AN ESSAY ON THE NATURE &

SIGNIFICANCE OF ECONOMIC
SCIENCE
BY

LIONEL ROBBINS
Professor of Economics in the University of London

SECOND EDITION, REVISED AND EXTENDED

MACMILLAN & CO., LIMITED

ST. MARTIN’S STREET, LONDON
1945
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 COPYRIGHT

First Edition, 1932

Second Edition, 1935
Reprinted, 1937, 1940 and 1945

Digital edition by the Mises Institute October 2013

ISBN: 978-1-61016-039-1
eISBN: 978-1-61016-618-8
TO MY FATHER
 PREFACE TO THