebieten der Wissenschaften zugrunde” (Max Weber, <span class="italics">Die Objectivität sozialwissenschaftlicher und sozialpolitischer Erkenntnis, Gesammelte Aufsätze zur Wissenschaftslehre</span>, p. 166).</p> |
| <p><a href="#ft5" id="fn5"><sup>5</sup></a> See Chapter II., Section 4, especially the footnote on p. 40, for further elaboration of this point.</p> | <> | <p><a href="#ft5" id="fn5"><sup>5</sup></a> See Chapter II., Section 5, especially the footnote on p. 42, for further elaboration of this point.</p> |
| <p><a href="#ft9" id="fn9"><sup>9</sup></a> <span class="italics">Essentials of Economic Theory</span>, p. 5. See also <span class="italics">Philosophy of Wealth</span>, ch. i. In this chapter the difficulties discussed below are explicitly recognised, but, surprisingly enough, instead of this leading to a rejection of the definition, it leads only to a most perverse attempt to change the significance of the word “material”.</p> | <> | <p><a href="#ft9" id="fn9"><sup>9</sup></a> <span class="italics">Essentials of Economic Theory</span>, p. 6. See also <span class="italics">Philosophy of Wealth</span>, ch. i. In this chapter the difficulties discussed below are explicitly recognised, but, surprisingly enough, instead of this leading to a rejection of the definition, it leads only to a somewhat surprising attempt to change the significance of the word “material”.</p> |
| <p><a href="#ft11" id="fn11"><sup>11</sup></a> In this connection it is perhaps worth while clearing up a confusion which not infrequently occurs in discussions of terminology. It is often urged that scientific definitions of words used both in ordinary language and in scientific analysis should not depart from the usages of everyday speech. No doubt this is a counsel of perfection, but in principle the main contention may be accepted. Appalling confusion is created when a word which is used in one sense in business practice is used in another sense in the analysis of such practice. One has only to think of the difficulties which have been created by such departures in regard to the meaning of the term capital. But it is one thing to follow everyday usage when appropriating a term. It is another thing to contend that everyday speech is the final court of appeal when defining a science. For in this case the significant implication of the word <span class="italics">is</span> the subject-matter of the generalisations of the science. And it is only by reference to these that the definition can finally be established. Any other procedure would be intolerable.</p> | <> | <p><a href="#ft11" id="fn11"><sup>11</sup></a> In this connection it is perhaps worth while clearing up a confusion which not infrequently occurs in discussions of terminology. It is often urged that scientific definitions of words used both in ordinary language and in scientific analysis should not depart from the usages of everyday speech. No doubt this is a counsel of perfection, but in principle the main contention may be accepted. Great confusion is certainly created when a word which is used in one sense in business practice is used in another sense in the analysis of such practice. One has only to think of the difficulties which have been created by such departures in regard to the meaning of the term capital. But it is one thing to follow everyday usage when appropriating a term. It is another thing to contend that everyday speech is the final court of appeal when defining a science. For in this case the significant implication of the word <span class="italics">is</span> the subject-matter of the generalisations of the science. And it is only by reference to these that the definition can finally be established. Any other procedure would be intolerable.</p> |
| <p><a href="#ft18" id="fn18"><sup>18</sup></a> There are other quarrels which we might pick with this particular definition. As Dr. Benham has pointed out (<span class="italics">The Concept of Economic Welfare</span> [<span class="italics">Economica</span>, June, 1930]), the whole concept of welfare is suspect as the subject-matter of a scientific study. From the philosophical point of view, the term “material welfare” is a very odd construction. “The material causes of welfare” might be admitted. But “material welfare” seems to involve a division of states of mind which are essentially unitary. For the purposes of this chapter, however, it has seemed better to ignore these deficiencies and to concentrate on the main question, namely, whether the definition can in any way describe the contents of which it is intended to serve as a label.</p> | <> | <p><a href="#ft18" id="fn18"><sup>18</sup></a> There are other quarrels which we might pick with this particular definition. From the philosophical point of view, the term “material welfare” is a very odd construction. “The material causes of welfare” might be admitted. But “material welfare” seems to involve a division of states of mind which are essentially unitary. For the purposes of this chapter, however, it has seemed better to ignore these deficiencies and to concentrate on the main question, namely, whether the definition can in any way describe the contents of which it is intended to serve as a label.</p> |
| <p><a href="#ft19" id="fn19"><sup>19</sup></a> On the sense in which “end” is to be understood to be formulated, there are further elucidations in the next chapter. From our point of view here it is simply to be taken as an objective of conduct. No indeterministic view of behaviour is intended to be implied.</p> | <> | <p><a href="#ft19" id="fn19"><sup>19</sup></a> It is perhaps worth emphasising the significance of this qualification. The application of technically similar means to the achievement of qualitatively similar ends <span class="italics">at different times</span> constitute alternative uses of these means. Unless this is clearly realised, one of the most important types of economic action is overlooked.</p> |
| <p><a href="#ft20" id="fn20"><sup>20</sup></a> Cp. Schönfield, <span class="italics">Grenznutzen und Wirtschaftsrechnung</span>, p. 1; Hans Mayer, <span class="italics">Untersuchungen zu dem Grundgesetze der Wirtschaftlichen Wertrechnung</span> (<span class="italics">Zeitschrift für Volkswirtschaft und Sozialpolitik</span>, Bd. 2, p. 123).</p> | <> | <p><a href="#ft20" id="fn20"><sup>20</sup></a> This may seem an unnecessary refinement, and in the first edition of this essay I left it out for that reason. But the condition that there exists a hierarchy of ends is so important in the theory of value that it seems better to state it explicitly even at this stage. See Chapter IV., Section 2.</p> |
| <p><a href="#ft21" id="fn21"><sup>21</sup></a> See Mises, <span class="italics">Die Gemeinwirtschaft</span>, p. 98; also <span class="italics">Soziologie und Geschichte</span> (<span class="italics">Archiv für Sozialwissenschaft und Sozialpolitik</span>, Bd. 61, Heft 3, especially pp. 471-484).</p> | <> | <p><a href="#ft21" id="fn21"><sup>21</sup></a> Cp. Schönfeld, <span class="italics">Grenznutzen und Wirtschaftsrechnung</span>, p. 1; Hans Mayer, <span class="italics">Untersuchungen zu dem Grundgesetze der wirtschaftlichen Wertrechnung</span> (<span class="italics">Zeitschrift für Volkswirtschaft und Sozialpolitik</span>, Bd. 2, p. 123).</p> |
| -+ | <p>It should be sufficiently clear that it is not “time” as such which is scarce, but rather the potentialities of ourselves viewed as instruments. To speak of scarcity of time is simply a metaphorical way of invoking this rather abstract concept.</p> | |
| -+ | <p><a href="#ft22" id="fn22"><sup>22</sup></a> It should be clear that there is no disharmony between the conception of end here employed, the terminus of particular lines of conduct in acts of final consumption, and the conception involved when it is said that there is but one end of activity—the maximising of satisfaction, “utility”, or what not. Our “ends” are to be regarded as proximate to the achievement of this ultimate end. If the means are scarce they cannot all be achieved, and according to the scarcity of means and their relative importance the achievement of some ends has to be relinquished.</p> | |
| <p><a href="#ft22" id="fn22"><sup>22</sup></a> Cp. Menger, <span class="italics">Grundsätze der Volkswirtschaftslehre</span>, lte aufl., pp. 51-70; Mises, <span class="italics">Die Gemeinwirtschaft</span>, pp. 98 <span class="italics">seq.</span>; Fetter, <span class="italics">Economic Principles</span>, ch. i.; Strigl, <span class="italics">Die Ökonomischen Katagorien und die Organisation der Wirtschaft</span>, <span class="italics">passim</span>; Mayer, <span class="italics">op. cit</span>.</p> | <> | <p><a href="#ft23" id="fn23"><sup>23</sup></a> Cp. Menger, <span class="italics">Grundsätze der Volkswirtschaftslehre</span>, lte Aufl., pp. 51-70; Mises, <span class="italics">Die Gemeinwirtschaft</span>, pp. 98 <span class="italics">seq</span>.; Fetter, <span class="italics">Economic Principles</span>, ch. i.; Strigl, <span class="italics">Die ökonomischen Kategorien und die Organisation der Wirtschaft</span>, <span>passim</span>; Mayer, <span class="italics">op. cit.</span></p> |
| <p><a href="#ft23" id="fn23"><sup>23</sup></a> On the distinction between analytical and classificatory definitions, see Irving Fisher, <span class="italics">Senses of Capital</span> (<span class="italics">Economic Journal</span>, vol. vii., p. 213). It is interesting to observe that the change in the conception of Economics implied by our definition is similar to the change in the conception of capital implied in Professor Fisher’s definition. Adam Smith defined capital as a kind of wealth. Professor Fisher would have us regard it as an aspect of wealth.</p> | <> | <p><a href="#ft24" id="fn24"><sup>24</sup></a> On the distinction between analytical and classificatory definitions, see Irving Fisher, <span class="italics">Senses of Capital</span> (<span class="italics">Economic Journal</span>, vol. vii., p. 213). It is interesting to observe that the change in the conception of Economics implied by our definition is similar to the change in the conception of capital implied in Professor Fisher’s definition. Adam Smith defined capital as a kind of wealth. Professor Fisher would have us regard it as an aspect of wealth.</p> |
| <p><a href="#ft24" id="fn24"><sup>24</sup></a> See his <span class="italics">Objekt und Grundbegriffe der theoretischen Nationalökonomie</span>. The criticisms of Schumpeter and Strigl on pp. 110-125 and pp. 155-156 are particularly important from this point of view. With the very greatest respect for Professor Amonn’s exhaustive analysis, I cannot resist the impression that he is inclined rather to magnify the degree of his divergence from the attitude of these two authors.</p> | <> | <p><a href="#ft25" id="fn25"><sup>25</sup></a> See his <span class="italics">Objekt und Grundbegriffe der theoretischen Nationalökonomie</span>, 2 Aufl. The criticisms of Schumpeter and Strigl on pp. 110-125 and pp. 165-156 are particularly important from this point of view. With the very greatest respect for Professor Amonn’s exhaustive analysis, I cannot resist the impression that he is inclined rather to magnify the degree of his divergence from the attitude of these two authors.</p> |
| <p><a href="#ft25" id="fn25"><sup>25</sup></a> See Mises, <span class="italics">Die Gemeinwirtschaft</span>, pp. 94-138. In his <span class="italics">Die Lehren des Marxismus im Lichte der russischen Revolution</span> and <span class="italics">Planwirtschaft und Marktwirtschaft in der Sowjet Union</span> (<span class="italics">Der deutsche Volkswirt Jahrg</span>., 1931, No. 32, pp. 1073-1074), Professor Boris Brutzkus has well shown the way in which this difficulty has been exemplified in the various phases of the Russian experiment.</p> | <> | <p><a href="#ft26" id="fn26"><sup>26</sup></a> See Mises, <span class="italics">Die Gemeinwirtschaft</span>, pp. 94-138. In his <span class="italics">Economic Planning in Soviet Russia</span>, Professor Boris Brutzkus has well shown the way in which this difficulty has been exemplified in the various phases of the Russian experiment.</p> |
| <p><a href="#ft26" id="fn26"><sup>26</sup></a> See Strigl, <span class="italics">op. cit</span>., pp. 23-28.</p> | <> | <p><a href="#ft27" id="fn27"><sup>27</sup></a> See Strigl, <span class="italics">op. cit.</span>, pp. 23-28.</p> |
| <p><a href="#ft27" id="fn27"><sup>27</sup></a> Professor Cassel’s dismissal of Crusoe Economics (<span class="italics">Fundamental Thoughts</span>, p. 27) seems singularly unfortunate since, while the construction of the collectivist state which he favours, is intended to perform exactly the same function, in fact, it suggests possibilities of economic calculation which would not be available to the executive of such a society. Where there is no market for producers’ goods, there can be no cost computations based on individual valuations. It is a mistake to suppose that the mere pricing of consumers’ goods affords a basis for economic calculation. (See Halm, <span class="italics">Die Konkurrenz</span>, pp. 34-63.) Moreover, it is only when contemplating the conditions of isolated man that the importance of the alternative applicability of scarce means, which was emphasised above, leaps clearly to the eye. In a social economy of any kind, the mere multiplicity of economic subjects leads one to overlook the possibility of the existence of scarce goods with no alternative uses.</p> | +- | |
| <p><a href="#ft28" id="fn28"><sup>28</sup></a> <span class="italics">Op. cit</span>., p. 397. On pp. 119-120 Professor Amonn seems to go a long way towards admitting the point made above that the question under dispute relates to the interest, rather than to the limit, of the subject-matter. “Die Nationalökonomie <span class="italics">interessiert</span> (my italics) am Kaufe nicht die Bedeutung die das einzelne kaufende oder verkaufende Individuum unter seiner individualistisch praktischen Gesichtpunkte diesen Wirtschaftsubjekt beilegt. . . . Erst durch die Setzung einer bestimmten <span class="italics">sozialen</span> Bedingtheit und unter <span class="italics">dem Gesichtspunkte diesen sozialen Bedingtheit</span> erlangt die Güterquantitäten Veränderung <span class="italics">jene so besonder Kompliziertheit deren Analyse Aufgabe der theoretischen Nationalökonomie ist</span>.”</p> | <> | <p><a href="#ft28" id="fn28"><sup>28</sup></a> Professor Cassel’s dismissal of Crusoe Economics (<span class="italics">Fundamental Thoughts</span>, p. 27) seems unfortunate since it is only when contemplating the conditions of isolated man that the importance of the condition that the scarce means must have alternative uses if there is to be economic activity, which was emphasised above, leaps clearly to the eye. In a social economy of any kind, the mere multiplicity of economic subjects leads one to overlook the possibility of the existence of scarce goods with no alternative uses.</p> |
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| <h1 id="sigil_toc_id_3" title="II. Ends and Means">CHAPTER II</h1> | <> | <h1 title="II. Ends and Means">CHAPTER II</h1> |
| <p class="noindent"><span class="smallcaps">1. We</span> have now established a working definition of the subject-matter of Economics. The next step is to examine its implications. In this chapter we shall be concerned with the status of ends and means as they figure in Economic Theory and Economic History. In the next we shall be concerned with the interpretation of various economic “quantities”.</p> | <> | <p class="noindent"><span class="smallcaps">1. We</span> have now established a working definition of the subject matter of Economics. The next step is to examine its implications. In this chapter we shall be concerned with the status of ends and means as they figure in Economic Theory and Economic History. In the next we shall be concerned with the interpretation of various economic “quantities”.</p> |
| <p>Economics, we have seen, is concerned with that aspect of behaviour which arises from the scarcity of means to achieve given ends. It follows that Economics is entirely neutral between ends; that, in so far as the achievement of <span class="italics">any</span> end is dependent on scarce means, it is germane to the preoccupations of the Economist. Economics is not concerned with ends as such. It assumes that human beings have ends in the sense that they have tendencies to conduct which can be defined and understood,<a href="#fn2" id="ft2"><sup>2</sup></a> and it asks how their progress towards their objectives is conditioned by the scarcity of means—how the disposal of the scarce means is contingent on these ultimate valuations.</p> | <> | <p>Economics, we have seen, is concerned with that aspect of behaviour which arises from the scarcity of means to achieve given ends. It follows that Economics is entirely neutral between ends; that, in so far as the achievement of <span class="italics">any</span> end is dependent on scarce means, it is germane to the preoccupations of the economist. Economics is not concerned with ends as such. It assumes that human beings have ends in the sense that they have tendencies to conduct which can be defined and understood, and it asks how their progress towards their objectives is conditioned by the scarcity of means—how the disposal of the scarce means is contingent on these ultimate valuations.</p> |
| <p>It should be clear, therefore, that to speak of any end as being itself “economic” is entirely misleading. The habit, prevalent among certain groups of economists, of discussing “economic satisfactions” is alien to the central intention of economic analysis. A satisfaction is to be conceived as an end-product of activity. It is not itself part of that activity which we study. It would be going too far to urge that it is impossible to conceive of “economic satisfactions”. For, presumably, we <span class="italics">can</span> so describe a satisfaction which is contingent on the availability of scarce means as distinct from a satisfaction which depends entirely on subjective factors—<span class="italics">e.g</span>., the satisfaction of having a summer holiday, as compared with the satisfaction of remembering it. But since, as we have seen, the scarcity of means is so wide as to influence in some degree almost all kinds of conduct, this does not seem a useful conception. And since it is manifestly out of harmony with the main implications of our definition, it is probably better avoided altogether.</p> | <> | <p>It should be clear, therefore, that to speak of any end as being itself “economic” is entirely misleading. The habit, prevalent among certain groups of economists, of discussing “economic satisfactions” is alien to the central intention of economic analysis. A satisfaction is to be conceived as an end-product of activity. It is not itself part of that activity which we study. It would be going too far to urge that it is impossible to conceive of “economic satisfactions”. For, presumably, we <span class="italics">can</span> so describe a satisfaction which is contingent on the availability of scarce means as distinct from a satisfaction which depends entirely on subjective factors—<span class="italics">e.g.</span>, the satisfaction of having a summer holiday, as compared with the satisfaction of remembering it. But since, as we have seen, the scarcity of means is so wide as to influence in some degree almost all kinds of conduct, this does not seem a useful conception. And since it is manifestly out of harmony with the main implications of our definition, it is probably best avoided altogether.</p> |
| <p>It follows, further, that the belief, prevalent among the more neurotic critics of Economic Science, that the preoccupation of the economist is with a peculiarly low type of conduct, depends upon misapprehension. The economist is not concerned with ends as such. He is concerned with the way in which the attainment of ends is limited. The ends may be noble or they may be base. They may be “material” or “immaterial”—if ends can be so described. But if the attainment of one set of ends involves the sacrifice of others, then it has an economic aspect.</p> | <> | <p>It follows, further, that the belief, prevalent among certain critics of Economic Science, that the preoccupation of the economist is with a peculiarly low type of conduct, depends upon misapprehension. The economist is not concerned with ends as such. He is concerned with the way in which the attainment of ends is limited. The ends may be noble or they may be base. They may be “material” or “immaterial”—if ends can be so described. But if the attainment of one set of ends involves the sacrifice of others, then it has an economic aspect.</p> |
| <p>All this is quite obvious if only we consider the actual sphere of application of economic analysis, instead of resting content with the assertions of those who do not know what economic analysis is. Suppose, for instance, a community of sybarites, their pleasures gross and sensual, their intellectual activities preoccupied with the “purely material”. It is clear enough that economic analysis can provide categories for describing the relationships between these ends and the means which are available for achieving them. But it is not true, as Ruskin and Carlyle and suchlike critics have asserted, that it is <span class="italics">limited</span> to this sort of thing. Let us suppose this reprehensible community to be visited by a Savonarola. Their former ends become revolting to them. The pleasures of the senses are banished. The sybarites become ascetics. Surely economic analysis is still applicable. There is no need to change the categories of explanation. All that has happened is that the demand schedules have changed. Some things have become relatively less scarce, others more so. The rent of vineyards falls. The rent of quarries for ecclesiastical masonry rises. That is all. The distribution of time between prayer and good works has its economic aspect equally with the distribution of time between orgies and slumber. The “pig-philosophy”—to use poor Carlyle’s name for Economics—turns out to be all-embracing.</p> | <> | <p>All this is quite obvious if only we consider the actual sphere of application of economic analysis, instead of resting content with the assertions of those who do not know what economic analysis is. Suppose, for instance, a community of sybarites, their pleasures gross and sensual, their intellectual activities preoccupied with the “purely material”. It is clear enough that economic analysis can provide categories for describing the relationships between these ends and the means which are available for achieving them. But it is not true, as Ruskin and Carlyle and suchlike critics have asserted, that it is <span class="italics">limited</span> to this sort of thing. Let us suppose this reprehensible community to be visited by a Savonarola. Their former ends become revolting to them. The pleasures of the senses are banished. The sybarites become ascetics. Surely economic analysis is still applicable. There is no need to change the categories of explanation. All that has happened is that the demand schedules have changed. Some things have become relatively less scarce, others more so. The rent of vineyards falls. The rent of quarries for ecclesiastical masonry rises. That is all. The distribution of time between prayer and good works has its economic aspect equally with the distribution of time between orgies and slumber. The “pig-philosophy”—to use Carlyle’s contemptuous epithet—turns out to be all-embracing.</p> |
| <p>To be perfectly fair, it must be admitted that this is a case in which Economists are to some extent to blame for their own misfortunes. As we have seen already, their practice has been unexceptionable. But their definitions have been misleading, and their attitude in the face of criticism has been unnecessarily apologetic. It is even said that quite modern Economists who have been convinced both of the importance of Economics <span class="italics">and</span> of its preoccupation with the “more material side of human welfare” have been reduced to prefacing their lectures on general Economic Theory with the rather sheepish apology that, after all, bread and butter are necessary, even to the lives of artists and saints. This seems to be unnecessary in itself, and at the same time liable to give rise to misconception in the minds of those who are apt to find the merely material rather small beer. Nevertheless, if Carlyle and Ruskin had been willing to make the intellectual effort necessary to assimilate the body of analysis bequeathed by the great men whom they criticised so unjustly, they would have realised its profound significance in regard to the interpretation of conduct in general, even if they had been unable to provide any better description than its authors. But, as is abundantly clear from their criticisms, they never made this effort. They did not want to make the effort. It was so much easier, so much more congenial, misrepresenting those who did. And the opportunities for misrepresenting a science that had hardly begun to become conscious of its ultimate implications were not far to seek.</p> | <> | <p>To be perfectly fair, it must be admitted that this is a case in which economists are to some extent to blame for their own misfortunes. As we have seen already, their practice has been more or less unexceptionable. But their definitions have been misleading, and their attitude in the face of criticism has been unnecessarily apologetic. It is even said that quite modern economists who have been convinced both of the importance of Economics <span class="italics">and</span> of its preoccupation with the “more material side of human welfare” have been reduced to prefacing their lectures on general Economic Theory with the rather sheepish apology that, after all, bread and butter are necessary, even to the lives of artists and saints. This seems to be unnecessary in itself, and at the same time liable to give rise to misconception in the minds of those who are apt to find the merely material rather small beer. Nevertheless, if Carlyle and Ruskin had been willing to make the intellectual effort necessary to assimilate the body of analysis bequeathed by the great men whom they criticised so unjustly, they would have realised its profound significance in regard to the interpretation of conduct in general, even if they had been unable to provide any better description than its authors. But, as is abundantly clear from their criticisms, they never made this effort. They did not want to make the effort. It was so much easier, so much more congenial, misrepresenting those who did. And the opportunities for misrepresenting a science that had hardly begun to become conscious of its ultimate implications were not far to seek.</p> |
| <p>But, if there is no longer any excuse for the detractors of Economics to accuse it of preoccupation with particularly low ends of conduct, there is equally no excuse for Economists to adopt an attitude of superiority as regards the subjects that they are capable of handling. We have already noticed Professor Cannan’s rather paradoxical attitude to a Political Economy of War. And, speaking generally in this respect, Professor Cannan is a little apt to follow St. Peter and cry, “Lord, I have never touched the unclean thing”. In the opening chapter of <span class="italics">Wealth</span>,<a href="#fn3" id="ft3"><sup>3</sup></a> he goes out of his way to say that “the criterion of buying and selling brings many things into economics which are not commonly treated there and which it does not seem convenient to treat there. A large trade has existed since history began in supplying certain satisfactions of a sensual character which are never regarded as economic goods. Indulgences to commit what would otherwise be regarded as offences against religion or morality have been sold sometimes openly and at all times under some thin disguise: nobody has regarded these as economic goods”. This is surely very questionable. Economists, equally with other human beings, may regard the services of prostitutes as conducive to no “good” in the ultimate ethical sense. But to deny that such services are scarce in the sense in which we use the term, and that there is therefore an economic aspect of hired love, susceptible to treatment in the same categories of general analysis as enable us to explain fluctuations in the price of hired writing, does not seem to be in accordance with the facts. As for the sale of indulgences, surely the status in Economic History of these agreeable transactions is not seriously open to question. Did the sale of indulgences affect the distribution of income, the magnitude of expenditure on other commodities, the direction of production, or did it not? We must not evade the consequences of the conclusion that all conduct coming under the influence of scarcity has its economic aspect.</p> | <> | <p>But, if there is no longer any excuse for the detractors of Economics to accuse it of preoccupation with particularly low ends of conduct, there is equally no excuse for economists to adopt an attitude of superiority as regards the subjects that they are capable of handling. We have already noticed Professor Cannan’s rather paradoxical attitude to a political economy of war. And, speaking generally, are we not entitled to urge that in this respect Professor Cannan is a little apt to follow St. Peter and cry, “Not so, Lord: for nothing common or unclean hath at any time entered into my mouth”? In the opening chapter of <span class="italics">Wealth</span>,<a href="#fn2" id="ft2"><sup>2</sup></a> he goes out of his way to say that “the criterion of buying and selling brings many things into economics which are not commonly treated there and which it does not seem convenient to treat there. A large trade has existed since history began in supplying certain satisfactions of a sensual character which are never regarded as economic goods. Indulgences to commit what would otherwise be regarded as offences against religion or morality have been sold sometimes openly and at all times under some thin disguise: nobody has regarded these as economic goods”. This is surely very questionable. Economists, equally with other human beings, may regard the services of prostitutes as conducive to no “good” in the ultimate ethical sense. But to deny that such services are scarce in the sense in which we use the term, and that there is therefore an economic aspect of hired love, susceptible to treatment in the same categories of general analysis as enable us to explain fluctuations in the price of hired rhetoric, does not seem to be in accordance with the facts. As for the sale of indulgences, surely the status in Economic History of these agreeable transactions is not seriously open to question. Did the sale of indulgences affect the distribution of income, the magnitude of expenditure on other commodities, the direction of production, or did it not? We must not evade the consequences of the conclusion that all conduct coming under the influence of scarcity has its economic aspect.</p> |
| <p>3. A very interesting example of the difficulties which may arise if the implications which we have been trying to drag into the light are neglected, is afforded in Sir Josiah Stamp’s paper on <span class="italics">Æsthetics as an Economic Factor</span>.<a href="#fn4" id="ft4"><sup>4</sup></a> Sir Josiah, who has done so much to maintain sweetness and light in our times, is anxious to preserve the countryside and to safeguard ancient monuments. (The occasion of the paper was a decision on the part of his railway company not to destroy Stratford House, a sixteenth-century half-timbered building in Birmingham, to make room for railway sidings.) At the same time, he believes that Economics is concerned with material welfare.<a href="#fn5" id="ft5"><sup>5</sup></a> He is, therefore, driven to argue that “indifference to the æsthetic will in the long run lessen the economic product; that attention to the æsthetic will increase economic welfare”.<a href="#fn6" id="ft6"><sup>6</sup></a> That is to say, that if we seek first the Kingdom of the Beautiful, all material welfare will be added unto us. And he brings all the solid weight of his authority to the task of stampeding the business world into believing that this is true.</p> | <> | <p>3. A very interesting example of the difficulties which may arise if the implications which we have been trying to drag into the light are neglected, is afforded in a paper by Sir Josiah Stamp on <span class="italics">Æsthetics as an Economic Factor</span>.<a href="#fn3" id="ft3"><sup>3</sup></a> Sir Josiah, in common with most men of vision and imagination, is anxious to preserve the countryside and to safeguard ancient monuments. (The occasion of the paper was a decision on the part of his railway company not to destroy Stratford House, a sixteenth-century half-timbered building in Birmingham, to make room for railway sidings.) At the same time, he believes that Economics is concerned with material welfare.<a href="#fn4" id="ft4"><sup>4</sup></a> He is, therefore, driven to argue that “indifference to the æsthetic will in the long run lessen the economic product; that attention to the æsthetic will increase economic welfare”.<a href="#fn5" id="ft5"><sup>5</sup></a> That is to say, that if we seek first the Kingdom of the Beautiful, all material welfare will be added unto us. And he brings all the solid weight of his authority to the task of stampeding the business world into believing that this is true.</p> |
| <p>It is easy to sympathise with the intention of the argument. But it is difficult to believe that its logic is very convincing. It may be perfectly true, as Sir Josiah contends, that the wide interests fostered by the study of ancient monuments and the contemplation of beautiful objects are both stimulating to the intelligence and restful to the nervous system, and that, to that extent, a community which offers opportunities for such interests may gain in other, “more material”, ways. But it is surely an optimism, unjustified either by experience or by <span class="italics">a priori</span> probability, to assume that this <span class="italics">necessarily</span> follows. It is surely a fact which we must all recognise that rejection of material comfort in favour of æsthetic or ethical values does not necessarily bring material compensation. There are cases when it is <span class="italics">either</span> bread or a lily. Choice of the one involves sacrifice of the other, and, although we may be satisfied with our choice, we cannot delude ourselves that it was not really a choice at all, that more bread will follow. It is not true that all things work together for <span class="italics">material</span> good to them that love God. So far from postulating a harmony of ends in this sense, Economics brings into full view that conflict of choice which is one of the permanent characteristics of human existence. Your economist is a true tragedian.</p> | <> | <p>It is easy to sympathise with the intention of the argument. But it is difficult to believe that its logic is very convincing. It may be perfectly true, as Sir Josiah contends, that the wide interests fostered by the study of ancient monuments and the contemplation of beautiful objects are both stimulating to the intelligence and restful to the nervous system, and that, to that extent, a community which offers opportunities for such interests may gain in other, “more material”, ways. But it is surely an optimism, unjustified either by experience or by <span class="italics">a priori</span> probability, to assume that this <span class="italics">necessarily</span> follows. It is surely a fact which we must all recognise that rejection of material comfort in favour of æsthetic or ethical values does not necessarily bring material compensation. There are cases when it is <span class="italics">either</span> bread <span class="italics">or</span> a lily. Choice of the one involves sacrifice of the other, and, although we may be satisfied with our choice, we cannot delude ourselves that it was not really a choice at all, that more bread will follow. It is not true that all things work together for <span class="italics">material</span> good to them that love God. So far from postulating a harmony of ends in this sense, Economics brings into full view that conflict of choice which is one of the permanent characteristics of human existence. Your economist is a true tragedian.</p> |
| <p>What has happened, of course, is that adherence to the “materialist” definition has prevented Sir Josiah from recognising clearly that Economics and Æsthetics are not <span class="italics">in pari materia</span>.<a href="#fn7" id="ft7"><sup>7</sup></a> Æsthetics is concerned with certain kinds of ends. The Æsthetic is an end which offers itself for choice in competition, so to speak, with others. Economics is not concerned at all with any ends <span class="italics">as such</span>. It is concerned with ends in so far as they affect the disposition of means. It takes the ends as given in scales of relative valuation, and enquires what consequences follow in regard to certain aspects of behaviour.</p> | <> | <p>What has happened, of course, is that adherence to the “materialist” definition has prevented Sir Josiah from recognising clearly that Economics and Æsthetics are not <span class="italics">in pari materia</span>.<a href="#fn6" id="ft6"><sup>6</sup></a> Æsthetics is concerned with certain kinds of ends. The beautiful is an end which offers itself for choice in competition, so to speak, with others. Economics is not concerned at all with any ends <span class="italics">as such</span>. It is concerned with ends in so far as they affect the disposition of means. It takes the ends as given in scales of relative valuation, and enquires what consequences follow in regard to certain aspects of behaviour.</p> |
| <p>But, it may be argued, is it not possible to regard the procuring of money as something which competes with other ends, and, if this is so, may we not legitimately speak of an “economic” end of conduct? This raises questions of very great import. Full discussion of the part played in Economic Analysis of the assumption that money-making is the sole motive of conduct must be deferred until a later chapter, where it will be investigated fully. But, for the moment, it may be replied that the objection rests upon a misconception of the significance of money. Money-making in the normal sense of the term is merely the intermediate stage between a sale and a purchase. The procuring of a flow of money from the sale of one’s services or the hiring out of one’s property is not an end <span class="italics">per se</span>. The money is clearly a means to ultimate purchase. It is sought, not for itself, but for the things on which it may be spent—whether these be the constituents of real income now or of real income in the future. Money-making in this sense means securing the means for the achievement of <span class="italics">all</span> those ends which are capable of achievement by the aid of purchasable commodities. Money <span class="italics">as such</span> is obviously merely a means—a medium of exchange, an instrument of calculation. For society, from the static point of view, the presence of more or less money is irrelevant. For the individual it is relevant only in so far as it serves his ultimate objectives. Only the miser, the psychological monstrosity, desires an infinite accumulation of money. Indeed, so little do we regard this as typical that, far from regarding the demand for money to hold as being indefinitely great, we are in the habit of assuming that money is desired only to be passed on. Instead of assuming the demand curve for money to hold to be a straight line parallel with the <span class="italics">y</span> axis, economists have been in the habit of assuming, as a first approximation, that it is of the nature of a rectangular hyperbola.<a href="#fn8" id="ft8"><sup>8</sup></a></p> | <> | <p>But, it may be argued, is it not possible to regard the procuring of money as something which competes with other ends, and, if this is so, may we not legitimately speak of an “economic” end of conduct? This raises questions of very great import. Full discussion of the part played in economic analysis of the assumption that money-making is the sole motive of conduct must be deferred until a later chapter, where it will be investigated fully. But, for the moment, it may be replied that the objection rests upon a misconception of the significance of money. Money-making in the normal sense of the term is merely the intermediate stage between a sale and a purchase. The procuring of a flow of money from the sale of one’s services or the hiring out of one’s property is not an end <span class="italics">per se</span>. The money is clearly a means to ultimate purchase. It is sought, not for itself, but for the things on which it may be spent—whether these be the constituents of real income now or of real income in the future. Money-making in this sense means securing the means for the achievement of <span class="italics">all</span> those ends which are capable of achievement by the aid of purchasable commodities. Money <span class="italics">as such</span> is obviously merely a means—a medium of exchange, an instrument of calculation. For society, from the static point of view, the presence of more or less money is irrelevant. For the individual it is relevant only in so far as it serves his ultimate objectives. Only the miser, the psychological monstrosity, desires an infinite accumulation of money. Indeed, so little do we regard this as typical that, far from regarding the demand for money to hold as being indefinitely great, we are in the habit of assuming that money is desired only to be passed on. Instead of assuming the demand curve for money to hold to be a straight line parallel with the <span class="italics">y</span> axis, economists have been in the habit of assuming, as a first approximation, that it is of the nature of a rectangular hyperbola.<a href="#fn7" id="ft7"><sup>7</sup></a></p> |
| <p>4. Economics, then, is in no way to be conceived as we may conceive Ethics or Æsthetics as being concerned with ends as such. It is equally important that its preoccupations should be sharply distinguished from those of the technical arts of production. This raises certain issues of considerable complexity which it is desirable to examine at some length.</p> | <> | <p>4. Economics, then, is in no way to be conceived, as we may conceive Ethics or Æsthetics, as being concerned with ends as such. It is equally important that its preoccupations should be sharply distinguished from those of the technical arts of production—with ways of using given means. This raises certain issues of considerable complexity which it is desirable to examine at some length.</p> |
| <p>The relation between Economics and the technical arts of production is one which has always presented great difficulties to those economists who have thought that they were concerned with the causes of material welfare. It is clear that the technical arts of production are concerned with material welfare. Yet the distinction between art and science does not seem to exhaust the difference. So much scientific knowledge is germane to the technical arts of production that is foreign to Economic Science. Yet where is one to draw the line? Sir William Beveridge has put this difficulty very clearly in his lecture on <span class="italics">Economics as a Liberal Education</span>. “It is too wide a definition to speak of Economics as the science of the material side of human welfare. A house contributes to human welfare and should be material. If, however, one is considering the building of a house, the question whether the roof should be made of paper or of some other material is a question not of Economics but of the technique of house building”.<a href="#fn9" id="ft9"><sup>9</sup></a> Nor do we meet this difficulty by inserting the word “general” before “causes of material welfare”. Economics is not the aggregate of the technologies. Nor is it an attempt to select from each the elements common to several. Motion study, for instance, may yield generalisations applicable to more than one occupation. But motion study has nothing to do with Economics. Nor, in spite of the hopes of certain industrial psychologists, is it capable of taking its place.<a href="#fn10" id="ft10"><sup>10</sup></a> So long as we remain within the ambit of any definition of the subject-matter of Economics in terms of the causes of material welfare, the connection between Economics and the technical arts of production must remain hopelessly obscure.</p> | <> | <p>The relation between Economics and the technical arts of production is one which has always presented great difficulties to those economists who have thought that they were concerned with the causes of material welfare. It is clear that the technical arts of production are concerned with material welfare. Yet the distinction between art and science does not seem to exhaust the difference. So much scientific knowledge is germane to the technical arts of production that is foreign to Economic Science. Yet where is one to draw the line? Sir William Beveridge has put this difficulty very clearly in his lecture on <span class="italics">Economics as a Liberal Education</span>. “It is too wide a definition to speak of Economics as the science of the material side of human welfare. A house contributes to human welfare and should be material. If, however, one is considering the building of a house, the question whether the roof should be made of paper or of some other material is a question not of Economics but of the technique of house building”.<a href="#fn8" id="ft8"><sup>8</sup></a> Nor do we meet this difficulty by inserting the word “general” before “causes of material welfare”. Economics is not the aggregate of the technologies. Nor is it an attempt to select from each the elements common to several. Motion study, for instance, may yield generalisations applicable to more than one occupation. But motion study has nothing to do with Economics. Nor, in spite of the hopes of certain industrial psychologists, is it capable of taking its place. So long as we remain within the ambit of any definition of the subject-matter of Economics in terms of the causes of material welfare, the connection between Economics and the technical arts of production must remain hopelessly obscure.</p> |
| <p>But, from the point of view of the definition we have adopted, the connection is perfectly definite. The technical arts of production are simply to be grouped among the <span class="italics">given</span> factors influencing the relative scarcity of different economic goods.<a href="#fn10" id="ft10-1"><sup>10</sup></a> The technique of cotton manufacture, as such, is no part of the subject-matter of Economics, but the existence of a given technique of various potentialities, together with the other factors influencing supply, conditions the possible response to any valuation of cotton goods, and consequently influences the adaptations which it is the business of Economics to study.</p> | <> | <p>But, from the point of view of the definition we have adopted, the connection is perfectly definite. The technical arts of production are simply to be grouped among the <span class="italics">given</span> factors influencing the relative scarcity of different economic goods.<a href="#fn9" id="ft9"><sup>9</sup></a> The technique of cotton manufacture, as such, is no part of the subject-matter of Economics, but the existence of a given technique of various potentialities, together with the other factors influencing supply, conditions the possible response to any valuation of cotton goods, and consequently influences the adaptations which it is the business of Economics to study.</p> |
| <p>So far, matters are supremely simple. But now it is necessary to remove certain possible misunderstandings. At first sight it might appear as if the conception we are adopting ran the danger of tipping the baby out with the bath water. In regarding technique as providing merely given data, are we not excluding from the subject-matter of Economics just those matters where economic analysis is most at home? For is not production a matter of technique? And is not the Theory of Production one of the central preoccupations of economic analysis?</p> | <> | <p>So far, matters are supremely simple. But now it is necessary to remove certain possible misunderstandings. At first sight it might appear as if the conception we are adopting ran the danger of tipping the baby out with the bath water. In regarding technique as merely data, are we not in danger of excluding from the subject-matter of Economics just those matters where economic analysis is most at home? For is not production a matter of technique? And is not the theory of production one of the central preoccupations of economic analysis?</p> |
| <p>The objection sounds plausible. But, in fact, it involves a complete misapprehension—a misapprehension which it is important finally to dispel. The attitude we have adopted towards the technical arts of production does not eliminate the desirability of an economic theory of production.<a href="#fn11" id="ft11"><sup>11</sup></a> For the influences determining the structure of production are not purely technical in nature. No doubt, technique is very important. But technique is not everything. It is one of the merits of modern analysis that it enables us to put technique in its proper place. This deserves further elucidation. It is not an exaggeration to say that, at the present day, one of the main dangers to civilisation arises from the inability of minds trained in the natural sciences to perceive the difference between the economic and the technical.</p> | <> | <p>The objection sounds plausible. But, in fact, it involves a complete misapprehension—a misapprehension which it is important finally to dispel. The attitude we have adopted towards the technical arts of production does not eliminate the desirability of an economic theory of production.<a href="#fn10" id="ft10"><sup>10</sup></a> For the influences determining the structure of production are not purely technical in nature. No doubt, technique is very important. But technique is not everything. It is one of the merits of modern analysis that it enables us to put technique in its proper place. This deserves further elucidation. It is not an exaggeration to say that, at the present day, one of the main dangers to civilisation arises from the inability of minds trained in the natural sciences to perceive the difference between the economic and the technical.</p> |
| <p>Let us consider the behaviour of an isolated man in disposing of a single scarce commodity.<a href="#fn12" id="ft12"><sup>12</sup></a> Let us consider, for instance, the behaviour of a Robinson Crusoe in regard to a stock of wood of strictly limited dimensions. Robinson has not sufficient wood for all the purposes to which he could put it. For the time being the stock is irreplaceable. What are the influences which will determine the way in which he utilises it?</p> | <> | <p>Let us consider the behaviour of an isolated man in disposing of a single scarce commodity.<a href="#fn11" id="ft11"><sup>11</sup></a> Let us consider, for instance, the behaviour of a Robinson Crusoe in regard to a stock of wood of strictly limited dimensions. Robinson has not sufficient wood for all the purposes to which he could put it. For the time being the stock is irreplaceable. What are the influences which will determine the way in which he utilises it?</p> |
| <p>But if he wants the wood for more than one purpose—if, in addition to wanting it for a fire, he needs it for fencing the ground round the cabin and keeping the fence in good condition—then, inevitably, he is confronted by a new problem<span class="italics">—the problem of how much wood to use for fires and how much for fencing</span>. In these circumstances the techniques of fire-making and fencing are still important. But the problem is no longer a purely technical problem. Or, to put the matter in more behaviouristic terms, the influences on his disposal of wood are no longer purely technical. Conduct is the resultant of conflicting psychological pulls acting within an environment of given material and technical possibilities. The problem of technique and the problem of economy are fundamentally different problems. To use Professor Mayer’s very elegant way of putting the distinction, the problem of technique arises when there is one end and a multiplicity of means, the problem of economy when both the ends and the means are multiple.<a href="#fn13" id="ft13"><sup>13</sup></a></p> | <> | <p>But if he wants the wood for more than one purpose—if, in addition to wanting it for a fire, he needs it for fencing the ground round the cabin and keeping the fence in good condition—then, inevitably, he is confronted by a new problem<span class="italics">—the problem of how much wood to use for fires and how much for fencing</span>. In these circumstances the techniques of fire-making and fencing are still important. But the problem is no longer a purely technical problem.<a href="#fn12" id="ft12"><sup>12</sup></a> Or, to put the matter another way, the considerations determining his disposal of wood are no longer purely technical. Conduct is the resultant of conflicting psychological pulls acting within an environment of given material and technical possibilities. The problem of technique and the problem of economy are fundamentally different problems. To use Professor Mayer’s very elegant way of putting the distinction, the problem of technique arises when there is one end and a multiplicity of means, the problem of economy when both the ends and the means are multiple.<a href="#fn13" id="ft13"><sup>13</sup></a></p> |
| <p>Now, as we have seen already, it is one of the characteristics of the world as we find it that our ends are various and that most of the scarce means at our disposal are capable of alternative application. This applies not only to scarce products. It applies still more to the ultimate factors of production. The various kinds of natural resources and labour can be used for an almost infinite variety of purposes. The disposition to abstain from consumption in the present releases uses of primary factors for more than one kind of roundabout process. And, for this reason, a mere knowledge of existing technique does not enable us to determine the actual “set” of the productive apparatus. We need to know also the ultimate valuations of the producers and consumers connected with it. It is out of the interplay of the given systems of ends on the one side and the material and technical potentialities on the other, that the aspects of behaviour which the economist studies are determined.</p> | <> | <p>Now, as we have seen already, it is one of the characteristics of the world as we find it that our ends are various and that most of the scarce means at our disposal are capable of alternative application. This applies not only to scarce products. It applies still more to the ultimate factors of production. The various kinds of natural resources and labour can be used for an almost infinite variety of purposes. The disposition to abstain from consumption in the present releases uses of primary factors for more than one kind of roundabout process. And, for this reason, a mere knowledge of existing technique does not enable us to determine the actual “set” of the productive apparatus. We need to know also the ultimate valuations of the producers and consumers connected with it. It is out of the interplay of the given systems of ends on the one side and the material and technical potentialities on the other, that the aspects of behaviour which the economist studies are determined. Only in a world in which all goods were free goods would technical considerations be the sole determinants of the satisfaction of given ends. But, in such a world, by definition, the economic problem would have ceased to exist.</p> |
| <p>But this brings us back—although with new knowledge of its implications—to the proposition from which we started. Economists are not interested in technique as such. They are interested in it solely as one of the influences determining relative scarcity. Conditions of technique “show” themselves in the productivity functions just as conditions of taste “show” themselves in the scales of relative valuations. But there the connection ceases. Economics is a study of the disposal of scarce commodities. The technical arts of production study the “intrinsic” properties of objects or human beings.<a href="#fn15" id="ft15"><sup>15</sup></a></p> | <> | <p>But this brings us back—although with new knowledge of its implications—to the proposition from which we started. Economists are not interested in technique as such. They are interested in it solely as one of the influences determining relative scarcity. Conditions of technique “show” themselves in the productivity functions just as conditions of taste “show” themselves in the scales of relative valuations. But there the connection ceases. Economics is a study of the disposal of scarce commodities. The technical arts of production study the “intrinsic” properties of objects or human beings.</p> |
| <p>5. It follows from the argument of the preceding sections that the subject-matter of Economics is essentially a relationship—a relationship between ends conceived as tendencies to conduct, on the one hand, and the technical and social environment on the other. Ends as such do not form part of this subject-matter. Nor does the technical and social environment. It is the relationships between these things and not the things in themselves which are important for the economist.</p> | <> | <p>5. It follows from the argument of the preceding sections that the subject-matter of Economics is essentially a series of relationships—relationships between ends conceived as the possible objectives of conduct, on the one hand, and the technical and social environment on the other. Ends as such do not form part of this subject-matter. Nor does the technical and social environment. It is the relationships between these things and not the things in themselves which are important for the economist.</p> |
| <p>If this point of view be accepted, a far-reaching elucidation of the nature of Economic History and what is sometimes called Descriptive Economics is possible—an elucidation which renders clear the relationship between these branches of study and theoretical Economics and removes all possible grounds of conflict between them. The nature of Economic Theory is clear. It is the study of the formal implications of this relationship of ends and means. The nature of Economic History should be no less evident. It is the study of the substantial instances in which this relationship shows itself through time. It is the explanation of the historical manifestations of “scarcity”. Economic Theory describes the forms, Economic History the substance.</p> | <> | <p>If this point of view be accepted, a far-reaching elucidation of the nature of Economic History and what is sometimes called Descriptive Economics is possible—an elucidation which renders clear the relationship between these branches of study and theoretical Economics and removes all possible grounds of conflict between them. The nature of Economic Theory is clear. It is the study of the formal implications of these relationships of ends and means on various assumptions concerning the nature of the ultimate data. The nature of Economic History should be no less evident. It is the study of the substantial instances in which these relationships show themselves through time. It is the explanation of the historical manifestations of “scarcity”. Economic Theory describes the forms, Economic History the substance.</p> |
| <p>Thus, in regard to Economic History no more than in regard to Economic Theory can we classify events into groups and say: these are the subject-matter of your branch of knowledge and these are not. The province of Economic History, equally with the province of Economic Theory, cannot be restricted to any part of the stream of events without doing violence to its inner intentions. But no more than any other kind of history does it attempt comprehensive description of this stream of events;<a href="#fn16" id="ft16"><sup>16</sup></a> it concentrates solely upon the description of a certain <span class="italics">aspect</span> thereof—a changing network of economic relationships,<a href="#fn17" id="ft17"><sup>17</sup></a> the effect on values in the economic sense of changes in ends and changes in the technical and social opportunities of realising them.<a href="#fn18" id="ft18"><sup>18</sup></a></p> | <> | <p>Thus, in regard to Economic History no more than in regard to Economic Theory can we classify events into groups and say: these are the subject-matter of your branch of knowledge and these are not. The province of Economic History, equally with the province of Economic Theory, cannot be restricted to any part of the stream of events without doing violence to its inner intentions. But no more than any other kind of history does it attempt comprehensive description of this stream of events;<a href="#fn15" id="ft15"><sup>15</sup></a> it concentrates upon the description of a certain <span class="italics">aspect</span> thereof—a changing network of economic relationships,<a href="#fn16" id="ft16"><sup>16</sup></a> the effect on values in the economic sense of changes in ends and changes in the technical and social opportunities of realising them.<a href="#fn17" id="ft17"><sup>17</sup></a> If the Economic Theorist, manipulating his shadowy abacus of forms and inevitable relationships, may comfort himself with the reflection that all action may come under its categories, the Economic Historian, freed from subservience to other branches of history, may rest assured that there is no segment of the multicoloured weft of events which may not prove relevant to his investigations.</p> |
| <p>A few illustrations should make this clear. Let us take, for example, that vast upheaval which, for the sake of compendious description, we call the Reformation. From the point of view of the historian of religion, the Reformation is significant in its influence on doctrine and ecclesiastical organisation. From the point of view of the political historian, its interest consists in the changes in political organisation, the new relations of rulers and subjects, the emergence of the national states, to which it gave rise. To the cultural historian it signifies important changes both in the form and the subject-matter of the arts, and the freeing of the spirit of modern scientific enquiry. But to the economic historian it signifies chiefly changes in the distribution of property, changes in the channels of trade, changes in the demand for fish, changes in the supply of indulgences, changes in the incidence of taxes. The economic historian is not interested in the changes of ends and the changes of means in themselves. He is interested only in so far as they affect the series of relationships between means and ends which it is his function to study.</p> | <> | <p>A few illustrations should make this clear. Let us take, for example, that vast upheaval which, for the sake of compendious description, we call the Reformation. From the point of view of the historian of religion, the Reformation is significant in its influence on doctrine and ecclesiastical organisation. From the point of view of the political historian, its interest consists in the changes in political organisation, the new relations of rulers and subjects, the emergence of the national states, to which it gave rise. To the historian of culture it signifies important changes both in the form and the subject-matter of the arts, and the freeing of the spirit of modern scientific enquiry. But to the economic historian it signifies chiefly changes in the distribution of property, changes in the channels of trade, changes in the demand for fish, changes in the supply of indulgences, changes in the incidence of taxes. The economic historian is not interested in the changes of ends and the changes of means in themselves. He is interested only in so far as they affect the series of relationships between means and ends which it is his function to study.</p> |
| <p>Again, we may take a change in the technical processes of production—the invention of the steam engine or the discovery of rail transport. Events of this sort, equally with changes in ends, have an almost inexhaustible variety of aspects. They are significant for the history of technique, for the history of manners, for the history of the arts, and so on <span class="italics">ad infinitum</span>. But, for the economic historian, all these aspects are irrelevant save in so far as they involve action and reaction in his sphere of interest. The precise shape of the early steam engine and the physical principles upon which it rested are no concern of the economic historian as economic historian—although economic historians in the past have often displayed a quite inordinate interest in such matters. For him it is significant because it affected the supply of and the demand for certain products and certain factors of production, because it affected the price and income structures of the communities where it was adopted.</p> | <> | <p>Again, we may take a change in the technical processes of production—the invention of the steam engine or the discovery of rail transport. Events of this sort, equally with changes in ends, have an almost inexhaustible variety of aspects. They are significant for the history of technique, for the history of manners, for the history of the arts, and so on <span class="italics">ad infinitum</span>. But, for the economic historian, all these aspects are irrelevant save in so far as they involve action and reaction in his sphere of interest. The precise shape of the early steam engine and the physical principles upon which it rested are no concern of the economic historian as economic historian—although economic historians in the past have sometimes displayed a quite inordinate interest in such matters. For him it is significant because it affected the supply of and the demand for certain products and certain factors of production, because it affected the price and income structures of the communities where it was adopted.</p> |
| <p>So, too, in the field of “Descriptive Economics”—the Economic History of the present day—the main object is always the elucidation of particular “scarcity relationships”—although the attainment of this object often necessarily involves very specialised investigations. In the study of monetary phenomena, for instance, we are often compelled to embark upon enquiries of a highly technical or legal character—the mode of granting overdrafts, the law relating to the issue of paper money. For the banker or the lawyer these things are the focus of attention. But for the economist, although an exact knowledge of them may be essential to his purpose, the acquisition of this knowledge is essentially subservient to his main purpose of explaining the potentialities, in particular situations, of changes in the supply of circulating media. The technical and the legal are of interest solely in so far as they have this aspect.<a href="#fn19" id="ft19"><sup>19</sup></a></p> | <> | <p>So, too, in the field of “Descriptive Economics”—the Economic History of the present day—the main object is always the elucidation of particular “scarcity relationships”—although the attainment of this object often necessarily involves very specialised investigations. In the study of monetary phenomena, for instance, we are often compelled to embark upon enquiries of a highly technical or legal character—the mode of granting overdrafts, the law relating to the issue of paper money. For the banker or the lawyer these things are the focus of attention. But for the economist, although an exact knowledge of them may be essential to his purpose, the acquisition of this knowledge is essentially subservient to his main purpose of explaining the potentialities, in particular situations, of changes in the supply of circulating media. The technical and the legal are of interest solely in so far as they have this aspect.<a href="#fn18" id="ft18"><sup>18</sup></a></p> |
| <p>We have seen already that, although in the past Economics has been given what may be described as a “materialist” definition, yet its content is not at all materialistic. The change of definition which we have suggested, so far from necessitating a change of content, serves only to make the present content more comprehensible. The “materialism” of Economics was a pseudo-materialism. In fact, it is not materialistic at all.</p> | <> | <p>We have seen already that, although in the past Economics has been given what may be described as a “materialist” definition, yet its content is not at all materialistic. The change of definition which we have suggested, so far from necessitating a change of content, serves only to make the present content more comprehensible. The “materialism” of Economics was a pseudo-materialism. In fact, it was not materialistic at all.</p> |
| <p>It might be thought that a similar state of affairs prevailed in regard to the “Economic” or Materialist Interpretation of History—that a mere change of label would suffice to make this doctrine consistent with the modern conception of economic analysis. But this is not so. For the so-called “Economic” Interpretation of History is not only <span class="italics">labelled</span> “Materialist”, it is <span class="italics">in substance</span> through and through materialistic. It holds that all the events of history, or at any rate all the major events in history, are attributable to “material” changes, not in the philosophical sense that these events are part of the material world, nor in the psychological sense that psychic dispositions are the mere epiphenomena of physiological changes—though, of course, Marx would have accepted these positions—but in the sense that the material technique of production conditions the form of all social institutions, and all changes in social institutions are the result of changes in the technique of production. History is the epiphenomenon of technical change. The history of tools is the history of mankind.<a href="#fn20" id="ft20"><sup>20</sup></a></p> | <> | <p>It might be thought that a similar state of affairs prevailed in regard to the “Economic” or Materialist Interpretation of History—that a mere change of label would suffice to make this doctrine consistent with the modern conception of economic analysis. But this is not so. For the so-called “Economic” Interpretation of History is not only <span class="italics">labelled</span> “Materialist”, it is <span class="italics">in substance</span> through and through materialistic. It holds that all the events of history, or at any rate all the major events in history, are attributable to “material” changes, not in the philosophical sense that these events are part of the material world, nor in the psychological sense that psychic dispositions are the mere epiphenomena of physiological changes—though, of course, Marx would have accepted these positions—but in the sense that the material technique of production conditions the form of all social institutions, and <span class="italics">all</span> changes in social institutions are the result of changes in the technique of production. History is the epiphenomenon of technical change. The history of tools is the history of mankind.<a href="#fn19" id="ft19"><sup>19</sup></a></p> |
| <p>Now, whether this doctrine is right or wrong, it is certainly materialistic, and it is certainly not derivative from Economic Science as we know it. It asserts quite definitely, not only that technical changes cause changes in scarcity relationships and social institutions generally—which would be a proposition in harmony with modern economic analysis—but also that all changes in social relations are due to technical changes—which is a sociological proposition quite outside the limited range of Economic generalisation. It definitely implies that all changes in ends, in relative valuations, are conditioned by changes in the technical potentialities of production. It implies, that is to say, that ultimate valuations are merely the bye-product of technical conditions. If technical conditions alter, tastes, etc., alter. If they remain unchanged, then tastes, etc., are unaltered. There are no <span class="italics">autonomous</span> changes on the demand side. What changes occur are, in the end, attributable to changes in the technical machinery of supply. There is no independent “psychological” (or, for that matter, “physiological”) side to scarcity. No matter what their fundamental make-up, be it inherited or acquired, men in similar technical environments will develop similar habits and institutions. This may be right or wrong, pseudo-Hegelian twaddle or profound insight into things which at the moment are certainly not susceptible of scientific analysis, but it is not to be deduced from any laws of theoretical Economics. It is a general statement about the causation of human motive which, from the point of view of Economic Science, is sheer metaphysics. The label “Materialist” fits the doctrine. The label “Economic” is misplaced. Economics may well provide an important instrument for the elucidation of history. But there is nothing in economic analysis which entitles us to assert that all history is to be explained in “economic” terms, if “economic” is to be used as equivalent to the technically material. The Materialist Interpretation of History has come to be called the Economic Interpretation of History, because it was thought that the subject-matter of Economics was “the causes of material welfare”. Once it is realised that this is not the case, the Materialist Interpretation must stand or fall by itself. Economic Science lends no support to its doctrines. Nor does it assume at any point the connections it asserts. From the point of view of Economic Science, changes in relative valuations are given data.<a href="#fn21" id="ft21"><sup>21</sup></a></p> | <> | <p>Now, whether this doctrine is right or wrong, it is certainly materialistic, and it is certainly not derivative from Economic Science as we know it. It asserts quite definitely, not only that technical changes cause changes in scarcity relationships and social institutions generally—which would be a proposition in harmony with modern economic analysis—but also that all changes in social relations are due to technical changes—which is a sociological proposition quite outside the limited range of economic generalisation. It definitely implies that all changes in ends, in relative valuations, are conditioned by changes in the technical potentialities of production. It implies, that is to say, that ultimate valuations are merely the by-product of technical conditions. If technical conditions alter, tastes, etc., alter. If they remain unchanged, then tastes, etc., are unaltered. There are no <span class="italics">autonomous</span> changes on the demand side. What changes occur are, in the end, attributable to changes in the technical machinery of supply. There is no independent “psychological” (or, for that matter, “physiological”) side to scarcity. No matter what their fundamental make-up, be it inherited or acquired, men in similar technical environments will develop similar habits and institutions. This may be right or wrong, pseudo-Hegelian twaddle or profound insight into things which at the moment are certainly not susceptible of scientific analysis, but it is not to be deduced from any laws of theoretical Economics. It is a general statement about the causation of human motive which, from the point of view of Economic Science, is completely gratuitous. The label “Materialist” fits the doctrine. The label “Economic” is misplaced. Economics may well provide an important instrument for the elucidation of history. But there is nothing in economic analysis which entitles us to assert that all history is to be explained in “economic” terms, if “economic” is to be used as equivalent to the technically material. The Materialist Interpretation of History has come to be called the Economic Interpretation of History, because it was thought that the subject-matter of Economics was “the causes of material welfare”. Once it is realised that this is not the case, the Materialist Interpretation must stand or fall by itself. Economic Science lends no support to its doctrines. Nor does it assume at any point the connections it asserts. From the point of view of Economic Science, changes in relative valuations are data.<a href="#fn20" id="ft20"><sup>20</sup></a></p> |
| <p><a href="#ft2" id="fn2"><sup>2</sup></a> Such a definition, it will be noticed, entirely removes our conception of an “end” from the realms of the metaphysical. The metaphysical conception of a unitary end of conduct may or may not be valid. In economic analysis we are not concerned with these ultimates. We are concerned simply with the objectives which are, so to speak, formulated in the various tendencies to action. It is not denied that difficulties may arise when the formulation is collective, <span class="italics">e.g</span>. in the sphere of public expenditure. There will be something to be said about this later on. At the moment, all that is necessary is that the limitations of our conception of an end should be recognised.</p> | +- | |
| <p><a href="#ft3" id="fn3"><sup>3</sup></a> First edition, p. 15.</p> | <> | <p><a href="#ft2" id="fn2"><sup>2</sup></a> First, edition, p. 15.</p> |
| <p><a href="#ft4" id="fn4"><sup>4</sup></a> <span class="italics">Some Economic Factors in Modern Life</span>, pp. 1-25.</p> | <> | <p><a href="#ft3" id="fn3"><sup>3</sup></a> <span class="italics">Some Economic Factors in Modern Life</span>, pp. 1-25.</p> |
| <p><a href="#ft5" id="fn5"><sup>5</sup></a> “. . . I use . . . economics as a term to cover the getting of material welfare” (<span class="italics">op. cit</span>., p. 3).</p> | <> | <p><a href="#ft4" id="fn4"><sup>4</sup></a> “I use . . . economics as a term to cover the getting of material welfare” (<span class="italics">op. cit.</span>, p. 3).</p> |
| <p><a href="#ft6" id="fn6"><sup>6</sup></a> <span class="italics">Ibid</span>., p. 4.</p> | <> | <p><a href="#ft5" id="fn5"><sup>5</sup></a> <span class="italics">Ibid</span>., p. 4.</p> |
| <p><a href="#ft7" id="fn7"><sup>7</sup></a> It is only fair to state that there are passages in the same essay which seem to be dictated by this sort of consideration. I refer especially to the remarks on pp. 14-16 on balance in consumption. Needless to say, my dispute with Sir Josiah is largely on a matter of presentation.</p> | <> | <p><a href="#ft6" id="fn6"><sup>6</sup></a> It is only fair to state that there are passages in the same essay which seem to be dictated by this sort of consideration, especially the remarks on pp. 14-16 on balance in consumption.</p> |
| <p><a href="#ft8" id="fn8"><sup>8</sup></a> On all this, see Wicksteed, <span class="italics">The Commonsense of Political Economy</span>, pp. 155-157. It is not denied that the acquisition of the power to procure real income may itself become an objective, or that, if it does, the economic system will not be affected in various ways. All that is contended is that to label any of these ends “economic” implies a false view of what is necessarily embraced by economic analysis. Economics takes all ends for granted. They “show” themselves in the scales of relative valuation which are assumed by the propositions of modern economic analysis.</p> | <> | <p><a href="#ft7" id="fn7"><sup>7</sup></a> On all this, see Wicksteed, <span class="italics">The Commonsense of Political Economy</span>, pp. 155-157. It is not denied that the acquisition of the power to procure real income may itself become an objective, or that, if it does, the economic system will not be affected in various ways. All that is contended is that to label any of these ends “economic” implies a false view of what is necessarily embraced by economic analysis. Economics takes all ends for granted. They “show” themselves in the scales of relative valuation which are assumed by the propositions of modern economic analysis.</p> |
| <p><a href="#ft9" id="fn9"><sup>9</sup></a> <span class="italics">Economica</span>, vol. i., p. 3. Of course the question whether the roof shall be of slate or tiles, for instance, may well depend on the relative prices of these materials and therefore have an economic aspect. Technique merely prescribes certain limits within which choice may operate. See below, p. 35.</p> | <> | <p><a href="#ft8" id="fn8"><sup>8</sup></a> <span class="italics">Economica</span>, vol. i., p. 3. Of course the question whether the roof shall be of slate or tiles, for instance may well depend on the relative prices of these materials and therefore ha ve an economic aspect. Technique merely prescribes certain limits within which choice may operate. See below, p. 35.</p> |
| <p><a href="#ft10" id="fn10"><sup>10</sup></a> An eminent industrial psychologist once genially assured me that “if people only understood industrial psychology there would be no need for Economics”. With considerable interest, I at once enquired his solution of a problem of foreign exchange which had been perplexing me, but to my great mortification no answer was forthcoming.</p> | <> | <p><a href="#ft9" id="fn9"><sup>9</sup></a> Professor Knight in a recent article (“Economic Science in Recent Discussion”, <span class="italics">American Economic Review</span>, vol. xxiv., p. 225 <span class="italics">et seq</span>.) complains that I do not make clear that technique in relation to economics is simply so much <span class="italics">data</span>. I cannot help thinking that the passage above must have escaped Professor Knight’s attention. I certainly agree with his views in this respect. But I do not know how to put the matter more strongly than I have done already.</p> |
| <p><a href="#ft11" id="fn11"><sup>11</sup></a> Whether this theory is to be conceived, as it sometimes has been in the past, as concerned with aggregates of wealth is another matter which will be dealt with in the next chapter. See below, Chapter III., Section 6.</p> | <> | <p><a href="#ft10" id="fn10"><sup>10</sup></a> Whether this theory is to be conceived, as it sometimes has been in the past, as concerned with aggregates of wealth is another matter which will be dealt with in the next chapter. See below, Chapter III., Section 6.</p> |
| <p><a href="#ft12" id="fn12"><sup>12</sup></a> Compare Oswalt, <span class="italics">Vorträge über wirtschaftliche Grundbegriffe</span>, pp. 20-41.</p> | <> | <p><a href="#ft11" id="fn11"><sup>11</sup></a> Compare Oswalt, <span class="italics">Vorträge über wirtschaftliche Grundbegriffe</span>, pp. 20-41.</p> |
| -+ | <p><a href="#ft12" id="fn12"><sup>12</sup></a> All this can be made very clear by the use of a few Paretean curves. Given the production opportunity curves, we know the technical possibilities. But the problem is not determinate unless the consumption indifference curves are also known.</p> | |
| <p><a href="#ft13" id="fn13"><sup>13</sup></a> See Hans Mayer, <span class="italics">op. cit</span>., pp. 5 and 6.</p> | <> | <p><a href="#ft13" id="fn13"><sup>13</sup></a> See Hans Mayer, <span class="italics">op. cit.</span>, pp. 5 and 6.</p> |
| <p><a href="#ft15" id="fn15"><sup>15</sup></a> On the general question of the relation between technology and Economics, see Mises, <span class="italics">Vom Weg der Subjectiv Wertlehre</span> (<span class="italics">Schriften des Vereins für Sozialpolitik</span>, Bd. 183, pp. 83-84).</p> | +- | |
| <p><a href="#ft16" id="fn16"><sup>16</sup></a> On the impossibility of history of any kind without selective principle see Rickert, <span class="italics">Kulturwissenschaft und Naturwissenschaft</span>, pp. 28-60.</p> | <> | <p><a href="#ft15" id="fn15"><sup>15</sup></a> On the impossibility of history of any kind without selective principle see Rickert, <span class="italics">Kulturwissenschaft und Naturwissenschaft</span>, pp. 28-60.</p> |
| <p><a href="#ft17" id="fn17"><sup>17</sup></a> Cp. Cunningham: “Economic History is not so much the study of a special class of facts as the study of all the facts from a special point of view” (<span class="italics">Growth of English Industry and Commerce</span>, vol. i., p. 8).</p> | <> | <p><a href="#ft16" id="fn16"><sup>16</sup></a> Cp. Cunningham: “Economic History is not so much the study of a special class of facts as the study of all the facts from a special point of view” (<span class="italics">Growth of English Industry and Commerce</span>, vol. i., p. 8).</p> |
| <p><a href="#ft18" id="fn18"><sup>18</sup></a> On the relation between Economic Theory and Economic History, see Hecksher, <span class="italics">A Plea for Theory in Economic History</span> (<span class="italics">Economic History</span>, vol. i., pp. 525-535); Clapham, <span class="italics">The Study of Economic History, passim</span>; Mises, <span class="italics">Soziologie und Geschichte</span> (<span class="italics">Archiv für Sozialwissenschaft und Sozialpolitik</span>, Bd. 61, pp. 465-512). It may be urged that the above description of the nature of Economic History presents a very idealised picture of what is to be found in the average work on Economic History. And it may be admitted that, in the past, Economic History, equally with Economic Theory, has not always succeeded in purging itself of adventitious elements. In particular it is clear that the influence of the German Historical School was responsible for the intrusion of all sorts of sociological and ethical elements which cannot, by the widest extension of the meaning of words, be described as <span class="italics">Economic</span> History. It is true too that there has been considerable confusion between Economic History and the economic interpretation of other aspects of history—in the sense of the word “economic” suggested above—and between Economic History and the “Economic Interpretation” of History in the sense of the Materialist Interpretation of History (see below, Section 6). But the main stream of Economic History from Fleetwood and Adam Smith down to Professor Clapham bears the interpretation put on it here more consistently than any other.</p> | <> | <p><a href="#ft17" id="fn17"><sup>17</sup></a> On the relation between Economic Theory and Economic History, see Heckscher, <span class="italics">A Plea for Theory in Economic History</span> (<span class="italics">Economic History</span>, vol. i., pp. 525-535); Clapham, <span class="italics">The, Study of Economic History</span>, <span class="italics">passim</span>; Mises, <span class="italics">Soziologie und Geschichte</span> (<span class="italics">Archiv für Sozialwissenschaft und Sozialpolitik</span>, Bd. 61, pp. 465-512). It may be urged that the above description of the nature of Economic History presents a very idealised picture of what is to be found in the average work on Economic History. And it may be admitted that, in the past, Economic History, equally with Economic Theory, has not always succeeded in purging itself of adventitious elements. In particular it is clear that the influence of the German Historical School was responsible for the intrusion of all sorts of sociological and ethical elements which cannot, by the widest extension of the meaning of words, be described as <span class="italics">Economic</span> History. It is true too that there has been considerable confusion between Economic History and the economic interpretation of other aspects of history—in the sense of the word “economic” suggested above—and between Economic History and the “Economic Interpretation” of History in the sense of the Materialist Interpretation of History (see below, Section 6). But I venture to suggest the main stream of Economic History from Fleetwood and Adam Smith down to Professor Clapham bears the interpretation put on it here more consistently than any other.</p> |
| <p><a href="#ft19" id="fn19"><sup>19</sup></a> Considerations of this sort suggest the very real dangers of overmuch sectionalism in economic studies. In recent years there has been an immense extension of sectional studies in the economic field. We have institutes of Agricultural Economics, Transport Economics, Mining Economics, and so on. Sombart gives a list of some sixty special connections (including <span class="italics">Schweine</span>- and <span class="italics">Vieh</span>-) in which the word <span class="italics">Wirtschaft</span>, the German equivalent for our Economics, has acquired some sense (<span class="italics">Die Drei Nationalökonomien</span>, p. 17). And, no doubt, up to a point this is all to the good. In the realm of Applied Economics, some division of labour is essential, and, as we shall see later, theory cannot be fruitfully applied to the interpretation of concrete situations unless it is informed continually of the changing background of the facts of particular industries. But, as experience shows, sectional investigations conducted in isolation are exposed to very grave dangers. If continual vigilance is not exercised they tend to the gradual replacement of economic by technological interests. The focus of attention becomes shifted, and a body of generalisations which have only technical significance comes to masquerade under the garb of Economic Science. And this is fatal. For, since the scarcity of means is relative to <span class="italics">all</span> ends, it follows that an adequate view of the influences governing social relationships in their economic aspects can only be obtained by viewing the economic system as a whole. In the economic system, “industries” do not live to themselves. Their <span class="italics">raison d’être</span>, indeed, is the existence of other industries, and their fortunes can only be understood in relation to the whole network of economic relationships. It follows, therefore, that studies which are exclusively devoted to one industry or occupation are continually exposed to the danger of losing touch with the essentials. Their attention may be supposed to be directed to the study of prices and costs, but they tend continually to degenerate either into mere accountancy or into amateur technology. This may or may not be interesting or useful, but it has little to do with Economic Science.</p> | <> | <p><a href="#ft18" id="fn18"><sup>18</sup></a> Considerations of this sort suggest the very real dangers of overmuch sectionalism in economic studies. In recent years there has been an immense extension of sectional studies in the economic field. We have institutes of Agricultural Economics, Transport Economics, Mining Economics, and so on. And, no doubt, up to a point this is all to the good. In the realm of Applied Economics, some division of labour is essential, and, as we shall see later, theory cannot be fruitfully applied to the interpretation of concrete situations unless it is informed continually of the changing background of the facts of particular industries. But, as experience shows, sectional investigations conducted in isolation are exposed to very grave dangers. If continual vigilance is not exercised they tend to the gradual replacement of economic by technological interests. The focus of attention becomes shifted, and a body of generalisations which have only technical significance comes to masquerade as Economics. And this is fatal. For, since the scarcity of means is relative to <span class="italics">all</span> ends, it follows that an adequate view of the influences governing social relationships in their economic aspects can only be obtained by viewing the economic system as a whole. In the economic system, “industries” do not live to themselves. Their <span class="italics">raison d’être</span>, indeed, is the existence of other industries, and their fortunes can only be understood in relation to the whole network of economic relationships. It follows, therefore, that studies which are exclusively devoted to one industry or occupation are continually exposed to the danger of losing touch with the essentials. Their attention may be supposed to be directed to the study of prices and costs, but they tend continually to degenerate either into mere accountancy or into amateur technology. The existence of this danger is no ground for dispensing with this kind of investigation. But it is fundamental that its existence should be clearly recognised. Here as elsewhere, it is the preservation of a proper balance which is important. Our knowledge would be very much poorer if it were not for the existence of many of the various specialised research institutes. But many serious misunderstandings would be avoided if the workers engaged therein would keep more clearly in mind a conception of what is economically relevant.</p> |
| <p><a href="#ft20" id="fn20"><sup>20</sup></a> It is extremely difficult to give a compendious account of this doctrine, for its advocates will not allow themselves to be pinned down to precise definition. This is not surprising, since it is obvious that their whole conception of historical causation is hopelessly naïve and muddled.</p> | +- | |
| <p>In what follows, the distinctions I employ are very similar to those used by Dr. Strigl (<span class="italics">op. cit</span>., pp. 158-161). The differences in our emphasis may be attributed to a difference of expository purpose. Dr. Strigl is trying to exhibit the Materialist Interpretation as a primitive theory of what he calls <span class="italics">Datenänderung</span>. He, therefore, tends to slur its deficiency in refusing to take account of changes in ultimate valuations save as derivative from changes on the supply side. I am anxious to show the fundamental distinction between any explanation of history springing from economic analysis as we know it and the explanation attempted by the Materialist Interpretation. I therefore drag this particular point into the light. I do not think that Dr. Strigl would question the logic of my distinctions any more than I would question the interest of his analogy.</p> | <> | <p><a href="#ft19" id="fn19"><sup>19</sup></a> In what follows, the distinctions I employ are very similar to those used by Dr. Strigl (<span class="italics">op. cit.</span>, pp. 158-161). The differences in our emphasis may be attributed to a difference of expository purpose. Dr. Strigl is trying to exhibit the Materialist Interpretation as a primitive theory of what he calls <span class="italics">Datenänderung</span>. He, therefore, tends to slur its deficiency in refusing to take account of changes in ultimate valuations save as derivative from changes on the supply side. I am anxious to show the fundamental distinction between any explanation of history springing from economic analysis as we know it and the explanation attempted by the Materialist Interpretation. I therefore drag this particular point into the light. I do not think that Dr. Strigl would question the logic of my distinctions any more than I would question the interest of his analogy.</p> |
| <p><a href="#ft21" id="fn21"><sup>21</sup></a> It might be argued, indeed, that a thorough understanding of economic analysis was conducive to presumptions against the Materialist Interpretation. Once it is realised how changes in technique <span class="italics">directly</span> influence the amounts demanded, it is extraordinarily difficult to bring oneself to postulate any <span class="italics">necessary</span> connection between technical changes and autonomous changes on the demand side. Such an attitude of scepticism towards the Marxian theory does not imply denial of metaphysical materialism—though equally it does not imply its acceptance—it implies merely a refusal to believe that the causes influencing taste and so on are technical in nature. The most intransigent behaviourist need find nothing to quarrel with in the belief that technical materialism in this sense is a very misleading half truth.</p> | <> | <p><a href="#ft20" id="fn20"><sup>20</sup></a> It might be argued, indeed, that a thorough understanding of economic analysis was conducive to presumptions against the Materialist Interpretation. Once it is realised how changes in technique do <span class="italics">directly</span> influence amounts demanded, it is extraordinarily difficult to bring oneself to postulate any <span class="italics">necessary</span> connection between technical changes and autonomous changes on the demand side. Such an attitude of scepticism towards the Marxian theory does not imply denial of metaphysical materialism—though equally it does not imply its acceptance—it implies merely a refusal to believe that the causes influencing taste and so on are technical in nature. The most intransigent behaviourist need find nothing to quarrel with in the belief that technical materialism in this sense is a very misleading half truth.</p> |
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| <h1 id="sigil_toc_id_4" title="III. The Relativity of Economic “Quantities”">CHAPTER III</h1> | <> | <h1 title="III. The Relativity of Economic “Quantities”">CHAPTER III</h1> |
| <p>A very vivid example of what this means is to be found in Mr. Winston Churchill’s account of the situation confronting the Ministry of Munitions at 11 a.m. on November 11th, 1918—the moment of the signing of the Armistice. After years of effort, the nation had acquired a machine for turning out the materials of war in unprecedented quantities. Enormous programmes of production were in every stage of completion. Suddenly the whole position is changed. The “demand” collapses. The needs of war are at an end. What was to be done? Mr. Churchill relates how, in the interests of a smooth change-over, instructions were issued that material more than 60 per cent. advanced was to be finished. “Thus for many weeks after the war was over we continued to disgorge upon the gaping world masses of artillery and military materials of every kind.”<a href="#fn3" id="ft3"><sup>3</sup></a> “It was waste”, he adds, “but perhaps it was a prudent waste.” Whether this last contention is correct or not is irrelevant to the point under discussion. What is relevant is that what at 10.55 a.m. that morning was wealth and productive power, at 11.5 had become “not-wealth,” an embarrassment, a source of social waste. The substance had not changed. The guns were the same. The potentialities of the machines were the same. From the point of view of the technician, everything was exactly the same. But from the point of view of the economist, everything was different. Guns, explosives, lathes, retorts, all had suffered a sea change. The ends had changed. The scarcity of means was different.<a href="#fn4" id="ft4"><sup>4</sup></a></p> | <> | <p>A very vivid example of what this means is to be found in Mr. Winston Churchill’s account of the situation confronting the Ministry of Munitions at 11 a.m. on November 11th, 1918—the moment of the signing of the Armistice. After years of effort, the nation had acquired a machine for turning out the materials of war in unprecedented quantities. Enormous programmes of production were in every stage of completion. Suddenly the whole position is changed. The “demand” collapses. The needs of war are at an end. What was to be done? Mr. Churchill relates how, in the interests of a smooth change-over, instructions were issued that material more than 60 per cent. advanced was to be finished. “Thus for many weeks after the war was over we continued to disgorge upon the gaping world masses of artillery and military materials of every kind.”<a href="#fn3" id="ft3"><sup>3</sup></a> “It was waste”, he adds, “but perhaps it was a prudent waste.” Whether this last contention is correct or not is irrelevant to the point under discussion. What is relevant is that what at 10.55 a.m. that morning was wealth and productive power, at 11.5 had become “not-wealth,” an embarrassment. a source of social waste. The substance had not changed. The guns were the same. The potentialities of the machines were the same. From the point of view of the technician, everything was exactly the same. But from the point of view of the economist, everything was different. Guns, explosives, lathes, retorts, all had suffered a sea change. The ends had changed. The scarcity of means was different.<a href="#fn4" id="ft4"><sup>4</sup></a></p> |
| <p>Now, naturally, no economist in his senses would wish to deny the importance for modern civilisation of the potentialities of modern manufacturing technique. The technical changes which bring to the door, even of the comparatively poor man, the motor-car, the gramophone, the wireless apparatus, are truly momentous changes. But, in judging their significance in regard to a given set of ends, it is very important to bear in mind this distinction between the mere multiplication of material objects and the satisfaction of demand, which the definitions of this chapter elucidate. To use a convenient jargon, it is important to bear in mind the distinction between technical and value productivity. The mass production of particular things irrespective of demand for them, however technically efficient, is not necessarily “economical”. As we have seen already, there is a fundamental difference between technical and economic problems.<a href="#fn5" id="ft5"><sup>5</sup></a> We may take it as obvious that, within certain limits (which, of course, change with changing conditions of technique), specialisation of men and machinery is conducive to technical efficiency. But the extent to which such specialisation is “economical” depends essentially upon the extent of the market—that is to say, upon demand.<a href="#fn6" id="ft6"><sup>6</sup></a> For a blacksmith producing for a small and isolated community to specialise solely on the production of a certain type of horse-shoe, in order to secure the economies of mass production, would be folly. After he has made a limited number of shoes of one size, it is clearly better for him to turn his attention to producing shoes of other sizes, additional units of which will be more urgently demanded, than additional units of the size of which he has already manufactured a large quantity.</p> | <> | <p>Now, naturally, no economist in his senses would wish to deny the importance for modern civilisation of the potentialities of modern manufacturing technique. The technical changes which bring to the door, even of the comparatively poor man, the motor-car, the gramophone, the wireless apparatus, are truly momentous changes. But, in judging their significance in regard to a given set of ends, it is very important to bear in mind this distinction between the mere multiplication of material objects and the satisfaction of demand, which the definitions of this chapter elucidate. To use a convenient jargon, it is important to bear in mind the distinction between technical and value productivity. The mass production of particular things irrespective of demand for them, however technically efficient, is not necessarily “economical”. As we have seen already, there is a fundamental difference between technical and economic problems.<a href="#fn5" id="ft5"><sup>5</sup></a> We may take it as obvious that, within certain limits (which, of course, change with changing conditions of technique), specialisation of men and machinery is conducive to technical efficiency. But the extent to which such specialisation is “economical” depends essentially upon the extent of the market—that is to say, upon demand.<a href="#fn6" id="ft6"><sup>6</sup></a> For a blacksmith producing for a small and isolated community to specialise solely on the production of a certain type of horse-shoe, in order to secure the economies of mass production, would be folly. After he has made a limited number of shoes of one size, it is clearly better for him to turn his attention to producing shoes of other sizes, additional units of which will be more urgently demanded than additional units of the size of which he has already manufactured a large quantity.</p> |
| <p>So, too, in the world at large at any particular moment, there are definite limits to the extent to which the mass production of any one type of commodity to the exclusion of other types is in conformity with the demands of consumers. If it is carried beyond these limits, not only is there waste, in the sense that productive power is used to produce goods of less value than could be produced otherwise, but there is also definite financial loss for the productive enterprise concerned. It is one of the paradoxes of the history of modern thought that, at a time when the disproportionate development of particular lines of production has wrought more chaos in the economic system than at any earlier period in history, there should arise the naïve belief that a general resort to mass production, whenever and wherever it is technically possible, regardless of the conditions of demand, will see us out of our difficulties.<a href="#fn7" id="ft7"><sup>7</sup></a> It is the nemesis of the worship of the machine, the paralysis of the intellect of a world of technicians.</p> | <> | <p>So, too, in the world at large at any particular moment, there are definite limits to the extent to which the mass production of any one type of commodity to the exclusion of other types is in conformity with the demands of consumers. If it is carried beyond these limits, not only is there waste, in the sense that productive power is used to produce goods of less value than could be produced otherwise, but there is also definite financial loss for the productive enterprise concerned. It is one of the paradoxes of the history of modern thought that, at a time when the disproportionate development of particular lines of production has wrought more chaos in the economic system than at any earlier period in history, there should arise the naïve belief that a general resort to mass production, whenever and wherever it is technically possible, regardless of the conditions of demand, will see us out of our difficulties. It is the nemesis of the worship of the machine, the paralysis of the intellect of a world of technicians.</p> |
| <p>This confusion between technical potentiality and economic value, which, borrowing a phrase of Professor Whitehead’s, we may call the “fallacy of misplaced concreteness”,<a href="#fn8" id="ft8"><sup>8</sup></a> also underlies certain notions at present unduly prevalent with regard to the value of fixed capital. It is sometimes thought that the fact that large sums of money have been sunk in certain forms of fixed capital renders it undesirable, if consumer’s demand changes, or if technical invention renders it possible to satisfy a given consumer’s demand in other more profitable ways, that the capital should fall into disuse. If the satisfaction of demand is assumed as the criterion of economic organisation, this belief is completely fallacious. If I purchase a railway ticket from London to Glasgow, and half-way on my journey I receive a telegram informing me that my appointment must take place in Manchester, it is not rational conduct for me to continue my journey northwards, just because I have “sunk capital” in the ticket which I am unable to recover. It is true that the ticket is still as “technically efficient” in procuring me the right to go to Glasgow. But my objective has now changed. The power to continue my journey northward is no longer valuable to me. To continue nevertheless would be irrational. In Economics, as Jevons remarked, bygones are forever bygones.</p> | <> | <p>This confusion between technical potentiality and economic value, which, borrowing a phrase of Professor Whitehead’s, we may call the “fallacy of misplaced concreteness”,<a href="#fn7" id="ft7"><sup>7</sup></a> also underlies certain notions at present unduly prevalent with regard to the value of fixed capital. It is sometimes thought that the fact that large sums of money have been sunk in certain forms of fixed capital renders it undesirable, if consumer’s demand changes, or if technical invention renders it possible to satisfy a given consumer’s demand in other more profitable ways, that the capital should fall into disuse. If the satisfaction of demand is assumed as the criterion of economic organisation, this belief is completely fallacious. If I purchase a railway ticket from London to Glasgow, and half-way on my journey I receive a telegram informing me that my appointment must take place in Manchester, it is not rational conduct for me to continue my journey northwards, just because I have “sunk capital” in the ticket which I am unable to recover. It is true that the ticket is still as “technically efficient” in procuring me the right to go to Glasgow. But my objective has now changed. The power to continue my journey northward is no longer valuable to me. To continue nevertheless would be irrational. In Economics, as Jevons remarked, bygones are forever bygones.</p> |
| <p>Exactly similar considerations apply when we are considering the present status of machinery for whose products demand has ceased, or which has ceased to be as profitable, taking everything into account, as other kinds of machinery. Although the machinery may be technically as efficient as it was before these changes, yet its economic status is different.<a href="#fn9" id="ft9"><sup>9</sup></a> No doubt, <span class="italics">if</span> the change in demand or in cost conditions which led to its supersession had been foreseen, the disposition of resources would have been different. In that sense it is not meaningless to speak of a waste due to ignorance. But once the change has taken place, what has happened before is totally irrelevant—it is waste to take it into further consideration. The problem is one of adjustment to the situation that is given. When every legitimate criticism of the Subjective Theory of Value has been taken into account, it still remains the unshakable achievement of this theory that it focuses attention on this fact, as important in applied economics as in the purest of pure theory.</p> | <> | <p>Exactly similar considerations apply when we are considering the present status of machinery for whose products demand has ceased, or which has ceased to be as profitable, taking everything into account, as other kinds of machinery. Although the machinery may be technically as efficient as it was before these changes, yet its economic status is different.<a href="#fn8" id="ft8"><sup>8</sup></a> No doubt, <span class="italics">if</span> the change in demand or in cost conditions which led to its supersession had been foreseen, the disposition of resources would have been different. In that sense it is not meaningless to speak of a waste due to ignorance—although there are difficulties here. But once the change has taken place, what has happened before is totally irrelevant—it is waste to take it into further consideration. The problem is one of adjustment to the situation that is given. When every legitimate criticism of the subjective theory of value has been taken into account, it still remains the unshakable achievement of this theory that it focuses attention on this fact, as important in applied Economics as in the purest of pure theory.</p> |
| <p>As a last example of the importance for applied economics of the propositions we have been considering, we may examine certain misconceptions with regard to the economic effects of inflation. It is a well-known fact that during periods of inflation there is often for a time extreme activity in the constructional industries. Under the stimulus of the artificially low interest rates, overhauling of capital equipment on the most extensive scale is often undertaken. New factories are built. Old factories are re-equipped. To the lay mind, there is something extraordinarily fascinating about this spectacular activity; and when the effects of inflation are being discussed, it is not infrequently regarded as a virtue that it should be instrumental in bringing this about. How often does one hear it said of the German inflation that, while it was painful enough while it lasted, it did at least provide German industry with a new capital equipment. Indeed, no less an authority than Professor F. B. Graham has given the weight of his authority to this view.<a href="#fn10" id="ft10"><sup>10</sup></a></p> | <> | <p>As a last example of the importance for applied Economics of the propositions we have been considering, we may examine certain misconceptions with regard to the economic effects of inflation. It is a well-known fact that during periods of inflation there is often for a time extreme activity in the constructional industries. Under the stimulus of the artificially low interest rates, overhauling of capital equipment on the most extensive scale is often undertaken. New factories are built. Old factories are reequipped. To the lay mind, there is something extraordinarily fascinating about this spectacular activity; and when the effects of inflation are being discussed, it is not infrequently regarded as a virtue that it should be instrumental in bringing this about. How often does one hear it said of the German inflation that, while it was painful enough while it lasted, it did at least provide German industry with a new capital equipment. Indeed, no less an authority than Professor F. B. Graham has given the weight of his authority to this view.<a href="#fn9" id="ft9"><sup>9</sup></a></p> |
| <p>But, plausible as all this may seem, it is founded on the same crude materialist conception as the other fallacies we have been discussing. For the efficiency of any industrial system does not consist in the presence of large quantities of up-to-date capital equipment, irrespective of the demand for its products or the price of the factors of production which are needed for the profitable exploitation of such equipment. It consists in the degree of adaptation to meet demand of the organisation of <span class="italics">all</span> resources. Now it can be shown<a href="#fn11" id="ft11"><sup>11</sup></a> that, during times of inflation, the artificially low rates of interest tend to encourage expansion of certain kinds of capitalistic production in such measure that, when the stimulus is exhausted, it is no longer possible to work them as profitable undertakings. At the same time, liquid resources are dissipated and exhausted. When the slump comes, the system is left high and dry with an incubus of fixed capital too costly to be worked at a profit, and a relative shortage of “fluid capital” which causes interest rates to be stringent and oppressive. The beautiful machinery which so impressed the newspaper correspondents is still there, but the wheels are empty of profit. The material is there. But it has lost its economic significance. Considerations of this sort might have been thought to be very remote from reality at the time of the German inflation or at the time of stabilisation. After years of chronic “capital shortage” in that unhappy country, they begin to appear less paradoxical.<a href="#fn12" id="ft12"><sup>12</sup></a></p> | <> | <p>But, plausible as all this may seem, it is founded on the same crude materialist conception as the other fallacies we have been discussing. For the efficiency of any industrial system does not consist in the presence of large quantities of up-to-date capital equipment, irrespective of the demand for its products or the price of the factors of production which are needed for the profitable exploitation of such equipment. It consists in the degree of adaptation to meet demand of the organisation of <span class="italics">all</span> resources. Now it can be shown<a href="#fn10" id="ft10"><sup>10</sup></a> that, during times of inflation, the artificially low rates of interest tend to encourage expansion of certain kinds of capitalistic production in such measure that, when the stimulus is exhausted, it is no longer possible to work them as profitable undertakings. At the same time, liquid resources are dissipated and exhausted. When the slump comes, the system is left high and dry with an incubus of fixed capital too costly to be worked at a profit, and a relative shortage of “liquid capital” which causes interest rates to be stringent and oppressive. The beautiful machinery which so impressed the newspaper correspondents is still there, but the wheels are empty of profit. The material is there. But it has lost its economic significance. Considerations of this sort might have been thought to be very remote from reality at the time of the German inflation or at the time of stabilisation. After years of chronic “capital shortage” in that unhappy country, they begin to appear less paradoxical.<a href="#fn11" id="ft11"><sup>11</sup></a></p> |
| <p>According to modern price theory, the prices of different commodities and factors of production are expressions of relative scarcity, or, in other words, marginal valuations.<a href="#fn13" id="ft13"><sup>13</sup></a> Given an initial distribution of resources, each individual entering the market may be conceived to have a scale of relative valuations; and the interplay of the market serves to bring these individual scales and the market scale as expressed in relative prices into harmony with one another.<a href="#fn14" id="ft14"><sup>14</sup></a> Prices, therefore, express in money a grading of the various goods and services coming on the market. Any given price, therefore, has significance only in relation to the other prices prevailing at that time. Taken by itself it means nothing. It is only as the expression in money terms of a certain order of preference that it means anything at all. As Samuel Bailey pointed out over a hundred years ago, “As we cannot speak of the distance of any object without implying some other object between which and the former this relation exists, so we cannot speak of the value of a commodity, but in reference to another commodity compared with it. A thing cannot be valuable in itself without reference to another thing, any more than a thing can be distant in itself without reference to another thing.”<a href="#fn15" id="ft15"><sup>15</sup></a></p> | <> | <p>According to modern price theory, the prices of different commodities and factors of production are expressions of relative scarcity, or, in other words, marginal valuations.<a href="#fn12" id="ft12"><sup>12</sup></a> Given an initial distribution of resources, each individual entering the market may be conceived to have a scale of relative valuations; and the interplay of the market serves to bring these individual scales and the market scale as expressed in relative prices into harmony with one another.<a href="#fn13" id="ft13"><sup>13</sup></a> Prices, therefore, express in money a grading of the various goods and services coming on the market. Any given price, therefore, has significance only in relation to the other prices prevailing at that time. Taken by itself it means nothing. It is only as the expression in money terms of a certain order of preference that it means anything at all. As Samuel Bailey pointed out over a hundred years ago, “As we cannot speak of the distance of any object without implying some other object between which and the former this relation exists, so we cannot speak of the value of a commodity, but in reference to another commodity compared with it. A thing cannot be valuable in itself without reference to another thing, any more than a thing can be distant in itself without reference to another thing.”<a href="#fn14" id="ft14"><sup>14</sup></a></p> |
| <p>It follows from this that the term which, for the sake of continuity and to raise certain definite associations, we have used hitherto in this chapter, the term “economic <span class="italics">quantity</span>” is really very misleading. A price, it is true, expresses the quantity of money which it is necessary to give in exchange for a given commodity. But its significance is the relationship between this quantity of money and other similar quantities. And the valuations which the price system expresses are not quantities at all. They are arrangements in a certain order. To assume that the scale of relative prices measures any quantity at all save quantities of money is gratuitous metaphysics. Value is a relation, not a measurement.<a href="#fn16" id="ft16"><sup>16</sup></a></p> | <> | <p>It follows from this that the term which, for the sake of continuity and to raise certain definite associations, we have used hitherto in this chapter, the term “economic <span class="italics">quantity</span>” is really very misleading. A price, it is true, expresses the quantity of money which it is necessary to give in exchange for a given commodity. But its significance is the relationship between this quantity of money and other similar quantities. And the valuations which the price system expresses are not quantities at all. They are arrangements in a certain order. To assume that the scale of relative prices measures any quantity at all save quantities of money is quite unnecessary. Value is a relation, not a measurement.<a href="#fn15" id="ft15"><sup>15</sup></a></p> |
| <p>But, if this is so, it follows that the addition of prices or individual incomes to form social aggregates is an operation with a very limited meaning. As quantities of money expended, particular prices and particular incomes are capable of addition, and the total arrived at has a definite monetary significance. But as expressions of an order of preference, a relative scale, they are incapable of addition. Their aggregate has no meaning. They are only significant in relation to each other. Estimates of the social income have a quite definite meaning for monetary theory. But beyond this they have only <span class="italics">conventional</span> significance.</p> | <> | <p>But, if this is so, it follows that the addition of prices or individual incomes to form social aggregates is an operation with a very limited meaning. As quantities of money expended, particular prices and particular incomes are capable of addition, and the total arrived at has a definite monetary significance. But as expressions of an order of preference, a relative scale, they are incapable of addition. Their aggregate has no meaning. They are only significant in relation to each other. Estimates of the social income may have a quite definite meaning for monetary theory. But beyond this they have only <span class="italics">conventional</span> significance.</p> |
| <p>It is important to realise exactly both the weight and the limitations of this conclusion. It does mean that a comprehensive aggregate of prices means nothing but a stream of money payments. Both the concept of world money income and the national money income have strict significance only for monetary theory—the one in relation to the general Theory of Indirect Exchange, the other to the Ricardian Theory of the Distribution of the Precious Metals. But, of course, this does not exclude a <span class="italics">conventional</span> significance. If we like to assume that preferences and property do not change rapidly within short periods, and that certain price changes may be regarded as particularly significant for the majority of economic subjects, then no doubt we may assign to the movements of these aggregates a certain arbitrary meaning which is not without its uses. And this is all that is claimed for such estimates by the best statisticians. All that is intended here is to emphasise the essentially arbitrary nature of the assumptions necessary. They do not have an exact counterpart in fact, and they do not follow from the main categories of pure theory.</p> | <> | <p>It is important to realise exactly both the weight and the limitations of this conclusion. It does mean that a comprehensive aggregate of prices means nothing but a stream of money payments. Both the concept of world money income and the national money income have strict significance only for monetary theory—the one in relation to the general theory of indirect exchange, the other to the Ricardian theory of the distribution of the precious metals. But, of course, this does not exclude a <span class="italics">conventional</span> significance. If we like to assume that preferences and distribution do not change rapidly within short periods, and that certain price changes may be regarded as particularly significant for the majority of economic subjects, then no doubt we may assign to the movements of these aggregates a certain arbitrary meaning which is not without its uses. And this is all that is claimed for such estimates by the best statisticians. All that is intended here is to emphasise the essentially arbitrary nature of the assumptions necessary. They do not have an exact counterpart in fact, and they do not follow from the main categories of pure theory.</p> |
| <p>We can see the bearing of all this if we consider for a moment the use which may be made of such aggregates in examining the probable effects of drastic changes in distribution. From time to time computations are made of the total money income accruing within a given area, and, from these totals, attempts are made to estimate the effects of large changes in an equalitarian direction. The best known of such attempts are the estimates of Professor Bowley and Sir Josiah Stamp.<a href="#fn17" id="ft17"><sup>17</sup></a></p> | <> | <p>We can see the bearing of all this if we consider for a moment the use which may be made of such aggregates in examining the probable effects of drastic changes in distribution. From time to time computations are made of the total money income accruing within a given area, and, from these totals, attempts are made to estimate the effects of large changes in an equalitarian direction. The best known of such attempts are the estimates of Professor Bowley and Sir Josiah Stamp.<a href="#fn16" id="ft16"><sup>16</sup></a></p> |
| <p>Now, in so far as such estimates are confined to ascertaining the initial amount of spending power available for redistribution, they are valuable and important. And, of course, this is all that has ever been contended by the distinguished statisticians who put them forward. But beyond this it is futile to attach any precise significance to them. For, by the very fact of redistribution, relative valuations would necessarily alter. The whole “set” of the productive machine would be different. The stream of goods and services would have a different composition. Indeed, if we think a little further into the problem, we can see that an estimate of this sort must very grossly overestimate the amount of productive power that would be released by such changes. For a substantial proportion of the high incomes of the rich are due to the existence of other rich persons. Lawyers, doctors, the proprietors of rare sites, etc., enjoy high incomes because there exist people with high incomes who value their services highly. Redistribute money incomes, and, although the technical efficiency of the factors concerned would be the same, their place on the relative scale would be entirely different. With a constant volume of money and a constant velocity of circulation, it is almost certain that the main initial result would be a rise in the prices of articles of working-class consumption. This conclusion, which is obvious enough from the census of occupations, tends actually to be concealed by computations in money—pessimistic as these computations are often supposed to be. If we compute the proportion of the population now producing real income for the rich who could be turned to producing real income for the poor, it is easy to see that the increase available would be negligible. If we attempt greater precision by means of money computations, we are likely to exaggerate. And the greater the degree of initial inequality, the greater the degree of exaggeration.<a href="#fn18" id="ft18"><sup>18</sup></a></p> | <> | <p>Now, in so far as such estimates are confined to ascertaining the initial amount of spending power available for redistribution, they are valuable and important. And, of course, this is all that has ever been contended by the distinguished statisticians who put them forward. But beyond this it is futile to attach any precise significance to them. For, by the very fact of redistribution, relative valuations would necessarily alter. The whole “set” of the productive machine would be different. The stream of goods and services would have a different composition. Indeed, if we think a little further into the problem, we can see that an estimate of this sort must very grossly overestimate the amount of productive power that would be released by such changes. For a substantial proportion of the high incomes of the rich are due to the existence of other rich persons. Lawyers, doctors, the proprietors of rare sites, etc., enjoy high incomes because there exist people with high incomes who value their services highly. Redistribute money incomes, and, although the technical efficiency of the factors concerned would be the same, their place on the relative scale would be entirely different. With a constant volume of money and a constant velocity of circulation, it is almost certain that the main initial result would be a rise in the prices of articles of working-class consumption. This conclusion, which is obvious enough from the census of occupations, tends actually to be concealed by computations in money—pessimistic as these computations are often supposed to be. If we compute the proportion of the population now producing real income for the rich who could be turned to producing real income for the poor, it is easy to see that the increase available would be negligible. If we attempt greater precision by means of money computations, we are likely to exaggerate. And the greater the degree of initial inequality, the greater the degree of exaggeration.<a href="#fn17" id="ft17"><sup>17</sup></a></p> |
| <p>It follows, therefore, that to compare the prices of a particular commodity at different periods of time in the past, is an operation which, by itself, does not necessarily afford results which have further meaning. The fact that bread last year was 8d. and bread this year is 6d. does not necessarily imply that the relative scarcity of bread this year is less than the relative scarcity of bread last year. The significant comparison is not the comparison between 8d. last year and 6d. this year, but the comparison between 8d. and other prices last year and the comparison between 6d. and other prices this year. For it is these relationships which are significant for conduct. It is these relationships alone which imply a unitary system of valuations.<a href="#fn19" id="ft19"><sup>19</sup></a></p> | <> | <p>It follows, therefore, that to compare the prices of a particular commodity at different periods of time in the past, is an operation which, by itself, does not necessarily afford results which have further meaning. The fact that bread last year was 8d. and bread this year is 6d. does not necessarily imply that the relative scarcity of bread this year is less than the relative scarcity of bread last year. The significant comparison is not the comparison between 8d. last year and 6d. this year, but the comparison between 8d. and other prices last year and the comparison between 6d. and other prices this year. For it is these relationships which are significant for conduct. It is these relationships alone which imply a unitary system of valuations.<a href="#fn18" id="ft18"><sup>18</sup></a></p> |
| <p class="margintop noindent">then matters would be simple, and the comparison would have some meaning. But such a relationship is not possible save as a result of a series of compensatory accidents. This is not merely because demand or the conditions of production of <span class="italics">other commodities</span> may change. It is because any conceivable change, either real or monetary, must bring about <span class="italics">different</span> changes in the relation of a particular good to each other commodity. That is to say, save in the case of a compensatory accident, any change will lead not to a new set of relationships of the order of equation (2), but rather to a set of relationships of the order</p> | <> | <p class="margintop noindent">then matters would be simple, and the comparison would have some meaning. But such a relationship is not possible save as a result of a series of compensatory accidents. This is not merely because demand or the conditions of production of <span class="italics">other commodities</span> may change. It is because almost any conceivable change, either real or monetary, must bring about <span class="italics">different</span> changes in the relation of a particular good to each other commodity. That is to say, save in the case of a compensatory accident, any change will lead not to a new set of relationships of the order of equation (2), but rather to a set of relationships of the order</p> |
| <p class="margintop noindent">It has long been recognised that this must be the case with real changes. If the demand for <span class="italics">a</span> changes, it is most improbable that the demand for <span class="italics">b</span>, <span class="italics">c</span>, <span class="italics">d</span>, <span class="italics">e</span> . . . will change in such a way that the change in relation between <span class="italics">a</span> and <span class="italics">b</span> will be equivalent to the change in relation to <span class="italics">b</span> and <span class="italics">c</span> . . . and so on. With changes in technique, factors of production which are released from the production of <span class="italics">a</span> will not be likely to be distributed between <span class="italics">b</span>, <span class="italics">c</span>, <span class="italics">d</span> in such proportions as to preserve P<span class="italics"><sub>b</sub></span> : P<span class="italics"><sub>c</sub></span> :: P<span class="italics"><sub>c</sub></span> : P<span class="italics"><sub>d</sub></span> . . . But, as has been demonstrated once and for all by Professor Hayek,<a href="#fn20" id="ft20"><sup>20</sup></a> the same is true of “monetary” changes. It is almost impossible to conceive a “monetary” change which does not affect relative prices differently. But, if this is so, the idea of precise “correction” of price changes over time is illusory.<a href="#fn21" id="ft21"><sup>21</sup></a> Samuel Bailey’s conclusion remains: “When we say that an article in a former age was of a certain value, we mean that it exchanged for a certain quantity of some other commodity. But this is an inapplicable expression in speaking of only one commodity at two different periods.”<a href="#fn22" id="ft22"><sup>22</sup></a> Here, again, it is important to realise the limitations of this proposition. It does not deny the possibility of intertemporal price relationships. Quite clearly, at any moment, anticipations of what prices will be at a future period inevitably influence present valuations and price relationships.<a href="#fn23" id="ft23"><sup>23</sup></a> It is possible to exchange goods now for goods in the future, and we can conceive an equilibrium direction of price change through time. This is true and important. But while there is and must be a connection between present prices and anticipations of future prices, there is no necessary connection or significant value relationship between present prices and <span class="italics">past prices</span>. The conception of an equilibrium relationship through time is a hypothetical relationship. Through history, the given data change, and though <span class="italics">at every moment</span> there are tendencies towards an equilibrium, yet <span class="italics">from moment to moment</span> it is not the <span class="italics">same</span> equilibrium towards which there is movement. There is a fundamental asymmetry in price relationships through time. The future—the apparent future, that is to say—affects the present, but the past is irrelevant. The effects of the past are now simply part of the “given data”. So far as value relationships are concerned, bygones are forever bygones.</p> | <> | <p class="margintop noindent">It has long been recognised that this must be the case with real changes. If the demand for <span class="italics">a</span> changes, it is most improbable that the demand for <span class="italics">b</span>, <span class="italics">c</span>, <span class="italics">d</span>, <span class="italics">e</span> . . . will change in such a way that the change in relation between <span class="italics">a</span> and <span class="italics">b</span> will be equivalent to the change in relation to <span class="italics">b</span> and <span class="italics">c</span> . . . and so on. With changes in technique, factors of production which are released from the production of <span class="italics">a</span> will not be likely to be distributed between <span class="italics">b</span>, <span class="italics">c</span>, <span class="italics">d</span> in such proportions as to preserve P<span class="italics"><sub>b</sub></span>:P<span class="italics"><sub>c</sub></span>::P<span class="italics"><sub>c</sub></span>:P<span class="italics"><sub>d</sub></span> . . . But, as may be demonstrated by very elementary reasoning,<a href="#fn19" id="ft19"><sup>19</sup></a> the same is true of “monetary” changes. It is almost impossible to conceive a “monetary” change which does not affect relative prices differently. But, if this is so, the idea of precise “correction” of price changes over time is illusory.<a href="#fn20" id="ft20"><sup>20</sup></a> Samuel Bailey’s conclusion remains: “When we say that an article in a former age was of a certain value, we mean that it exchanged for a certain quantity of some other commodity. But this is an inapplicable expression in speaking of only one commodity at two different periods.”<a href="#fn21" id="ft21"><sup>21</sup></a> It is important to realise the exact significance of this proposition. It does not deny the possibility of intertemporal price relationships. Quite clearly, at any moment, anticipations of what prices will be at a future period inevitably influence present valuations and price relationships.<a href="#fn22" id="ft22"><sup>22</sup></a> It is possible to exchange goods now for goods in the future, and we can conceive an equilibrium direction of price change through time. This is true and important. But while there is and must be a connection between present prices and anticipations of future prices, there is no necessary connection or significant value relationship between present prices and <span class="italics">past prices</span>. The conception of an equilibrium relationship through time is a hypothetical relationship. It is realised only in so far as anticipations are proved to have been justified. Through history, the data change, and though <span class="italics">at every moment</span> there may be tendencies towards an equilibrium, yet <span class="italics">from moment to moment</span> it is not the <span class="italics">same</span> equilibrium towards which there is movement. There is a fundamental asymmetry in price relationships through time. The future—the apparent future, that is to say—affects the present, but the past is irrelevant. The effects of the past are now simply part of the data. So far as the act of valuation is concerned, bygones are forever bygones.</p> |
| <p>Here, again, as in the case of our considerations regarding aggregates, there is no intention of denying the practical utility and significance of comparisons of certain prices over time, or of the value of “corrections” of these prices by suitably devised index numbers. It is not open to serious question that for certain questions of applied Economics on the one hand, and interpretation of history on the other, the index number technique is invaluable. Given a willingness to make arbitrary assumptions with regard to the significance of certain price sums, it is not denied that conclusions which are important for practice may be reached. All that it is desired to emphasise is that such conclusions do not follow from the categories of pure theory, and that they must necessarily involve a <span class="italics">conventional</span> element depending either upon the assumption of a certain empirical constancy of data<a href="#fn24" id="ft24"><sup>24</sup></a> or upon arbitrary judgments of value with regard to the relative importance of particular prices.</p> | <> | <p>Here, again, as in the case of our considerations regarding aggregates, there is no intention of denying the practical utility and significance of comparisons of certain prices over time, or of the value of “corrections” of these prices by suitably devised index numbers. It is not open to serious question that for certain questions of applied Economics on the one hand, and interpretation of history on the other, the index number technique is of great practical utility. Given a willingness to make arbitrary assumptions with regard to the significance of certain price sums, it is not denied that conclusions which are important for practice may be reached. All that it is desired to emphasise is that such conclusions do not follow from the categories of pure theory, and that they must necessarily involve a <span class="italics">conventional</span> element depending either upon the assumption of a certain empirical constancy of data<a href="#fn23" id="ft23"><sup>23</sup></a> or upon arbitrary judgments of value with regard to the relative importance of particular prices and particular economic subjects.</p> |
| <p>The traditional approach to Economics, at any rate among English-speaking economists, has been by way of an enquiry into the causes determining the production and distribution of wealth.<a href="#fn25" id="ft25"><sup>25</sup></a> Economics has been divided into two main divisions, the Theory of Production and the Theory of Distribution, and the task of these theories has been to explain the causes determining the size of the “total product” and the causes determining the proportions in which it is distributed between different factors of production and different persons. There have been minor differences of content under these two headings. There has always been a great deal of trouble about the position of the Theory of Value. But, speaking broadly, up to quite a recent date, this has been the main “cut” into the body of the subject.</p> | <> | <p>The traditional approach to Economics, at any rate among English-speaking economists, has been by way of an enquiry into the causes determining the production and distribution of wealth.<a href="#fn24" id="ft24"><sup>24</sup></a> Economics has been divided into two main divisions, the theory of production and the theory of distribution, and the task of these theories has been to explain the causes determining the size of the “total product” and the causes determining the proportions in which it is distributed between different factors of production and different persons. There have been minor differences of content under these two headings. There has always been a great deal of trouble about the position of the theory of value. But, speaking broadly, up to quite a recent date, this has been the main “cut” into the body of the subject.</p> |
| <p>Now, no doubt, there is a strong <span class="italics">prima facie</span> case for this procedure. As Professor Cannan urges,<a href="#fn26" id="ft26"><sup>26</sup></a> the questions in which we are interested from the point of view of social policy are—or at any rate appear to be—questions relating to production and distribution. If we are contemplating the imposition of a tax or the granting of a subsidy, the questions we tend to ask (whether we understand what we mean or not) are: What will be the effects of this measure on production, What will be its effects on distribution? It is not unnatural, therefore, that, in the past, economists have tended to arrange their generalisations in the form of answers to these two questions.<a href="#fn27" id="ft27"><sup>27</sup></a></p> | <> | <p>Now, no doubt, there is a strong <span class="italics">prima facie</span> case for this procedure. As Professor Cannan urges,<a href="#fn25" id="ft25"><sup>25</sup></a> the questions in which we are interested from the point of view of social policy are—or at any rate appear to be—questions relating to production and distribution. If we are contemplating the imposition of a tax or the granting of a subsidy, the questions we tend to ask (whether we understand what we mean or not) are: What will be the effects of this measure on production? What will be its effects on distribution? It is not unnatural, therefore, that, in the past, economists have tended to arrange their generalisations in the form of answers to these two questions.<a href="#fn26" id="ft26"><sup>26</sup></a></p> |
| <p>It should not be necessary at this stage to dwell upon the inappropriateness of the various technical elements which almost inevitably intrude into a system arranged on this principle. We have all felt, with Professor Schumpeter, a sense almost of shame at the incredible banalities of much of the so-called theory of production—the tedious discussions of the various forms of peasant proprietorship, factory organisation, industrial psychology, technical education, etc., which are apt to occur in even the best treatises on general theory arranged on this plan.<a href="#fn28" id="ft28"><sup>28</sup></a> One has only to compare the masterly sweep of Book V. of Marshall’s <span class="italics">Principles</span>, which deals with problems which are strictly economic in our sense, with the spineless platitudes about manures<a href="#fn29" id="ft29"><sup>29</sup></a> and the “fine natures among domestic servants”<a href="#fn30" id="ft30"><sup>30</sup></a> of much of Book IV. to realise the insidious effect of a procedure which opens the door to the intrusions of amateur technology into discussions which should be purely economic.</p> | <> | <p>It should not be necessary at this stage to dwell upon the inappropriateness of the various technical elements which almost inevitably intrude into a system arranged on this principle. We have all felt, with Professor Schumpeter, a sense almost of shame at the incredible banalities of much of the so-called theory of production—the tedious discussions of the various forms of peasant proprietorship, factory organisation, industrial psychology, technical education, etc., which are apt to occur in even the best treatises on general theory arranged on this plan.<a href="#fn27" id="ft27"><sup>27</sup></a></p> |
| <p>But there is a more fundamental objection to this procedure; it necessarily precludes precision. Scientific generalisations, if they are to pretend to the status of laws, must be capable of being stated exactly. That does not mean, as we shall see in a later chapter, that they must be capable of quantitative exactitude. We do not need to give numerical values to the law of demand to be in a position to use it for deducing important consequences. But we do need to state it in such a way as to make it relate to formal relations which are capable of being <span class="italics">conceived</span> exactly.<a href="#fn31" id="ft31"><sup>31</sup></a></p> | <> | <p>But there is a more fundamental objection to this procedure; it necessarily precludes precision. Scientific generalisations, if they are to pretend to the status of laws, must be capable of being stated exactly. That does not mean, as we shall see in a later chapter, that they must be capable of quantitative exactitude. We do not need to give numerical values to the law of demand to be in a position to use it for deducing important consequences. But we do need to state it in such a way as to make it relate to formal relations which are capable of being <span class="italics">conceived</span> exactly.<a href="#fn28" id="ft28"><sup>28</sup></a></p> |
| <p>As a matter of fact, nothing which can really be called a “law” of production in this sense has ever been elaborated.<a href="#fn32" id="ft32"><sup>32</sup></a> Whenever the generalisations of economists have assumed the form of laws, they have related not to vague notions such as the total product, but to perfectly definite concepts such as price, supply, demand, and so on. The Ricardian System which, in this respect, provides the archetype of all subsequent systems, is essentially a discussion of the tendencies to equilibrium of clear-cut quantities and relationships. It is no accident that wherever its discussions have related to separate types of economic goods and ratios of exchange between economic goods, there the generalisations of Economics have assumed the form of scientific laws.<a href="#fn33" id="ft33"><sup>33</sup></a></p> | <> | <p>As a matter of fact, nothing which can really be called a “law” of production in this sense has ever been elaborated.<a href="#fn29" id="ft29"><sup>29</sup></a> Whenever the generalisations of economists have assumed the form of laws, they have related not to vague notions such as the total product, but to perfectly definite concepts such as price, supply, demand, and so on. The Ricardian System which, in this respect, provides the archetype of all subsequent systems, is essentially a discussion of the tendencies to equilibrium of clear-cut quantities and relationships. It is no accident that wherever its discussions have related to separate types of economic goods and ratios of exchange between economic goods, there the generalisations of Economics have assumed the form of scientific laws.<a href="#fn30" id="ft30"><sup>30</sup></a></p> |
| <p>For this reason, in recent years Economists have tended more and more to abandon the traditional arrangement. We no longer enquire concerning the causes determining variations of production and distribution. We enquire rather concerning the conditions of equilibrium of various economic “quantities”,<a href="#fn34" id="ft34"><sup>34</sup></a> given certain initial data, and we enquire concerning the effects of variations of these data. Instead of dividing our central body of analysis into a Theory of Production and a Theory of Distribution, we have a Theory of Equilibrium and a Theory of Variations.<a href="#fn35" id="ft35"><sup>35</sup></a> Instead of regarding the economic system as a gigantic machine for turning out an aggregate product and proceeding to enquire what causes make this product greater or less, and in what proportions this product is divided, we regard it as a series of interdependent but conceptually discrete relationships between men and economic goods; and we ask under what conditions these relationships are constant and what are the effects of changes in either the ends or the means between which they mediate.</p> | <> | <p>For this reason, in recent years economists have tended more and more to abandon the traditional arrangement. We no longer enquire concerning the causes determining variations of production and distribution. We enquire rather concerning the conditions of equilibrium of various economic “quantities”,<a href="#fn31" id="ft31"><sup>31</sup></a> given certain initial data, and we enquire concerning the effects of variations of these data. Instead of dividing our central body of analysis into a theory of production and a theory of distribution, we have a theory of equilibrium, a theory of comparative statics and a theory of dynamic change. Instead of regarding the economic system as a gigantic machine for turning out an aggregate product and proceeding to enquire what causes make this product greater or less, and in what proportions this product is divided, we regard it as a series of interdependent but conceptually discrete relationships between men and economic goods; and we ask under what conditions these relationships are constant and what are the effects of changes in either the ends or the means between which they mediate and how such changes may be expected to take place through time.<a href="#fn32" id="ft32"><sup>32</sup></a></p> |
| <p>As we have seen already, this tendency, although in its completest form very modern indeed, has its origin very early in the literature of scientific Economics. Quesnay’s <span class="italics">Tableau Economique</span> was essentially an attempt to apply what is now called equilibrium analysis. And, although Adam Smith’s great work professed to deal with the causes of the wealth of nations, and did in fact make many remarks on the general question of the conditions of opulence which are of great importance in any history of Applied Economics, yet, from the point of view of the history of Theoretical Economics, the central achievement of his book was his demonstration of the mode in which the division of labour tended to be kept in equilibrium by the mechanism of relative prices—a demonstration which, as Allyn Young has shown,<a href="#fn36" id="ft36"><sup>36</sup></a> is in harmony with the most refined apparatus of the modern School of Lausanne. The theory of Value and Distribution was really the central core of the analysis of the Classics, try as they might to conceal their objects under other names. And the traditional theory relating to the effects of taxes and bounties was always couched in terms thoroughly consistent with the procedure of the modern Theory of Variations. Thus, though the appearance of modern theory may be new, its substance is continuous with what was most essential in the old. The modern arrangement simply makes explicit the methodological foundations of the earlier theories and generalises the procedure.<a href="#fn37" id="ft37"><sup>37</sup></a></p> | <> | <p>As we have seen already, this tendency, although in its completest form very modern indeed, has its origin very early in the literature of scientific Economics. Quesnay’s <span class="italics">Tableau Economique</span> was essentially an attempt to apply what is now called equilibrium analysis. And, although Adam Smith’s great work professed to deal with the causes of the wealth of nations, and did in fact make many remarks on the general question of the conditions of opulence which are of great importance in any history of applied Economics, yet, from the point of view of the history of theoretical Economics, the central achievement of his book was his demonstration of the mode in which the division of labour tended to be kept in equilibrium by the mechanism of relative prices—a demonstration which, as Allyn Young has shown,<a href="#fn33" id="ft33"><sup>33</sup></a> is in harmony with the most refined apparatus of the modern School of Lausanne. The theory of value and distribution was really the central core of the analysis of the Classics, try as they might to conceal their objects under other names. And the traditional theory relating to the effects of taxes and bounties was always couched in terms thoroughly consistent with the procedure of modern comparative statics. Thus, though the appearance of modern theory may be new, its substance is continuous with what was most essential in the old. The modern arrangement simply makes explicit the methodological foundations of the earlier theories and generalises the procedure.<a href="#fn34" id="ft34"><sup>34</sup></a></p> |
| <p>We may take as an example of the advantages of this procedure the modern treatment of organisation of production. The old treatment of this subject was hopelessly unsatisfactory: A few trite generalisations about the advantages of the division of labour copied from Adam Smith, and illustrated perhaps by a few examples from Babbage; then extensive discursions on industrial “forms” and the “entrepreneur” with a series of thoroughly unscientific and question-begging remarks on national characteristics—the whole wound up, perhaps, with a chapter on localisation. There is no need to dwell on the insufferable dreariness and mediocrity of all this. But it is perhaps just as well to state definitely its glaring positive deficiencies. It suggests that from the point of view of the economist “organisation” is a matter of internal industrial (or agricultural) arrangement—if not internal to the firm, at any rate internal to “the” industry. At the same time it tends to leave out completely the governing factor of all productive organisation—the relationship of prices and costs. That comes in a different division which deals with “value”. As a result, as almost any teacher who has taken over students reared on the old textbooks will realise, it was quite possible for a man to have an extensive knowledge of value theory and its copious refinements and to be able to prattle away at great length about the rate of interest and its possible “causes”, without ever having realised the fundamental part played by prices, costs, and interest rates in the organisation of production.</p> | <> | <p>We may take as an example of the advantages of this procedure the modern treatment of organisation of production. The old treatment of this subject was very unsatisfactory: A few trite generalisations about the advantages of the division of labour copied from Adam Smith, and illustrated perhaps by a few examples from Babbage; then extensive discursions on industrial “forms” and the “entrepreneur” with a series of thoroughly unscientific and question-begging remarks on national characteristics—the whole wound up, perhaps, with a chapter on localisation. There is no need to dwell on the dreariness and mediocrity of all this. But it is perhaps just as well to state definitely its considerable positive deficiencies. It suggests that from the point of view of the economist “organisation” is a matter of internal industrial (or agricultural) arrangement—if not internal to the firm, at any rate internal to “the” industry—although, as might be expected, “the” industry is seldom satisfactorily defined. At the same time it tends to leave out completely the governing factor of all productive organisation—the relationship of prices and costs. That comes in a different division which deals with “value”. As a result, as almost any teacher who has taken over students reared on the old textbooks will realise, it was quite possible for a man to have an extensive knowledge of value theory and its copious refinements and to be able to prattle away at great length about the rate of interest and its possible “causes”, without ever having realised the fundamental part played by prices, costs, and interest rates in the organisation of production.</p> |
| <p>In the modern treatment this is impossible. In the modern treatment, discussion of “production” is an integral part of the Theory of Equilibrium. It is shown how factors of production are distributed between the production of different goods by the mechanism of prices and costs, how given certain fundamental data, interest rates, and price margins determine the distribution of factors between production for the present and production for the future. The doctrine of division of labour, heretofore so disagreeably technological, becomes an integral feature of a theory of moving equilibrium through time.<a href="#fn38" id="ft38"><sup>38</sup></a> Even the question of “internal” organisation and administration now becomes related to an outside network of relative prices and costs; and since this is how things work in practice, what is at first sight the greater remoteness of pure theory in fact brings us much nearer to reality.</p> | <> | <p>In the modern treatment this is impossible. In the modern treatment, discussion of “production” is an integral part of the theory of equilibrium. It is shown how factors of production are distributed between the production of different goods by the mechanism of prices and costs, how given certain fundamental data, interest rates and price margins determine the distribution of factors between production for the present and production for the future.<a href="#fn35" id="ft35"><sup>35</sup></a> The doctrine of division of labour, heretofore so disagreeably technological, becomes an integral feature of a theory of moving equilibrium through time. Even the question of “internal” organisation and administration now becomes related to an outside network of relative prices and costs; and since this is how things work in practice, what is at first sight the greater remoteness of pure theory in fact brings us much nearer to reality.</p> |
| <p><a href="#ft1" id="fn1"><sup>1</sup></a> Of course, the conceptions of any pure science are <span class="italics">necessarily</span> purely formal. If we were attempting to construct Economics from pure logic instead of describing it as it appears from a consideration of what is essential in its subject-matter, this would be a guiding consideration. But it is interesting to observe how, starting from the inspection of an apparatus for solving concrete problems, we eventually arrive, by the necessities of accurate description, at conceptions which are in full conformity with the expectations of pure methodology.</p> | <> | <p><a href="#ft1" id="fn1"><sup>1</sup></a> Of course, the conceptions of any pure science are <span class="italics">necessarily</span> purely formal. If we were attempting to describe Economics by inference from general methodological principles, instead of describing it as it appears from a consideration of what is essential in its subject-matter, this would be a guiding consideration. But it is interesting to observe how, starting from the inspection of an apparatus which actually exists for solving concrete problems, we eventually arrive, by the necessities of accurate description, at conceptions which are in full conformity with the expectations of pure methodology.</p> |
| <p><a href="#ft5" id="fn5"><sup>5</sup></a> See above, pp. 31-37.</p> | <> | <p><a href="#ft5" id="fn5"><sup>5</sup></a> See above, pp. 32-38.</p> |
| <p><a href="#ft7" id="fn7"><sup>7</sup></a> It is a striking comment on the quality of the intellectual life of our time that economies of mass production are often invoked as an argument <span class="italics">in favour of</span> the tariffs which are at present strangling trade, on the ground that “safeguarding the home market” makes possible the desired concentration. Quite apart from the logical weakness and ambiguities of the argument, which are sufficiently exposed in any of the standard works on the subject (see, <span class="italics">e.g</span>., Pigou, <span class="italics">Protective and Preferential Import Duties</span>, pp. 16-19), this is a very good example of inability to see the wood for the trees ! As we have seen already, the wider the market the more extensive is the resort which is possible to the economies of mass production. Since tariffs necessarily contract markets, it therefore follows that the growth of tariffs must prevent resort to the economies of mass production being as widespread as might otherwise be the case. The leaders of industry all over the world, deluded by the prospect of a momentary gain, pursue a policy which in the long run is bound to be inimical to yet greater profits. A world in which the inhabitants of each petty national area insulate themselves against commercial intercourse with the rest of mankind “to safeguard the home market” is a world in which the genuine economies of large production which modern technique makes possible are for ever unattainable. Yet that is the world which, at the present time, we are all busily engaged in making.</p> | +- | |
| <p><a href="#ft8" id="fn8"><sup>8</sup></a> <span class="italics">Science and the Modern World</span>, p. 64.</p> | <> | <p><a href="#ft7" id="fn7"><sup>7</sup></a> <span class="italics">Science and the Modern World</span>, p. 64.</p> |
| <p><a href="#ft9" id="fn9"><sup>9</sup></a> Compare Pigou, <span class="italics">Economics of Welfare</span>, 3rd edition, pp. 190-192. It is, perhaps, worth noting that most contemporary discussion of the so-called Transport Problem completely ignores these elementary considerations. If there is a concealed subsidy to motor transport through public expenditure on roads, this is a matter for the Chancellor of the Exchequer. It is no argument for attempting to make people go by train who prefer to travel by road. If we want to preserve railways which are unprofitable in the present conditions of demand, we should subsidise them as ancient monuments.</p> | <> | <p><a href="#ft8" id="fn8"><sup>8</sup></a> Compare Pigou, <span class="italics">Economics of Welfare</span>, 3rd edition, pp. 190-192. It is, perhaps, worth noting that most contemporary discussion of the so-called Transport Problem completely ignores these elementary considerations. If there is a concealed subsidy to motor transport through public expenditure on roads, this is a matter for the Chancellor of the Exchequer. It is no argument for attempting to make people go by train who prefer to travel by road. If we want to preserve railways which are unprofitable in the present conditions of demand, we should subsidise them as ancient monuments.</p> |
| <p><a href="#ft10" id="fn10"><sup>10</sup></a> <span class="italics">Exchange, Prices and Production in Hyperinflation: Germany, 1920-1923,</span> p, 320. “So far as output is concerned, there is little support in actual statistics for the contention that the evils of inflation were other than evils of distribution.” In his conclusion, Professor Graham does indeed make the grudging admission that “in the later stages of inflation, investment in durable goods took on a bizarre aspect”. But he seems to be under the delusion that the “quality” of capital equipment may deteriorate without any detriment to its “quantity”. A better example of the “fallacy of misplaced concreteness” could scarcely be imagined.</p> | <> | <p><a href="#ft9" id="fn9"><sup>9</sup></a> <span class="italics">Exchange, Prices and Production in Hyperinflation: Germany</span>, 1920-1923, p. 320. “So far as output is concerned, there is little support in actual statistics for the contention that the evils of inflation were other than evils of distribution.” In his conclusion, Professor Graham does indeed make the grudging admission that “in the later stages of inflation, investment in durable goods took on a bizarre aspect”. But he seems to believe that the “quality” of capital equipment may deteriorate without any detriment to its “quantity”.</p> |
| <p><a href="#ft11" id="fn11"><sup>11</sup></a> See Mises, <span class="italics">Theorie des Oeldes und der Umlaufsmitteln</span>, 2nd edition, pp. 347-376; Hayek, <span class="italics">Geldtheorie und Konjunkturtheorie</span>, and <span class="italics">Prices and Production</span>; Strigl, <span class="italics">Die Produktion unter dem Einflusse einer Kreditexpansion</span> (<span class="italics">Schriften des Vereins für Sozialpolitik</span>, Bd. 173, pp. 187-211).</p> | <> | <p><a href="#ft10" id="fn10"><sup>10</sup></a> See Mises, <span class="italics">The Theory of Money and Credit</span>, pp. 339-366; Hayek, <span class="italics">Monetary Theory and the Trade Cycle</span>, and <span class="italics">Prices and Production</span>; Strigl, <span class="italics">Die Produktion unter dem Einflusse einer Kreditexpansion</span> (<span class="italics">Schriften des Vereins für Sozialpolitik</span>, Bd. 173, pp. 187-211).</p> |
| <p><a href="#ft12" id="fn12"><sup>12</sup></a> See Bonn, <span class="italics">Das Schicksal des Deutschen Kapitalismus</span>, pp. 14-31.</p> | <> | <p><a href="#ft11" id="fn11"><sup>11</sup></a> See Bonn, <span class="italics">Das Schicksal des deutschen Kapitalismus</span>, pp. 14-31. Bresciani-Turroni, <span class="italics">Il Vicendi del Marco Tedesco</span>.</p> |
| <p><a href="#ft13" id="fn13"><sup>13</sup></a> The pretence that there is anything fundamentally different between the various modern versions of the theory of price equilibrium is now sufficiently exploded to be dispensed with. See Morgenstern, <span class="italics">Die Drei Grundtypen der Theorie des Subjektiven Wertes</span> (<span class="italics">Schriften des Vereins für Sozialpolitik</span>, Bd. 183, 1, pp. 1-42). On the alleged difference of the Casselian system, see Schams, <span class="italics">Die Casselsche Gleichungen und die Mathematische Wirtschaftstheorie, Jahrbücher für Nationalökonomie und Statistik</span>, Bd. 127, 1927, p. 385; Wicksell, Professor Cassel’s <span class="italics">Nationalökonomisches System; Schmoller’s Jahrbuch</span>, 52 Jahr, pp. 771-808.</p> | <> | <p><a href="#ft12" id="fn12"><sup>12</sup></a> See below, Chapter IV., Section 2.</p> |
| <p><a href="#ft14" id="fn14"><sup>14</sup></a> For an exhaustive description of the process, see especially Wicksteed, <span class="italics">Commonsense of Political Economy</span>, pp. 212-400.</p> | <> | <p><a href="#ft13" id="fn13"><sup>13</sup></a> For an exhaustive description of the process, see especially Wicksteed, <span class="italics">Commonsense of Political Economy</span>, pp. 212-400.</p> |
| <p><a href="#ft15" id="fn15"><sup>15</sup></a> <span class="italics">A Critical Dissertation on Value</span>, p. 5.</p> | <> | <p><a href="#ft14" id="fn14"><sup>14</sup></a> <span class="italics">A Critical Dissertation on Value</span>, p. 5.</p> |
| <p><a href="#ft16" id="fn16"><sup>16</sup></a> See Čuhel, <span class="italics">Zur Lehre der Bedurfnissen</span>, pp. 186-216. See also Mises, <span class="italics">Theorie des Oeldes</span>, pp. 10-20, and Knight, <span class="italics">Risk, Uncertainty and Profit</span>, pp. 69 and 70 (footnote). Recognition of the ordinal nature of the valuations implied in price is fundamental. It is difficult to overstress its importance. With one slash of Occam’s razor, it extrudes for ever from economic analysis the last vestiges of psychological hedonism. The conception is implicit in Menger’s use of the term <span class="italics">Bedeutung</span> in his statement of the Theory of Value, but the main credit for its explicit statement and subsequent elaboration is due to subsequent writers.</p> | <> | <p><a href="#ft15" id="fn15"><sup>15</sup></a> Recognition of the ordinal nature of the valuations implied in price is fundamental. It is difficult to overstress its importance. With one slash of Occam’s razor, it extrudes for ever from economic analysis the last vestiges of psychological hedonism. The conception is implicit in Manger’s use of the term <span class="italics">Bedeutung</span> in his statement of the Theory of Value, but the main credit for its explicit statement and subsequent elaboration is due to subsequent writers. See especially Čuhel, <span class="italics">Zur Lehre von den Bedürfnissen</span>, pp. 186-216; Pareto, <span class="italics">Manuel d’Economie Politique</span>, pp. 540-2; and Hicks and Allen, <span class="italics">A Reconsideration of the Theory of Value</span> (<span class="italics">Economica</span>, 1934, pp. 51-76). In this important article it is shown how the most refined conceptions of the theory of value, complementarity, substitutability, etc., may be developed without recourse to the notion of a determinate utility function.</p> |
| <p><a href="#ft17" id="fn17"><sup>17</sup></a> See Bowley, <span class="italics">The Division of the Product of Industry</span>, and Stamp, <span class="italics">Wealth and Taxable Capacity</span>.</p> | <> | <p><a href="#ft16" id="fn16"><sup>16</sup></a> See Bowley, <span class="italics">The Division of the Product of Industry</span>, and Stamp, <span class="italics">Wealth and Taxable Capacity</span>.</p> |
| <p><a href="#ft18" id="fn18"><sup>18</sup></a> Of course, this is not necessarily so. If, instead of spending their incomes on the expensive services of doctors, lawyers, and so on, the rich were in the habit of spending them on vast retinues of retainers <span class="italics">who were supported by the efforts of others</span>, the change in money incomes might release factors which, from the point of view of the new conditions of demand, represented much productive power. But in fact this is not the case. Even when the rich do support vast retinues of retainers, the retainers spend most of their time looking after each other. Anyone who has lived in a household in which there was more than one servant will realise the force of this consideration.</p> | <> | <p><a href="#ft17" id="fn17"><sup>17</sup></a> Of course, this is not necessarily so. If, instead of spending their incomes on the expensive services of doctors, lawyers, and so on, the rich were in the habit of spending them on vast retinues of retainers <span class="italics">who were supported by the efforts of others</span>, the change in money incomes might release factors which, from the point of view of the new conditions of demand, represented much productive power. But in fact this is not the case. Even when the rich do support vast retinues of retainers, the retainers spend most of their time looking after each other. Anyone who has lived in a household in which there was more than one servant will realise the force of this consideration.</p> |
| <p><a href="#ft19" id="fn19"><sup>19</sup></a> On all this, the classical discussion is still to be found in Samuel Bailey’s chapter (<span class="italics">op. cit</span>., pp. 71-93) “On comparing commodities at different periods”. Bailey overstates his case to this extent, that he does not mention <span class="italics">prospective</span> value relations through time (see below). But in every other respect his position is unassailable, and his demonstrations are among the most elegant to be found in the whole range of theoretical analysis. Even the most <span class="italics">blasé</span> could scarcely resist a thrill at the exquisite delicacy of his exhibition of the ambiguities of the first proposition of Ricardo’s <span class="italics">Principles</span>. It was one of the few real injuries done to the progress of Economic Science by the solidarity of the English Classics that, presumably because of its attacks on Ricardo and Malthus, Bailey’s work was allowed to drop into neglect. It is hardly an exaggeration to say that Index Number Theory is only today emancipating itself from errors into which a regard to Bailey’s main proposition would effectively have prevented it from falling.</p> | <> | <p><a href="#ft18" id="fn18"><sup>18</sup></a> On all this, the classical discussion is still to be found in Samuel Bailey’s chapter (<span class="italics">op. cit.</span>, pp. 71-93) “On comparing commodities at different periods”. Bailey overstates his case to this extent, that he does not mention <span class="italics">prospective</span> value relations through time (see below, p. 61). But in every other respect his position is unassailable, and his demonstrations are among the most elegant to be found in the whole range of theoretical analysis. Even the most <span class="italics">blasé</span> could scarcely resist a thrill at the exquisite delicacy of his exhibition of the ambiguities of the first proposition of Ricardo’s <span class="italics">Principles</span>. It was one of the few real injuries done to the progress of Economic Science by the solidarity of the English Classics that, presumably because of its attacks on Ricardo and Malthus, Bailey’s work was allowed to drop into neglect. It is hardly an exaggeration to say that the theory of index number is only today emancipating itself from errors into which a regard to Bailey’s main proposition would effectively have prevented it from falling.</p> |
| <p><a href="#ft20" id="fn20"><sup>20</sup></a> <span class="italics">Prices and Production</span>, especially ch. iii. See also Mises, <span class="italics">Theorie des Oeldes und der Umlaufsmitteln</span>, pp. 358-375.</p> | <> | <p><a href="#ft19" id="fn19"><sup>19</sup></a> See especially Hayek, <span class="italics">Prices and Production</span>, ch. iii.</p> |
| <p><a href="#ft21" id="fn21"><sup>21</sup></a> It is not always realised that the difficulty of attaching precise meaning to the idea of changes in value, if there are more than two commodities and the ratios of exchange between one and the rest do not move in the same proportion, is not limited to the idea of changes in the “value of money”. The problem of conceiving changes in the “purchasing power” of pig iron is just as insoluble as the problem of conceiving changes in the purchasing power of money. The difference is a practical one. The fact that production is determined by relative valuations makes it unnecessary for practical purposes to worry about changes in the purchasing power of pig iron, while for all sorts of reasons, some good, some bad, we are obliged to worry a good deal about the effects of “monetary” changes.</p> | <> | <p><a href="#ft20" id="fn20"><sup>20</sup></a> It is not always realised that the difficulty of attaching precise meaning to the idea of changes in value, if there are more than two commodities and the ratios of exchange between one and the rest do not move in the same proportion, is not limited to the idea of changes in the “value of money”. The problem of conceiving changes in the “purchasing power” of pig iron is just as insoluble as the problem of conceiving changes in the purchasing power of money. The difference is a practical one. The fact that production is determined by relative valuations makes it unnecessary for practical purposes to worry about changes in the purchasing power of pig iron, while for all sorts of reasons, some good, some bad, we are obliged to worry a good deal about the effects of “monetary” changes.</p> |
| <p><a href="#ft22" id="fn22"><sup>22</sup></a> <span class="italics">Op. cit.</span>, p. 72.</p> | <> | <p><a href="#ft21" id="fn21"><sup>21</sup></a> <span class="italics">Op. cit.</span>, p. 72.</p> |
| <p><a href="#ft23" id="fn23"><sup>23</sup></a> See Fetter, <span class="italics">Economic Principles</span>, p. 101 <span class="italics">ff</span>., and pp. 235-277. See also Hayek, <span class="italics">Das Intertemporale Gleichgewichtsystem der Preise und die Bewegungen des</span> “<span class="italics">Geldwertes</span>” (<span class="italics">Weltwirtschaftliches Archiv</span>, Bd. 28, pp. 33-76).</p> | <> | <p><a href="#ft22" id="fn22"><sup>22</sup></a> See Fetter, <span class="italics">Economic Principles</span>, p. 101 <span class="italics">ff</span>., and pp. 235-277. See also Hayek, <span class="italics">Das intertemporale Gleichgewichtsystem der Preise und die Bewegungen des</span> “<span class="italics">Geldwertes</span>” (<span class="italics">Weltwirtschaftliches Archiv</span>, Bd. 28, pp. 33-76).</p> |
| <p><a href="#ft24" id="fn24"><sup>24</sup></a> As in discussions of changes in real income and the cost of living. On all this see Haberler, <span class="italics">Der Sinn der Indexzahlen, passim</span>. Dr. Haberler’s conclusion is definitive. “Die Wissenschaft macht sich einer Grenzüberschreitung schuldig, sie fällt ein Werturteil wenn sie die Wirtschaftsubjekte belehren will welches von zwei Naturaleinkommen das ‘grössere’ Realeinkommen enthalt. Darüber zu entscheiden, welches vorzuziehen ist, sind einzig und allein die Wirtschafter selbst berufen” (“Science is guilty of trespassing beyond its necessary limits—that is to say, it is delivering a judgment of value—if it attempts to lay down for others which of two real incomes is the ‘larger’. To decide on this, to decide which real income is to be preferred, is a task which can only be done by him who is to enjoy it—that is, by the individual as ‘economic subject’”. The translation is very free, for there is no English equivalent to the very useful German contrast between <span class="italics">Naturaleinkommen</span> and <span class="italics">Realeinkommen</span> unless we use “Real income” as equivalent to <span class="italics">Naturaleinkommen</span> and Fetter’s “Psychic income” for the German <span class="italics">Realeinkommen</span>).</p> | <> | <p><a href="#ft23" id="fn23"><sup>23</sup></a> As in discussions of changes in real income and the cost of living. On all this see Haberler, <span class="italics">Der Sinn der Indexzahlen</span>, <span class="italics">passim</span>. Dr. Haberler’s conclusion is definitive. “Die Wissenschaft macht sich einer Grenzüberschreitung schuldig, sie fällt ein Werturteil wenn sie die Wirtschaftsubjekte belehren will welches von zwei Naturaleinkommen das ‘grössere’ Realeinkommen enthält. Darüber zu entscheiden, welches vorzuziehen ist, sind einzig und allein die Wirtschafter selbst berufen.” p. 83 (“Science is guilty of trespassing beyond its necessary limits—that is to say. it is delivering a judgment of value if it attempts to lay down for others which of two real incomes is the ‘larger’. To decide on this, to decide which real income is to be preferred, is a task which can only be done by him who is to enjoy it—that is, by the individual as ‘economic subject’”. The translation is very free, for there is no English equivalent to the very useful German contrast between <span class="italics">Naturaleinkommen</span> and <span class="italics">Realeinkommen</span> unless we use “Real income” as equivalent to <span class="italics">Naturaleinkommen</span> and Fetter’s “Psychic income” for the German <span class="italics">Realeinkommen</span>).</p> |
| <p><a href="#ft25" id="fn25"><sup>25</sup></a> See Cannan, <span class="italics">Theories of Production and Distribution</span>, ch. ii.</p> | <> | <p><a href="#ft24" id="fn24"><sup>24</sup></a> See Cannan, <span class="italics">Theories of Production and Distribution</span>, ch. ii.</p> |
| <p><a href="#ft26" id="fn26"><sup>26</sup></a> “The fundamental questions of economies are why all of us taken together are as well off as we are and why some of us are much better off and others much worse off than the average . . .” (Cannan, <span class="italics">Wealth</span>, 3rd edition, p. v).</p> | <> | <p><a href="#ft25" id="fn25"><sup>25</sup></a> “The fundamental questions of economics are why all of us taken together are as well off as we are and why some of us are much better off and others much worse off than the average . . .” (Cannan, <span class="italics">Wealth</span>, 3rd edition, p. v).</p> |
| <p><a href="#ft27" id="fn27"><sup>27</sup></a> Whether their generalisations <span class="italics">did</span> answer the questions, especially that relating to personal distribution, is another matter (see Cannan, <span class="italics">Economic Outlook</span>, pp. 215-253, and <span class="italics">Review of Economic Theory</span>, pp. 284-332; see also Dalton, <span class="italics">Inequality of Incomes</span>, pp. 33-158). The point is that they thought they ought to answer them. The fact that they did not is not necessarily to the discredit either of economists or their generalisations. There is strong reason for supposing that personal distribution is determined in part by extra-economic causes.</p> | <> | <p><a href="#ft26" id="fn26"><sup>26</sup></a> Whether their generalisations <span class="italics">did</span> answer the questions, especially that relating to personal distribution, is another matter (see Cannan, <span class="italics">Economic Outlook</span>, pp. 215-253, and <span class="italics">Review of Economic Theory</span>, pp. 284-332; see also Dalton, <span class="italics">Inequality of Incomes</span>, pp. 33-158). The point is that they thought they ought to answer them. The fact that they did not is not necessarily to the discredit either of economists or their generalisations. There is strong reason for supposing that personal distribution is determined in part by extra-economic causes.</p> |
| <p><a href="#ft28" id="fn28"><sup>28</sup></a> See Schumpeter, <span class="italics">Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie</span>, p. 156.</p> | <> | <p><a href="#ft27" id="fn27"><sup>27</sup></a> See Schumpeter, <span class="italics">Das Wesen uni der Hauptinhalt der theoretischen Nationalökonomie</span>, p. 156.</p> |
| <p><a href="#ft29" id="fn29"><sup>29</sup></a> <span class="italics">Principles</span>, 8th edition, pp. 145-146.</p> | +- | |
| <p><a href="#ft30" id="fn30"><sup>30</sup></a> <span class="italics">Ibid</span>., p. 207.</p> | +- | |
| <p><a href="#ft31" id="fn31"><sup>31</sup></a> See Edgeworth, <span class="italics">Mathematical Psychics</span>, pp. 1-6; Kaufmann, <span class="italics">Was kann die mathematische Methode in der Nationalökonomie leisten?</span> (<span class="italics">Zeitschrift für Nationalökonomie</span>, Bd. 2, pp. 754-779).</p> | <> | <p><a href="#ft28" id="fn28"><sup>28</sup></a> See Edgeworth, <span class="italics">Mathematical Psychics</span>, pp. 1-6; Kaufmann, <span class="italics">Was kann die mathematische Methode in der Nationalökonomie leisten?</span> (<span class="italics">Zeitschrift für Nationalökonomie</span>. Bd. 2, pp. 754-779).</p> |
| <p><a href="#ft32" id="fn32"><sup>32</sup></a> The nearest approach to a law of production is embodied in the celebrated Optimum Theory of Population. This starts from the perfectly precise law of Non-proportional Returns which relates to variations of productivity in the proportionate combinations of individual factors, and <span class="italics">appears</span> to achieve a similar precision in regard to variations of all human factors in a fixed material environment. In fact, however, it introduces conceptions of averages and aggregates to which it is impossible to give meaning without conventional assumptions. On the Optimum Theory see my <span class="italics">Optimum Theory of Population</span> in <span class="italics">London Essays in Economics</span>, edited by Dalton and Gregory. In that essay I discussed the difficulties of averaging, but I had not then perceived the full weight of the general methodological difference between statements relating to averages and statements relating to precise quantities. Hence my emphasis on this point is insufficient.</p> | <> | <p><a href="#ft29" id="fn29"><sup>29</sup></a> The nearest approach to a law of production is embodied in the celebrated Optimum Theory of Population. This starts from the perfectly precise law of Non-proportional Returns which relates to variations of productivity in the proportionate combinations of individual factors, and <span class="italics">appears</span> to achieve a similar precision in regard to variations of all human factors in a fixed material environment. In fact, however, it introduces conceptions of averages and aggregates to which it is impossible to give meaning without conventional assumptions. On the Optimum Theory see my <span class="italics">Optimum Theory of Population</span> in <span class="italics">London Essays in Economics</span>, edited by Dalton and Gregory. In that essay I discussed the difficulties of averaging, but I had not then perceived the full weight of the general methodological difference between statements relating to averages and statements relating to precise quantities. Hence my emphasis on this point is insufficient.</p> |
| <p><a href="#ft33" id="fn33"><sup>33</sup></a> It is important not to overstress the excellence of past procedure. The theory of money, <span class="italics">e.g</span>., although in many respects the most highly developed branch of Economic Theory, has continually employed pseudo-concepts of the sort we have just declared suspect—the price level, movements of purchasing power parities, etc. But it is just here that the difficulties of monetary theory have persisted. And recent improvements in monetary theory have been directed to eliminating all dependence on these fictions.</p> | <> | <p><a href="#ft30" id="fn30"><sup>30</sup></a> It is important not to overstress the excellence of past procedure. The theory of money <span class="italics">e.g.</span>, although in many respects the most highly developed branch of Economic Theory, has continually employed pseudoconcepts of the sort we have just declared suspect—the price level, movements of purchasing power parities, etc. But it is just here that the difficulties of monetary theory have persisted. And recent improvements in monetary theory have been directed to eliminating all dependence on these fictions.</p> |
| <p><a href="#ft34" id="fn34"><sup>34</sup></a> On the various types of equilibrium contemplated, see Knight, <span class="italics">Risk, Uncertainty and Profit</span>, p. 143, note; Wicksell, <span class="italics">Vorlesungen über Nationalökonomie</span>, Bd. 1; and Robbins, <span class="italics">On a Certain Ambiguity in the Conception of Stationary Equilibrium</span> (<span class="italics">Economic Journal</span>, vol. xl., pp. 194-214).</p> | <> | <p><a href="#ft31" id="fn31"><sup>31</sup></a> On the various types of equilibrium contemplated, see Knight, <span class="italics">Risk, Uncertainty and Profit</span>, p. 143, note; Wicksell, <span class="italics">Lectures on Political Economy</span>, vol. i; and Robbins, <span class="italics">On a Certain Ambiguity in the Conception of Stationary Equilibrium</span> (<span class="italics">Economic Journal</span>, vol. xl., pp. 194-214).</p> |
| <p><a href="#ft35" id="fn35"><sup>35</sup></a> If I am not mistaken, the title Theory of Variations was first used in this context by Professor Schumpeter, <span class="italics">op cit</span>., p. 441 <span class="italics">seq</span>. The content of the theory is, of course, older than Ricardo.</p> | <> | <p><a href="#ft32" id="fn32"><sup>32</sup></a> See Pareto, <span class="italics">Manuel d’Economie Politique</span>, p. 147; also my article on <span class="italics">Production</span> in the <span class="italics">Encyclopædia of the Social Sciences</span>. In the first edition of this essay I subsumed the theory of comparative statics and the theory of dynamic change under the single heading, “Theory of Variations.” I now think it it better to make explicit the two types of variation theory. For further elucidations see below, Chapter IV., Section 7.</p> |
| <p><a href="#ft36" id="fn36"><sup>36</sup></a> <span class="italics">Op cit</span>., pp. 540-542.</p> | <> | <p><a href="#ft33" id="fn33"><sup>33</sup></a> <span class="italics">Op cit</span>., pp. 540-542.</p> |
| <p><a href="#ft37" id="fn37"><sup>37</sup></a> The beginning of the change dates from the coming of the Subjective Theory of Value. So long as the Theory of Value was expounded in terms of costs, it was possible to regard the subject-matter of Economics as something social and collective, and to discuss price relationships simply as market phenomena. With the realisation that these market phenomena were, in fact, dependent on the interplay of individual choice, and that the very social phenomena in terms of which they were explained—costs—were in the last analysis the reflex of individual choice—the valuation of alternative opportunities (Wieser, Davenport)—this approach becomes less and less convenient. The work of the mathematical economists in this respect only sets out particularly boldly a procedure which is really common to all modern theory.</p> | <> | <p><a href="#ft34" id="fn34"><sup>34</sup></a> The beginning of the change dates from the coming of the subjective theory of value. So long as the theory of value was expounded in terms of costs, it was possible to regard the subject-matter of Economics as something social and collective, and to discuss price relationships simply as market phenomena. With the realisation that these market phenomena were, in fact, dependent on the interplay of individual choice, and that the very social phenomena in terms of which they were explained—costs—were in the last analysis the reflex of individual choice—the valuation of alternative opportunities (Wieser, Davenport)—this approach becomes less and less convenient. The work of the mathematical economists in this respect only sets out particularly boldly a procedure which is really common to all modern theory.</p> |
| <p><a href="#ft38" id="fn38"><sup>38</sup></a> The best discussions are to be found in Wicksell, <span class="italics">Vorlesungen</span>, Bd. 1, pp. 158-290; Hans Mayer, <span class="italics">Produktion in the Handwörterbuch der Staatswissenschaft</span>.</p> | <> | <p><a href="#ft35" id="fn35"><sup>35</sup></a> The best discussions are to be found in Wicksell, <span class="italics">Lectures on Political Economy</span>, vol. i., pp. 100-206; Hans Mayer, <span class="italics">Produktion</span> in the <span class="italics">Handwörterbuch der Staatswissenschaften</span>.</p> |
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| <h1 id="sigil_toc_id_5" title="IV. The Nature of Economic Generalisations">CHAPTER IV</h1> | <> | <h1 title="IV. The Nature of Economic Generalisations">CHAPTER IV</h1> |
| <p>2. It is the object of this Essay to arrive at conclusions which are based on the inspection of Economic Science as it actually exists. Its aim is not to discover how Economics should be pursued—that controversy, although we shall have occasion to refer to it <span class="italics">en passant</span>,<a href="#fn1" id="ft1"><sup>1</sup></a> may be regarded as settled as between reasonable people—but rather what significance is to be attached to the results which it has already achieved. It will be convenient, therefore, at the outset of our investigations, if, instead of attempting to derive the nature of Economic Generalisations from the pure categories of our subject-matter,<a href="#fn2" id="ft2"><sup>2</sup></a> we commence by examining a typical specimen.</p> | <> | <p>2. It is the object of this essay to arrive at conclusions which are based on the inspection of Economic Science as it actually exists. Its aim is not to discover how Economics should be pursued—that controversy, although we shall have occasion to refer to it <span class="italics">en passant</span>,<a href="#fn1" id="ft1"><sup>1</sup></a> may be regarded as settled as between reasonable people—but rather what significance is to be attached to the results which it has already achieved. It will be convenient, therefore, at the outset of our investigations, if, instead of attempting to derive the nature of economic generalisations from the pure categories of our subject-matter,<a href="#fn2" id="ft2"><sup>2</sup></a> we proceed rather by examining specimens drawn from the existing body of analysis.</p> |
| <p>It is a well-known generalisation of elementary Price Theory that, in a free market, intervention by some outside body to fix a price below the market price will lead to an excess of demand over supply. This proposition, although usually ignored by statesmen and writers in the popular press, has been demonstrated so often in practice that, even from the point of view of “straightforward common sense” (<span class="italics">i.e</span>., naïve acceptance of the apparent evidence of experience) there can be little doubt concerning its validity.<a href="#fn3" id="ft3"><sup>3</sup></a> Upon what foundations does it rest?</p> | <> | <p>The most fundamental propositions of economic analysis are the propositions of the general theory of value. No matter what particular “school” is in question, no matter what arrangement of subject-matter is adopted, the body of propositions explaining the nature and the determination of the relation between given goods of the first order will be found to have a pivotal position in the whole system. It would be premature to say that the theory of this part of the subject is complete. But it is clear that enough has been done to warrant our taking the central propositions as established. We may proceed, therefore, to inquire on what their validity depends.</p> |
| <p>It should not be necessary to spend much time showing that it cannot rest upon any appeal to History. The frequent concomitance of certain phenomena in time may suggest a problem to be solved. It cannot by itself be taken to imply a definite causal relationship. It might be shown that, whenever the fixing of maximum prices in relatively free markets has taken place, it has been followed, either by evasion or by the kind of distributive chaos which we associate with the food queues of the late War or the French Revolution. But this would not prove that the two phenomena were causally connected in any intimate sense. Nor would it afford any safe ground for prediction with regard to their future relationship. In the absence of rational grounds for supposing intimate connection, there would be no sufficient reason for supposing that History “would repeat itself”. For if there is one thing which <span class="italics">is</span> shown by History, not less than by elementary logic, it is that historical induction, unaided by the analytical judgment, is the worst possible basis of prophecy.<a href="#fn4" id="ft4"><sup>4</sup></a> “History shows”, commences the bore at the club, and we resign ourselves to the prediction of the improbable. It is one of the great merits of the modern Philosophy of History that it has repudiated all claims of this sort, and indeed makes it the <span class="italics">fundamentum divisionis</span> between History and Natural Science that history does not proceed by way of generalising abstraction.<a href="#fn5" id="ft5"><sup>5</sup></a></p> | <> | <p>It should not be necessary to spend much time showing that it cannot rest upon a mere appeal to “History”. The frequent concomitance of certain phenomena in time may suggest a problem to be solved. It cannot by itself be taken to imply a definite causal relationship. It might be shown that, whenever the conditions postulated in any of the simple corollaries of the theory of value have actually existed, the consequences deduced have actually been observed to follow. Thus, whenever the fixing of prices in relatively free markets has taken place it has been followed either by evasion or by the kind of distributive chaos which we associate with the food queues of the late war or the French or Russian Revolutions.<a href="#fn3" id="ft3"><sup>3</sup></a> But this would not prove that the phenomena in question were causally connected in any intimate sense. Nor would it afford any safe ground for predictions with regard to their future relationship. In the absence of rational grounds for supposing intimate connection, there would be no sufficient reason for supposing that history “would repeat itself”. For if there is one thing which <span class="italics">is</span> shown by history, not less than by elementary logic, it is that historical induction, unaided by the analytical judgment, is the worst possible basis of prophecy.<a href="#fn4" id="ft4"><sup>4</sup></a> “History shows”, commences the bore at the club, and we resign ourselves to the prediction of the improbable. It is one of the great merits of the modern philosophy of history that it has repudiated all claims of this sort, and indeed makes it the <span class="italics">fundamentum divisionis</span> between history and natural science that history does not proceed by way of generalising abstraction.<a href="#fn5" id="ft5"><sup>5</sup></a></p> |
| <p>It is equally clear that our belief does not rest upon the results of controlled experiment. It is perfectly true that this particular proposition has on more than one occasion been exemplified by the results of government intervention carried out under conditions which might be held to bear some resemblance to the conditions of controlled experiment. But it would be gross superficiality to suppose that the results of these experiments can be held to justify a proposition of such universality as the proposition we are examining. Certainly it would be a very fragile body of Economic Generalisations which could be erected on a basis of this sort. Yet, in fact, our belief in this particular generalisation and many others is more complete than belief based upon any number of controlled experiments.</p> | <> | <p>It is equally clear that our belief does not rest upon the results of controlled experiment. It is perfectly true that the particular case just mentioned has on more than one occasion been exemplified by the results of government intervention carried out under conditions which might be held to bear some resemblance to the conditions of controlled experiment. But it would be very superficial to suppose that the results of these “experiments” can be held to justify a proposition of such wide applicability, let alone the central propositions of the general theory of value. Certainly it would be a very fragile body of economic generalisations which could be erected on a basis of this sort. Yet, in fact, our belief in these propositions is as complete as belief based upon any number of controlled experiments.</p> |
| -+ | <p>It does not require much knowledge of modern economic analysis to realise that the foundation of the theory of value is the assumption that the different things that the individual wants to do have a different importance to him, and can be arranged therefore in a certain order. This notion can be expressed in various ways and with varying degrees of precision, from the simple want systems of Menger and the early Austrians to the more refined scales of relative valuations of Wicksteed and Schönfeld and the indifference systems of Pareto and Messrs. Hicks and Allen. But in the last analysis it reduces to this, that we can judge whether different possible experiences are of equivalent or greater or less importance to us. From this elementary fact of experience we can derive the idea of the substitutability of different goods, of the demand for one good in terms of another, of an equilibrium distribution of goods between different uses, of equilibrium of exchange and of the formation of prices. As we pass from the description of the behaviour of the single individual to the discussion of markets we naturally make other subsidiary assumptions—there are two individuals or many, the supply is in the hands of a monopoly or of a multiplicity of sellers, the individuals in one part of the market know or do not know what is going on in other parts of the market, the legal framework of the market prohibits this or that mode of acquisition or exchange, and so on. We assume, too, a given initial distribution of property.<a href="#fn6" id="ft6"><sup>6</sup></a> But always the main underlying assumption is the assumption of the schemes of valuation of the different economic subjects. But this, we have seen already,<a href="#fn7" id="ft7"><sup>7</sup></a> is really an assumption of one of the conditions which must be present if there is to be economic activity at all. It is an essential constituent of our conception of conduct with an economic aspect.</p> | |
| <p>Let us look more closely at the arguments by which it is established. The proposition that a price fixed below the equilibrium point must result in an excess of demand over supply is a simple corollary of the general Theory of Price. According to that theory, the equilibrium price must be conceived as that price which restricts demand to the available supply. It follows quite simply that if the price is lower than this, the necessary restriction will not be effected. Demand which would have been excluded by the higher price will arise and there will be disequilibrium.</p> | <> | <p>The propositions so far mentioned all relate to the theory of the valuation of given goods. In the elementary theory of value and exchange no inquiry is made into the conditions of continuous production. If we assume that production takes place, a new set of problems arises, necessitating new principles of explanation. We are confronted, <span class="italics">e.g.</span>, with the problem of explaining the relation between the value of the products and the value of the factors which produced them—the so-called problem of imputation. What is the sanction here for the solutions which have been put forward?</p> |
| <p>But why should we assume that there exist demands which must be excluded at a price at which demand and supply are equal? Surely this follows from the fact that a price exists at all. If there were no demand beyond the available supply, and no alternative use for the factors of production involved,<a href="#fn6" id="ft6"><sup>6</sup></a> there would be no price. The good would not be scarce in relation to the demand for it. It would not be an economic good at all. It would be a free good.</p> | <> | <p>As is well known, the main principle of explanation, supplementary to the principles of subjective valuation assumed in the narrower theory of value and exchange, is the principle sometimes described as the Law of Diminishing Returns. Now the Law of Diminishing Returns is simply one way of putting the obvious fact that different factors of production are imperfect substitutes for one another. If you increase the amount of labour without increasing the amount of land the product will increase, but it will not increase proportionately. To secure a doubling of the product, if you do not double both land and labour, you have to more than double either one of the factors. This is obvious. If it were not so, then all the corn in the world could be produced from one acre of land. It follows, too, from considerations more intimately connected with our fundamental conceptions. A class of scarce factors is to be defined as consisting of those factors which are perfect substitutes. That is to say, difference in factors is to be defined essentially as imperfect substitutability. The Law of Diminishing Returns, therefore, follows from the assumption that there is more than one class of scarce factors of production.<a href="#fn8" id="ft8"><sup>8</sup></a> The supplementary principle that, within limits, returns may increase, follows equally directly from the assumption that factors are relatively indivisible. On the basis of these principles and with the aid of subsidiary assumptions of the kind already mentioned (the nature of markets and the legal framework of production, etc.), it is possible to build up a theory of equilibrium of production.<a href="#fn9" id="ft9"><sup>9</sup></a></p> |
| <p>In the last analysis, therefore, our proposition rests upon deductions which are implicit in our initial definition of the subject-matter of Economic Science as a whole. Economics is concerned with the disposal of scarce goods with alternative uses. That is our fundamental conception. And from this conception we are enabled to derive the whole complicated structure of modern Price Theory. That goods are scarce and have alternative uses is a fact. Economic analysis consists in elucidating the manifold implications thereof.</p> | <> | <p>Let us turn to more dynamic considerations. The theory of profits, to use the word in the rather restricted sense in which it has come to be used in recent theory, is essentially an analysis of the effects of uncertainty with regard to the future availability of scarce goods and scarce factors. We live in a world in which, not only are the things that we want scarce, but their exact occurrence is a matter of doubt and conjecture. In planning for the future we have to choose, not between certainties, but rather between a range of estimated probabilities. It is clear that the nature of this range itself may vary, and accordingly there must arise not only relative valuation of the different kinds of uncertainties between themselves, but also of different ranges of uncertainty similarly compared. From such concepts may be deduced many of the most complicated propositions of the theory of economic dynamics.<a href="#fn10" id="ft10"><sup>10</sup></a></p> |
| <p>The same thing can be put in a form which, although apparently more pretentious, may perhaps carry more conviction to those who are accustomed to the jargon of modern theory. The proposition that the fixing of a price below the equilibrium price necessarily results in an excess of demand over supply, involves the assumption of a demand schedule that increases as price diminishes—in the language of co-ordinate geometry, a downward sloping demand curve. But, as is well known, this assumption in turn involves the assumption of individual scales of relative valuation which show diminishing marginal significance as supply is assumed to increase. But this, too, is implicit in the conception of goods which are scarce in relation to the use which might be made of them. The assumption that some specific uses, either of the good itself or of the factors which produce it, must be relinquished so long as the good remains an economic good implies just that hierarchy of uses which underlies the various applications of the Law of Diminishing Marginal Utility.<a href="#fn7" id="ft7"><sup>7</sup></a></p> | <> | <p>And so we could go on. We could show how the use of money can be deduced from the existence of indirect exchange and how the demand for money can be deduced from the existence of the same uncertainties that we have just examined.<a href="#fn11" id="ft11"><sup>11</sup></a> We could examine the propositions of the theory of capital and interest, and reduce them to elementary concepts of the type we have been here discussing. But it is unnecessary to prolong the discussion further. The examples we have already examined should be sufficient to establish the solution for which we are seeking. The propositions of economic theory, like all scientific theory, are obviously deductions from a series of postulates. And the chief of these postulates are all assumptions involving in some way simple and indisputable facts of experience relating to the way in which the scarcity of goods which is the subject-matter of our science actually shows itself in the world of reality. The main postulate of the theory of value is the fact that individuals can arrange their preferences in an order, and in fact do so. The main postulate of the theory of production is the fact that there are more than one factor of production. The main postulate of the theory of dynamics is the fact that we are not certain regarding future scarcities. These are not postulates the existence of whose counterpart in reality admits of extensive dispute once their nature is fully realised. We do not need controlled experiments to establish their validity: they are so much the stuff of our everyday experience that they have only to be stated to be recognised as obvious. Indeed, the danger is that they may be thought to be so obvious that nothing significant can be derived from their further examination. Yet in fact it is on postulates of this sort that the complicated theorems of advanced analysis ultimately depend. And it is from the existence of the conditions they assume that the general applicability of the broader propositions of economic science is derived.</p> |
| <p>3. The example we have just examined was naturally of the simplest order. But nevertheless it is typical of the whole range of analytical Economics. From the fundamental concept of goods which are scarce in relation to the demand for them we derive the idea of scales or functions expressing the relative valuation put upon these goods by different individuals. We then make various suppositions concerning the technical and legal conditions under which production and exchange may be assumed to be possible, and we examine, on the one hand, what are the conditions of equilibrium in these various circumstances, and, on the other, what are the implications of changes in the given data. On the analytical side Economics proves to be a series of deductions from the fundamental concept of scarcity of time and materials.</p> | <> | <p>3. Now of course it is true, as we have already seen, that the development of the more complicated applications of these propositions involves the use of a great multitude of subsidiary postulates regarding the condition of markets, the number of parties to the exchange, the state of the law, the <span class="italics">minimum sensible</span><a href="#fn12" id="ft12"><sup>12</sup></a> of buyers and sellers, and so on and so forth. The truth of the deductions from this structure depends, as always, on their logical consistency. Their applicability to the interpretation of any particular situation depends upon the existence in that situation of the elements postulated. Whether the theory of competition or of monopoly is applicable to a given situation is a matter for inquiry. As in the applications of the broad principles of the natural sciences, so in the application of economic principles we must be careful to enquire concerning the nature of our material. It is not assumed that any of the many possible forms of competitive or monopolistic conditions <span class="italics">must</span> necessarily always exist. But while it is important to realise how many are the subsidiary assumptions which necessarily arise as our theory becomes more and more complicated, it is equally important to realise how widely applicable are the main assumptions on which it rests. As we have seen, the chief of them are applicable whenever and wherever the conditions which give rise to economic phenomena are present.</p> |
| -+ | <p>Considerations of this sort, it may be urged, should enable us easily to detect the fallacy implicit in a view which has played a great rôle in continental discussions. It has sometimes been asserted that the generalisations of Economics are essentially “historico-relative” in character, that their validity is limited to certain historical conditions, and that outside these they have no relevance to the analysis of social phenomena. This view is a dangerous misapprehension. It can be given plausibility only by a distortion of the use of words so complete as to be utterly misleading. It is quite true that in order fruitfully to apply the more general propositions of Economics, it is important to supplement them with a series of subsidiary postulates drawn from the examination of what may often be legitimately designated historico-relative material. It is certain that unless this is done bad mistakes are likely to be made. But it is not true that the main assumptions are historico-relative <span class="italics">in the same sense</span>. It is true that they are based upon experience, that they refer to reality. But it is experience of so wide a degree of generality as to place them in quite a different class from the more properly designated historico-relative assumptions. No one will really question the universal applicability of such assumption as the existence of scales of relative valuation, or of different factors of production, or of different degrees of uncertainty regarding the future, even though there may be room for dispute as to the best mode of describing their exact logical status. And no one who has really examined the kind of deductions which can be drawn from such assumptions can doubt the utility of starting from this plane. It is only failure to realise this, and a too exclusive preoccupation with the subsidiary assumptions, which can lend any countenance to the view that the laws of Economics are limited to certain conditions of time and space, that they are purely historical in character, and so on. If such views are interpreted to mean merely that we must realise that the applications of general analysis involve a host of subsidiary assumptions of a less general nature, that before we apply our general theory to the interpretation of a particular situation we must be sure of the facts—well and good. Any teacher who has watched good students over-intoxicated with the excitement of pure theory will agree. It may even be conceded that at times there may have been this degree of justification in the criticisms of the classical economists by the better sort of historian. But if, as in the history of the great methodological controversies has notoriously been the case, they are interpreted to mean that the broad conclusions springing from general analysis are as limited as their particular applications—that the generalisations of Political Economy were applicable only to the state of England in the early part of the reign of Queen Victoria, and such-like contentions—then it is clearly utterly misleading. There is perhaps a sense in which it is true to say that <span class="italics">all</span> scientific knowledge is historico-relative. Perhaps in some other existence it would all be irrelevant. But if this is so, then we need a new term to designate what is usually called historico-relative. So with that body of knowledge which is general economics. If it is historico-relative, then a new term is needed to describe what we know as historico-relative studies.</p> | |
| <p>It is worth while spending a little longer examining the grounds for this verdict, for it is not always realised how far the theoretical developments of the last half century have succeeded in unifying analytical economics on the lines we have indicated; and at first sight the position may appear paradoxical. Analytical Economics did not originate consciously in this manner. It arose from attempts to provide practical answers to very practical questions. It was only after a long process of development that it became possible to detect in the various solutions the common element we have isolated. And even at the present day, the formulation of general theory is often marred by a quite unnecessary eclecticism. Unless it is made quite clear that in the marginal analysis we possess the basis for a completely unitary Economic Theory, it is safe to say that the inner significance of that analysis has not been recognised at all.</p> | <> | <p>Stated this way, surely the case for the point of view underlying the so-called “orthodox” conception of the science since the time of Senior and Cairnes is overwhelmingly convincing. It is difficult to see why there should have been such fuss, why anybody should have thought it worth while calling the whole position in question. And, of course, if we examine the actual history of the controversy it becomes abundantly clear that the case for the attack was not primarily scientific and philosophical at all. It may have been the case that from time to time a sensitive historian was outraged by the crudities of some very second-rate economist—more probably by some business man or politician repeating at second-hand what he thought the economists had said. It may have been the case sometimes that a pure logician has been offended by an incautious use of philosophical terms on the part of an economist, anxious to vindicate a body of knowledge which he knows to be true and important. But in the main the attacks have not come from these quarters. Rather they have been <span class="italics">political</span> in nature. They have come from men with an axe to grind—from men who wished to pursue courses which the acknowledgment of law in the economic sphere would have suggested to be unwise. This was certainly the case with the majority of the leaders of the younger Historical School,<a href="#fn13" id="ft13"><sup>13</sup></a> who were the spearhead of the attack on international liberalism in the Bismarckian era. It is equally the case to-day with the lesser schools which adopt a similar attitude. The only difference between Institutionalism and <span class="italics">Historismus</span> is that <span class="italics">Historismus</span> is much more interesting.</p> |
| <p>A good example of what we have to elucidate is to be found in the Law of Costs. Under competitive conditions in equilibrium the price of commodities is equal to their cost of production per unit—cost of production of course being taken to include what Marshall called expenses of management. How does this follow from the fundamental concept we have elaborated?</p> | <> | <p>4. If the argument which has been developed above is correct, economic analysis turns out to be as Fetter has emphasised,<a href="#fn14" id="ft14"><sup>14</sup></a> the elucidation of the implications of the necessity of choice in various assumed circumstances. In pure Mechanics we explore the implication of the existence of certain given properties of bodies. In pure Economics we examine the implication of the existence of scarce means with alternative uses. As we have seen, the assumption of relative valuations is the foundation of all subsequent complications.</p> |
| <p>Until quite recently the connection was not understood. In the classical system, cost of production, in the sense of the “real” counterpart of money expenses, tended to be exhibited as something ultimate. For purposes of analysis, commodities were separated into two groups, commodities whose value was determined by their scarcity, and commodities whose value was determined by their cost of production either in the sense of labour cost or labour plus abstinence.<a href="#fn8" id="ft8"><sup>8</sup></a> In the one case the play of demand was regarded as the determining factor; in the other, cost of production in one or other of the senses just mentioned. And even in modern times the psychological forces working on the supply side have been thought to be something entirely different from the forces working on the demand side. Marginal utility and cost of production—these were the two blades of Marshall’s celebrated pair of scissors.</p> | <> | <p>It is sometimes thought, even at the present day, that this notion of relative valuation depends upon the validity of particular psychological doctrines. The borderlands of Economics are the happy hunting-ground of minds averse to the effort of exact thought, and, in these ambiguous regions, in recent years, endless time has been devoted to attacks on the alleged psychological assumptions of Economic Science. Psychology, it is said, advances very rapidly. If, therefore, Economics rests upon particular psychological doctrines, there is no task more ready to hand than every five years or so to write sharp polemics showing that, since psychology has changed its fashion, Economics needs “rewriting from the foundations upwards”. As might be expected, the opportunity has not been neglected. Professional economists, absorbed in the exciting task of discovering new truth, have usually disdained to reply: and the lay public, ever anxious to escape the necessity of recognising the implications of choice in a world of scarcity, has allowed itself to be bamboozled into believing that matters, which are in fact as little dependent on the truth of fashionable psychology as the multiplication table, are still open questions on which the enlightened man, who, of course, is nothing if not a psychologist, must be willing to suspend judgment.</p> |
| <p>It is one of the great achievements of Wieser and his successors that this duality has been removed.<a href="#fn9" id="ft9"><sup>9</sup></a> The expenses of producing a given commodity fall into two types of outlay—outlays on factors of production which are specialised to produce the goods in question and no others (specific factors), and outlays on factors which are not so specialised (non-specific factors). Now, so far as the outlays due to the specific factors are concerned, it is fairly clear that the scarcity of these factors, and hence their price, is derived from the scarcity of the product. No independent principle of explanation is needed here. But so far as the outlays for the non-specific factors are concerned, at first sight the price is something given independently of the conditions of demand. And of course it is perfectly true that it may be considered as being to some extent independent of the conditions of demand for the particular product under consideration. But just as it is illegitimate to consider the valuations of one good independently of the valuation of other goods, so it is illegitimate to regard the valuation of the services of productive factors as exhausting itself <span class="italics">via</span> the demand in any one line of production. Once this is realised the rest is simple. What is it which causes the price paid for a given factor of production in a given line of production to be what it is and not something else? Clearly the demand in that line of production in relation to the supply. But why is the supply of the factors in that line limited to what it is? Why is not the whole supply devoted to this line of production? Clearly because there is demand for the scarce products which it can produce <span class="italics">elsewhere</span>. Its price in one line therefore depends upon the price which is put upon it in others. In the end, subjective valuations govern costs equally with product prices.</p> | <> | <p>Unfortunately, in the past, incautious utterances on the part of economists themselves have sometimes afforded a pretext for these strictures. It is well known that certain of the founders of the modern subjective theory of value did in fact claim the authority of the doctrines of psychological hedonism as sanctions for their propositions. This was not true of the Austrians. From the beginning the Mengerian tables were constructed in terms which begged no psychological questions.<a href="#fn15" id="ft15"><sup>15</sup></a> Böhm-Bawerk explicitly repudiated any affiliation with psychological hedonism; indeed, he went to infinite pains to avoid this kind of misconception.<a href="#fn16" id="ft16"><sup>16</sup></a> But the names of Gossen and Jevons and Edgeworth, to say nothing of their English followers, are a sufficient reminder of a line of really competent economists who did make pretensions of this sort. Gossen’s <span class="italics">Entwicklung der Gesetze des menschlichen Verkehrs</span> certainly invokes hedonistic postulates. Jevons in his <span class="italics">Theory of Political Economy</span> prefaces his theory of utility and exchange with a theory of pleasure and pain. Edgeworth commences his <span class="italics">Mathematical Psychics</span> with a section which urges the conception of “man as a pleasure machine”.<a href="#fn17" id="ft17"><sup>17</sup></a> Attempts have even been made to exhibit the law of diminishing marginal utility as a special case of the Weber-Fechner Law.<a href="#fn18" id="ft18"><sup>18</sup></a></p> |
| <p>It has sometimes been objected that this unification is only possible on the assumption that the total supplies of factors of production are constant. Given flexible supply, it is urged that the concept of real cost once more comes into its own as an independent principle of explanation. In the nineties this view was strongly supported by Edgeworth.<a href="#fn10" id="ft10"><sup>10</sup></a> At the present day its most distinguished exponent is Mr. D. H. Robertson.<a href="#fn11" id="ft11"><sup>11</sup></a></p> | <> | <p>But it is fundamentally important to distinguish between the actual practice of economists, and the logic which it implies, and their occasional <span class="italics">ex post facto</span> apologia. It is just this distinction which the critics of Economic Science fail to make. They inspect with supererogatory zeal the external façade, but they shrink from the intellectual labour of examining the inner structure. Nor do they trouble to acquaint themselves with the more recent formulations of the theory they are attacking. No doubt this has strategic advantages, for, in polemics of this kind, honest misconception is an excellent spur to effective rhetoric; and no one who was acquainted with recent value theory could honestly continue to argue that it has any essential connection with psychological hedonism, or for that matter with any other brand of <span class="italics">Fach-Psychologie</span>. If the psychological critics of Economics had troubled to do these things they would speedily have perceived that the hedonistic trimmings of the works of Jevons and his followers were incidental to the main structure of a theory which—as the parallel development in Vienna showed—is capable of being set out and defended in absolutely non-hedonistic terms. As we have seen already, all that is assumed in the idea of the scales of valuation is that different goods have different uses and that these different uses have different significances for action, such that in a given situation one use will be preferred before another and one good before another. Why the human animal attaches particular values in this sense to particular things, is a question which we do not discuss. That is quite properly a question for psychologists or perhaps even physiologists. All that we need to assume as economists is the obvious fact that different possibilities offer different incentives, and that these incentives can be arranged in order of their intensity.<a href="#fn19" id="ft19"><sup>19</sup></a> The various theorems which may be derived from this fundamental conception are unquestionably capable of explaining a manifold of social activity incapable of explanation by any other technique. But they do this, not by assuming some particular psychology, but by regarding the things which psychology studies as the data of their own deductions. Here, as so often, the founders of Economic Science constructed something more universal in its application than anything that they themselves claimed.</p> |
| <p>The objection is plausible. And it may be admitted that, as against the form in which the arguments of the early Austrians were cast, it has a certain degree of validity. It is clear that, for expository purposes, both Wieser and Böhm-Bawerk had recourse to the hypothesis of fixed total factor-supplies, while their opponents, Marshall and Edgeworth, always proceeded from the assumption that factor-supplies were flexible.<a href="#fn12" id="ft12"><sup>12</sup></a></p> | <> | <p>But now the question arises how far even this procedure is legitimate. It should be clear from all that has been said already that although it is not true that the propositions of analytical economics rest upon any particular psychology, yet they do most unquestionably involve elements which are of a psychological—or perhaps better said a psychical—nature. This, indeed, is explicitly recognised in the name by which they are sometimes known—the subjective or psychological theory of value; and, as we have seen, it is clear that the foundation of this theory is a psychical fact, the valuations of the individual. In recent years, however, partly as a result of the influence of Behaviourism, partly as a result of a desire to secure the maximum possible austerity in analytical exposition, there have arisen voices urging that this framework of subjectivity should be discarded. Scientific method, it is urged, demands that we should leave out of account anything which is incapable of direct observation. We may take account of demand as it shows itself in observable behaviour in the market. But beyond this we may not go. Valuation is a subjective process. We cannot <span class="italics">observe</span> valuation. It is therefore out of place in a scientific explanation. Our theoretical constructions must assume observable data. Such, for instance, is the attitude of Professor Cassel,<a href="#fn20" id="ft20"><sup>20</sup></a> and there are passages in the later work of Pareto<a href="#fn21" id="ft21"><sup>21</sup></a> which permit of a similar interpretation. It is an attitude which is very frequent among those economists who have come under the influence of Behaviourist psychology or who are terrified of attack from exponents of this queer cult.</p> |
| <p>But even if we proceed from the wider hypothesis Wieser’s proposition still holds. The total supply of work depends upon the relative valuation of the product of work and leisure. The supply of capital depends upon the relative valuation of income now and income in the future. The intricate interrelationships of the Stationary State all resolve themselves into what Pareto called an equilibrium of tastes and obstacles. On the one side we have scales of relative valuation: on the other the given facts of the technique of production and the material and human equipment.<a href="#fn13" id="ft13"><sup>13</sup></a></p> | <> | <p>At first sight this seems very plausible. The argument that we should do nothing that is not done in the physical sciences is very seductive. But it is doubtful whether it is really justified. After all, our business is to explain certain aspects of conduct. And it is very questionable whether this can be done in terms which involve no psychical element. It is quite certain that whether it be pleasing or no to the desire for the maximum austerity, we do in fact <span class="italics">understand</span> terms such as choice, indifference, preference, and the like in terms of inner experience. The idea of an end, which is fundamental to our conception of the economic, is not possible to define in terms of external behaviour only. If we are to explain the relationships which arise from the existence of a scarcity of means in relation to a multiplicity of ends, surely at least one-half of the equation, as it were, must be psychical in character.</p> |
| <p>Again, we may take the theory of money. Money is a commodity whose absolute quantity in static conditions has no significance for the behaviour of any member of the community. For many years, therefore, it was thought that the fundamental principles of the Theory of Money were different in kind from the principles involved in non-monetary analysis. The value of money was explained in terms radically different from the terms involved in the general theory of value. The total quantity of money was opposed to the total quantity of goods and services exchanged against it; and its value per unit in any given period was held to be determined by the quantity multiplied by the velocity of circulation divided by the volume of trade—the celebrated equation of exchange MV/T = P.</p> | <> | <p>Such considerations would be decisive so long as it were taken for granted that the definition of the subject-matter of Economics suggested in this essay was correct. But it might be urged that they were simply an argument for rejecting that definition and substituting one relating only to “objective”, observable matters, market prices, ratios of exchange, and so on. This is clearly what is implied by Professor Cassel’s procedure—the celebrated <span class="italics">Ausschaltung der Wertlehre</span>.</p> |
| -+ | <p>But even if we restrict the object of Economics to the explanation of such observable things as prices, we shall find that in fact it is impossible to explain them unless we invoke elements of a subjective or psychological nature. It is surely clear, as soon as it is stated specifically, that the most elementary process of price determination must depend <span class="italics">inter alia</span> upon what people think is going to happen to prices in the future. The demand functions which Professor Cassel thinks enable us to dispense with any subjective elements, must be conceived not merely as relating to prices which prevail now, or which might prevail, on present markets, but also as relating to a whole series of prices which people expect to prevail in the future. It is obvious that what people expect to happen in the future is not susceptible of observation by purely behaviourist methods. Yet, as Professor Knight and others have shown, it is absolutely essential to take such anticipations into account if we are to understand at all the mechanics of economic change. It is essential for a thorough explanation of competitive prices. It is indispensable for the most superficial explanation of monopolistic prices. It is quite easy to exhibit such anticipations as part of a general system of scales of preference.<a href="#fn22" id="ft22"><sup>22</sup></a> But if we suppose that such a system takes account of observable data only we deceive ourselves. How can we observe what a man thinks is going to happen?</p> | |
| -+ | <p>It follows, then, that if we are to do our job as economists, if we are to provide a sufficient explanation of matters which every definition of our subject-matter necessarily covers, we must include psychological elements. They cannot be left out if our explanation is to be adequate. It seems, indeed, as if investigating this central problem of one of the most fully developed parts of any of the social sciences we have hit upon one of the essential differences between the social and the physical sciences. It is not the business of this essay to explore these more profound problems of methodology. But it may be suggested that if this case is at all typical—and some would regard the procedure of theory of prices as standing near the limit of proximity to the physical sciences—then the procedure of the social sciences which deal with conduct, which is in some sense purposive, can never be completely assimilated to the procedure of the physical sciences. It is really not possible to understand the concepts of choice, of the relationship of means and ends, the central concepts of our science, in terms of observation of external data. The conception of purposive conduct in this sense does not necessarily involve any ultimate indeterminism. But it does involve links in the chain of causal explanation which are psychical, not physical, and which are, for that reason, not necessarily susceptible of observation by behaviourist methods. Recognition of this does not in the least imply renunciation of “objectivity” in Max Weber’s sense. It was exactly this that Max Weber had in mind when he wrote his celebrated essays.<a href="#fn23" id="ft23"><sup>23</sup></a> All that the “objective” (that is to say, the <span class="italics">wertfrei</span>, to use Max Weber’s phrase) explanation of conduct involves is the consideration of certain data, individual valuations, etc., which are not merely physical in character. The fact that such data are themselves of the nature of judgments of value does not necessitate that they should be valued as such. They are not judgments of value by the observer. What is of relevance to the social sciences is, not whether individual judgments of value are <span class="italics">correct</span> in the ultimate sense of the philosophy of value, but whether they are <span class="italics">made</span> and whether they are essential links in the chain of causal explanation. If the argument of this section is correct, this question must be answered in the affirmative.</p> | |
| <p>From a purely formal point of view no doubt this procedure was valid. MV must equal PT because they are just the same quantities set out in a different manner.<a href="#fn14" id="ft14"><sup>14</sup></a> It is a mere tautology, though no doubt it is significant in the discussion of certain problems. Certainly the old quantity theory of money has a practical utility whose value should not be underrated.</p> | <> | <p>5. But now the question arises whether the generalisations of economics, in addition to being based on this fundamental assumption of relative valuations, do not also depend upon a more general psychological assumption—upon the assumption of completely rational conduct. Is it not correct to describe the subject-matter of Economics as the <span class="italics">rational</span> disposal of goods?<a href="#fn24" id="ft24"><sup>24</sup></a> And in this sense cannot Economics be said to depend upon another, and more contentious, kind of psychological assumption than any we have yet examined? This is a matter of some intricacy which deserves attention, not only for its own sake, but for the light it casts upon the methods of Economics in general.</p> |
| -+ | <p>Now in so far as the idea of rational action involves the idea of <span class="italics">ethically appropriate</span> action, and it certainly is sometimes used in this sense in everyday discussion, it may be said at once—there will be more to be said about it later—that no such assumption enters into economic analysis. As we have just seen, economic analysis is <span class="italics">wertfrei</span> in the Weber sense. The values of which it takes account are valuations of individuals. The question whether in any further sense they are <span class="italics">valuable</span> valuations is not one which enters into its scope. If the word rationality is to be construed as in any way implying this meaning, then it may be said that the concept for which it stands does not enter into economic analysis.</p> | |
| <p>But there is nothing in the equation of exchange which <span class="italics">explains</span> the ratio of exchange between the unit of account and other things in the circle of exchange. Nor is there anything which relates it to individual conduct. <span class="italics">Prima facie</span> it is not based upon any general principle deduced from the fundamental categories of pure theory.</p> | <> | <p>But in so far as the term rational is taken to mean merely “consistent”, then it is true that an assumption of this sort does enter into certain analytical constructions. The celebrated generalisation that in a state of equilibrium the relative significance of divisible commodities is equal to their price, does involve the assumption that each final choice is consistent with every other, in the sense that if I prefer A to B and B to C, I also prefer A to C: in short, that in a state of perfect equilibrium the possibility of advantage from further “internal arbitrage operations” is excluded.</p> |
| <p>Again modern analysis has effected the desired unification. Working on the basis of the general Law of Diminishing Marginal Significance, Marshall<a href="#fn15" id="ft15"><sup>15</sup></a> and Cannan<a href="#fn16" id="ft16"><sup>16</sup></a> in this country, and Mises<a href="#fn17" id="ft17"><sup>17</sup></a> in Austria, have succeeded in showing how individual demand for money may be formulated in terms strictly symmetrical with the conception of demand for other things, so that ultimately the value of money, equally with the value of anything else, may be explained in terms of relative subjective valuations. For the community as a whole, the quantity of money may be a matter of indifference. But, for the individual with given resources, to keep a certain proportion of these resources available in the form of free cash is in itself a convenience. Hence there arises a demand for money to hold—a relative valuation of cash and other resources which is expressed “in” the system of relative prices equally with other valuations. It is characteristic of this synthesis, as of many others, that while achieving much greater logical and æsthetic elegance than the old theory, it yet retains all that was useful and valid in it. It is not necessary here to show how the old conception of velocity of circulation can be derived from the modern conception of demand for money: the thing has been done very frequently.<a href="#fn18" id="ft18"><sup>18</sup></a> All that it has been desired to indicate is the fundamental unity of economic analysis. Not only the general Theory of Economic Equilibrium, but also the pure Theory of Money, can be deduced from the fundamental conception of goods which are scarce in relation to the possible uses which may be made of them.</p> | <> | <p>There is a wider sense, too, in which the conception of rationality as equivalent to consistency can be understood as figuring in discussions of the conditions of equilibrium. It may be irrational to be completely consistent as between commodities, in the sense just described, just because the time and attention which such exact comparisons require are (in the opinion of the economic subject concerned) better spent in other ways. In other words, there may be an opportunity cost of “internal arbitrage” which, beyond a certain point, outweighs the gain. The marginal utility of not bothering about marginal utility is a factor of which account has been taken by the chief writers on the subjective theory of value from Böhm-Bawerk onwards. It is not a recent discovery. It can be taken into account in a formal sense by permitting a certain margin (or structure of margins) of inconsistency between particular valuations.</p> |
| <p>4. If this is true, economic analysis turns out to be, as Fetter has emphasised,<a href="#fn19" id="ft19"><sup>19</sup></a> the elucidation of the implications of the necessity of choice in various assumed circumstances. In pure Mechanics we explore the implication of the existence of certain given properties of bodies. In pure Economics we examine the implication of the existence of scarce means with alternative uses. The assumption of scales of relative valuation is the foundation of all subsequent complications.</p> | <> | <p>It is perfectly true that the assumption of perfect rationality figures in constructions of this sort. But it is not true that the generalisations of economics are limited to the explanation of situations in which action is perfectly consistent. Means may be scarce in relation to ends, even though the ends be inconsistent. Exchange, production, fluctuation—all take place in a world in which people do not know the full implications of what they are doing. It is often inconsistent (<span class="italics">i.e.</span>, irrational in this sense) to wish at once for the fullest satisfaction of consumers’ demands, and at the same time to impede the import of foreign goods by tariffs or such-like obstacles. Yet it is frequently done: and who shall say that economic science is not competent to explain the situation resulting?</p> |
| <p>It is sometimes thought, even at the present day, that this notion of scales of relative valuation depends upon the validity of particular psychological doctrines. The borderlands of Economics are the happy hunting-ground of the charlatan and the quack, and, in these ambiguous regions, in recent years, endless time has been devoted to the acquisition of cheap notoriety by attacks on the alleged psychological assumptions of Economic Science. Psychology, it is said, advances very rapidly. If, therefore, Economics rests upon particular psychological doctrines, there is no task more ready to hand for the intellectually sterile, than every five years or so to write sharp polemics showing that, since psychology has changed its fashion, Economics needs “rewriting from the foundations upwards”. As might be expected, the opportunity has not been neglected. Professional economists, absorbed in the exciting task of discovering new truth, have usually disdained to reply: and the lay public, ever anxious to escape the necessity of recognising the implications of choice in a world of scarcity, has allowed itself to be bamboozled into believing that matters, which are in fact as little dependent on the truth of fashionable psychology as the multiplication table, are still open questions on which the enlightened man, who, of course, is nothing if not a psychologist, must be willing to suspend judgment.</p> | <> | <p>Of course there is a sense in which the word rationality can be used which renders it legitimate to argue that at least some rationality is assumed before human behaviour has an economic aspect—the sense, namely, in which it is equivalent to “purposive”. As we have seen already, it is arguable that if behaviour is not conceived of as purposive, then the conception of the means-end relationships which economics studies has no meaning. So if there were no purposive action, it could be argued that there were no economic phenomena.<a href="#fn25" id="ft25"><sup>25</sup></a> But to say this is not to say in the least that all purposive action is completely consistent. It may indeed be urged that the more that purposive action becomes conscious of itself, the more it necessarily becomes consistent. But this is not to say that it is necessary to assume <span class="italics">ab initio</span> that it always is consistent or that the economic generalisations are limited to that, perhaps, tiny section of conduct where all inconsistencies have been resolved.</p> |
| <p>Unfortunately, in the past, incautious utterances on the part of economists themselves have sometimes afforded a pretext for these strictures. It is well known that certain of the founders of the modern Subjective Theory of Value did in fact claim the authority of the doctrines of psychological hedonism as sanctions for their propositions. This was not true of the Austrians. From the beginning the Mengerian tables were constructed in terms which begged no psychological questions.<a href="#fn20" id="ft20"><sup>20</sup></a> Böhm-Bawerk explicitly repudiated any affiliation with psychological hedonism; indeed, he went to infinite pains to avoid this kind of misconception.<a href="#fn21" id="ft21"><sup>21</sup></a> But the names of Gossen and Jevons and Edgeworth, to say nothing of their English followers, are a sufficient reminder of a line of really competent economists who did make pretensions of this sort. Gossen’s <span class="italics">Entwicklung der Gesetze des menschlichen Verkehrs</span> certainly invokes hedonistic postulates. Jevons in his <span class="italics">Theory of Political Economy</span> prefaces his Theory of Utility and Exchange with a theory of pleasure and pain. Edgeworth commences his <span class="italics">Mathematical Psychics</span> with a section which urges the conception of “man as a pleasure machine”.<a href="#fn22" id="ft22"><sup>22</sup></a> Attempts have even been made to exhibit the Law of Diminishing Marginal Utility as a special case of the Weber-Fechner Law.<a href="#fn23" id="ft23"><sup>23</sup></a></p> | <> | <p>The fact is, of course, that the assumption of perfect rationality in the sense of complete consistency is simply one of a number of assumptions of a psychological nature which are introduced into economic analysis at various stages of approximation to reality. The perfect foresight, which it is sometimes convenient to postulate, is an assumption of a similar nature. The purpose of these assumptions is not to foster the belief that the world of reality corresponds to the constructions in which they figure, but rather to enable us to study, in isolation, tendencies which, in the world of reality, operate only in conjunction with many others, and then, by contrast as much as by comparison, to turn back to apply the knowledge thus gained to the explanations of more complicated situations. In this respect, at least, the procedure of pure economics has its counterpart in the procedure of all physical sciences which have gone beyond the stage of collection and classification.</p> |
| <p>But it is fundamentally important to distinguish between the actual practice of economists, and the logic which it implies, and their occasional <span class="italics">ex post facto</span> apologia. It is just this distinction which the critics of Economic Science fail to make. They inspect with supererogatory zeal the external façade, but they shrink from the intellectual labour of examining the inner structure. Nor do they trouble to acquaint themselves with the more modern formulations of the theory they are attacking. No doubt this has strategic advantages, for, in polemics of this kind, honest misconception is an excellent spur to effective rhetoric; and no one who was acquainted with modern value theory could honestly continue to argue that it has any essential connection with psychological hedonism, or for that matter with any other brand of <span class="italics">FachPsychologie</span>. If the psychological critics of Economics had troubled to do these things they would speedily have perceived that the hedonistic trimmings of the works of Jevons and his followers were incidental to the main structure of a theory which—as the parallel development in Vienna showed—is capable of being set out and defended in absolutely non-hedonistic terms. As we have seen already, all that is assumed in the idea of the scales of valuation is that different goods have different uses and that these different uses have different significances for action, such that in a given situation one use will be preferred before another and one good before another. Why the human animal attaches particular values in this behaviouristic sense to particular things, is a question which we do not discuss. That may be quite properly a question for psychologists or perhaps even physiologists. All that we need to assume is the obvious fact that different possibilities offer different stimuli to behaviour, and that these stimuli can be arranged in order of their intensity.<a href="#fn24" id="ft24"><sup>24</sup></a> The various theorems which may be derived from this fundamental conception are capable of explaining a manifold of social activity more varied and rich in its substance than anything yet entering the psychological laboratory. But they do this, not by assuming some particular psychology, but by regarding the things which psychology studies as the given data of their own deductions. Here, as so often, the founders of Economic Science constructed something more universal in its application than anything that they themselves claimed.</p> | +- | |
| <p>5. But if this is so, what are we to say of the oft-reiterated accusation that Economics assumes a world of economic men concerned only with money-making and self-interest? Foolish and exasperating as this may appear to any competent economist, it is worth some further examination. Although it is completely false, yet there is a certain expository device of pure analysis which, if not explained in detail, might give rise to structures of this nature.</p> | <> | <p>6. Considerations of this sort enable us to deal also with the oft-reiterated accusation that Economics assumes a world of economic men concerned only with money-making and self-interest. Foolish and exasperating as this may appear to any competent economist, it is worth some further examination. Although it is false, yet there is a certain expository device of pure analysis which, if not explained in detail, might give rise to strictures of this nature.</p> |
| <p>The general absurdity of the belief that the world contemplated by the economist is peopled only by egotists or “pleasure machines” should be sufficiently clear from what has been said already. The fundamental concept of economic analysis is the idea of scales of relative valuations; and, as we have seen, while we assume that different goods have different values at different margins, we do not regard it as part of our problem to explain why these particular valuations exist. We take them as given data. So far as we are concerned, our economic subjects can be pure egoists, pure altruists, pure ascetics, pure sensualists or—what is much more likely—mixed bundles of all these impulses. The scales of relative valuation are merely a convenient formal way of exhibiting certain permanent characteristics of man as he actually is. Failure to recognise the primacy of these valuations is simply a failure to understand the significance of the last sixty years of Economic Science.</p> | <> | <p>The general absurdity of the belief that the world contemplated by the economist is peopled only by egotists or “pleasure machines” should be sufficiently clear from what has been said already. The fundamental concept of economic analysis is the idea of relative valuations; and, as we have seen, while we assume that different goods have different values at different margins, we do not regard it as part of our problem to explain why these particular valuations exist. We take them as data. So far as we are concerned, our economic subjects can be pure egoists, pure altruists, pure ascetics, pure sensualists or—what is much more likely—mixed bundles of all these impulses. The scales of relative valuation are merely a convenient formal way of exhibiting certain permanent characteristics of man as he actually is. Failure to recognise the primacy of these valuations is simply a failure to understand the significance of the last sixty years of Economic Science.</p> |
| <p>All these things are taken into account in our conception of scales of relative valuation. And the generalisations descriptive of economic equilibrium are couched in a form which explicitly brings this to the fore. Every first-year student since the days of Adam Smith has learnt to describe equilibrium in the distribution of particular grades of labour in terms of a tendency, <span class="italics">not</span> to the maximisation of <span class="italics">money gains</span>, but to the maximisation of <span class="italics">net advantages</span> in the various alternatives open.<a href="#fn25" id="ft25"><sup>25</sup></a> The modern theory of risk, too, and its influence on the capital market depends essentially on assumptions of this kind.<a href="#fn26" id="ft26"><sup>26</sup></a> But sometimes for purposes of exposition it is convenient to start from the first approximation that the valuation is simple, and that, on the one side is a simple thing desired or offered, and on the other is the money to be got or given in exchange for it. For the elucidation of certain complicated propositions such as the Theory of Imputation or marginal productivity analysis it permits an economy of terms. It is not in the least difficult, at the appropriate stage, to remove these assumptions and to pass to analysis couched in terms of complete formal generality.</p> | <> | <p>All these things are taken into account in our conception of scales of relative valuation. And the generalisations descriptive of economic equilibrium are couched in a form which explicitly brings this to the fore. Every first-year student since the days of Adam Smith has learnt to describe equilibrium in the distribution of particular grades of labour in terms of a tendency, <span class="italics">not</span> to the maximisation of <span class="italics">money gains</span>, but to the maximisation of <span class="italics">net advantages</span> in the various alternatives open.<a href="#fn26" id="ft26"><sup>26</sup></a> As we have seen already, the theory of risk, too, and its influence on the capital market depends essentially on assumptions of this kind. But sometimes for purposes of exposition it is convenient to start from the first approximation that the valuation is of a very simple order, and that, on the one side is a thing desired or offered, and on the other is the money to be got or given in exchange for it. For the elucidation of certain complicated propositions, such as the theory of costs or marginal productivity analysis, it permits an economy of terms. It is not in the least difficult, at the appropriate stage, to remove these assumptions and to pass to analysis couched in terms of complete generality.</p> |
| <p>This, then, is all that lies behind the occasional appearance of the <span class="italics">homo œconomicus</span>—the purely formal assumption that in certain exchange relationships all the means, so to speak, are on one side and all the ends on the other. If. <span class="italics">e.g</span>., for purposes of demonstrating the circumstances in which a single price will emerge in a limited market, it is assumed that in my dealings in that market I always buy from the cheapest seller, it is not assumed at all that I am necessarily actuated by egotistical motives. On the contrary, it is well known that the impersonal relationship postulated is to be seen in its purest form when trustees, not being in a position to allow themselves the luxury of more complicated relationships, are trying to make the best terms for the estates they administer. All that it means is that my relation to the dealers does not enter into my hierarchy of ends. For me (who may be acting for myself or my friends or some civic or charitable authority) they are regarded merely as means. Or, again, if it is assumed—which in fact is usually done for purposes of showing <span class="italics">by contrast</span> what the total influences in equilibrium bring about—that I sell my labour always in the dearest market, it is not assumed that money and self-interest are my ultimate objects—I may be working entirely to support some philanthropic institution. It is assumed only that, so far as that transaction is concerned, my labour is only a means to an end; it is not to be regarded as an end in itself.</p> | <> | <p>This, then, is all that lies behind the <span class="italics">homo œconomicus</span>—the occasional assumption that in certain exchange relationships all the means, so to speak, are on one side and all the ends on the other. If. <span class="italics">e.g.</span>, for purposes of demonstrating the circumstances in which a single price will emerge in a limited market, it is assumed that in my dealings in that market I always buy from the cheapest seller, it is not assumed at all that I am necessarily actuated by egotistical motives. On the contrary, it is well known that the impersonal relationship postulated is to be seen in its purest form when trustees, not being in a position to allow themselves the luxury of more complicated relationships, are trying to make the best terms for the estates they administer: your business man is a much more complicated fellow. All that it means is that my relation to the dealers does not enter into my hierarchy of ends. For me (who may be acting for myself or my friends or some civic or charitable authority) they are regarded merely as means. Or, again, if it is assumed—which in fact is usually done for purposes of showing <span class="italics">by contrast</span> what the total influences in equilibrium bring about—that I sell my labour always in the dearest market, it is not assumed that money and self-interest are my ultimate objects—I may be working entirely to support some philanthropic institution. It is assumed only that, so far as that transaction is concerned, my labour is only a means to an end; it is not to be regarded as an end in itself.</p> |
| <p>If this were commonly known, if it were generally realised that Economic Man is only an expository device—a first approximation used very cautiously at one stage in the development of arguments which, in their full development, neither employ any such assumption nor demand it in any way for a justification of their procedure—it is improbable that he would be such a universal bogey. But of course it is generally thought that he has a wider significance, that he lurks behind all those generalisations of the “Laws of Supply and Demand” better described as the Theory of Variations, whose elucidation so often is inimical to the universal desire to be able to believe it to be possible both to have your cake and to eat it. And it is for this reason that he is so furiously attacked. If it were Economic Man who barred the gates of Cloud-cuckoo-land, then it might well seem that a little psychology—it does not matter much of what brand—might be expected to burst them open.</p> | <> | <p>If this were commonly known, if it were generally realised that Economic Man is only an expository device—a first approximation used very cautiously at one stage in the development of arguments which, in their full development, neither employ any such assumption nor demand it in any way for a justification of their procedure—it is improbable that he would be such a universal bogey. But of course it is generally thought that he has a wider significance, that he lurks behind all those generalisations of the “Laws of Supply and Demand” better described as the theory of comparative statics, whose elucidation so often is inimical to the desire to be able to believe it to be possible both to have your cake and to eat it. And it is for this reason that he is so furiously attacked. If it were Economic Man who barred the gates of Cloud-cuckoo-land, then it might well seem that a little psychology—it would not matter much of what brand—might be expected to burst them open. What prestige, what repute for really <span class="italics">deep</span> insight into human motivation might be expected to accrue from so spectacular an exposure!</p> |
| <p>Unfortunately this belief rests upon complete misapprehension. The propositions of the Theory of Variations do not in the least involve the assumption that men are actuated <span class="italics">only</span> by considerations of money gains and losses. They involve only the assumption that money plays <span class="italics">some</span> part in the valuation of the given alternatives. And they suggest only that if from any position of equilibrium the money incentive is <span class="italics">varied</span> this must tend to alter the equilibrium valuations. Money may not be regarded as playing a predominant part in the situation contemplated. So long as it plays some part then the propositions are applicable.</p> | <> | <p>Unfortunately this belief rests upon misapprehension. The propositions of the theory of variations do not involve the assumption that men are actuated <span class="italics">only</span> by considerations of money gains and losses. They involve only the assumption that money plays <span class="italics">some</span> part in the valuation of the given alternatives. And they suggest only that if from any position of equilibrium the money incentive is <span class="italics">varied</span> this must tend to alter the equilibrium valuations. Money may not be regarded as playing a predominant part in the situation contemplated. So long as it plays some part then the propositions are applicable.</p> |
| <p>A simple illustration should make this quite plain. Let us suppose that a small bounty is granted in respect of the production of an article produced under conditions of free competition. According to the Theory of Variations there will be a tendency for the production of that commodity to increase—the magnitude of the increase depending upon considerations of elasticity into which it is not necessary for us to enter. Now upon what does this generalisation depend? Upon the assumption that producers are actuated only by considerations of monetary gain? Not at all. We may assume that they take into account all the “other advantages and disadvantages” with which Cantillon and Adam Smith have made us familiar. But, if we assume that before the bounty was granted there was equilibrium, we must assume that its institution must disturb the equilibrium. The granting of the bounty implies a lowering of the terms on which real income is obtainable in this particular line of enterprise. It is the most elementary implication of the idea of scarcity that if a price is lowered the demand tends to increase.</p> | <> | <p>A simple illustration should make this quite plain. Let us suppose that a small bounty is granted in respect of the production of an article produced under conditions of free competition. According to well-known theorems there will be a tendency for the production of that commodity to increase—the magnitude of the increase depending upon considerations of elasticity into which it is not necessary for us to enter. Now upon what does this generalisation depend? Upon the assumption that producers are actuated only by considerations of monetary gain? Not at all. We may assume that they take into account all the “other advantages and disadvantages” with which Cantillon and Adam Smith have made us familiar. But, if we assume that before the bounty was granted there was equilibrium, we must assume that its institution must disturb the equilibrium. The granting of the bounty implies a lowering of the terms on which real income is obtainable in this particular line of enterprise. It is a very elementary proposition that if a price is lowered the demand tends to increase.</p> |
| <p>There is perhaps one refinement of this conclusion which needs to be stated explicitly. It may quite well be that, if the change contemplated is a very small one, no primary movement will take place.<a href="#fn27" id="ft27"><sup>27</sup></a> Is this in contradiction with our theory? Not at all. The idea of scales of valuation does not assume that every <span class="italics">physical unit</span> of any of the things which enter into the range of effective valuation must necessarily have a separate significance for action. In the assumption of the hierarchy of alternatives we do not ignore the fact that, for change to be effective, it must attain the <span class="italics">minimum sensibile</span>.<a href="#fn28" id="ft28"><sup>28</sup></a> Changes in price of a penny or twopence may not affect the habits of a given economic subject. But this is not to say that changes of a shilling will not be effective. Nor is it to say that, given limited resources, the necessity of spending more or less on one thing does not <span class="italics">inevitably</span> affect the distribution of expenditure, even if in the line of expenditure directly affected it leaves the quantity demanded unchanged.<a href="#fn29" id="ft29"><sup>29</sup></a></p> | <> | <p>There is perhaps one refinement of this conclusion which needs to be stated explicitly. It may quite well be that, if the change contemplated is a very small one, no primary movement will take place.<a href="#fn27" id="ft27"><sup>27</sup></a> Is this in contradiction with our theory? Not at all. The idea of scales of valuation does not assume that every <span class="italics">physical unit</span> of any of the things which enter into the range of effective valuation must necessarily have a separate significance for action. In the assumption of the hierarchy of alternatives we do not ignore the fact that, for change to be effective, it must attain the <span class="italics">minimum sensibile</span>.<a href="#fn28" id="ft28"><sup>28</sup></a> Changes in price of a penny or twopence may not affect the habits of a given economic subject. But this is not to say that changes of a shilling will not be effective. Nor is it to say that, given limited resources, the necessity of spending more or less on one thing does not <span class="italics">inevitably</span> affect the distribution of expenditure, even if in the line of expenditure directly affected it leaves the quantity demanded unchanged.</p> |
| <p>6. Before leaving this part of our subject there is perhaps one further matter which it is desirable to mention explicitly—the relations between the scales of relative valuations and the historical framework of institutions which may be assumed to be existing at any moment. Fortunately, this is not a matter over which it is necessary to linger long, for it has been exhaustively dealt with by Dr. Strigl;<a href="#fn30" id="ft30"><sup>30</sup></a> and it has never presented great difficulties to those who did not wish to read into Economic Law more than Economic Law actually implies.</p> | <> | <p>7. In the light of all that has been said the nature of economic analysis should now be plain. It consists of deductions from a series of postulates, the chief of which are almost universal facts of experience present whenever human activity has an economic aspect, the rest being assumptions of a more limited nature based upon the general features of particular situations or types of situations which the theory is to be used to explain.</p> |
| <p>The valuation put upon a good by a given economic subject depends essentially upon the qualities of that good and other goods which happen to be in his possession. It follows, therefore, that, in all discussions of tendencies either to equilibrium or to variation, we must start by assuming a given distribution of property. We have seen already how, if distribution changes, relative valuations must be expected to change also.<a href="#fn31" id="ft31"><sup>31</sup></a> It should be sufficiently clear without further demonstration that all valuations, and hence the whole system of equilibrium analysis, must be understood to start from an initial distribution both of the ultimate commodities and of the command over the factors of production<a href="#fn32" id="ft32"><sup>32</sup></a> relevant to the situation under discussion.</p> | <> | <p>It is sometimes thought, however, that such a conception is essentially statical in nature, that it relates only to descriptions of final positions of equilibrium, variations being essentially outside its scope. Since the world of reality is not in a state of equilibrium, but rather exhibits the appearance of incessant change, it follows that knowledge of this sort has little explanatory value. This belief, which apparently is very widespread, needs further examination.</p> |
| <p>But this is not all. Given such a distribution of goods and factors, it is clearly necessary to assume a <span class="italics">social order</span> within which the valuations based upon it may show themselves in tendencies to action. We must assume that there are ways in which this distribution may be altered without external interference, and ways in which it may not. In the theory of simple exchange, for instance, we assume that Primus is free to acquire corn from Secundus by offering him wine. But we do not necessarily assume that he is free to acquire corn by killing him or otherwise doing him violence. We assume a legal framework of economic activity.<a href="#fn33" id="ft33"><sup>33</sup></a> This framework, as it were, limits by exclusion the area within which the valuations of the economic subjects may influence their action. It prescribes a region in which one is <span class="italics">not</span> free to adopt all possible expedients; and these prescriptions are assumed in the discussion of what happens in the residual area of free action. Labour legislation, laws of property and inheritance, tax systems, obstacles to trade and to movement—all these are taken for granted when we assume the scales of relative valuation. We have seen already that these scales assume psychology. It should now be equally clear that they assume institutions.</p> | <> | <p>Now it is quite true that the elementary propositions of economic analysis are descriptions of stationary equilibrium. We start by examining, not conditions of complete rest, as in the Statics from which by analogy the name of this part of our subject is sometimes taken, but conditions in which the various “flows” of activity exhibit no tendency to change, or change only in a recurrent cycle.<a href="#fn29" id="ft29"><sup>29</sup></a> Thus we may take the conditions of a simple market in which the fundamental conditions of supply and demand are unaltered from day to day and enquire under what conditions would the quantities exchanged day by day remain invariable, even though the parties to the exchange were free to vary their bargains. Or we may consider the case in which the production takes place, but in which the fundamental data—that is, the valuations of the economic subjects, the technical possibilities of production and the ultimate supplies of the factors—are unchanged, and enquire under what condition there would be no tendency to change in the rate of flow of products. And so on. There is no need to rehearse the whole list of possibilities; any of the more rigorous textbooks on the subject—for instance, Wicksell’s <span class="italics">Lectures on Political Economy</span>, or Walras’ <span class="italics">Elements</span>—provide examples of the sort of thing under discussion.</p> |
| <p>Thus, from yet another point of view, the relationship between Economic Theory and Economic History, which follows from the main contention of this essay, emerges into prominence. Economic Theory deduces from the assumption of scales of relative valuation their formal implications in different situations. Economic History explains, in terms of all the multitudinous influences at work, the determination of particular economic relationships. If the Economic Theorist, manipulating his shadowy abacus of forms and inevitable relationships, may comfort himself with the reflection that all action must come under its categories, the Economic Historian, too, freed from subservience to other branches of history, may rest assured that there is no segment of the multicoloured weft of events which may not prove relevant to his investigations.</p> | +- | |
| <p>7. It is clear, then, that economic analysis may be conceived to assume the whole structure of “historico-relative” psychology and institutions. It should be equally clear in what respects it can deal with variations in this structure. There are two main ways in which this can be done.</p> | <> | <p>But it is quite wrong to suppose that our investigations are limited to these essential preliminaries. Once we have thoroughly investigated the conditions of constant flows, and hence learnt <span class="italics">by contrast</span> to understand the conditions in which the flows will be tending to alter, we may push our investigations further and consider variations.</p> |
| <p>In the first place it can deal with the changes in the distribution of goods which occur as a result of the operation of the equilibrating tendencies. This indeed is the function of the Theory of Equilibrium.</p> | <> | <p>We may do this in two ways. In the first place, we may compare the equilibrium positions, assuming small variations in the data. Thus we may assume the imposition of a tax, the discovery of a change in technical methods, a change in tastes, and so on. And we may endeavour to ascertain in what respects one equilibrium position differs from the other. The so-called classical analysis, imperfect as a full description of final states of equilibrium, provides a great variety of useful comparisons of differences of this sort. This part of our theory has sometimes been called the theory of comparative statics.<a href="#fn30" id="ft30"><sup>30</sup></a></p> |
| <p>It is to explain movements of this sort that the Theory of Equilibrium is instrumental.</p> | <> | <p>But we may go beyond this. Not only may we compare two final states of equilibrium assuming given variations, we may also endeavour to trace out the path actually followed by different parts of a system if a state of disequilibrium is given. This, of course, is the significance of Marshall’s “period” analysis. Into this category falls also much of what is most significant in the theory of money and banking. And in doing all this we make no assumption that final equilibrium is necessary. We assume that there are operative in different parts of the system certain tendencies which make for the restoration of an equilibrium in respect to certain limited points of reference. But we do not assume that the composite effect of these tendencies will necessarily be equilibrating. It is easy to conceive of initial configurations of the data, which have no total tendency to equilibrium, but which rather tend to cumulative oscillation.<a href="#fn31" id="ft31"><sup>31</sup></a></p> |
| <p>And, secondly, it can <span class="italics">assume</span> changes in the given structure and describe the difference between the new equilibrium and the old. It can assume the removal of a tax, the imposition of a new obstacle, the effects of a change in certain property relationships. As is well known, this is one of the main functions of the Theory of Variations.</p> | <> | <p>In all this, as will be obvious to anyone acquainted with the procedure of economic analysis, our knowledge of the statical foundations is fundamental.<a href="#fn32" id="ft32"><sup>32</sup></a> We examine change by comparing small differences of equilibrium or by comparing the effects of different tendencies to equilibrium; it is difficult to see what other procedure could be adopted. But it should be equally obvious that we study these statical problems not merely for their own sake, but in order to apply them to the explanation of change. There are certain propositions of economic statics which are significant and important in themselves. But it is hardly an exaggeration to say that their chief significance lies in their further application in economic dynamics. We study the laws of “rest” in order to understand the laws of change.</p> |
| <p>But can it not describe the laws of change in the given data themselves? Can it not tell us how outside these “consequential readjustments”—to use a phrase of Professor Pigou’s—the given data themselves change? This raises questions which can be treated more conveniently in another chapter.</p> | <> | <p>But now the question arises, Can we not even transcend all this? Will the dynamic operations described so far relate to the study of the effects of given variations in the data, or the consequences of given disequilibria? Can we not go outside all this and explain changes in the data themselves? This raises questions which can be treated more conveniently in another chapter.</p> |
| <p><a href="#ft1" id="fn1"><sup>1</sup></a> See below, Chapter V., Section 3.</p> | <> | <p><a href="#ft1" id="fn1"><sup>1</sup></a> See below, Section 4, and Chapter V., Section 3.</p> |
| <p><a href="#ft2" id="fn2"><sup>2</sup></a> For an example of such a derivation reaching substantially similar results, see Strigl, <span class="italics">op. cit</span>., p. 121 <span class="italics">seq</span>.</p> | <> | <p><a href="#ft2" id="fn2"><sup>2</sup></a> For an example of such a derivation reaching substantially similar results, see Strigl, <span class="italics">op. cit.</span>, p. 121 <span class="italics">seq</span>.</p> |
| <p><a href="#ft3" id="fn3"><sup>3</sup></a> If any reader of this book has any doubt of the evidence of the facts, he should consult the standard work on recent British experiments in such measures, <span class="italics">British Food Control</span>, by Sir William Beveridge. It is worth noting that unanimity among experts has not prevented the introduction of a Profiteering Act during the present crisis (21 and 22 Geo. V., cap. 51), although it may be suspected that expert knowledge in the departments which might have administered it, has prevented it becoming anything but a dead letter.</p> | <> | <p><a href="#ft3" id="fn3"><sup>3</sup></a> If any reader of this book has any doubt of the evidence of the facts he should consult the standard work on recent British experiments in such measures, <span class="italics">British Food Control</span>, by Sir William Beveridge.</p> |
| <p><a href="#ft5" id="fn5"><sup>5</sup></a> See Rickert, <span class="italics">op. cit</span>., pp. 78-101, <span class="italics">Die Grenzen der Naturwissenschaftlichen Begriffsbildung</span>, <span class="italics">passim</span>. See also Max Weber, <span class="italics">op. cit.</span>, <span class="italics">passim</span>.</p> | <> | <p><a href="#ft5" id="fn5"><sup>5</sup></a> See Rickert, <span class="italics">op. cit.</span>, pp. 78-101, <span class="italics">Die Grenzen der naturwissenschaftlichen Begriffsbildung</span>, <span class="italics">passim</span>, See also Max Weber, <span class="italics">op. cit.</span>, <span class="italics">passim</span>.</p> |
| <p><a href="#ft6" id="fn6"><sup>6</sup></a> The qualifying clause is necessary to take account of the case where, although the demand curve becomes parallel to the <span class="italics">y</span> axis, the transferability of the cost factors keeps the supply within the limits of active demand. This case is covered explicitly by the generalisation of paragraph 3. Where goods are reproducible, the scarcity of the factors is fundamental.</p> | <> | <p><a href="#ft6" id="fn6"><sup>6</sup></a> On all this see the illuminating observations of Dr. Strigl, <span class="italics">Die ökonomischen Kategorien und die Organisation der Wirtschaft</span>, pp. 85-121.</p> |
| <p><a href="#ft7" id="fn7"><sup>7</sup></a> On the concept of scales of the relative marginal significance of various commodities, see especially Wicksteed, <span class="italics">Commonsense of Political Economy</span>, pp. 1-125; Rosenstein-Rodan, art. <span class="italics">Grenznutzen</span> in the <span class="italics">Handwörterbuch der Staatswissenschaft</span>, Bd. 4, pp. 1190-1223. (This article, in addition to being itself no mean addition to the literature of marginal utility theory, contains a very valuable bibliography of that literature.) Viner, <span class="italics">The Utility Concept in Value Theory and its Critics</span> (<span class="italics">Journal of Political Economy</span>, vol. xxxiii., pp. 369-387); and Knight, <span class="italics">Risk, Uncertainty and Profit</span>, pp. 51-93. It should be noted that the scales are individual scales. They involve no assumption of a superpersonal collective utility. See below, Chapter VI., Section 2.</p> | <> | <p><a href="#ft7" id="fn7"><sup>7</sup></a> See above, Chapter I., Section 3.</p> |
| <p><a href="#ft8" id="fn8"><sup>8</sup></a> See, <span class="italics">e.g</span>., Ricardo, <span class="italics">Principles</span> (ed. McCulloch), p. 9. It is not true, as certain critics of the classics have alleged, that the best classics regarded supply and demand and cost of production as distinct principles of explanation. In the <span class="italics">Notes on Malthus</span>, Ricardo makes it quite clear that he understood cost of production as an influence limiting supply. (“Mr. Malthus mistakes the question—I do not say that the value of a commodity will always conform to its natural price without an additional supply, but I say that the cost of production regulates the supply and therefore regulates the price” [p. 21]). Francis Horner in his review of Canard’s <span class="italics">Principes d’Economie Politique</span> in the <span class="italics">Edinburgh Review</span>, vol. ii., 1803, pp. 437-450, puts the matter as well as it has been put by any modern: “The proper mode of introducing this principle” (<span class="italics">i.e</span>., the cost principle) “into the theory of exchangeable value, is, not to state the value of labour as constituting the whole price or forming the adequate measure of it, but to view it as a condition which limits the eventual supply of each commodity” (<span class="italics">ibid</span>., p. 437).</p> | +- | |
| <p><a href="#ft9" id="fn9"><sup>9</sup></a> <span class="italics">Ursprung und Hauptgesetze des Wirtschaftlichen Werthes</span>, pp. 146-170; <span class="italics">Natural Value</span>, pp. 171-214. See also the juvenile work, <span class="italics">Über das Verhältnis der Kosten zum Wert</span>, printed in the <span class="italics">Gesammelte Abhandlungen</span>, pp. 377-404. On the significance of Wieser’s achievement in this field see Mayer, <span class="italics">Friedrich Wiener zum Gedächtnis, Zeitschrift für Volkswirtschaft und Sozialpolitik, N.F</span>,, Bd. 5, p. 636. Wicksteed’s <span class="italics">Commonsense of Political Economy</span> contains an extensive statement of the modern law of cost in general Equilibrium Theory. Dr. Haberler’s <span class="italics">Die Theorie des Komparativen Kosten</span> (<span class="italics">Weltwirtschaftliches Archiv</span>, Bd. 31, p. 349) contains an extension of this law to the special case of international equilibrium.</p> | <> | <p><a href="#ft8" id="fn8"><sup>8</sup></a> See Robinson, <span class="italics">Economics of Imperfect Competition</span>, pp. 330-31. I myself first learnt this way of putting things from a conversation with Professor Mises many years ago. But so far as I know Mrs. Robinson is the first to put matters so succinctly and clearly in print: I think that Mrs. Robinson’s book will have done much to convince many hitherto sceptics of the utility and significance of the kind of abstract reasoning from very simple postulates which is the subject of the present discussion.</p> |
| <p><a href="#ft10" id="fn10"><sup>10</sup></a> Böhm-Bawerk on the Ultimate Standard of Value, <span class="italics">Papers relating to Political Economy</span>, vol. iii., pp. 69-64.</p> | <> | <p><a href="#ft9" id="fn9"><sup>9</sup></a> See, <span class="italics">e.g.</span>, Schneider, <span class="italics">Theorie des Produktion</span>, <span class="italics">passim</span>.</p> |
| <p><a href="#ft11" id="fn11"><sup>11</sup></a> See, <span class="italics">e.g., Economic Fragments</span>, p. 21. Mr. Robertson’s explicit pronouncements on this subject are tantalisingly concise. But I am sure he would not regard it as unfair to say that reliance on the real cost concept informs much of his most characteristic work.</p> | <> | <p><a href="#ft10" id="fn10"><sup>10</sup></a> See Knight, <span class="italics">Risk, Uncertainty, and Profit</span>; Hicks, <span class="italics">The Theory of Profit</span> (<span class="italics">Economica</span>, No. 31, pp. 170-190).</p> |
| <p><a href="#ft12" id="fn12"><sup>12</sup></a> For a fuller elucidation of the difference of assumption involved, see my <span class="italics">On a Certain Ambiguity in the Conception of Stationary Equilibrium</span> (<span class="italics">Economic Journal</span>, vol. xl., pp. 194-214). See also my <span class="italics">Economic Works of Philip Wicksteed</span> (<span class="italics">Economica</span>, December, 1930, pp. 253-256).</p> | <> | <p><a href="#ft11" id="fn11"><sup>11</sup></a> See Mises, <span class="italics">The Theory of Money</span>, pp. 147 and 200; Lavington, <span class="italics">The English Capital Market</span>, pp. 29-35; Hicks, <span class="italics">A Suggestion for Simplifying the Theory of Money</span> (<span class="italics">Economica</span>, 1934, pp. 1-20).</p> |
| <p><a href="#ft13" id="fn13"><sup>13</sup></a> It is easy to see that in carrying through the more elaborate forms of analysis recourse may very often be conveniently made to the language of mathematics. No logical difference exists between theory which employs symbols and theory which is content with words. The choice is solely a matter of convenience. See Kaufmann, <span class="italics">Was kann die mathematische Methode in Nationalökonomie leisten?</span> (<span class="italics">Zeitschrift für Nationalökonomie</span>, Bd. 2, pp. 754-779).</p> | <> | <p><a href="#ft12" id="fn12"><sup>12</sup></a> See below, p. 99.</p> |
| <p><a href="#ft14" id="fn14"><sup>14</sup></a> See Marshall, <span class="italics">Money, Credit and Commerce</span>, p. 48; Haberler, <span class="italics">Kritische Bemerkungen zur Schumpeter Geldtheorie</span> (<span class="italics">Zeitschrift für Volkswirtschaft und Sozialpolitik N.F</span>., vol. iv., 1925, pp. 647-668).</p> | +- | |
| <p><a href="#ft15" id="fn15"><sup>15</sup></a> <span class="italics">Official Papers</span>, pp. 43-45.</p> | <> | <p><a href="#ft13" id="fn13"><sup>13</sup></a> Cp. Mises, <span class="italics">Kritik des Interventionismus</span>, pp. 66-90.</p> |
| <p><a href="#ft16" id="fn16"><sup>16</sup></a> <span class="italics">Money</span> (4th edition), pp. 10-17 and 71-79.</p> | <> | <p><a href="#ft14" id="fn14"><sup>14</sup></a> <span class="italics">Economic Principles</span>, pp. ix and 12-21.</p> |
| <p><a href="#ft17" id="fn17"><sup>17</sup></a> <span class="italics">Theorie des Geldes</span>, pp. 85-146.</p> | <> | <p><a href="#ft15" id="fn15"><sup>15</sup></a> See Menger, <span class="italics">Grundsätze</span>, 1 Aufl., pp. 77-162.</p> |
| <p><a href="#ft18" id="fn18"><sup>18</sup></a> See, <span class="italics">e.g</span>., Pigou, <span class="italics">Essays in Applied Economics</span>, pp. 174-178.</p> | <> | <p><a href="#ft16" id="fn16"><sup>16</sup></a> See <span class="italics">Positive Theorie des Kapitals</span>, 4<sup>e</sup>Auflage, pp. 232-246.</p> |
| <p><a href="#ft19" id="fn19"><sup>19</sup></a> <span class="italics">Economic Principles</span>, pp. ix and 12-21.</p> | <> | <p><a href="#ft17" id="fn17"><sup>17</sup></a> <span class="italics">Mathematical Psychics</span>, p. 15.</p> |
| <p><a href="#ft20" id="fn20"><sup>20</sup></a> See Menger, <span class="italics">Grundsätze</span>, pp. 77-152.</p> | <> | <p><a href="#ft18" id="fn18"><sup>18</sup></a> For a refutation of this view, see Max Weber, <span class="italics">Die Grenznutzenlehr und das psychophysische Grundgesetz</span> (<span class="italics">Archiv für Sozialwissenschaft und Sozialpolitik</span>, vol. xxix., 1909).</p> |
| <p><a href="#ft21" id="fn21"><sup>21</sup></a> See <span class="italics">Positive Theorie des Kapitals</span><span class="bold">, 4<sup>e</sup> Auflage, pp. 232-246</span>.</p> | <> | <p><a href="#ft19" id="fn19"><sup>19</sup></a> That this does not assume the possibility of measuring valuations has been already sufficiently emphasised in Chapter III., Section 4, above.</p> |
| <p><a href="#ft22" id="fn22"><sup>22</sup></a> <span class="italics">Mathematical Psychics</span>, p. 15.</p> | <> | <p><a href="#ft20" id="fn20"><sup>20</sup></a> <span class="italics">The Theory of Social Economy</span>, First English Edition, vol. i., pp. 50-51.</p> |
| -+ | <p><a href="#ft21" id="fn21"><sup>21</sup></a> Notably in the article on <span class="italics">Economie mathématique</span> in the <span class="italics">Encyclopédie des Sciences mathématiques</span>, Paris, 1911.</p> | |
| <p><a href="#ft23" id="fn23"><sup>23</sup></a> For a conclusive refutation of this view, which, however, itself rests upon a certain degree of misconception of the logical basis of Economic Analysis, see Max Weber, <span class="italics">Die Grenznutzlehre und das psychophysische Grundgesetz</span> (<span class="italics">Archiv für Sozialwissenschaft und Sozialpolitik</span>, vol. xxix., 1909).</p> | <> | <p><a href="#ft22" id="fn22"><sup>22</sup></a> See, <span class="italics">e.g.</span>, Hicks, <span class="italics">Gleichgewicht und Konjunktur</span> (<span class="italics">Zeitschrift für National-</span><span class="italics">ökonomie</span>, vol. iv., pp. 441-455).</p> |
| <p><a href="#ft24" id="fn24"><sup>24</sup></a> That this does not assume the possibility of measuring valuations has been already sufficiently emphasised in Chapter III., Section 4, above.</p> | <> | <p><a href="#ft23" id="fn23"><sup>23</sup></a> Max Weber, <span class="italics">Die Objectivität socialwissenschaftlichen und socialpolitischen Erkenntnis: Der Sinn der Werlfreiheit der soziologischen und ökonomischen Wissenschaft</span> in <span class="italics">Gesammelte Aufsatze zur Wissenschaftlehre</span>.</p> |
| <p><a href="#ft25" id="fn25"><sup>25</sup></a> See Cantillon, <span class="italics">Essai sur la Nature du Commerce</span> (Higgs’ edition), p. 21; Adam Smith, <span class="italics">Wealth of Nations</span>, Bk. I., eh. x; Senior, <span class="italics">Political Economy</span>, pp. 200-216; McCulloch, <span class="italics">Political Economy</span>, pp. 364-378; J. S. Mill, <span class="italics">Political Economy</span>, 5th edition, vol. i., pp. 460-483; Marshall, <span class="italics">Principles</span>, 8th edition, pp. 546-558—to take a representative sample of what would be regarded as the more hard-boiled English tradition. For an up-to-date version of these doctrines, see Wicksteed, <span class="italics">Commonsense of Political Economy</span>, Part I., <span class="italics">passim</span>.</p> | <> | <p><a href="#ft24" id="fn24"><sup>24</sup></a> In her interesting pamphlet entitled <span class="italics">Economics is a Serious Subject</span> Mrs. Joan Robinson reproaches me for not having made this limitation. (The word she uses is “sensible”, but I do not think she would dispute my interpretation of her meaning.) I had, indeed, in various phrases tucked away a negative attitude to such a proposal. But I did not deal with it explicitly for fear of being charged with the introduction of overmuch discussion of side issues. I now see that this was wrong. The following section is an attempt to deal more positively with this question. But it is a matter of very great difficulty to put things correctly, and I am far from claiming to have provided a definitive analysis.</p> |
| <p><a href="#ft26" id="fn26"><sup>26</sup></a> See Knight, <span class="italics">Risk, Uncertainty and Profit</span>, Part III.; Hicks, <span class="italics">The Theory of Profit</span> (<span class="italics">Economica</span>, No. 31, pp. 170-190).</p> | <> | <p><a href="#ft25" id="fn25"><sup>25</sup></a> It is in this sense, I think, that Professor Mises uses the term when he argues that all <span class="italics">conduct</span> (Handeln) must be conceived of as rational as opposed to merely vegetative reactions (<span class="italics">Grundprobleme der Nationalökonomie</span>, pp. 22 and 34). The great emphasis which Professor Mises has laid upon this use of the term follows necessarily from his insistence that for the purposes of the social sciences conduct is not to be divided according to ethical standards. That is, that it is not to be divided into <span class="italics">rational</span> and <span class="italics">irrational</span> using these terms with a normative significance. Those who have criticised Professor Mises, on the assumption that he uses the word in other senses, have really not paid sufficient attention to the context of his emphasis. It is surely gratuitous to assume that the author of the <span class="italics">Kritik des Interventionismus</span> has omitted to notice that conduct may be irrational in the sense of <span class="italics">inconsistent</span>.</p> |
| -+ | <p><a href="#ft26" id="fn26"><sup>26</sup></a> See Cantillon, <span class="italics">Essai sur la Nature du Commerce</span>, (Higgs’ edition), p. 21; Adam Smith, <span class="italics">Wealth of Nations</span>. Bk. I., ch. x; Senior, <span class="italics">Political Economy</span>, pp. 200-216; McCulloch, <span class="italics">Political Economy</span>, pp. 364-378; J. S. Mill, <span class="italics">Political Economy</span>, 5th edition, vol. i., pp. 460-483; Marshall, <span class="italics">Principles</span>, 8th edition, pp. 546-558 -to take a representative sample of what would be regarded as the more hard-boiled English tradition. For an up-to-date version of these doctrines, see Wicksteed, <span class="italics">Commonsense of Political Economy</span>, Part I., <span class="italics">passim</span>.</p> | |
| <p><a href="#ft28" id="fn28"><sup>28</sup></a> <span class="italics">Cp</span>. Wicksteed, <span class="italics">op. cit</span>., Part II., chs. i. and ii.</p> | <> | <p><a href="#ft28" id="fn28"><sup>28</sup></a> Cp. Wicksteed, <span class="italics">op. cit.</span>, Part II., chs. i. and ii.</p> |
| <p><a href="#ft29" id="fn29"><sup>29</sup></a> Since we are dealing here with vulgar error, it is perhaps desirable to mention the allegation that the conclusions of economic analysis depend upon the assumption of perfect competition. The answer to this is very short. The allegation is totally wrong. Among the various technical assumptions under which we examine the forms of behaviour imposed by scarcity, free competition is one. But it is only one. Modern economic analysis deals not only with free competition, but with all forms of monopolistic and monopoloid situations. This particular objection, therefore, is a sure indication that the objector does not know what he is talking about.</p> | <> | <p><a href="#ft29" id="fn29"><sup>29</sup></a> In his interesting remarks on the relation between statics and dynamics (<span class="italics">Prolegomena to Relativity Economics</span>, pp. 11-13) Professor Souter appears to assume that the possibility of recurrent change within a stationary equilibrium is overlooked by those who operate with this concept. I venture to suggest that this is a misapprehension. Change of this sort has certainly been taken account of. Professor Schumpeter’s description of a stationary society in the first chapter of his <span class="italics">Theory of Economic Development</span> certainly does not assume that corn is reaped all the year round, and the particular complications of this concept of intertemporal equilibrium have been very thoroughly examined by Professor Hayek in his article on the <span class="italics">Intertemporale Gleichgewicht System, Weltwirtschaftliches Archiv</span>, Bd. 28, pp. 33-76.</p> |
| <p><a href="#ft30" id="fn30"><sup>30</sup></a> <span class="italics">Op. cit</span>., pp. 85-121.</p> | +- | |
| <p><a href="#ft31" id="fn31"><sup>31</sup></a> See Chapter III., Section 4, above.</p> | +- | |
| <p><a href="#ft32" id="fn32"><sup>32</sup></a> This point is made with great clarity by Professor Knight in his review of <span class="italics">Cassel’s Theoretische Sozialökonomie</span> (<span class="italics">Quarterly Journal of Economics</span>, vol. iii., pp. 279-310); but, of course, it is implicit in the procedure of the whole <span class="italics">corpus</span> of modern equilibrium analysis.</p> | <> | <p><a href="#ft30" id="fn30"><sup>30</sup></a> The phrase, I believe, is due to Dr. Schams. See his <span class="italics">Komparative Statik</span> (<span class="italics">Zeitschrift für Nationalökonomie</span>, Bd. II, pp. 27-61). But, as indicated above, the procedure goes back to the time of the classical economists.</p> |
| <p><a href="#ft33" id="fn33"><sup>33</sup></a> See J. M. Clark, <span class="italics">The Social Control of Business</span>, p. 89 <span class="italics">et seq</span>. In using Professor Clark’s phrase, I do not wish to be understood to be endorsing many of the judgments which he passes in this particular connection. See also Cannan, <span class="italics">Wealth</span>, ch. iv.</p> | <> | <p><a href="#ft31" id="fn31"><sup>31</sup></a> See the illuminating article of Dr. Rosenstein-Rodan, <span class="italics">The Rôle of Time in Economic Theory</span> (<span class="italics">Economica</span>, new series, vol. i., p. 77).</p> |
| -+ | <p><a href="#ft32" id="fn32"><sup>32</sup></a> Professor Souter has misconceived entirely my attitude to Marshall in this connection, doubtless on account of crudities in my exposition. I was once bold enough to say that I regarded the stationary state as a theoretical instrument as superior to the statical method (<span class="italics">On a Certain Ambiguity in the Conception of Stationary Equilibrium, Economic Journal</span>, vol. xl., p. 194). By this, however, I did <span class="italics">not</span> mean that I regarded the analysis of stationary equilibrium as an end in itself, and the dynamic investigations in the sense here indicated, which of course were Marshall’s chief preoccupation, superfluous. I do most cordially agree with Professor Souter’s high claims for Marshall here. In many respects we are only painfully regaining ground which he conquered thirty years ago. And I completely agree, as I have emphasised above, that the <span class="italics">raison d’être</span> of statical investigations is the explanation of dynamic change. All that I meant, in the sentences to which Professor Souter takes such strong exception, was that if we are to proceed to these dynamic investigations, we shall do so the better equipped if we are fully aware of all the implications of full stationary equilibrium than if we go simply on a knowledge gained from the examination of partial equilibrium positions. I agree that it would be wrong to speak as if Marshall was not aware of the intricacies of full interdependence, though I think he sometimes overlooked things here which subsequent investigations have brought to light, and I am inclined to agree that in order to study many kinds of change we have to abstract—as did Marshall—from all the remote possibilities of interdependence. But I do think that it is legitimate to argue that it is better to do this, having explicitly recognised and stated all the difficulties, than to proceed straight away to the dynamic problems, leaving the full statical foundations to be provided intuitively by the reader. It is surely not derogating from the high esteem in which Marshall must be held by all sensible people, to urge that Economics would be further advanced to-day than it actually is if, instead of regarding them as a burden which his readers were to be spared, he had rigorously set out all the assumptions of his procedure; we have had to relearn so much that he did not think it worth while to set forth explicitly. No doubt even this is a matter of opinion. It is easy to sympathise with the desire to be comprehensible to competent members of the world of affairs who, in spite of their competence, would be impatient of the severities of rigorous analysis; and teachers at least must be grateful to Marshall for having provided a work which will prevent beginners from being carried away by facile mathematics. But it is difficult not to agree with Mr. Keynes that it is a pity Marshall did not publish more monographs like the <span class="italics">Papers on the Pure Theory of International and Domestic Values</span>. Would Professor Souter really disagree with this?</p> | |
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| <h1 id="sigil_toc_id_6" title="V. Economic Generalisations and Reality">CHAPTER V</h1> | <> | <h1 title="V. Economic Generalisations and Reality">CHAPTER V</h1> |
| <h2 class="sigil_not_in_toc">ECONOMIC GENERALISATIONS AND REALITY<a href="#fn1" id="ft1"><sup>1</sup></a></h2> | <> | <h2 class="sigil_not_in_toc">ECONOMIC GENERALISATIONS AND REALITY</h2> |
| -+ | <p class="noindent"><span class="smallcaps">1. It</span> is a characteristic of scientific generalisations that they refer to reality. Whether they are cast in hypothetical or categorical form, they are distinguished from the propositions of pure logic and mathematics by the fact that in some sense their reference is to that which exists, or that which may exist, rather than to purely formal relations.</p> | |
| -+ | <p>In this respect, it is clear, the propositions of Economics are on all fours with the proposition of all other sciences. As we have seen, these propositions are deductions from simple assumptions reflecting very elementary facts of general experience. If the premises relate to reality the deductions from them must have a similar point of reference.</p> | |
| <p class="noindent"><span class="smallcaps">1. The</span> scarcity of goods and services, which is the fundamental assumption of the system of deductive generalisations whose nature we have been examining, is a known fact both of introspection and of observation. We know that the means for achieving our own ends are limited; and that, therefore, some ends must be relinquished in favour of the achievement of others. We observe that, faced with a given range of opportunities for the exploitation of which his powers are limited, the creature man prefers some to others; that, at different margins, units of the same class of objects have a different significance for action. And, on the basis of this knowledge, we may assert the applicability of the abstract deductions from the concept of scarcity to the actual condition of the world in which we live. Any suggestion that this is not so rests upon the most palpable failure to observe elementary facts. Of course, the existence of scarcity in the sense in which we have defined it is, as it were, an “empirical accident”. But, until it can be shown that all the goods, which are the object of human desire, are available in such quantities that no price is obtainable for any one of them and that no human effort, which could have been applied to other desirable ends, is necessary for their reproduction, the persistence of this “empirical accident” may continue to be assumed.</p> | <> | <p>It follows, therefore, that the belief often expressed by the critics of Economics, that it is a mere system of formal inferences having no necessary relation to reality, is based upon misconception. It may be admitted that our knowledge of the facts which are the basis of economic deductions is different in important respects from our knowledge of the facts which are the basis of the deductions of the natural sciences. It may be admitted, too, that for this reason the methods of economic science—although not the tests of its logical consistency—are often different from the methods of the natural sciences. But it does not follow in the least that its generalisations have a “merely formal” status—that they are “scholastic” deductions from arbitrarily established definitions. Indeed, it may be urged that, on the contrary, there is less reason to doubt their real bearing than that of the generalisations of the natural sciences. In Economics, as we have seen, the ultimate constituents of our fundamental generalisations are known to us by immediate acquaintance. In the natural sciences they are known only inferentially. There is much less reason to doubt the counterpart in reality of the assumption of individual preferences than that of the assumption of the electron.<a href="#fn1" id="ft1"><sup>1</sup></a> It is true that we deduce much from definitions. But it is not true that the definitions are arbitrary.</p> |
| <p>It is sometimes thought that the applicability of economic generalisations has been suspended by the coming of modern machine production. Under primitive conditions, it is urged, the “laws of supply and demand” are no doubt useful and illuminating. But under modern conditions it is different. The coming of the machine changes everything. For the machine-age we need a “new Economics”. Such a view involves a complete failure to perceive the nature of the subject-matter of Economics or the scope of its generalisations. It can only be justified in terms of that conception of the economic which we rejected at the outset. It is perfectly true that, with the advance of modern technique, the provision of the most elementary requirements of “material welfare” has come to demand a diminishing proportion of the powers of production at the disposal of the human race. But it is not in the least true that the phenomena of prices and costs, incomes and capitalisation rates, which are the central preoccupation of the Economics of an exchange economy, have shown any tendency to disappear or to lose their practical significance. On the contrary, it is in just these advanced and complicated conditions that the generalisations of Economic Theory are most useful if we are to understand what is happening. Nor has it yet been demonstrated that in any other possible form of society would the general conditions of scarcity cease to have practical relevance.</p> | <> | <p>It follows, too, that it is a complete mistake to regard the economist, whatever his degree of “purity”, as concerned merely with pure deduction. It is quite true that much of his work is in the nature of elaborate processes of inference. But it is quite untrue to suppose that it is only, or indeed mainly, thus. The concern of the economist is the interpretation of reality. The business of discovery consists not merely in the elucidation of given premises but in the perception of the facts which are the basis of the premises. The process of discovering those elements in common experience which afford the basis of our trains of deductive reasoning is economic discovery just as much as the shaking out of new inferences from old premises. The theory of value as we know it has developed in recent times by the progressive elaboration of deductions from very simple premises. But the great discovery, the Mengerian revolution, which initiated this period of progress, was the discovery of the premises themselves. Similarly with the other foundations we have discussed. The perception and selection of the basis of economic analysis is as much economics as the analysis itself. Indeed it is this which gives analysis significance.</p> |
| <p>2. As we have seen already, the generalisations which are deduced from this observation are purely formal in character. If a certain good is scarce, then we know that its disposal must conform to certain laws. If its demand schedule is of a certain order, then we know that with alterations of supply its price must move in a certain way. But, as we have discovered already,<a href="#fn2" id="ft2"><sup>2</sup></a> there is nothing in this conception of scarcity which warrants us in attaching it to any particular commodity. Our <span class="italics">a priori</span> deductions do not provide any justification for saying that caviare is an economic good and carrion a disutility. Still less do they inform us concerning the intensity of the demand for caviare or the demand to be rid of carrion. From the point of view of pure Economics these things are conditioned on the one side by individual valuations, and on the other by the technical facts of the given situation. And both individual valuations and technical facts are outside the sphere of economic uniformity. To use Strigl’s expressive phrase, from the point of view of economic analysis, these things constitute the <span class="italics">irrational</span> element in our universe of discourse.<a href="#fn3" id="ft3"><sup>3</sup></a></p> | <> | <p>2. At the same time it must be admitted that the propositions which have hitherto been established are very general in character. If a certain good is scarce, then we know that its disposal must conform to certain laws. If its demand schedule is of a certain order, then we know that with alterations of supply its price must move in a certain way. But, as we have discovered already,<a href="#fn2" id="ft2"><sup>2</sup></a> there is nothing in this conception of scarcity which warrants us in attaching it to any particular commodity. Our deductions do not provide any justification for saying that caviare is an economic good and carrion a disutility. Still less do they inform us concerning the intensity of the demand for caviare or the demand to be rid of carrion. From the point of view of pure Economics these things are conditioned on the one side by individual valuations, and on the other by the technical facts of the given situation. And both individual valuations and technical facts are outside the sphere of economic uniformity. To use Strigl’s expressive phrase, from the point of view of economic analysis, these things constitute the <span class="italics">irrational</span> element in our universe of discourse.<a href="#fn3" id="ft3"><sup>3</sup></a></p> |
| <p>But is it not desirable to transcend such limitations? Ought we not to wish to be in a position to give numerical values to the scales of valuation, to establish quantitative laws of demand and supply? This raises, in a slightly different form, the questions we left unanswered at the conclusion of the last chapter.</p> | <> | <p>But is it not desirable to transcend such limitations? Ought we not to wish to be in a position to give numerical values to the scales of valuation, to establish quantitative laws of demand and supply? This raises, in a slightly different form, some of the questions we left unanswered at the conclusion of the last chapter.</p> |
| <p>But can we hope to attain such an enviable position? Let us assume that in 1907-1908 Blank had succeeded in ascertaining that, with a given price change in that year, the elasticity of demand was 1.3. (Rough computations of this sort are not really very difficult.) What reason is there to suppose that he was unearthing a constant law? No doubt the herring meets certain physiological needs which are capable of fairly accurate description, although it is by no means the only food capable of meeting these needs. The demand for herrings, however, is not a simple derivative of needs. It is, as it were, a function of a great many apparently independent variables. It is a function of fashion; and by fashion is meant something more than the ephemeral results of an Eat British Herrings campaign; the demand for herrings might be substantially changed by a change in the theological views of the economic subjects entering the market. It is a function of the availability of other foods. It is a function of the quantity and quality of the population. It is a function of the distribution of income within the community and of changes in the volume of money. Transport changes will alter the area of demand for herrings. Discoveries in the art of cooking may change their relative desirability. Is it possible reasonably to suppose that coefficients derived from the observation of a particular herring market at a particular time and place have any <span class="italics">permanent</span> significance—save as Economic History?</p> | <> | <p>But can we hope to attain such an enviable position? Let us assume that in 1907-1908 Blank had succeeded in ascertaining that, with a given price change in that year, the elasticity of demand was 1.3. Rough computations of this sort are not really very difficult and may have considerable utility for certain purposes. But what reason is there to suppose that he was unearthing a constant law? No doubt the herring meets certain physiological needs which are capable of fairly accurate description, although it is by no means the only food capable of meeting these needs. The demand for herrings, however, is not a simple derivative of needs. It is, as it were, a function of a great many apparently independent variables. It is a function of fashion; and by fashion is meant something more than the ephemeral results of an Eat British Herrings campaign; the demand for herrings might be substantially changed by a change in the theological views of the economic subjects entering the market. It is a function of the availability of other foods. It is a function of the quantity and quality of the population. It is a function of the distribution of income within the community and of changes in the volume of money. Transport changes will alter the area of demand for herrings. Discoveries in the art of cooking may change their relative desirability. Is it possible reasonably to suppose that coefficients derived from the observation of a particular herring market at a particular time and place have any <span class="italics">permanent</span> significance—save as Economic History?</p> |
| <p>Now, of course, by the aid of various devices it is possible to extend the area of observation over periods of time. Instead of observing the market for herrings for a few days, statistics of price changes and changes in supply and demand may be collected over a period of years and by judicious “doctoring” for seasonal movements, population change, and so on, be used to deduce a figure representing average elasticity over the period.<a href="#fn5" id="ft5"><sup>5</sup></a> And within limits such computations have their uses. They are a convenient way of describing certain forces operative during that period of history. As we shall see later on, they may provide some guidance concerning what may happen in the immediate future. But they have no claim to be regarded as “laws”. However accurately they describe the past, there is no presumption that they will describe the future. Things have just happened to be so in the past. They may continue to be so for a short time in the future. But there is no reason to suppose that their having been so in the past is the result of the operation of homogeneous causes, nor that their changes in the future will be due to the causes which have operated in the past. Important as such investigations may be, at the moment at which they are made and perhaps for a short time after, there is no justification for claiming for their results the status of the so-called “statistical” laws of the natural sciences.<a href="#fn6" id="ft6"><sup>6</sup></a></p> | <> | <p>Now, of course, by the aid of various devices it is possible to extend the area of observation over periods of time. Instead of observing the market for herrings for a few days, statistics of price changes and changes in supply and demand may be collected over a period of years and by judicious “doctoring” for seasonal movements, population change, and so on, be used to deduce a figure representing average elasticity over the period. And within limits such computations have their uses. They are a convenient way of describing certain forces operative during that period of history. As we shall see later on, they may provide some guidance concerning what may happen in the immediate future. Rough ideas relating to the elasticity of demand in particular markets are indeed essential if we are to make full use of the more refined tools of economic analysis. But they have no claim to be regarded as immutable laws. However accurately they describe the past, there is no presumption that they must continue to describe the future. Things have just happened to be so in the past. They may continue to be so for a short time in the future. But there is no reason to suppose that their having been so in the past is the result of the operation of homogeneous causes, nor that their changes in the future will be due to the causes which have operated in the past. If we wanted to be helpful about herrings we should never dream of relying on the researches of the wretched Blank who was working in 1907-8. We should work the whole thing out afresh on the basis of more recent data. Important as such investigations may be—and nothing that is here said on their methodological status should be regarded as derogating from their very considerable practical value—there is no justification for claiming for their results the status of the so-called “statistical” laws of the natural sciences.<a href="#fn5" id="ft5"><sup>5</sup></a></p> |
| -+ | <p>But, it might be said, is not the difference between the results of such investigation and the postulates on which, as was shown in the last chapter, the main generalisation of Economics depends, a matter only of <span class="italics">degree</span> rather than kind? It has been shown that if there were not a hierarchy of ends, but if the different ends were all of equal importance, the results of conduct would be quite indeterminate, and even the most elementary generalisations of the theory of value would not be applicable. There is no guarantee that this will not happen. It is only a matter of probability that the conditions making such propositions applicable will persist. In exactly the same way it can be shown analytically that circumstances are conceivable in which the demand curve may have a positive inclination. Yet if this were frequent many of the best accepted generalisations of deductive theory would not be applicable. Again, it is only a matter of probability that this is not the case. Wherein is the difference of kind between this assumption and the assumption that the elasticity of demand for herrings is 1.3?</p> | |
| -+ | <p>The argument is weighty. And it may be freely conceded that in this sense the difference is a difference of degree rather than a difference of kind. But it is surely open to the reply that the difference of degree is so great as to justify our acting as if it were a difference of kind. It <span class="italics">might</span> be the case that valuations were of such a peculiar nature that conduct was indeterminate. But it is so overwhelmingly unlikely that we are warranted in neglecting the possibility. It is not so unlikely that the demand function may be positive, but there is still a very strong probability that this is not the rule, but the exception. On the other hand, when we are dealing with the valuation of particular products and the elasticity of demand derived therefrom, for the reasons already set forth, there is surely an overwhelming probability that constancy is not to be expected. Here, indeed, we have the historico-relative <span class="italics">in excelsis</span>. The fact that we can arrange our preferences in an order is a fact of so much greater a degree of generality than the actual momentary order of preference of any individual that we are surely justified in regarding them as possessing, in our universe of discourse at least, a difference of status. And while it is arguable that in the future much valuable work will be done in attempting to ascertain these momentary values, it seems more important, if a sense of proportion is to be maintained, that their limitations should be realised than that stress should be laid on the formal similarity with the broad qualitative foundations which constitute the basis of the science as we know it. Perhaps, indeed, this is another of the methodological differences between the natural and the social sciences. In the natural sciences the transition from the qualitative to the quantitative is easy and inevitable. In the social sciences, for reasons which have already been set forth, it is in some connection almost impossible, and it is always associated with peril and difficulty. It seems clear, from what has happened already, that less harm is likely to be done by emphasising the differences between the social and the natural sciences than by emphasising their similarities.<a href="#fn6" id="ft6"><sup>6</sup></a></p> | |
| <p>3. If this is true of attempts to provide definite quantitative values for such elementary concepts as demand and supply functions, how much more does it apply to attempts to provide “concrete” laws of the movement of more complex phenomena, price fluctuations, cost dispersions, business cycles, and the like. In the last ten years there has been a great multiplication of this sort of thing under the name of Institutionalism, “Quantitative Economics”, “Dynamic Economics”, and what not;<a href="#fn7" id="ft7"><sup>7</sup></a> yet most of the investigations involved have been doomed to futility from the outset and might just as well never have been undertaken. The theory of probability on which modern mathematical statistics is based affords no justification for averaging where conditions are obviously not such as to warrant the belief that homogeneous causes of different kinds are operating. Yet this is the normal procedure of much of the work of this kind. The correlation of trends subject to influences of the most diverse character is scrutinised for “quantitative laws”. Averages are taken of phenomena occurring under the most heterogeneous circumstances of time and space, and the result is expected to have significance. In Professor Wesley Mitchell’s <span class="italics">Business Cycles</span>,<a href="#fn8" id="ft8"><sup>8</sup></a> for instance, a work for whose collection of data economists are rightly grateful, after a prolonged and valuable account of the course of business fluctuations in different countries since the end of the eighteenth century, an average is struck of the duration of all cycles and a Logarithmic Normal Curve is fitted by Davies’ Method to the frequency distribution of the 166 observations involved. What possible meaning can inhere in such an operation? Here are observations of conditions widely differing in time, space, and the institutional framework of business activity. If there is any significance at all in bringing them together, it must be by way of <span class="italics">contrast</span>. Yet Professor Mitchell, who never tires of belittling the methods and results of orthodox analysis, apparently thinks that, by taking them all together and fitting a highly complicated curve to their frequency distribution, he is constructing something significant—something which is more than a series of straight lines and curves on half a page of his celebrated treatise.<a href="#fn9" id="ft9"><sup>9</sup></a> Certainly he has provided the most mordant comment on the methodology of “Quantitative Economics” that any of its critics could possibly wish.</p> | <> | <p>3. If this is true of attempts to provide definite quantitative values for such elementary concepts as demand and supply functions, how much more does it apply to attempts to provide “concrete” laws of the movement of more complex phenomena, price fluctuations, cost dispersions, business cycles, and the like. In the last ten years there has been a great multiplication of this sort of thing under the name of Institutionalism, “Quantitative Economics”, “Dynamic Economics”, and what not;<a href="#fn7" id="ft7"><sup>7</sup></a> yet most of the investigations involved have been doomed to futility from the outset and might just as well never have been undertaken. The theory of probability on which modern mathematical statistics is based affords no justification for averaging where conditions are obviously not such as to warrant the belief that homogeneous causes of different kinds are operating. Yet this is the normal procedure of much of the work of this kind. The correlation of trends subject to influences of the most diverse character is scrutinised for “quantitative laws”. Averages are taken of phenomena occurring under the most heterogeneous circumstances of time and space, and the result is expected to have significance. In Professor Wesley Mitchell’s <span class="italics">Business Cycles</span>,<a href="#fn8" id="ft8"><sup>8</sup></a> for instance, a work for whose magnificent collection of data economists are rightly grateful, after a prolonged and valuable account of the course of business fluctuations in different countries since the end of the eighteenth century, an average is struck of the duration of all cycles and a logarithmic normal curve is fitted by Davies’ Method to the frequency distribution of the 166 observations involved. What possible meaning can inhere in such an operation? Here are observations of conditions widely differing in time, space, and the institutional framework of business activity. If there is any significance at all in bringing them together, it must be by way of <span class="italics">contrast</span>. Yet Professor Mitchell, who never tires of belittling the methods and results of orthodox analysis, apparently thinks that, by taking them all together and fitting a highly complicated curve to their frequency distribution, he is constructing something significant—something which is more than a series of straight lines and curves on half a page of his celebrated treatise.<a href="#fn9" id="ft9"><sup>9</sup></a> Certainly he has provided the most mordant comment on the methodology of “Quantitative Economics” that any of its critics could possibly wish.</p> |
| <p>There is no need to linger on the futility of these grandiose projects. After all, in spite of their recent popularity, they are not new, and a movement which has continually invoked a pragmatic logic may well be judged by a pragmatic test. It is just about a hundred years ago since Richard Jones, in his Inaugural Lecture at King’s College, London,<a href="#fn10" id="ft10"><sup>10</sup></a> sounded the note of revolt against the “formal abstraction” of Ricardian Economics, with arguments which, if more vividly expressed, are more or less exactly similar to those which have been expressed by the advocates of “inductive methods” ever since that day. And time has gone on, and the “rebels” have become a highly respectable band of expert authorities, the pontifical occupants of chairs, the honoured recipients of letters from the Kaiser, the directing functionaries of expensive research institutes. . . . We have had the Historical School. And now we have the Institutionalists. Save in one or two privileged places, it is safe to say that, until the close of the War, views of this sort were dominant in German University circles; and in recent years, if they have not secured the upper hand altogether, they have certainly had a wide area of power in America. Yet not one single “law” deserving of the name, not one quantitative generalisation of permanent validity has emerged from their efforts. A certain amount of interesting statistical material. Many useful monographs on particular historical situations. But of “concrete laws”, substantial uniformities of “economic behaviour”, not one. And, at the end of the hundred years, the greatest slump in history finds them sterile and incapable of helpful comment—their trends gone awry and their dispersions distorted.<a href="#fn11" id="ft11"><sup>11</sup></a> Meanwhile, a few isolated thinkers, using the despised apparatus of deductive theory, have brought our knowledge of the theory of fluctuations to a point from which the fateful events of the last few years can be explained in general terms, and a complete solution of the riddle of depressions within the next few years does not seem outside the bounds of probability.</p> | <> | <p>There is no need to linger on the futility of these grandiose projects. After all, in spite of their recent popularity, they are not new, and a movement which has continually invoked a pragmatic logic may well be judged by a pragmatic test. It is just about a hundred years ago since Richard Jones, in his Inaugural Lecture at King’s College, London,<a href="#fn10" id="ft10"><sup>10</sup></a> sounded the note of revolt against the “formal abstraction” of Ricardian Economics, with arguments which, if more vividly expressed, are more or less exactly similar to those which have been expressed by the advocates of “inductive methods” ever since that day. And time has gone on, and the “rebels” have become a highly respectable band of expert authorities, the pontifical occupants of chairs, the honoured recipients of letters from the Kaiser, the directing functionaries of expensive research institutes. . . . We have had the Historical School. And now we have the Institutionalists. Save in one or two privileged places, it is safe to say that, until the close of the War, views of this sort were dominant in German University circles; and in recent years, if they have not secured the upper hand altogether, they have certainly had a wide area of power in America. Yet not one single “law” deserving of the name, not one quantitative generalisation of permanent validity has emerged from their efforts. A certain amount of interesting statistical material. Many useful monographs on particular historical situations. But of “concrete laws”, substantial uniformities of “economic behaviour”, not one—all the really interesting applications of modern statistical technique to economic enquiry have been carried through, not by the Institutionalists, but by men who have been themselves adept in the intricacies of the “orthodox” theoretical analysis. And, at the end of the hundred years, the greatest slump in history finds them sterile and incapable of helpful comment their trends gone awry and their dispersions distorted.<a href="#fn11" id="ft11"><sup>11</sup></a> Meanwhile, a few isolated thinkers, using the despised apparatus of deductive theory, have brought our knowledge of the theory of fluctuations to a point from which the fateful events of the last few years can be explained in general terms, and a complete solution of the riddle of depressions within the next few years does not seem outside the bounds of probability.</p> |
| <p>4. But what, then, are we to say of empirical studies? Having ascertained the persistence of the fact of scarcity, is the economist then excused from the obligation of maintaining further contact with reality?</p> | <> | <p>4. But what, then, are we to say of the more detailed kind of realistic studies? Having ascertained the persistence of the fact of scarcity, the multiplicity of factors of production, ignorance of the future, and the other qualitative postulates of his theory, is the economist then excused from the obligation of maintaining further contact with reality?</p> |
| <p>The answer is most decidedly in the negative. And the negative answer is implicit in the practice of all those economists who, since Adam Smith and Cantillon, have contributed most to the development of Economic Science. It has never been the case that the exponents of the so-called orthodox tradition have frowned upon empirical studies. As Menger pointed out years ago, at the height of the <span class="italics">Methodenstreit</span>,<a href="#fn12" id="ft12"><sup>12</sup></a> the analytical school have never been the assailants in these controversies. The attacks, the attempts to exclude, have always come from the other side. The analytics have always acknowledged the importance of realistic studies, and have themselves contributed much to the development of the technique of such investigations. Indeed, it may be argued that the most important work of this kind has come, not from this or that “rebel” group who were calling in question the application in Economics of the elementary laws of thought, but rather from just those men who were the object of their onslaught. In the history of Applied Economics, the work of a Jevons, a Taussig, a Bowley, has more claim on our attention than the work of, say, a Schmoller, a Veblen, or a Hamilton. And this is no accident. The fruitful conduct of realistic studies can only be undertaken by those who have a firm grasp of analytical principle and some notion of what can and what cannot legitimately be expected from activities of this sort.</p> | <> | <p>The answer is most decidedly in the negative. And the negative answer is implicit in the practice of all those economists who, since Adam Smith and Cantillon, have contributed most to the development of Economic Science. It has never been the case that the exponents of the so-called orthodox tradition have frowned upon realistic studies. As Menger pointed out years ago, at the height of the <span class="italics">Methodenstreit</span>,<a href="#fn12" id="ft12"><sup>12</sup></a> the analytical school have never been the assailants in these controversies. Economics is not one of those social sciences which are always discussing method before proceeding to deliver the goods; if it had not been for the Historical School there would have been no methodological controversy save such as related to the status of particular propositions. The procedure of “orthodoxy” has always been essentially catholic. The attacks, the attempts to exclude, have always come from the other side. The analytics have always acknowledged the importance of “realistic” studies, and have themselves contributed much to the development of the technique of investigation. Indeed, it is notorious that the most important work of this kind has come, not from this or that “rebel” group who were calling in question the application in Economics of the elementary laws of thought, but rather from just those men who were the object of their onslaught. In the history of applied Economics, the work of a Jevons, a Menger, a Bowley, has much more claim on our attention than the work of, say, a Schmoller, a Veblen, or a Hamilton. And this is no accident. The fruitful conduct of realistic investigations can only be undertaken by those who have a firm grasp of analytical principle and some notion of what can and what cannot legitimately be expected from activities of this sort.</p> |
| <p>But what, then, are legitimate expectations in this respect?</p> | <> | <p>But what, then, are legitimate expectations in this respect? We may group them under three headings.</p> |
| <p>The first and the most obvious is the provision of a check on the applicability to given situations of different types of theoretical constructions. As we have seen already, the <span class="italics">truth</span> of a particular theory is a matter of its logical derivation from the general assumptions of the science. But its <span class="italics">applicability</span> to a given situation depends upon the extent to which its concepts actually reflect the forces operating in that situation. Now the concrete manifestations of scarcity are various and changing; and, unless there is continuous check on the words which are used to describe them, there is always a danger that the area of application of a particular principle may be misconceived. The terminology of theory and the terminology of practice, although apparently identical, may, in fact, cover different areas.</p> | <> | <p>The first and the most obvious is the provision of a check on the applicability to given situations of different types of theoretical constructions. As we have seen already, the <span class="italics">validity</span> of a particular theory is a matter of its logical derivation from the general assumptions which it makes. But its <span class="italics">applicability</span> to a given situation depends upon the extent to which its concepts actually reflect the forces operating in that situation. Now the concrete manifestations of scarcity are various and changing; and, unless there is continuous check on the words which are used to describe them, there is always a danger that the area of application of a particular principle may be misconceived. The terminology of theory and the terminology of practice, although apparently identical, may, in fact, cover different areas.</p> |
| <p>A simple illustration will make this clear. According to pure monetary theory, if the quantity of money in circulation is increased and other things remain the same, the value of money must fall. As we have seen, this is deducible from the elementary categories of the science, and its truth is independent of further inductive test. But its applicability to a given situation depends upon a correct understanding of what things are to be regarded as money, and this is a matter which can only be discovered by reference back to the facts. It may well be that over a period of time the concrete significance of the term “money” has altered. If then, while retaining the original term, we proceed to interpret a new situation in terms of the original content, we may be led into serious misapprehension. We may even conclude that the <span class="italics">theory</span> is fallacious. It is indeed well known that this has happened again and again in the course of the history of theory. The failure of the Currency School to secure permanent acceptance for their theory of Banking and the Exchanges, in other respects so greatly superior to that of their opponents, was notoriously due to their failure to perceive the importance of including Bank Credit in their conception of money. Only by continuous sifting and scrutiny of the changing body of facts<a href="#fn13" id="ft13"><sup>13</sup></a> can such misapprehensions be avoided.</p> | <> | <p>A simple illustration will make this clear. According to pure monetary theory, if the quantity of money in circulation is increased and other things remain the same, the value of money must fall. This proposition is deducible from the most elementary facts of experience of the science, and its truth is independent of further inductive test. But its applicability to a given situation depends upon a correct understanding of what things are to be regarded as money; and this is a matter which can only be discovered by reference back to the facts. It may well be that over a period of time the concrete significance of the term “money” has altered. If then, while retaining the original term, we proceed to interpret a new situation in terms of the original content, we may be led into serious misapprehension. We may even conclude that the <span class="italics">theory</span> is fallacious. It is indeed well known that this has happened again and again in the course of the history of theory. The failure of the Currency School to secure permanent acceptance for their theory of Banking and the Exchanges, in other respects so greatly superior to that of their opponents, was notoriously due to their failure to perceive the importance of including Bank Credit in their conception of money. Only by continuous sifting and scrutiny of the changing body of facts<a href="#fn13" id="ft13"><sup>13</sup></a> can such misapprehensions be avoided.</p> |
| -+ | <p>Secondly, and closely connected with this first function of realistic studies, we may expect the suggestion of those auxiliary postulates whose part in the structure of analysis was discussed in the last chapter By inspection of different fields of economic activity we may expect to discover types of the configuration of the data suitable for further analytical study.</p> | |
| -+ | <p>Again, we may take an example from the theory of money. It will be clear from an inspection of the actual procedure of banks of issue that the effect upon the supply of money in the widest sense of given additions to the reserve of precious metals will depend upon the exact nature of the law and practice concerning reserve requirements. It follows, therefore, that in the full elaboration of the theory of money we must introduce alternative assumptions, taking account of the various possibilities in this respect. It is clear that these are not possibilities which are necessarily easily exhausted by general reflections on the nature of banks of issue. Only close study of the facts is likely to reveal which assumptions are most likely to have a counterpart in reality, which assumptions, therefore, it is most convenient to make.</p> | |
| <p>But, secondly, we may expect of realistic studies, not merely a knowledge of the appropriate application of particular theories, but also the exposure of areas where pure theory needs to be reformulated and extended. Empirical studies bring to light new problems.</p> | <> | <p>And, thirdly, we may expect of realistic studies, not merely a knowledge of the application of particular theories, and the assumptions which make them appropriate to particular situations, but also the exposure of areas where pure theory needs to be reformulated and extended. They bring to light new problems.</p> |
| <p>The best example of the unexplained residue is provided by those fluctuations of trade which have come to be known as the trade cycle. Pure equilibrium theory, as is well known, does not provide any explanation of the phenomena of booms and slumps. It explains the adjustment of the economic system to external change either on the demand side or on the supply side. It explains fluctuations which are in the nature of orderly adaptations. But it does not explain the existence within the economic system of tendencies conducive to disproportionate development. It does not explain discrepancies between total supply and total demand in the sense in which these terms are used in the celebrated Law of Markets.<a href="#fn14" id="ft14"><sup>14</sup></a> Yet unquestionably such discrepancies exist, and any attempt to interpret reality solely in terms of such a theory must necessarily leave a residue of phenomena not capable of being subsumed under its generalisations.</p> | <> | <p>The best example of the unexplained residue is provided by those fluctuations of trade which have come to be known as the trade cycle. Elementary equilibrium theory, as is well known, does not provide any explanation of the phenomena of booms and slumps. It explains the relationships in an economic system on a state of rest. As we have seen, with a certain extension of its assumptions it can describe differences between the relationships resulting from different configurations of the data. But it does not explain without further elaboration the existence within the economic system of tendencies conducive to disproportionate development. It does not explain discrepancies between total supply and total demand in the sense in which these terms are used in the celebrated Law of Markets.<a href="#fn14" id="ft14"><sup>14</sup></a> Yet unquestionably such discrepancies exist, and any attempt to interpret reality solely in terms of such a theory must necessarily leave a residue of phenomena not capable of being subsumed under its generalisations.</p> |
| <p>Here is a clear case where empirical studies bring us face to face with the insufficiencies of certain generalisations. And it is in the revelation of deficiencies of this kind that the main function of realistic studies in relation to theory consists.<a href="#fn15" id="ft15"><sup>15</sup></a> The theoretical economist who wishes to safeguard the implications of his theory must be continually “trying out”, in the explanation of particular situations, the generalisations he has already achieved. It is in the examination of particular instances that lacunæ in the structure of existing theory tend to be revealed.</p> | <> | <p>Here is a clear case where empirical studies bring us face to face with the insufficiencies of certain generalisations. And it is perhaps in the revelation of deficiencies of this kind that the main function of realistic studies in relation to theory consists.<a href="#fn15" id="ft15"><sup>15</sup></a> The theoretical economist who wishes to safeguard the implications of his theory must be continually “trying out”, in the explanation of particular situations, the generalisations he has already achieved. It is in the examination of particular instances that lacunæ in the structure of existing theory tend to be revealed.</p> |
| <p>But this is not in the least to say that the <span class="italics">solution</span> of the problems thus presented are themselves to be discovered by the mere multiplication of observations of divergences of this sort. That is not the function of observation, and the whole history of the various “inductive revolts” shows that all studies based on this expectation have proved utterly fruitless. This is particularly true of trade cycle theory. So long as the investigators of this problem were content with the multiplication of time series and the accumulation of coefficients of correlation, no significant advance was discernible. It was not until there arose men who were prepared to undertake the entirely different task of starting where equilibrium analysis leaves off and deriving from the pure categories of pure theory an explanation of fluctuation which is compatible with the assumptions of that analysis, that progress began to be made. There can be no better example of the correct relationship between the two branches of study. Realistic studies may suggest the problem to be solved. They may test the range of applicability of the answer when it is forthcoming. But it is theory and theory alone which is capable of supplying the solution. Any attempt to reverse the relationship must lead inevitably to the nirvana of purposeless observation and record.</p> | <> | <p>But this is not in the least to say that the <span class="italics">solutions</span> of the problems thus presented are themselves to be discovered by the mere multiplication of observations of divergences of this sort. That is not the function of observation, and the whole history of the various “inductive revolts” shows that all studies based on this expectation have proved utterly fruitless. This is particularly true of trade cycle theory. So long as the investigators of this problem were content with the multiplication of time series and the accumulation of coefficients of correlation, no significant advance was discernible. It was not until there arose men who were prepared to undertake the entirely different task of starting where elementary theoretical analysis leaves off and deriving from the introduction of further assumptions of the elementary qualitative nature we have already examined, an explanation of fluctuation which is compatible with the assumptions of that analysis, that progress began to be made. There can be no better example of the correct relationship between the two branches of study. Realistic studies may suggest the problem to be solved. They may test the range of applicability of the answer when it is forthcoming. They may suggest assumptions for further theoretical elaboration. But it is theory and theory alone which is capable of supplying the solution. Any attempt to reverse the relationship must lead inevitably to the nirvana of purposeless observation and record.</p> |
| <p>Moreover—and this brings us back to the point from which we started—there is no reason to believe that the generalisations which may be elaborated to explain the residues thus discovered will be anything but formal in character. For reasons which we have already examined, the hope of giving permanent and substantial content to the categories of pure analysis is vain. By “trying out” pure theory on concrete situations and referring back to pure theory residual difficulties, we may hope continually to improve and extend our analytical apparatus. But that such studies should enable us to say what goods must be economic goods and what precise values will be attached to them in different situations, is not to be expected. To say this is not to abandon the hope of solving any genuine problem of Economics. It is merely to recognise what does and what does not lie within the necessary boundaries of our subject-matter. To pretend that this is not so is just pseudo-scientific bravado.</p> | <> | <p>Moreover—and this brings us back to the point from which we started—there is no reason to believe that the generalisations which may be elaborated to explain the residues thus discovered will be anything but general in character. For reasons which we have already examined, the hope of giving permanent and particular content to the categories of pure analysis is vain. By “trying out” pure theory on concrete situations and referring back to pure theory residual difficulties, we may hope continually to improve and extend our analytical apparatus. But that such studies should enable us to say what goods must be economic goods and what precise values will be attached to them in different situations, is not to be expected. To say this is not to abandon the hope of solving any genuine problem of Economics. It is merely to recognise what does and what does not lie within the necessary boundaries of our subject-matter. To pretend that this is not so is just pseudo-scientific bravado.</p> |
| <p>5. But to recognise that Economic laws are formal in nature is not to deny the reality of the necessities they describe or to derogate from their value as a means of interpretation and prediction. On the contrary, having carefully delimited the nature and the scope of such generalisations, we may proceed with all the greater confidence to claim for them a complete necessity within this field.</p> | <> | <p>5. But to recognise that Economic laws are general in nature is not to deny the reality of the necessities they describe or to derogate from their value as a means of interpretation and prediction. On the contrary, having carefully delimited the nature and the scope of such generalisations, we may proceed with all the greater confidence to claim for them a complete necessity within this field.</p> |
| <p>Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense, as Professor Knight emphasises, they are as universal as the laws of mathematics or mechanics,<a href="#fn16" id="ft16"><sup>16</sup></a> and as little capable of “suspension”. If, in a given situation, the facts are of a certain order, Economic law warrants us in deducing with complete certainty that other facts which it enables us to describe are also present. To those who have grasped the implications of the proposition set forth in the last chapter the reason is not far to seek. If the “given situation” conforms to a certain pattern, certain other features must also be present, for their presence is “deducible” from the pattern originally postulated. The analytic method is simply a way of discovering the necessary consequences of complex collocations of facts—consequences whose counterpart in reality is not so immediately discernible as the counterpart of the original postulates. It is an instrument for “shaking out” all the implications of given suppositions. It is a form of applied logic, and, granted the correspondence of its original assumptions and the facts, its conclusions are inevitable and inescapable.</p> | <> | <p>Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense they are on the same footing as other scientific laws, and as little capable of “suspension”. If, in a given situation, the facts are of a certain order, we are warranted in deducing with complete certainty that other facts which it enables us to describe are also present. To those who have grasped the implications of the propositions set forth in the last chapter the reason is not far to seek. If the “given situation” conforms to a certain pattern, certain other features must also be present, for their presence is “deducible” from the pattern originally postulated. The analytic method is simply a way of discovering the necessary consequences of complex collocations of facts—consequences whose counterpart in reality is not so immediately discernible as the counterpart of the original postulates. It is an instrument for “shaking out” all the implications of given suppositions. Granted the correspondence of its original assumptions and the facts, its conclusions are inevitable and inescapable.</p> |
| <p>All this becomes particularly clear if we consider the procedure of diagrammatic analysis. Suppose, for example, we wish to exhibit the effects on price of the imposition of a small tax. We make certain suppositions as regards the elasticity of demand, certain suppositions as regards the cost functions, embody these in the usual diagram, and we can at once <span class="italics">read off</span>, as it were, the effects on the price.<a href="#fn17" id="ft17"><sup>17</sup></a> They are implied in the original suppositions. The diagram has simply made explicit the concealed implications.</p> | <> | <p>All this becomes particularly clear if we consider the procedure of diagrammatic analysis. Suppose, for example, we wish to exhibit the effects on price of the imposition of a small tax. We make certain suppositions as regards the elasticity of demand, certain suppositions as regards the cost functions, embody these in the usual diagram, and we can at once <span class="italics">read</span> as it were, the effects on the price.<a href="#fn16" id="ft16"><sup>16</sup></a> They are implied in the original suppositions. The diagram has simply made explicit the concealed implications.</p> |
| <p>It is this inevitability of economic analysis which gives it its very considerable prognostic value. It has been emphasised sufficiently already that Economic Science knows no way of predicting what will be the given data at any particular point of time. It cannot predict changes of valuations. But, given the data in a particular situation, it can draw inevitable conclusions as to their implications. And if the data remain unchanged, these implications will certainly be realised. They must be, for they are implied in the presence of the original data.</p> | <> | <p>It is this inevitability of economic analysis which gives it its very considerable prognostic value. It has been emphasised sufficiently already that Economic Science knows no way of predicting out of the blue the configuration of the data at any particular point of time. It cannot predict changes of valuations. But, given the data in a particular situation, it can draw inevitable conclusions as to their implications. And if the data remain unchanged, these implications will certainly be realised. They must be, for they are implied in the presence of the original data.</p> |
| <p>It is just here that we can perceive yet a further function for empirical investigation. It can bring to light the changing facts which make prediction in any given situation possible. As we have seen, it is most improbable that it can ever discover the law of their change, for the data are not subject to homogeneous causal influences. But it can put us in possession of information which is relevant at the particular moment concerned. It can give us some idea of the relative magnitude of the different forces operative. It can afford a basis for enlightened conjectures with regard to potential directions of change. And this unquestionably is one of the main uses of applied studies—not to unearth empirical laws in an area where the rule of law is not to be expected, but to provide from moment to moment some knowledge of the varying data on which, in the given situation, prediction can be based. It cannot supersede formal analysis. But it can suggest in different situations what formal analysis is appropriate, and it can provide <span class="italics">at that moment</span> some content for the formal categories.</p> | <> | <p>It is just here that we can perceive yet a further function for empirical investigation. It can bring to light the changing facts which make prediction in any given situation possible. As we have seen, it is most improbable that it can ever discover the law of their change, for the data are not subject to homogeneous causal influences. But it can put us in possession of information which is relevant at the particular moment concerned. It can give us some idea of the relative magnitude of the different forces operative. It can afford a basis for enlightened conjectures with regard to potential directions of change. And this unquestionably is one of the main uses of applied studies—not to unearth “empirical” laws in an area where such laws are not to be expected, but to provide from moment to moment some knowledge of the varying data on which, in the given situation, prediction can be based. It cannot supersede formal analysis. But it can suggest in different situations what formal analysis is appropriate, and it can provide <span class="italics">at that moment</span> some content for the formal categories.</p> |
| <p>Of course, if other things do not remain unchanged, the consequences predicted do not necessarily follow. This elementary platitude, necessarily implicit in <span class="italics">any</span> scientific prediction, needs especially to be kept in the foreground of attention when discussing this kind of prognosis. The statesman who said “<span class="italics">Ceteris paribus</span> be damned!”, has a large and enthusiastic following among the critics of Economics! Nobody in his senses would hold that the laws of mechanics were invalidated if an experiment designed to illustrate them were interrupted by an earthquake. Yet a substantial majority of the lay public, and a good many <span class="italics">soi-disant</span> economists as well, are continually criticising well-established economic laws on grounds hardly less slender.<a href="#fn18" id="ft18"><sup>18</sup></a> A protective tariff is imposed on the importation of commodities, the conditions of whose domestic production makes it certain that, if other things remain unchanged, the effect of such protection will be a rise in price. For quite adventitious reasons, the progress of technique, the lowering of the price of raw materials, wage reductions, or what not, costs are reduced and the price does not rise. In the eyes of the lay public and “Institutionalist” economists the generalisations of Economics are invalidated. The laws of supply and demand are suspended. The bogus claims of a science which does not regard the facts are laid bare. And so on and so forth. Yet, whoever asked of the practitioners of any other science that they should predict the complete course of an uncontrolled history?</p> | <> | <p>Of course, if other things do not remain unchanged, the consequences predicted do not necessarily follow. This elementary platitude, necessarily implicit in <span class="italics">any</span> scientific prediction, needs especially to be kept in the foreground of attention when discussing this kind of prognosis. The statesman who said “<span class="italics">Ceteris paribus</span> be damned!” has a large and enthusiastic following among the critics of Economics! Nobody in his senses would hold that the laws of mechanics were invalidated if an experiment designed to illustrate them were interrupted by an earthquake. Yet a substantial majority of the lay public, and a good many <span class="italics">soi-disant</span> economists as well, are continually criticising well-established propositions on grounds hardly less slender.<a href="#fn17" id="ft17"><sup>17</sup></a> A protective tariff is imposed on the importation of commodities, the conditions of whose domestic production make it certain that, if other things remain unchanged, the effect of such protection will be a rise in price. For quite adventitious reasons, the progress of technique, the lowering of the price of raw materials, wage reductions, or what not, costs are reduced and the price does not rise. In the eyes of the lay public and “Institutionalist” economists the generalisations of Economics are invalidated. The laws of supply and demand are suspended. The bogus claims of a science which does not regard the facts are laid bare. And so on and so forth. Yet, whoever asked of the practitioners of any other science that they should predict the complete course of an uncontrolled history?</p> |
| <p>Now, no doubt, the very fact that events in the large are uncontrolled,<a href="#fn19" id="ft19"><sup>19</sup></a> that the fringe of given data is so extensive and so exposed to influence from unexpected quarters, must make the task of prediction, however carefully safeguarded, extremely hazardous. In many situations, small changes in particular groups of data are so liable to be counterbalanced by other changes which may be occurring independently and simultaneously, that the prognostic value of the knowledge of operative tendencies is small. But there are certain broad changes, usually involving many lines of expenditure or production at once, where a knowledge of implications is a very firm basis for conjectures of strong probability. This is particularly the case in the sphere of monetary phenomena. There can be no question that a quite elementary knowledge of the Quantity Theory was immense prognostic value during the War and the disturbances which followed. If the speculators who bought German marks, after the War, in the confident expectation that the mark would automatically resume its old value, had been aware of as much of the theory of money as was known, say, to Sir William Petty, they would have known that what they were doing was ridiculous. Similarly, it becomes more and more clear, for purely analytical reasons, that, once the signs of a major boom in trade have made their appearance, the coming of slump and depression is almost certain; though when it will come and how long it will last are not matters which are predictable, since they depend upon human volitions occurring after the indications in question have appeared. So, too, in the sphere of the labour market, it is quite certain that some types of wage policy must result in unemployment if other things remain equal: and knowledge of how the “other things” must change in order that this consequence may be avoided makes it very often possible to predict with considerable confidence the actual results of given policies. These things have been verified again and again in practice. Today it is only he who is blind because he does not want to see who is prepared to deny their validity. If certain conditions are present, then certain consequences are inevitable.</p> | <> | <p>Now, no doubt, the very fact that events in the large are uncontrolled,<a href="#fn18" id="ft18"><sup>18</sup></a> that the fringe of given data is so extensive and so exposed to influence from unexpected quarters, must make the task of prediction, however carefully safeguarded, extremely hazardous. In many situations, small changes in particular groups of data are so liable to be counterbalanced by other changes which may be occurring independently and simultaneously, that the prognostic value of the knowledge of operative tendencies is small. But there are certain broad changes, usually involving many lines of expenditure or production at once, where a knowledge of implications is a very firm basis for conjectures of strong probability. This is particularly the case in the sphere of monetary phenomena. There can be no question that a quite elementary knowledge of the Quantity Theory was of immense prognostic value during the War and the disturbances which followed. If the speculators who bought German marks, after the War, in the confident expectation that the mark would automatically resume its old value, had been aware of as much of the theory of money as was known, say, to Sir William Petty, they would have known that what they were doing was ridiculous. Similarly, it becomes more and more clear, for purely analytical reasons, that, once the signs of a major boom in trade have made their appearance, the coming of slump and depression is almost certain; though when it will come and how long it will last are not matters which are predictable, since they depend upon human volitions occurring after the indications in question have appeared. So, too, in the sphere of the labour market, it is quite certain that some types of wage policy must result in unemployment if other things remain equal: and knowledge of how the “other things” must change in order that this consequence may be avoided makes it very often possible to predict with considerable confidence the actual results of given policies. These things have been verified again and again in practice. Today it is only he who is blind because he does not want to see who is prepared to deny them. If certain conditions are present, then, in the absence of new complications, certain consequences are inevitable.</p> |
| <p>The irrational element in the economist’s universe of discourse lies behind the individual valuation. As we have seen already, there is no means available for determining the probable movement of the relative scales of valuation. Hence in all our analysis we take the scales of valuation as given. It is only what follows from these given assumptions that has the character of inevitability. It is only in this area that we find the régime of law.</p> | <> | <p>The irrational element in the economist’s universe of discourse lies behind the individual valuation. As we have seen already, there is no means available for determining the probable movement of the relative scales of valuation.<a href="#fn19" id="ft19"><sup>19</sup></a> Hence in all our analysis we take the scales of valuation as given. It is only what follows from these given assumptions that has the character of inevitability. It is only in this area that we find the régime of law.</p> |
| <p>It follows, therefore, that economic laws cannot be held to relate to movements of the relative scales, and that economic causation only extends through the range of their original implication. This is not to say that changes in values may not be contemplated. Of course, changes in values are the main preoccupation of theoretical Economics. It is only to say that, as economists, we cannot go behind changes in individual valuations. To put the matter in less abstract terms, we may explain, in terms of economic law, price-relationships which follow from given technical conditions and relative valuations. We may explain changes due to changes in these data. But we cannot explain changes in the data themselves. To demarcate these types of change the Austrians<a href="#fn20" id="ft20"><sup>20</sup></a> distinguish between endogenous and exogenous changes. The ones occur within a given structure of assumptions. The others come from outside.</p> | <> | <p>It follows, therefore, that economic laws cannot be held to relate to movements of the relative scales, and that economic causation only extends through the range of their original implication. This is not to say that changes in values may not be contemplated. Of course, changes in values are the main preoccupation of theoretical Economics. It is only to say that, as economists, we cannot go behind changes in individual valuations. We may explain, in terms of economic law, relationships which follow from given technical conditions and relative valuations. We may explain changes due to changes in these data. But we cannot explain changes in the data themselves. To demarcate these types of change the Austrians<a href="#fn20" id="ft20"><sup>20</sup></a> distinguish between endogenous and exogenous changes. The ones occur within a given structure of assumptions. The others come from outside.</p> |
| <p>A more complicated example of the same distinction is provided by the Reparations controversy.</p> | <> | <p>A more complicated example of the same distinction is provided by the Reparations controversy. Suppose that it could be shown that the external demand for German products was very inelastic, so that in the short period, at any rate, the degree of necessary transfer burden over and above the burden of paying the domestic taxes was very great. In such circumstances it might be argued that the present crisis was directly due to purely economic factors. That is to say that, up to the point at which panic supervened, the various complications were entirely due to obstacles implicit in the given conditions of world supply and demand.<a href="#fn21" id="ft21"><sup>21</sup></a> But suppose it can be shown that the prime cause of the present difficulty was financial panic, induced by the fear of political revolt at the magnitude of the original tax burden, then it cannot be argued that the train of causation was wholly economic. The political reaction to the tax burden intervenes. The “transfer crisis” arises from exogenous causes.<a href="#fn22" id="ft22"><sup>22</sup></a></p> |
| <p>Suppose that it could be shown that the external demand for German products was very inelastic, so that in the short period, at any rate, the degree of necessary transfer burden over and above the burden of paying the domestic taxes was very great. In such circumstances it might be argued that the present crisis was directly due to purely economic factors. That is to say that, up to the point at which panic supervened, the various complications were entirely due to obstacles implicit in the given conditions of world supply and demand.<a href="#fn21" id="ft21"><sup>21</sup></a> But suppose it can be shown that the prime cause of the present difficulty was financial panic, induced by the fear of political revolt at the magnitude of the original tax burden, then it cannot be argued that the train of causation was wholly economic. The political reaction to the tax burden intervenes. The “transfer crisis” arises from exogenous causes.</p> | <> | <p>Now there can be no doubt that this distinction is not always easy to draw. In some cases there may be a functional connection between rates of remuneration and increments of the quantity and the quality of the working population. How is this to be regarded? So far as the response is concerned, it is endogenous. But so far as the configuration of the market demand is concerned, it is exogenous. New people with new scales of relative valuation appear. Again, as Professor Knight has often pointed out, the situation is further complicated by the fact that in some societies there exist definite financial incentives to certain individuals to produce changes in the data. Resources are devoted to changing technical knowledge by research, and the tastes of economic subjects by persuasion. In respect of such changes the distinction is difficult to apply. We must admit that the system is “open”. Nevertheless, over a large part of the field the classification is intelligible enough and a positive aid to clear thinking. Until matters have been clarified very much further its retention seems essential.</p> |
| <p>Now there can be no doubt that in the discussion of practical problems, certain kinds of exogenous changes, apparently closely connected with changes within the chain of economic causation, are not infrequently involved. In the sphere of monetary problems the danger that falling exchanges may induce the monetary authorities of the area involved to embark on inflation, will certainly be considered germane to the discussion. In the sphere of tariff policy, the tendency of the granting of a protective tariff to create monopolistic communities of interest among domestic producers is certainly a probability which should not be overlooked by the practical administrator. Here and in many other connections there is a penumbra of psychological probabilities which, for purely practical reasons, it is often very convenient to take into account.<a href="#fn22" id="ft22"><sup>22</sup></a> No doubt the kind of insight required into these problems is often of a very elementary order—although it is surprising how many people lack it. No doubt most of the probabilities involved are virtual certainties. The proposition, for instance, that if it is made possible for democratic politicians to offer political bribes, some of them will sometimes do it, does not seem much more disputable than the proposition that the sun will rise tomorrow. Men in possession of their senses are not likely to question it as a working maxim of political practice. Still, not all participants in discussions of this sort are in possession of their senses, and it is highly desirable that every effort should be made to keep separate, at any rate in mode of statement,<a href="#fn23" id="ft23"><sup>23</sup></a> those generalisations which have the character of certainty, which are Economic Generalisations proper, from those generalisations of the “sociological penumbra”, which only have a high degree of probability. Economists have nothing to lose by underlining the limitations of Economic Law. Indeed, it is only when this is done that the overwhelming power to convince of what remains can be expected to have free play.</p> | <> | <p>In the same way it should be recognised that in the discussion of practical problems, certain kinds of exogenous changes, apparently closely connected with changes within the chain of economic causation, are not infrequently involved. In the sphere of monetary problems the danger that falling exchanges may induce the monetary authorities of the area involved to embark on inflation, will certainly be considered germane to the discussion. In the sphere of tariff policy, the tendency of the granting of a protective tariff to create monopolistic communities of interest among domestic producers is certainly a probability which should not be overlooked by the practical administrator. Here and in many other connections there is a penumbra of psychological probabilities which, for purely practical reasons, it is often very convenient to take into account.<a href="#fn23" id="ft23"><sup>23</sup></a> No doubt the kind of insight required into these problems is often of a very elementary order—although it is surprising how many people lack it. No doubt most of the probabilities involved are virtual certainties. Men in possession of their senses are not likely to question them as working maxims of political practice. Still, not all participants in discussions of this sort are in possession of their senses, and while it is highly desirable that the economist who wishes that the applications of his science should be fruitful should be fully qualified in cognate disciplines, and should be prepared to invoke their assistance, it is also highly desirable that the distinction should be recognised between those generalisations which are economic in the sense in which the word has here been used, and those generalisations of the “sociological penumbra” which do not have the same degree of probability. Economists have nothing to lose by understating rather than overstating the extent of their certainty. Indeed, it is only when this is done that the overwhelming power to convince of what remains can be expected to have free play.</p> |
| -+ | <p>7. All this has a very intimate bearing on the question which we left unanswered at the end of the last chapter. Is it not possible for us to extend our generalisations so as to cover changes of the data? We have seen in what sense it is possible to conceive of economic dynamics—the analysis of the path through time of a system making adjustments consequential upon the existence of given conditions? Can we not extend our technique so as to enable us to predict changes of these given conditions? In short, can we not frame a complete theory of economic development?</p> | |
| -+ | <p>If the preceding analysis is correct the prospects are very doubtful. If we were able to ascertain once and for all the elasticities of demand for all possible commodities and the elasticities of supply of all factors, and if we could assume that these coefficients were constant, then we might indeed conceive of a grand calculation which would enable an economic Laplace to foretell the economic appearance of our universe at any moment in the future. But, as we have seen, useful as such calculations are for judging the immediate potentialities of particular situations, there is no reason for attributing to them permanent validity. Our economic Laplace must fail in that there are no constants of this sort in his system. We have, as it were, to rediscover our various laws of gravitation from moment to moment.</p> | |
| -+ | <p>But is it not possible in a more formal sense to predict broad changes of the data? We may not be able to foretell particular tastes and the relationships between particular commodities, but by including in our conception of endogenous change, changes such as those indicated above, responses of the population to changes in income, induced invention, and so on, can we not still provide a formal outline of probable developments which shall be useful?</p> | |
| -+ | <p>Now there is no doubt that so far as population change is concerned it is possible to conceive of movements as responsive to money incentives. We can conceive, as did the classical economists, of a final equilibrium in which the value of the discounted future remuneration of labour is equal to the discounted costs of bearing, rearing, and training labourers. It is doubtful whether it is very profitable to assume this particular functional connection in dealing with societies other than communities of slave owners. For, save in this case, it must be remembered that we are not entitled to assume, as did the classical economists at one stage, that the costs which are equated to the gains are objective in character: the equilibrium rate outside the slave society is that which will <span class="italics">induce</span> the constant supply of labourers, not merely that which makes it <span class="italics">physiologically possible</span> to support them. Still, for what it is worth, such an assumption can be made.</p> | |
| -+ | <p>But even so we have only described in formal terms a condition of final equilibrium. We have done nothing which enables us to predict <span class="italics">changes</span> in the ultimate conditions of supply of labourers. The broad vicissitudes of opinion on the optional size of family or the most desirable entourage of slaves—these lie outside the scope of our technique of prediction. Who is to say whether the present influences on the size of the family, which bid fair, if they continue for a few millennia, to reduce the population of Europe to a few hundred thousands of people, will persist, or whether they will give way before the onset of new faiths, new conceptions of duty, new conceptions of the essentials of a good life? We may all venture our guess. But surely economic analysis can have very little to do with it.</p> | |
| -+ | <p>Nor are the prospects improved when we turn to the sphere of technical change and invention. As Professor Schumpeter has emphasised, it is very difficult to conceive even of equilibrium adjustments here. Perhaps with some ingenuity it could be done. But how would that help us to predict—what would be necessary for a theory of development in the sense in which we are now using the word—the <span class="italics">nature</span> of the changes forthcoming? What technique of analysis could predict the trends of inventions leading on the one hand to the coming of the railway, on the other to the internal combustion engine. Even if we think that, if we know the technique, we can predict the type of economic relationship associated with it, which of course is highly disputable, how can we predict the technique? As the examples just quoted amply illustrate, it is not at all true that the trend is all in one direction. We need postulate no ultimate indeterminism, if we assume that, from the point of view of our system, such changes are unpredictable.</p> | |
| -+ | <p>So, too, when we turn to the question of changes in the legal framework within which we conceive the adjustments we study to operate. There is an important sense in which the subject-matter of political science can be conceived to come within the scope of our definition of the economic. Systems of government, property relationships, and the like, can be conceived as the result of choice. It is desirable that this conception should be further explored on lines analogous to better known analysis. But how can we tell in advance what choice will be made? How can we predict the substance of the political indifference systems?</p> | |
| -+ | <p>It is well known that the claim has been made to interpret the evolution of political forms in terms of the distribution of “economic” power and the play of “economic” interest. And it would be foolish to deny that, within limits, elucidations of this sort can be provided which are at least intelligible. But on closer examination the limits within which this sort of thing is possible are seen to be much narrower than is often believed to be the case. We may perhaps explain particular political changes in terms of the “interest” of particular groups of producers; the machinery of the market affords at least a loose and superficial index of short period interest which is capable of objective definition. But the plausibility of the more grandiose explanations of this kind rest upon the assumption that the interests of larger groups are equally capable of objective definition. And this is not true. So far from providing a justification for this kind of economic explanation, economic analysis suggests that it is definitely false. The concept of interest involved in all these explanations is not objective, but subjective. It is a function of what people believe and feel. And there is no technique in economics which enables us to forecast these permutations of the spirit. We may forecast their effects when they have occurred. We may speculate with regard to the effects of hypothetical changes. We may consider alternative forms and enquire concerning their stability and tendency to change. But as regards our actual capacity to foretell a process of change, with its manifest dependence on the heterogeneous elements of contingency, persuasion, and blind force, if we are humble, we shall be modest in our pretensions.</p> | |
| -+ | <p>Thus in the last analysis the study of Economics, while it shows us a region of economic laws, of necessities to which human action is subject, shows us, too, a region in which no such necessities operate. This is not to say that within that region there is no law, no necessity. Into that question we make no enquiry. It is only to say that from its point of view at least there are certain things which must be taken as ultimate data.</p> | |
| <p><a href="#ft1" id="fn1"><sup>1</sup></a> On the main issues discussed in this chapter, the classical works of Senior, Mill, Cairnes, J. N. Keynes, and Menger should be consulted. I have touched very lightly upon the main issues of the old <span class="italics">Methodenstreit</span>, because I cannot believe that, at this time of day, there is very much to be said about them. So far as I am acquainted with the literature of Institutionalism and “Quantitative Economics” in the spurious sense of this term, nothing has been said by the modern assailants of the traditional methods which was not said in Germany or England fifty or sixty years ago, and no proposition has been advanced which was not finally refuted either by Menger or Max Weber in the thirty years before the War. Hence, in what follows I have addressed myself, not so much to the refutation of error, as to discovering the positive lessons which are to be learnt from the breakdown of the whole movement. The main value of “<span class="italics">Historismus</span>” and Institutionalism has been to show us more clearly than ever before what claims to avoid.</p> | <> | <p><a href="#ft1" id="fn1"><sup>1</sup></a> See the classical discussion of this matter in Cairnes’ <span class="italics">Character and Logical Method of Political Economy</span>, 2nd edition, pp. 81-99. See also Hayek: <span class="italics">Collectivist Economic Planning</span>, pp. 8-12.</p> |
| <p><a href="#ft3" id="fn3"><sup>3</sup></a> Strigl, <span class="italics">op. cit</span>., p. 18.</p> | <> | <p><a href="#ft3" id="fn3"><sup>3</sup></a> Strigl, <span class="italics">op. cit.</span>, p. 18.</p> |
| <p><a href="#ft4" id="fn4"><sup>4</sup></a> Note the qualification “permanent and constant value”. Before the above conclusion is dismissed as too drastic, the remarks below on the positive value of empirical investigations should be examined.</p> | <> | <p><a href="#ft4" id="fn4"><sup>4</sup></a> Note the qualification “permanent and constant value”. Before the above conclusion is dismissed as too drastic, the remarks below on the positive value of investigations of this sort should be examined.</p> |
| <p><a href="#ft5" id="fn5"><sup>5</sup></a> See, <span class="italics">e.g</span>., Schultz, <span class="italics">The Statistical Laws of Demand and Supply</span>; Leontieff, <span class="italics">Ein Versuch zur Statistischen Analyse von Angebot und Nachfrage</span> (<span class="italics">Weltwirtschaftliches Archiv</span>), vol. xxx., p. ix <span class="italics">seq.</span>; Staehle, <span class="italics">Die Analyse von Nachfragekurven in ihrer Bedeutung für die Konjunkturforschung</span>.</p> | <> | <p><a href="#ft5" id="fn5"><sup>5</sup></a> On the problems discussed above very interesting remarks are to be found in Halberstaédter, <span class="italics">Die Problematik des wirtschaftlichen Prinzips</span>.</p> |
| <p><a href="#ft6" id="fn6"><sup>6</sup></a> On the problems discussed above very interesting remarks are to be found in Halberstaédter, <span class="italics">Die Problematik des Wirtschaftlichen Prinzips</span>.</p> | <> | <p><a href="#ft6" id="fn6"><sup>6</sup></a> On the matters discussed in this section I am much indebted to conversations with Dr. Machlup.</p> |
| <p><a href="#ft7" id="fn7"><sup>7</sup></a> On the aspect of Institutionalism discussed below, Professor Wesley Mitchell’s essay on <span class="italics">The Prospects of Economics</span> in the <span class="italics">Trend of Economics</span> (edited Tugwell) should be consulted. On the general position of the school, see Morgenstern, <span class="italics">Bemerkungen über die Problematik der Amerikanischen Institutionalisten</span> in the <span class="italics">Suggi di Storia e Teori Economica in onore e recordo di Giuseppe Prato</span>, Turin, 1931; Fetter, art, America, <span class="italics">Wirtschaftstheorie der Gegenwart</span>, Bd. 1, pp. 31-60. See also the review of the <span class="italics">Trend of Economics</span> by the late Professor Allyn Young, reprinted in his <span class="italics">Economic Problems New and Old</span>, pp. 232-260.</p> | <> | <p><a href="#ft7" id="fn7"><sup>7</sup></a> On the aspect of Institutionalism discussed below, Professor Wesley Mitchell’s essay on <span class="italics">The Prospects of Economics</span> in the <span class="italics">Trend of Economics</span> (edited Tugwell) should be consulted. On the general position of the school, see Morgenstern, <span class="italics">Bemerkungen über die Problematik der Amerikanischen Institutionalisten</span> in the <span class="italics">Saggi di Storia e Teoria Economica in onore e recordo di Giuseppe Prato</span>, Turin, 1931; Fetter, art. America, <span class="italics">Wirtschaftstheorie der Gegenwart</span>, Bd. 1, pp. 31-60. See also the review of the <span class="italics">Trend of Economics</span> by the late Professor Allyn Young, reprinted in his <span class="italics">Economic Problems New and Old</span>, pp. 232-260.</p> |
| <p><a href="#ft9" id="fn9"><sup>9</sup></a> On this see Morgenstern, <span class="italics">International Vergleichende Konjunkturforschung</span> (<span class="italics">Zeitschrift für die Gesammte Staatswissenschaft</span>, vol. lxxxiii.. p. 261). In the second edition of his book, Professor Mitchell attempts to meet Dr. Morgenstern’s strictures in an extensive footnote, but so far as I can see, beyond urging that his observations for China relate to coast towns (!), he does not go beyond a dogmatic reiteration that “the distribution of the observations around their central tendency is a matter of much theoretical interest” (<span class="italics">Business Cycles</span>, 2nd edition, p. 420).</p> | <> | <p><a href="#ft9" id="fn9"><sup>9</sup></a> On this see Morgenstern, <span class="italics">International vergleichende Konjunkturforschung</span> (<span class="italics">Zeitschrift für die Gesammte Staatswissenschaft</span>, vol. lxxxiii., p. 261). In the second edition of his book, Professor Mitchell attempts to meet Dr. Morgenstern’s strictures in an extensive footnote, but so far as I can see, beyond urging that his observations for China relate to coast towns (!), he does not go beyond a reiteration that “the distribution of the observations around their central tendency is a matter of much theoretical interest” (<span class="italics">Business Cycles</span>, 2nd edition, p. 420).</p> |
| <p><a href="#ft10" id="fn10"><sup>10</sup></a> Richard Jones, <span class="italics">Collected Works</span>, pp. 21 and 22. The comparison is not altogether fair to Jones, who in some ways had a real contribution to make to Economics. The true precursor of modern “Quantitative Economics” was Sir Josiah Child, who attempted to prove that the concomitance of low interest rates and great riches was an indication that the latter was the result of the former.</p> | <> | <p><a href="#ft10" id="fn10"><sup>10</sup></a> Richard Jones, <span class="italics">Collected Works</span>, pp. 21 and 22. The comparison is not altogether fair to Jones, who may have been very well justified in some of his criticisms of the Ricardian system. The true precursor of modern “Quantitative Economics” was Sir Josiah Child, who attempted to prove that the concomitance of low interest rates and great riches was an indication that the latter was the result of the former.</p> |
| <p><a href="#ft11" id="fn11"><sup>11</sup></a> The discredit of the Historical School in Germany is very largely due to the failure of its members to understand the currency disturbances of the War and the post-War period. It is not improbable that the utter failure of “Quantitative Economics” to understand or predict the great slump may be followed by a similar revulsion. It would certainly be difficult to imagine a more complete or more conspicuous exposure.</p> | <> | <p><a href="#ft11" id="fn11"><sup>11</sup></a> The discredit of the Historical School in Germany is very largely due to the failure of its members to understand the currency disturbances of the War and the post-War period. It is not improbable that the utter failure of “Quantitative Economics” to understand or predict the great depression may be followed by a similar revulsion. It would certainly be difficult to imagine a more complete or more conspicuous exposure.</p> |
| <p><a href="#ft12" id="fn12"><sup>12</sup></a> <span class="italics">Die Inthümer des Historismus</span>, Preface, pp. iii. and iv.</p> | <> | <p><a href="#ft12" id="fn12"><sup>12</sup></a> <span class="italics">Die Irrthümer des Historismus</span>, Preface, pp. iii. and iv.</p> |
| <p><a href="#ft13" id="fn13"><sup>13</sup></a> Professor Jacob Viner’s <span class="italics">Canadian Balance of International Indebtedness</span> and Professor Taussig’s <span class="italics">International Trade</span> provide classic examples of this kind of investigation.</p> | <> | <p><a href="#ft13" id="fn13"><sup>13</sup></a> Professor Jacob Viner’s <span class="italics">Canadian Balance of International Indebtedness</span> and Professor Taussig’s <span class="italics">International Trade</span> provide classical examples of this kind of investigation.</p> |
| <p><a href="#ft14" id="fn14"><sup>14</sup></a> On all this see Hayek, <span class="italics">Geldtheorie und Konjunkturtheorie</span>, Kap. i. and ii., <span class="italics">passim</span>.</p> | <> | <p><a href="#ft14" id="fn14"><sup>14</sup></a> On all this see Hayek, <span class="italics">Monetary Theory and the Trade Cycle</span>, chaps i. and ii., <span class="italics">passim</span>.</p> |
| <p><a href="#ft16" id="fn16"><sup>16</sup></a> <span class="italics">Scientific Method in Economics</span> (essay in <span class="italics">The Trend of Economics</span>, edited Tugwell, p. 256).</p> | +- | |
| <p><a href="#ft17" id="fn17"><sup>17</sup></a> See, <span class="italics">e.g</span>., Dalton, <span class="italics">Public Finance</span>, 2nd edition, p. 73.</p> | <> | <p><a href="#ft16" id="fn16"><sup>16</sup></a> See, <span class="italics">e.g.</span>, Dalton, <span class="italics">Public Finance</span>, 2nd edition, p. 73.</p> |
| <p><a href="#ft18" id="fn18"><sup>18</sup></a> See, <span class="italics">e.g</span>., the various statistical “refutations” of the quantity theory of money which have appeared in recent years. On all these the classic comment of Torrens on Tooke is the last word that need ever be uttered. “The History of Prices may be regarded as a psychological study. Mr. Tooke commenced his labours as a follower of Horner and Ricardo, and derived reflected lustre from an alliance with those celebrated names; but his capacity for collecting contemporaneous facts preponderating over his perceptive and logical faculties, his accumulation of facts involved him in a labyrinth of error. Failing to perceive that a theoretical principle, although it may irresistibly command assent under all circumstances coinciding with the premises from which it is deduced, must be applied with due limitation and correction in all cases not coinciding with the premises, he fell into a total misconception of the proposition advanced by Adam Smith, and imputed to that high authority the absurdity of maintaining that variations in the quantity of money cause the money values of all commodities to vary in equal proportions, while the values of commodities, in relation to each other, are varying in unequal proportions. Reasonings derived from this extraordinary misconception necessarily led to extraordinary conclusions. Having satisfied himself that Adam Smith had correctly established as a principle universally true that variations in the purchasing power of money cause the prices of all commodities to vary in equal proportions, and finding, as he pursued his investigations into the phenomena of the market at different periods, no instances in which an expansion or contraction of the circulation caused the prices of commodities to rise or fall in an equal ratio, he arrived by a strictly logical inference from the premises thus illogically assumed, at his grand discovery—that no increase of the circulating medium can have the effect of increasing prices” (<span class="italics">The Principles and Operation of Sir Robert Peel’s Act of 1844 Explained and Defended</span>, 1st edition, p. 75).</p> | <> | <p><a href="#ft17" id="fn17"><sup>17</sup></a> See, <span class="italics">e.g.</span>, the various statistical “refutations” of the quantity theory of money which have appeared in recent years. On all these the comment of Torrens on Tooke is all that need be said. “The History of Prices may be regarded as a psychological study. Mr. Tooke commenced his labours as a follower of Horner and Ricardo, and derived reflected lustre from an alliance with those celebrated names; but his capacity for collecting contemporaneous facts preponderating over his perceptive and logical faculties, his accumulation of facts involved him in a labyrinth of error. Failing to perceive that a theoretical principle, although it may irresistibly command assent under all circumstances coinciding with the premises from which it is deduced, must be applied with due limitation and correction in all cases not coinciding with the premises, he fell into a total misconception of the proposition advanced by Adam Smith, and imputed to that high authority the absurdity of maintaining that variations in the quantity of money cause the money values of all commodities to vary in equal proportions, while the values of commodities, in relation to each other, are varying in unequal proportions. Reasonings derived from this extraordinary misconception necessarily led to extraordinary conclusions. Having satisfied himself that Adam Smith had correctly established as a principle universally true that variations in the purchasing power of money cause the prices of all commodities to vary in equal proportions, and finding, as he pursued his investigations into the phenomena of the market at different periods, no instances in which an expansion or contraction of the circulation caused the prices of commodities to rise or fall in an equal ratio, he arrived by a strictly logical inference from the premises thus illogically assumed, at his grand discovery—that no increase of the circulating medium can have the effect of increasing prices” (<span class="italics">The Principles and Operation of Sir Robert Peel’s Act of 1844 Explained and Defended</span>, 1st edition, p. 75).</p> |
| <p><a href="#ft19" id="fn19"><sup>19</sup></a> The alleged advantage of economic “planning”—namely, that it enables greater certainty with regard to the future—depends upon the assumption that under “planning” the present controlling forces, the choices of individual spenders and savers, are themselves brought under the control of the planners. The paradox therefore arises that either the planner is destitute of the instrument of calculating the ends of the community he intends to serve, or, if he restores the instrument, he removes the <span class="italics">raison d’être</span> of the “plan”. Of course, the dilemma does not arise if he thinks himself capable of interpreting these ends or—what is much more probable—if he has no intention of serving any other ends but those <span class="italics">he</span> thinks appropriate. Strange to say this not infrequently happens. Scratch a would-be planner and you usually find a would-be dictator.</p> | <> | <p><a href="#ft18" id="fn18"><sup>18</sup></a> The alleged advantage of economic “planning”—namely, that it enables greater certainty with regard to the future—depends upon the assumption that under “planning” the present controlling forces, the choices of individual spenders and savers, are themselves brought under the control of the planners. The paradox therefore arises that either the planner is destitute of the instrument of calculating the ends of the community he intends to serve, or, if he restores the instrument, he removes the <span class="italics">raison d’être</span> of the “plan”. Of course, the dilemma does not arise if he thinks himself capable of interpreting these ends or—what is much more probable—if he has no intention of serving any other ends but those <span class="italics">he</span> thinks appropriate. Strange to say this not infrequently happens. Scratch a would-be planner and you usually find a would-be dictator.</p> |
| -+ | <p><a href="#ft19" id="fn19"><sup>19</sup></a> It should be observed that this is not the same as saying that there is no means available for defining the probable movement of the demand curve. It is important to realise that the demand curve is to be conceived as derived from the more fundamental indifference system, and it is to this latter that our proposition relates.</p> | |
| <p><a href="#ft22" id="fn22"><sup>22</sup></a> Into the same category fall the much more difficult questions relating to the influence of changing incomes on birth-rates, etc. The population problem as a whole is one of the most conspicuous residents of this borderland of applied Economics.</p> | <> | <p><a href="#ft22" id="fn22"><sup>22</sup></a> Professor Souter says that words fail him to describe the type of mind that takes any pleasure in drawing such distinctions (<span class="italics">op. cit.</span>, p. 139). But surely, methodological considerations apart, there are very solid reasons of convenience for observing them. I venture to suggest that if Professor Souter had been asked to advise any Government on such questions there would have come a point at which, having diagnosed the “economic” factors, he would have turned and said, “But then, of course, there is the political problem; will people stand it?” And he might have added with Cantillon, “But that is not my business”. Or, as true blue Hegelian, taking all knowledge for his province, he might have then launched forth on a disquisition of what is and what is not politically possible. But he would have made the distinction. Exactly how he labelled it we might argue about in a friendly way afterwards.</p> |
| <p><a href="#ft23" id="fn23"><sup>23</sup></a> The qualification is important. It is more accuracy in mode of statement, not over-austerity in speculative range for which I am pleading. I am very far from suggesting that, when discussing practical problems, economists should refrain from contemplating the probability of those changes in the data whose causation falls outside the strict limits of Economic Science. Indeed, I am inclined to believe that there is here a field of sociological speculation in which economists may have a definite advantage over others. Certainly it is a field in which hitherto they have done very much more than others—one has only to think of the various discussions of the possible forms of a Tariff Commission in a democratic community (<span class="italics">e.g</span>., Plant, <span class="italics">Tariffs in Practice; Tariffs, the Case Restated</span>, edited by Sir William Beveridge) or the necessary conditions of bureaucratic administration of productive enterprise (<span class="italics">e.g</span>., Mises, <span class="italics">Die Gemeinwirtschaft</span>, pp. 199-210) to see the sort of thing I have in mind. All that I am contending is the desirability of separating out the kind of generalisation which belongs to this field from the kind which belongs to Economics proper.</p> | <> | <p><a href="#ft23" id="fn23"><sup>23</sup></a> I venture, as in the first edition, to draw attention to the actual words used in this prescription. It is more accuracy in mode of statement, not over-austerity in speculative range, for which I am pleading. I am very far from suggesting that, when discussing practical problems, economists should refrain from contemplating the probability of those changes in the data whose causation falls outside the strict limits of Economic Science. Indeed, I am inclined to believe that there is here a field of sociological speculation in which economists may have a definite advantage over others. Certainly it is a field in which hitherto they have done very much more than others—one has only to think of the various discussions of the possible forms of a Tariff Commission in a democratic community or the necessary conditions of bureaucratic administration of productive enterprise to see the sort of thing I have in mind. All that I am contending is the desirability of recognising the distinction between the kind of generalisation which belongs to this field and the kind which belongs to Economics proper.</p> |
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| <h1 id="sigil_toc_id_7" title="VI. The Significance of Economic Science">CHAPTER VI</h1> | <> | <h1 title="VI. The Significance of Economic Science">CHAPTER VI</h1> |
| <p class="noindent"><span class="smallcaps">1. We</span> now approach the last stage of our investigations. We have surveyed the subject-matter of Economics. We have examined the nature of its generalisations and their bearing on the interpretation of Reality. We have finally to ask: What is the significance of it all for social life and conduct? What is the bearing of Economic Science on practice?</p> | <> | <p class="noindent"><span class="smallcaps">1. We</span> now approach the last stage of our investigations. We have surveyed the subject-matter of Economics. We have examined the nature of its generalisations and their bearing on the interpretation of reality. We have finally to ask: What is the significance of it all for social life, and conduct? What is the bearing of Economic Science on practice?</p> |
| <p>At first sight the plausibility of the argument is overwhelming. But on closer inspection it is seen to be merely specious. It rests upon an extension of the Law of Diminishing Marginal Utility into a field in which it is entirely illegitimate. The “Law of Diminishing Marginal Utility” here invoked does not follow in the least from the fundamental conception of economic goods; and it makes assumptions which, whether they are true or false, can never be verified by observation or introspection. The proposition we are examining begs the great metaphysical question of the scientific comparability of different individual experiences. This deserves further examination.</p> | <> | <p>At first sight the plausibility of the argument is overwhelming. But on closer inspection it is seen to be merely specious. It rests upon an extension of the conception of diminishing marginal utility into a field in which it is entirely illegitimate. The “Law of Diminishing Marginal Utility” here invoked does not follow in the least from the fundamental conception of economic goods; and it makes assumptions which, whether they are true or false, can never be verified by observation or introspection. The proposition we are examining begs the great metaphysical question of the scientific comparability of different individual experiences. This deserves further examination.</p> |
| <p>The Law of Diminishing Marginal Utility, as we have seen, is derived from the conception of a scarcity of means in relation to the ends which they serve. It assumes that, for each individual, goods can be ranged in order of their significance for conduct; and that, in the sense that it will be preferred, we can say that one use of a good is more important than another. Proceeding on this basis, we can compare the order in which one individual may be supposed to prefer certain alternatives with the order in which they are preferred by another individual. In this way it is possible to build up a complete theory of exchange.</p> | <> | <p>The Law of Diminishing Marginal Utility, as we have seen, is derived from the conception of a scarcity of means in relation to the ends which they serve. It assumes that, for each individual, goods can be ranged in order of their significance for conduct; and that, in the sense that it will be preferred, we can say that one use of a good is more important than another. Proceeding on this basis, we can compare the order in which one individual may be supposed to prefer certain alternatives with the order in which they are preferred by another individual. In this way it is possible to build up a complete theory of exchange.<a href="#fn3" id="ft3"><sup>3</sup></a></p> |
| <p>But it is one thing to assume that scales can be drawn up showing the <span class="italics">order</span> in which an individual will prefer a series of alternatives, and to compare the arrangement of one such individual scale with another. It is quite a different thing to assume that behind such arrangements lie magnitudes which themselves can be compared as between individual scales. This is not an assumption which need anywhere be made in modern economic analysis, and it is an assumption which is of an entirely different kind from the assumption of individual scales of relative valuation. The theory of exchange assumes that <span class="italics">I</span> can compare the importance <span class="italics">to me</span> of Bread at 6d. per loaf and 6d. spent on other alternatives presented by the opportunities of the market, or—to empty out even the explanatory assumption of introspection—it assumes that confronted with such opportunities in certain circumstances my response will be of a determinate nature. And it assumes that the order of my preferences thus exhibited can be compared with the order of preferences of the Baker. But it does <span class="italics">not</span> assume that, at any point, it is necessary to compare the satisfaction which <span class="italics">I</span> get from the spending of 6d. on bread with the satisfaction which <span class="italics">the Baker</span> gets by receiving it. That comparison is a comparison of an entirely different nature. It is a comparison which is never needed in the theory of equilibrium and which is never implied by the assumptions of that theory. It is a comparison which necessarily falls outside the scope of any positive science. To state that A’s preference stands above B’s in order of importance is entirely different from stating that A prefers <span class="italics">n</span> to <span class="italics">m</span> and B prefers <span class="italics">n</span> and <span class="italics">m</span> in a different order. It involves an element of conventional valuation. Hence it is essentially normative. It has no place in pure science.</p> | <> | <p>But it is one thing to assume that scales can be drawn up showing the <span class="italics">order</span> in which an individual will prefer a series of alternatives, and to compare the arrangement of one such individual scale with another. It is quite a different thing to assume that behind such arrangements lie magnitudes which themselves can be compared. This is not an assumption which need anywhere be made in modern economic analysis, and it is an assumption which is of an entirely different kind from the assumption of individual scales of relative valuation. The theory of exchange assumes that <span class="italics">I</span> can compare the importance <span class="italics">to me</span> of bread at 6d. per loaf and 6d. spent on other alternatives presented by the opportunities of the market. And it assumes that the order of my preferences thus exhibited can be compared with the order of preferences of the baker. But it does <span class="italics">not</span> assume that, at any point, it is necessary to compare the satisfaction which <span class="italics">I</span> get from the spending of 6d. on bread with the satisfaction which <span class="italics">the Baker</span> gets by receiving it. That comparison is a comparison of an entirely different nature. It is a comparison which is never needed in the theory of equilibrium and which is never implied by the assumptions of that theory. It is a comparison which necessarily falls outside the scope of any positive science. To state that A’s preference stands above B’s in order of importance is entirely different from stating that A prefers <span class="italics">n</span> to <span class="italics">m</span> and B prefers <span class="italics">n</span> and <span class="italics">m</span> in a different order. It involves an element of conventional valuation. Hence it is essentially normative. It has no place in pure science.</p> |
| <p>But suppose that we differed about the satisfaction derived by A from an income of £1,000, and the satisfaction derived by B from an income of twice that magnitude. Asking them would provide no solution. Supposing they differed. A might urge that he had more satisfaction than B at the margin. While B might urge that, on the contrary, he had more satisfaction than A. We do not need to be slavish behaviourists to realise that here is no scientific evidence. <span class="italics">There is no means of testing the magnitude of A’s satisfaction as compared with B’s</span>. If we tested the state of their blood-streams, that would be a test of blood, not satisfaction. Introspection does not enable A to discover what is going on in B’s mind, nor B to discover what is going on in A’s. There is no way of comparing the satisfactions of different people.</p> | <> | <p>But suppose that we differed about the satisfaction derived by A from an income of £1,000, and the satisfaction derived by B from an income of twice that magnitude. Asking them would provide no solution. Supposing they differed. A might urge that he had more satisfaction than B at the margin. While B might urge that, on the contrary, he had more satisfaction than A. We do not need to be slavish behaviourists to realise that here is no scientific evidence. <span class="italics">There is no means of testing the magnitude of A’s satisfaction as compared with B’s</span>. If we tested the state of their blood-streams, that would be a test of blood, not satisfaction. Introspection does not enable A to measure what is going on in B’s mind, nor B to measure what is going on in A’s. There is no way of comparing the satisfactions of different people.</p> |
| <p>Now, of course, in daily life we do continually assume that the comparison can be made. But the very diversity of the assumptions actually made at different times and in different places is evidence of their conventional nature. In Western democracies we assume for certain purposes that men in similar circumstances are capable of equal satisfactions. Just as for purposes of justice we assume equality of responsibility in similar situations as between legal subjects, so for purposes of public finance we agree to assume equality of capacity for experiencing satisfaction from equal incomes in similar circumstances as between economic subjects. But, although it may be convenient to assume this, there is no way of proving that the assumption rests on ascertainable fact. And, indeed, if the representative of some other civilisation were to assure us that we were wrong, that members of his caste were capable of experiencing ten times as much satisfaction from given incomes as members of an inferior caste, we could not refute him. We might poke fun at him. We might flare up with indignation, and say that his valuation was hateful, that it led to civil strife, unhappiness, unjust privilege, and so on and so forth. But we could not show that he was wrong in any objective sense, any more than we could show that we were right. And since in our hearts we do not believe that men are equally capable of satisfaction, it would really be rather silly if we continued to pretend that the justification for our scheme of things was in any way <span class="italics">scientific</span>. It can be justified on grounds of general convenience. Or it can be justified by appeal to ultimate standards of value. But it cannot be justified by appeal to any kind of positive science.</p> | <> | <p>Now, of course, in daily life we do continually assume that the comparison can be made. But the very diversity of the assumptions actually made at different times and in different places is evidence of their conventional nature. In Western democracies we assume for certain purposes that men in similar circumstances are capable of equal satisfactions. Just as for purposes of justice we assume equality of responsibility in similar situations as between legal subjects, so for purposes of public finance we agree to assume equality of capacity for experiencing satisfaction from equal incomes in similar circumstances as between economic subjects. But, although it may be convenient to assume this, there is no way of proving that the assumption rests on ascertainable fact. And, indeed, if the representative of some other civilisation were to assure us that we were wrong, that members of his caste (or his race) were capable of experiencing ten times as much satisfaction from given incomes as members of an inferior caste (or an “inferior” race), we could not refute him. We might poke fun at him. We might flare up with indignation, and say that his valuation was hateful, that it led to civil strife, unhappiness, unjust privilege, and so on and so forth. But we could not show that he was wrong in any objective sense, any more than we could show that we were right. And since in our hearts we do not regard different men’s satisfactions from similar means as equally valuable, it would really be rather silly if we continued to pretend that the justification for our scheme of things was in any way <span class="italics">scientific</span>. It can be justified on grounds of general convenience. Or it can be justified by appeal to ultimate standards of obligation. But it cannot be justified by appeal to any kind of positive science.</p> |
| <p>Hence the extension of the Law of Diminishing Marginal Utility, postulated in the propositions we are examining, is entirely illegitimate. And the arguments based upon it therefore are all lacking in scientific foundation. Recognition of this no doubt involves a substantial curtailment of the claims of much of what now assumes the status of scientific generalisation in current discussions of applied Economics. The Law of Diminishing Marginal Utility does not justify the inference that transferences from the rich to the poor will increase total satisfaction. It does not tell us that a graduated income tax is less injurious to the social dividend than a non-graduated poll tax. Indeed, all that part of the theory of Public Finance which deals with “Social Utility” goes by the board. Interesting as a development of an ethical postulate, it is entirely foreign to the assumptions of scientific Economics. It is simply the accidental deposit of the historical association of English Economics with Utilitarianism: and both the utilitarian postulates from which it derives and the analytical Economics with which it has been associated will be the better and the more convincing for the separation.<a href="#fn3" id="ft3"><sup>3</sup></a></p> | <> | <p>Hence the extension of the Law of Diminishing Marginal Utility, postulated in the propositions we are examining, is illegitimate. And the arguments based upon it therefore are lacking in scientific foundation. Recognition of this no doubt involves a substantial curtailment of the claims of much of what now assumes the status of scientific generalisation in current discussions of applied Economics. The conception of diminishing relative utility (the convexity downwards of the indifference curve) does not justify the inference that transferences from the rich to the poor will increase total satisfaction. It does not tell us that a graduated income tax is less injurious to the social dividend than a non-graduated poll tax. Indeed, all that part of the theory of public finance which deals with “Social Utility” must assume a different significance. Interesting as a development of an ethical postulate, it does not at all follow from the positive assumptions of pure theory. It is simply the accidental deposit of the historical association of English Economics with Utilitarianism: and both the utilitarian postulates from which it derives and the analytical Economics with which it has been associated will be the better and the more convincing if this is clearly recognised.<a href="#fn4" id="ft4"><sup>4</sup></a></p> |
| <p>But supposing this were not so. Suppose that we could bring ourselves to tolerate the intrusion of these conventional assumptions that individual experiences can be compared, and that one man is as capable of experiencing satisfaction as another. And suppose that, proceeding on this basis, we had succeeded in showing that certain policies <span class="italics">had the effect</span> of increasing “social utility”, even so it would be totally illegitimate to argue that such a conclusion by itself warranted the inference that these policies <span class="italics">ought</span> to be carried out. For such an inference would beg the whole question whether the increase of satisfaction in this sense was socially obligatory.<a href="#fn4" id="ft4"><sup>4</sup></a> And there is nothing within the body of economic generalisations, even thus enlarged by the inclusion of elements of conventional valuation, which affords any means of deciding this question. Propositions involving “ought” are on an entirely different plane from propositions involving “is”. But more of this later.<a href="#fn5" id="ft5"><sup>5</sup></a></p> | <> | <p>But supposing this were not so. Suppose that we could bring ourselves to believe in the positive status of these conventional assumptions, the commensurability of different experiences, the equality of capacity for satisfaction, etc. And suppose that, proceeding on this basis, we had succeeded in showing that certain policies <span class="italics">had the effect</span> of increasing “social utility”, even so it would be totally illegitimate to argue that such a conclusion by itself warranted the inference that these policies <span class="italics">ought</span> to be carried out. For such an inference would beg the whole question whether the increase of satisfaction in this sense was socially obligatory.<a href="#fn5" id="ft5"><sup>5</sup></a> And there is nothing within the body of economic generalisations, even thus enlarged by the inclusion of elements of conventional valuation, which affords any means of deciding this question. Propositions involving “ought” are on an entirely different plane from propositions involving “is”. But more of this later.<a href="#fn6" id="ft6"><sup>6</sup></a></p> |
| <p>3. Exactly the same type of stricture may be applied to any attempt to make the criteria of free equilibrium in the price system at the same time the criteria of “economic justification”. The pure theory of equilibrium enables us to understand how, given the valuations of the various economic subjects and the facts of the legal and technical environment, a system of relationships can be conceived towards which existing relationships may be regarded as tending. It enables us to describe that distribution of resources which, given the valuations of the individual concerned, satisfies demand most fully. But it does not by itself provide any ethical sanctions. To show that, under certain conditions, demand is satisfied more adequately than under any alternative set of conditions, does not prove that that set of conditions is desirable. There is no penumbra of approbation round the Theory of Equilibrium. Equilibrium is just equilibrium.</p> | <> | <p>3. Exactly the same type of stricture may be applied to any attempt to make the criteria of free equilibrium in the price system at the same time the criteria of “economic justification”. The pure theory of equilibrium enables us to understand how, given the valuations of the various economic subjects and the facts of the legal and technical environment, a system of relationships can be conceived from which there would be no tendency to variation. It enables us to describe that distribution of resources which, given the valuations of the individual concerned, satisfies demand most fully. But it does not by itself provide any ethical sanctions. To show that, under certain conditions, demand is satisfied more adequately than under any alternative set of conditions, does not prove that that set of conditions is desirable. There is no penumbra of approbation round the theory of equilibrium. Equilibrium is just equilibrium.</p> |
| <p>Now, of course, given the desirability of individual liberty, absence of regimentation, power of continuous initiative, there is strong reason for supposing that conformity to the criteria of free economic equilibrium constitutes a fulfilment of these norms.<a href="#fn6" id="ft6"><sup>6</sup></a> It is of the essence of the conception of equilibrium that, given his initial resources, each individual secures a range of free choice, bounded only by the limitations of the material environment and the exercise of a similar freedom on the part of the other economic subjects. In equilibrium each individual is free to move to a different point on his lines of preference, but he does not move, for, in the circumstances postulated, any other point would be less preferred. But freedom to choose may not be regarded as an ultimate good. The creation of a state of affairs offering the maximum freedom of choice may not be thought desirable, having regard to other social ends. To show that, in certain conditions, the maximum of freedom of this sort is achieved is not to show that those conditions should be sought after.</p> | <> | <p>Now, of course, it is of the essence of the conception of equilibrium that, given his initial resources, each individual secures a range of free choice, bounded only by the limitations of the material environment and the exercise of a similar freedom on the part of the other economic subjects. In equilibrium each individual is free to move to a different point on his lines of preference, but he does not move, for, in the circumstances postulated, any other point would be less preferred. Given certain norms of political philosophy, this conception may throw an important light upon the types of social institutions necessary to achieve them.<a href="#fn7" id="ft7"><sup>7</sup></a> But freedom to choose may not be regarded as an ultimate good. The creation of a state of affairs offering the maximum freedom of choice may not be thought desirable, having regard to other social ends. To show that, in certain conditions, the maximum of freedom of this sort is achieved is not to show that those conditions should be sought after.</p> |
| <p>Moreover, there are certain limitations on the possibility of formulating ends in price offers. To secure the conditions within which the equilibrating tendencies may emerge there must exist a certain legal apparatus, not capable of being elicited by price bids, yet essential for their orderly execution.<a href="#fn7" id="ft7"><sup>7</sup></a> The negative condition of health, immunity from infectious disease, is not an end which can be wholly achieved by individual action. In urban conditions the failure of one individual to conform to certain sanitary requirements may involve all the others in an epidemic. The securing of ends of this sort must necessarily involve the using of factors of production in a way not fully compatible with complete freedom in the expenditure of gross individual resources. And it is clear that society, acting as a body of political citizens, may formulate ends which interfere much more drastically than this with the free choices of the individuals composing it. There is nothing in the corpus of economic analysis which in itself affords any justification for regarding these ends as good or bad. Economic analysis can simply point out the implications as regards the disposal of means of production of the various patterns of ends which may be chosen.</p> | <> | <p>Moreover, there are certain obvious limitations on the possibility of formulating ends in price offers. To secure the conditions within which the equilibrating tendencies may emerge there must exist a certain legal apparatus, not capable of being elicited by price bids, yet essential for their orderly execution.<a href="#fn8" id="ft8"><sup>8</sup></a> The negative condition of health, immunity from infectious disease, is not an end which can be wholly achieved by individual action. In urban conditions the failure of one individual to conform to certain sanitary requirements may involve all the others in an epidemic. The securing of ends of this sort must necessarily involve the using of factors of production in a way not fully compatible with complete freedom in the expenditure of given individual resources. And it is clear that society, acting as a body of political citizens, may formulate ends which interfere much more drastically than this with the free choices of the individuals composing it. There is nothing in the corpus of economic analysis which in itself affords any justification for regarding these ends as good or bad. Economic analysis can simply point out the implications as regards the disposal of means of production of the various patterns of ends which may be chosen.</p> |
| <p>For this reason, the use of the adjectives “economical” and “uneconomical” to describe certain policies is apt to be very misleading. The criterion of economy which follows from our original definitions is the securing of given ends with least means. It is, therefore, perfectly intelligible to say of a certain policy that it is uneconomical, if, in order to achieve certain ends, it uses more scarce means than are necessary. As regards the disposition of means, the terms “economical” and “uneconomical” can be used with complete intelligibility.</p> | <> | <p>For this reason, the use of the adjectives “economical” and “uneconomical” to describe certain policies is apt to be very misleading. The criterion of economy which follows from our original definitions is the securing of given ends with least means. It is, therefore, perfectly intelligible to say of a certain policy that it is uneconomical, if, in order to achieve certain ends, it uses more scarce means than are necessary. Once the ends by which they are valued are given as regards the disposition of means, the terms “economical” and “uneconomical” can be used with complete intelligibility.</p> |
| <p>But it is not intelligible to use them as regards ends themselves. As we have seen already, there are no economic ends.<a href="#fn8" id="ft8"><sup>8</sup></a> There are only economical and uneconomical ways of achieving given ends. We cannot say that the pursuit of given ends is uneconomical because the ends are uneconomical; we can only say it is uneconomical if the ends are pursued with an unnecessary expenditure of means.</p> | <> | <p>But it is not intelligible to use them as regards ends themselves. As we have seen already, there are no economic ends.<a href="#fn9" id="ft9"><sup>9</sup></a> There are only economical and uneconomical ways of achieving given ends. We cannot say that the pursuit of given ends is uneconomical because the ends are uneconomical; we can only say it is uneconomical if the ends are pursued with an unnecessary expenditure of means.</p> |
| <p>Thus it is not legitimate to say that going to war is uneconomical, if, having regard to all the issues and all the sacrifices necessarily involved, it is decided that the anticipated result is worth the sacrifice. It is only legitimate so to describe it if it is attempted to secure this end with an unnecessary degree of sacrifice.<a href="#fn9" id="ft9"><sup>9</sup></a></p> | <> | <p>Thus it is not legitimate to say that going to war is uneconomical, if, having regard to all the issues and all the sacrifices necessarily involved, it is decided that the anticipated result is worth the sacrifice. It is only legitimate so to describe it if it is attempted to secure this end with an unnecessary degree of sacrifice.</p> |
| <p>Again, we may examine the case of minimum wage regulation. It is a well-known generalisation of Theoretical Economics that a wage which is held above the equilibrium level necessarily involves unemployment and a diminution of the value of capital. This is one of the most elementary deductions from the theory of economic equilibrium. The history of this country since the War is one long vindication of its accuracy.<a href="#fn11" id="ft11"><sup>11</sup></a> The popular view that the validity of these “static” deductions is vitiated by the probability of “dynamic improvements” induced by wage pressure, depends upon an oversight of the fact that these “improvements” are themselves one of the manifestations of capital wastage.<a href="#fn12" id="ft12"><sup>12</sup></a> But such a policy is not <span class="italics">necessarily</span> to be described as uneconomical. If, in the society imposing such a policy, it is generally thought that the gain of the absence of wage payments below a certain rate, more than compensates for the unemployment and losses it involves, the policy cannot be described as uneconomical. As private individuals we may think that such a system of preferences sacrifices tangible increments of the ingredients of real happiness for the false end of a mere diminution of inequality. We may suspect that those who cherish such preferences are deficient in imagination. But there is nothing in scientific Economics which warrants us in passing these judgments. Economics is neutral as between ends. Economics cannot pronounce on the validity of ultimate judgments of value.</p> | <> | <p>Again, we may examine the case of minimum wage regulation. It is a well-known generalisation of theoretical Economics that a wage which is held above the equilibrium level necessarily involves unemployment and a diminution of the value of capital. This is one of the most elementary deductions from the theory of economic equilibrium. The history of this country since the War is one long vindication of its accuracy.<a href="#fn11" id="ft11"><sup>11</sup></a> The popular view that the validity of these “static” deductions is vitiated by the probability of “dynamic improvements” induced by wage pressure, depends upon an oversight of the fact that these “improvements” are themselves one of the manifestations of capital wastage.<a href="#fn12" id="ft12"><sup>12</sup></a> But such a policy is not <span class="italics">necessarily</span> to be described as uneconomical. If, in the society imposing such a policy, it is generally thought that the gain of the absence of wage payments below a certain rate more than compensates for the unemployment and losses it involves, the policy cannot be described as uneconomical. As private individuals we may think that such a system of preferences sacrifices tangible increments of the ingredients of real happiness for the false end of a mere diminution of inequality. We may suspect that those who cherish such preferences are deficient in imagination. But there is nothing in scientific Economics which warrants us in passing these judgments. Economics is neutral as between ends. Economics cannot pronounce on the validity of ultimate judgments of value.</p> |
| -+ | <p>All this is not to say that economists may not assume as postulates different judgments of value, and then on the assumption that these are valid enquire what judgment is to be passed upon particular proposals for action. On the contrary, as we shall see, it is just in the light that it casts upon the significance and consistency of different ultimate valuations that the utility of Economics consists. Applied Economics consists of propositions of the form, “If you want to do this, then you must do that.” “If such and such is to be regarded as the ultimate good, then this is clearly incompatible with it.” All that is implied in the distinction here emphasised is that the validity of assumptions relating to the value of what exists or what may exist is not a matter of scientific verification, as is the validity of assumptions relating to mere existence.</p> | |
| <p>All this is not to say that economists should not deliver themselves on ethical questions, any more than an argument that botany is not æsthetics is to say that botanists should not have views of their own on the lay-out of gardens. On the contrary, it is greatly to be desired that economists should have speculated long and widely on these matters, since only in this way will they be in a position to appreciate the implications as regards <span class="italics">given</span> ends of problems which are put to them for solution. Our methodological axioms involve no prohibition of outside interests! All that is contended is that there is no logical connection between the two types of generalisation, and that there is nothing to be gained by invoking the sanctions of one to reinforce the conclusions of the other.</p> | <> | <p>Nor is it in the least implied that economists should not deliver themselves on ethical questions, any more than an argument that botany is not æsthetics is to say that botanists should not have views of their own on the lay-out of gardens. On the contrary, it is greatly to be desired that economists should have speculated long and widely on these matters, since only in this way will they be in a position to appreciate the implications as regards <span class="italics">given</span> ends of problems which are put to them for solution. We may not agree with J. S. Mill that “a man is not likely to be a good economist if he is nothing else.” But we may at least agree that he may not be as useful as he otherwise might be. Our methodological axioms involve no prohibition of outside interests! All that is contended is that there is no logical connection between the two types of generalisation, and that there is nothing to be gained by invoking the sanctions of one to reinforce the conclusions of the other.</p> |
| <p>Surely it consists in just this, that, when we are faced with a choice between ultimates, it enables us to choose with full awareness of the implications of what we are choosing. Faced with the problem of deciding between this and that, we are not entitled to look to Economics for the ultimate decision. There is nothing in Economics which relieves <span class="italics">us</span> of the obligation to choose. There is nothing in any kind of science which can decide the ultimate problem of preference. But, to be rational, we must know what it is we prefer. We must be aware of the objective implications of the alternatives of choice. For rationality in choice is nothing more and nothing less than choice with complete awareness of the alternatives rejected. And it is just here that Economics acquires its practical significance. It can make clear to us the implications of the different ends we may choose. It makes it possible for us to will with knowledge of what it is we are willing. It makes it possible for us to select a system of ends which are mutually consistent with each other.<a href="#fn18" id="ft18"><sup>18</sup></a></p> | <> | <p>Surely it consists in just this, that, when we are faced with a choice between ultimates, it enables us to choose with full awareness of the implications of what we are choosing. Faced with the problem of deciding between this and that, we are not entitled to look to Economics for the ultimate decision. There is nothing in Economics which relieves <span class="italics">us</span> of the obligation to choose. There is nothing in any kind of science which can decide the ultimate problem of preference. But, to be completely rational, we must know what it is we prefer. We must be aware of the implications of the alternatives. For rationality in choice is nothing more and nothing less than choice with complete awareness of the alternatives rejected. And it is just here that Economics acquires its practical significance. It can make clear to us the implications of the different ends we may choose. It makes it possible for us to will with knowledge of what it is we are willing. It makes it possible for us to select a system of ends which are mutually consistent with each other.<a href="#fn18" id="ft18"><sup>18</sup></a></p> |
| <p>And even this is a narrow example. Without economic analysis it is not possible rationally to choose between alternative <span class="italics">systems</span> of society. We have seen already that if we regard a society which permits inequality of incomes as an evil in itself, and an equalitarian society as presenting an end to be pursued above all other things, then it is illegitimate to regard such a preference as uneconomic. But it is not possible to regard it as rational unless it is formulated with a full consciousness of the nature of the sacrifice which is thereby involved. And we cannot do this unless we understand, not only the essential nature of the capitalistic mechanism, but also the necessary conditions and limitations to which the type of society proposed as a substitute would be subject. It is not rational to will a certain end if one is not conscious of what sacrifice the achievement of that end involves. And, in this supreme weighing of alternatives, only a complete awareness of the implications of modern economic analysis can confer the capacity to judge rationally.<a href="#fn21" id="ft21"><sup>21</sup></a></p> | <> | <p>And even this is a narrow example. Without economic analysis it is not possible rationally to choose between alternative <span class="italics">systems</span> of society. We have seen already that if we regard a society which permits inequality of incomes as an evil in itself, and an equalitarian society as presenting an end to be pursued above all other things, then it is illegitimate to regard such a preference as uneconomic. But it is not possible to regard it as rational unless it is formulated with a full consciousness of the nature of the sacrifice which is thereby involved. And we cannot do this unless we understand, not only the essential nature of the capitalistic mechanism, but also the necessary conditions and limitations to which the type of society proposed as a substitute would be subject. It is not rational to will a certain end if one is not conscious of what sacrifice the achievement of that end involves. And, in this supreme weighing of alternatives, only a complete awareness of the implications of modern economic analysis can confer the capacity to judge rationally.</p> |
| <p>But, if this is so, what need is there to claim any larger status for Economic Science? Is it not the burden of our time that we do not realise what we are doing? Are not our difficulties due to just this fact, that we will ends which are incompatible, not because we wish for deadlock, but because we do not realise their incompatibility. It may well be that there may exist differences as regards ultimate ends in modern society which render some conflict inevitable. But it is clear that many of our most pressing difficulties arise, not for this reason, but because our aims are not co-ordinated. As consumers we will cheapness, as producers we choose security. We value one distribution of factors of production as private spenders and savers. As public citizens we sanction arrangements which frustrate the achievement of this distribution. We call for cheap money and lower prices, fewer imports and a larger volume of trade.<a href="#fn22" id="ft22"><sup>22</sup></a> The different “will-organisations” in society, although composed of the same individuals, formulate different preferences. Everywhere our difficulties seem to arise, not so much from divisions between the different members of the body politic, as from, as it were, split personalities on the part of each one of them.<a href="#fn23" id="ft23"><sup>23</sup></a></p> | <> | <p>But, if this is so, what need is there to claim any larger status for Economic Science? Is it not the burden of our time that we do not realise what we are doing? Are not most of our difficulties due to just this fact, that we will ends which are incompatible, not because we wish for deadlock, but because we do not realise their incompatibility. It may well be that there may exist differences as regards ultimate ends in modern society which render some conflict inevitable. But it is clear that many of our most pressing difficulties arise, not for this reason, but because our aims are not co-ordinated. As consumers we will cheapness, as producers we choose security. We value one distribution of factors of production as private spenders and savers. As public citizens we sanction arrangements which frustrate the achievement of this distribution. We call for cheap money and lower prices, fewer imports and a larger volume of trade.<a href="#fn21" id="ft21"><sup>21</sup></a> The different “will-organisations” in society, although composed of the same individuals, formulate different preferences. Everywhere our difficulties seem to arise, not so much from divisions between the different members of the body politic, as from, as it were, split personalities on the part of each one of them.<a href="#fn22" id="ft22"><sup>22</sup></a></p> |
| <p>To such a situation, Economics brings the solvent of knowledge. It enables us to conceive the far-reaching implications of alternative possibilities of policy. It does not, and it cannot, enable us to evade the necessity of choosing between alternatives. But it does make it possible for us to bring our different choices into harmony. It cannot remove the ultimate limitations on ‘human action. But it does make it possible within these limitations to act consistently. It serves for the inhabitant of the modern world with its endless interconnections and relationships as an extension of his perceptive apparatus. It provides a technique of rational action.</p> | <> | <p>To such a situation, Economics brings the solvent of knowledge. It enables us to conceive the far-reaching implications of alternative possibilities of policy. It does not, and it cannot, enable us to evade the necessity of choosing between alternatives. But it does make it possible for us to bring our different choices into harmony. It cannot remove the ultimate limitations on human action. But it does make it possible within these limitations to act consistently. It serves for the inhabitant of the modern world with its endless interconnections and relationships as an extension of his perceptive apparatus. It provides a technique of rational action.</p> |
| <p>6. This, then, is the sense in which Economics can be truly said to assume rationality in human society. It makes no pretence, as has been alleged so often, that action is necessarily rational in the sense that the ends pursued are not mutually inconsistent. There is nothing in its generalisations which necessarily implies reflective deliberation in ultimate valuation. It relies upon no assumption that individuals act rationally. But it does depend for its practical <span class="italics">raison d’être</span> upon the assumption that it is desirable that they should do so. It does assume that, within the bounds of necessity, it is desirable to choose ends which can be achieved harmoniously.</p> | <> | <p>This, then, is a further sense in which Economics can be truly said to assume rationality in human society. It makes no pretence, as has been alleged so often, that action is necessarily rational in the sense that the ends pursued are not mutually inconsistent. There is nothing in its generalisations which necessarily implies reflective deliberation in ultimate valuation. It relies upon no assumption that individuals will always act rationally. But it does depend for its practical <span class="italics">raison d’être</span> upon the assumption that it is desirable that they should do so. It does assume that, within the bounds of necessity, it is desirable to choose ends which can be achieved harmoniously.</p> |
| <p>And thus in the last analysis Economics does depend, if not for its existence, at least for its significance, on an ultimate valuation—the affirmation that rationality and ability to choose with knowledge is desirable. If irrationality, if the surrender to the blind force of external stimuli and unco-ordinated impulse at every moment is a good to be preferred above all others, then it is true the <span class="italics">raison d’être</span> of Economics disappears. And it is the tragedy of our generation, red with fratricidal strife and betrayed almost beyond belief by those who should have been its intellectual leaders, that there have arisen those who would uphold this ultimate negation, this yearning for the deep unawareness of the unborn state, this escape from the tragic necessities of choice which has become conscious. With all such there can be no argument. In love with death, their love will overtake them. For them there can be no “way out” save the way which leads out of life. But for all those who still affirm more positive values, that branch of knowledge which, above all others, is the symbol and safeguard of rationality in social arrangements, must, in the anxious days which are to come, by very reason of this menace to that for which it stands, possess a peculiar and a heightened significance.</p> | <> | <p>And thus in the last analysis Economics does depend, if not for its existence, at least for its significance, on an ultimate valuation—the affirmation that rationality and ability to choose with knowledge is desirable. If irrationality, if the surrender to the blind force of external stimuli and unco-ordinated impulse at every moment is a good to be preferred above all others, then it is true the <span class="italics">raison d’être</span> of Economics disappears. And it is the tragedy of our generation, red with fratricidal strife and betrayed almost beyond belief by those who should have been its intellectual leaders, that there have arisen those who would uphold this ultimate negation, this escape from the tragic necessities of choice which has become conscious. With all such there can be no argument. The revolt against reason is essentially a revolt against life itself. But for all those who still affirm more positive values, that branch of knowledge which, above all others, is the symbol and safeguard of rationality in social arrangements, must, in the anxious days which are to come, by very reason of this menace to that for which it stands, possess a peculiar and a heightened significance.</p> |
| <p><a href="#ft1" id="fn1"><sup>1</sup></a> See, <span class="italics">e.g</span>., Edgeworth, <span class="italics">The Pure Theory of Taxation</span> (<span class="italics">Papers Relating to Political Economy</span>, vol. ii., p. 63 <span class="italics">seq</span>.).</p> | <> | <p><a href="#ft1" id="fn1"><sup>1</sup></a> See, <span class="italics">e.g.</span>, Edgeworth, <span class="italics">The Pure Theory of Taxation</span> (<span class="italics">Papers Relating to Political Economy</span>, vol. ii., p. 63 <span class="italics">seq</span>.).</p> |
| -+ | <p><a href="#ft3" id="fn3"><sup>3</sup></a> So many have been the misconceptions based upon an imperfect understanding of this generalisation that Dr. Hicks has suggested that its present name be discarded altogether and the title Law of Increasing Rate of Substitution be adopted in its place. Personally, I prefer the established terminology, but it is clear that there is much to be said for the suggestion.</p> | |
| <p><a href="#ft3" id="fn3"><sup>3</sup></a> Cp. Davenport, <span class="italics">Value and Distribution</span>, pp. 301 and 571; Benham, <span class="italics">Economic Welfare</span> (<span class="italics">Economica</span>, June, 1930, pp. 173-187); M. Ste. Braun, <span class="italics">Theorie der Staatlichen Wirtschaftspolitik</span>, pp. 41-44. Even Professor Irving Fisher, anxious to provide a justification for his highly ingenious but entirely question-begging statistical method for measuring “marginal utility”, can find no better apology for his procedure than that “Philosophic doubt is right and proper, but the problems of life cannot and do not wait” (<span class="italics">Economic Essays in Honour of John Bates Clark</span>, p. 180). It does not seem to me that the problem of measuring marginal utility as between individuals is a particularly pressing problem. But whether this is so or not, the fact remains that Professor Fisher solves his problem only by making a conventional assumption. And it does not seem that it anywhere aids the solution of practical problems to pretend that conventional assumptions have scientific justification. It does not make me a more docile democrat to be told that <span class="italics">I</span> am equally capable of experiencing satisfaction as my neighbour; it fills me with unutterable fury. But I am perfectly willing to accept the statement that it is <span class="italics">convenient</span> to assume that this is the case. I am quite willing to accept the argument that in modern conditions societies which proceed on any other assumption have an inherent instability. But we are past the days when democracy could be made acceptable by the pretence that judgments of value are judgments of scientific fact. (For a detailed discussion of the Fisher proposals, see A. Bilimovic, <span class="italics">Irving Fisher’s statistische Methode für die Bemessung des Grenznutzens</span> [<span class="italics">Zeitschrift für Nationalökonomie</span>, Bd. 1, pp. 114-129].)</p> | <> | <p><a href="#ft4" id="fn4"><sup>4</sup></a> Cp. Davenport, <span class="italics">Value and Distribution</span>, pp. 301 and 571; Benham, <span class="italics">Economic Welfare</span> (<span class="italics">Economica</span>, June, 1930, pp. 173-187); M. St. Braun, <span class="italics">Theorie der staatlichen Wirtschaftspolitik</span>, pp. 41-44. Even Professor Irving Fisher, anxious to provide a justification for his statistical method for measuring “marginal utility”, can find no better apology for his procedure than that “Philosophic doubt is right and proper, but the problems of life cannot and do not wait” (<span class="italics">Economic Essays in Honour of John Bates Clark</span>, p. 180). It does not seem to me that the problem of measuring marginal utility as between individuals is a particularly pressing problem. But whether this is so or not, the fact remains that Professor Fisher solves his problem only by making a conventional assumption. And it does not seem that it anywhere aids the solution of practical problems to pretend that conventional assumptions have scientific justification. It does not make me a more docile democrat to be told that <span class="italics">I</span> am equally capable of experiencing satisfaction as my neighbour; it fills me with indignation. But I am perfectly willing to accept the statement that it is <span class="italics">convenient</span> to assume that this is the case. I am quite willing to accept the argument—indeed, as distinct from believers in the racial or proletarian myths, I very firmly believe—that, in modern conditions, societies which proceed on any other assumption have an inherent instability. But we are past the days when democracy could be made acceptable by the pretence that judgments of value are judgments of scientific fact. I am afraid that the same strictures apply to the highly ingenious <span class="italics">Methods for Measuring Marginal Utility</span> of Professor Ragnar Frisch.</p> |
| <p><a href="#ft4" id="fn4"><sup>4</sup></a> Psychological hedonism in so far as it went beyond the individual may have involved a non-scientific assumption, but it was not by itself a necessary justification for ethical hedonism.</p> | <> | <p><a href="#ft5" id="fn5"><sup>5</sup></a> Psychological hedonism in so far as it went beyond the individual may have involved a non-scientific assumption, but it was not by itself a necessary justification for ethical hedonism.</p> |
| <p><a href="#ft5" id="fn5"><sup>5</sup></a> See below, Section 4.</p> | <> | <p><a href="#ft6" id="fn6"><sup>6</sup></a> See below, Section 4.</p> |
| <p><a href="#ft6" id="fn6"><sup>6</sup></a> See two very important papers by Professor Plant, <span class="italics">Co-ordination and Competition in Transport</span> (<span class="italics">Journal of the Institute of Transport</span>, vol. xiii., pp. 127-136); <span class="italics">Trends in Business Administration</span> (<span class="italics">Economica</span>, No. 35, pp. 45-62).</p> | <> | <p><a href="#ft7" id="fn7"><sup>7</sup></a> See two very important papers by Professor Plant, <span class="italics">Co-ordination and Competition in Transport</span> (<span class="italics">Journal of the Institute of Transport</span>, vol. xiii., pp. 127-136); <span class="italics">Trends in Business Administration</span> (<span class="italics">Economica</span>, No. 35, pp. 45-62).</p> |
| <p><a href="#ft7" id="fn7"><sup>7</sup></a> On the place of the legal framework of Economic Activity, the “organisation” of the Economy as he calls it, Dr. Strigl’s work cited above is very illuminating. See Strigl, <span class="italics">op. cit</span>., pp. 85-121.</p> | <> | <p><a href="#ft8" id="fn8"><sup>8</sup></a> On the place of the legal framework of Economic Activity, the “organisation” of the Economy as he calls it, Dr. Strigl’s work cited above is very illuminating. See Strigl, <span class="italics">op. cit.</span>, pp. 85-121.</p> |
| <p><a href="#ft8" id="fn8"><sup>8</sup></a> See Chapter II., Sections 2 and 3, above.</p> | <> | <p><a href="#ft9" id="fn9"><sup>9</sup></a> See Chapter II., Sections 2 and 3, above.</p> |
| <p><a href="#ft9" id="fn9"><sup>9</sup></a> On all this see Mises, <span class="italics">Die Gemeinwirtschaft</span>, lte Auf., pp. 112-116.</p> | <> | <p><a href="#ft10" id="fn10"><sup>10</sup></a> See a paper by the present author on <span class="italics">The Case of Agriculture</span> in <span class="italics">Tariffs: The Case Examined</span> (edited by Sir William Beveridge).</p> |
| <p><a href="#ft10" id="fn10"><sup>10</sup></a> See a paper by the present author on <span class="italics">The Case of Agriculture in Tariffs</span>: The Case Examined (edited by Sir William Beveridge).</p> | <> | <p><a href="#ft11" id="fn11"><sup>11</sup></a> Hicks, <span class="italics">The Theory of Wages</span>, chs. ix and x. On the evidence of postwar history, Dr. Benham’s <span class="italics">Wages, Prices and Unemployment</span> (<span class="italics">Economist</span>, June 20, 1931) should be consulted.</p> |
| <p><a href="#ft11" id="fn11"><sup>11</sup></a> See Böhm-Bawerk, <span class="italics">Macht oder Ökonomischer Gesetz</span> (<span class="italics">Gesammelte Schriften</span>, pp. 250-300). (This has recently been translated by Dr. J. R. Mez of the University of Oregon under the title, <span class="italics">Control or Economic Law</span> [Eugene, Oregon]). See also Schumpeter, <span class="italics">Das Grundprinzip der Verteilungstheorie</span> (<span class="italics">Archiv für Sozialwissenschaft und Sozialpolitik</span>, vol. xlii., 1916, pp. 1-88); W. H. Hutt, <span class="italics">The Theory of Collective Bargaining</span>; Pigou, <span class="italics">Unemployment</span>, chs. v. and vi.; Hicks, <span class="italics">The Theory of Wages</span>. On the evidence of post-War history, Dr. Benham’s <span class="italics">Wages, Prices and Unemployment</span> (<span class="italics">Economist</span>, June 20, 1931) should be consulted.</p> | <> | <p><a href="#ft12" id="fn12"><sup>12</sup></a> It is curious that this should not have been more generally realised, for it is usually the most enthusiastic exponents of this view who also denounce most vigorously the unemployment “caused” by rationalisation. It is, of course, the necessity of the conversion of capital into forms which are profitable at the higher wage level which is responsible both for a shrinkage in social capital and the creation of an industrial structure incapable of affording full employment to the whole working population. There is no reason to expect permanent unemployment as a result of rationalisation <span class="italics">not</span> induced by wages above the equilibrium level.</p> |
| <p><a href="#ft12" id="fn12"><sup>12</sup></a> It is curious that this should not have been more generally realised, for it is usually the most enthusiastic exponents of this view who also denounce most vigorously the unemployment “caused” by rationalisation. It is, of course, the necessity of the conversion of capital into forms which are profitable at the higher wage level which is responsible both for a shrinkage in social capital and the creation of an industrial structure incapable of affording full employment to the whole working population. There is no reason to expect permanent unemployment as a result of rationalisation <span class="italics">not</span> induced by wages above the equilibrium level. For this reason it is to be feared that the statistics quoted by Mr. Colin Clark in his interesting <span class="italics">Statistical Studies on the Present Economic Position of Great Britain</span> (<span class="italics">Economic Journal</span>, 1931, pp. 360-362) do not lend themselves to the interpretation he puts on them. An increase of output per head in particular industries is not necessarily an index of increased general efficiency in any sense relevant to what Mr. Clark calls “real want-satisfying power”. The figure records <span class="italics">average</span> not <span class="italics">marginal</span> productivity. It takes no account of the position of the margin at which full employment is possible. It leaves completely unrevealed the question whether the capital investment which made it possible was as “productive” as alternative forms of investment profitable at other wage levels. Mr. Clark’s deductions are perilously akin to the economic fallacy of misplaced concreteness discussed in Chapter III.</p> | +- | |
| <p><a href="#ft14" id="fn14"><sup>14</sup></a> On all this it seems to me that the elucidations of Max Weber are quite definitive. Indeed, I confess that I am quite unable to understand how it can be conceived to be possible to call this part of Max Weber’s methodology in question. (See <span class="italics">Der Sinn der</span> “<span class="italics">Wertfreiheit</span>” <span class="italics">der Soziologischen und Ökonomischen Wissenschaften, Gesammelte Aufsätze zur Wissenschaftslehre</span>, pp. 451-502).</p> | <> | <p><a href="#ft14" id="fn14"><sup>14</sup></a> On all this it seems to me that the elucidations of Max Weber are quite definitive. Indeed, I confess that I am quite unable to understand how it can be conceived to be possible to call this part of Max Weber’s methodology in question. (See <span class="italics">Der Sinn der “Wertfreiheit” der Soziologischen und Ökonomischen Wissenschaften, Gesammelte Aufsätze zur Wissenschaftslehre</span>, pp. 451-502.)</p> |
| <p><a href="#ft15" id="fn15"><sup>15</sup></a> Mr. J. A. Hobson, commenting on a passage in my criticism of Mr. Hawtrey which was couched in somewhat similar terms, protests that “this is a refusal to recognise any empirical <span class="italics">modus vivendi</span> or contact between economic values and human values” (Hobson, <span class="italics">op. cit</span>., p. 129). Precisely, but why should Mr. Hobson, of all men, complain? My procedure simply empties out of Economics—what Mr. Hobson himself has never ceased to proclaim to be an illegitimate intrusion—any “economic” presumption that the valuations of the market-place are ethically respectable. I cannot help feeling that a great many of Mr. Hobson’s strictures on the procedure of Economic Science fall to the ground if the view of the scope of its subject-matter suggested above be explicitly adopted.</p> | <> | <p><a href="#ft15" id="fn15"><sup>15</sup></a> Mr. J. A. Hobson, commenting on a passage in my criticism of Mr. Hawtrey which was couched in somewhat similar terms, protests that “this is a refusal to recognise any empirical <span class="italics">modus vivendi</span> or contact between economic values and human values” (Hobson, <span class="italics">op. cit.</span>, p. 129). Precisely, but why should Mr. Hobson, of all men, complain? My procedure simply empties out of Economics—what Mr. Hobson himself has never ceased to proclaim to be an illegitimate intrusion—any “economic” presumption that the valuations of the market-place are ethically respectable. I cannot help feeling that a great many of Mr. Hobson’s strictures on the procedure of Economic Science fall to the ground if the view of the scope of its subject-matter suggested above be explicitly adopted.</p> |
| <p><a href="#ft17" id="fn17"><sup>17</sup></a> In fact, of course, such has been the practice of economists of the “orthodox” tradition ever since the emergence of scientific economics. See, <span class="italics">e.g</span>., Cantillon, <span class="italics">Essai sur la Nature du Commerce</span> (Higgs’ ed., p. 85): “It is also a question outside of my subject whether it is better to have a great multitude of inhabitants poor and badly provided, than a smaller number much more at their ease”. See also Ricardo, <span class="italics">Notes on Malthus</span>, p. 188: “It has been well said by M. Say that it is not the province of the Political Economist to advise—he is to tell you how you may become rich, but he is not to advise you to prefer riches to indolence or indolence to riches”. Of course, occasionally among those economists who have worked with a hedonistic bias, there has been confusion of the two kinds of proposition. But this has not happened to anything like the extent commonly suggested. Most of the allegations of bias spring from unwillingness to believe the facts that economic analysis brings to light. The proposition that real wages above the equilibrium point involve unemployment is a perfectly neutral inference from one of the most elementary propositions in theoretical economics. But it is difficult to mention it in some circles without being accused, if not of sinister interest, at least of a hopeless bias against the poor and the unfortunate. Similarly at the present day it is difficult to enunciate the platitude that a general tariff on imports will affect foreign demand for our exports without being thought a traitor to one’s country.</p> | <> | <p><a href="#ft17" id="fn17"><sup>17</sup></a> In fact, of course, such has been the practice of economists of the “orthodox” tradition ever since the emergence of scientific economics. See, <span class="italics">e.g.</span>, Cantillon, <span class="italics">Essai sur la Nature du Commerce</span> (Higgs’ ed., p. 85): “It is also a question outside of my subject whether it is better to have a great multitude of inhabitants poor and badly provided, than a smaller number much more at their ease”. See also Ricardo, <span class="italics">Notes on Malthus</span>, p. 188: “It has been well said by M. Say that it is not the province of the Political Economist to advise—he is to tell you how you may become rich, but he is not to advise you to prefer riches to indolence or indolence to riches”. Of course, occasionally among those economists who have worked with a hedonistic bias, there has been confusion of the two kinds of proposition. But this has not happened to anything like the extent commonly suggested. Most of the allegations of bias spring from unwillingness to believe the facts that economic analysis brings to light. The proposition that real wages above the equilibrium point involve unemployment is a perfectly neutral inference from one of the most elementary propositions in theoretical economics. But it is difficult to mention it in some circles without being accused, if not of sinister interest, at least of a hopeless bias against the poor and the unfortunate. Similarly at the present day it is difficult to enunciate the platitude that a general tariff on imports will affect foreign demand for our exports without being thought a traitor to one’s country.</p> |
| <p><a href="#ft20" id="fn20"><sup>20</sup></a> See Keynes, <span class="italics">A Tract on Monetary Reform</span>, pp. 154-155; also an interesting paper by Mr. Dennis Robertson, <span class="italics">How do We Want Gold to Behave?</span> reprinted in the <span class="italics">International Gold Problem</span>, pp. 18-46.</p> | <> | <p><a href="#ft20" id="fn20"><sup>20</sup></a> See Keynes, <span class="italics">A Tract on Monetary Reform</span>, pp. 154-155; also an interesting paper by Mr. D. H. Robertson, <span class="italics">How do We Want Gold to Behave?</span> reprinted in the <span class="italics">International Gold Problem</span>, pp. 18-46.</p> |
| <p><a href="#ft21" id="fn21"><sup>21</sup></a> In this connection the work of Professor Mises cited above should be consulted. See also Ludwig Pohle, <span class="italics">Kapitalismus und Sozialismus</span>; Halm, <span class="italics">Ist der Sozialismus wirtschaftlich möglich?</span> and N. G. Pierson, <span class="italics">Das Wertproblem in der sozialistischen Gesellschaft</span> (<span class="italics">Zeitschrift für Volkswirtschaft und Sozialpolitik</span>, N.F., Bd. 4, pp. 607-639).</p> | +- | |
| <p><a href="#ft22" id="fn22"><sup>22</sup></a> <span class="italics">Cf</span>. M. Ste. Braun, <span class="italics">Theorie der Staatlichen Wirtschaftspolitik</span>, p. 5.</p> | <> | <p><a href="#ft21" id="fn21"><sup>21</sup></a> <span class="italics">Cf</span>. M. S. Braun, <span class="italics">Theorie der Staatlichen Wirtschaftspolitik</span>, p. 6.</p> |
| <p><a href="#ft23" id="fn23"><sup>23</sup></a> In this way economic analysis reveals still further examples of a phenomenon to which attention has often been drawn in recent discussion of the theory of Sovereignty in Public Law. See Figgis, <span class="italics">Churches in the Modern State</span>; Maitland, <span class="italics">Introduction to</span> Gierke’s <span class="italics">Political Theories of the Middle Ages</span>; Laski, <span class="italics">The Problem of Sovereignty, Authority in the Modern State</span>.</p> | <> | <p><a href="#ft22" id="fn22"><sup>22</sup></a> In this way economic analysis reveals still further examples of a phenomenon to which attention has often been drawn in recent discussion of the theory of Sovereignty in Public Law. See Figgis, <span class="italics">Churches in the Modern State</span>; Maitland, <span class="italics">Introduction to</span> Gierke’s <span class="italics">Political Theories of the Middle Ages</span>; Laski, <span class="italics">The Problem of Sovereignly, Authority in the Modern State</span>.</p> |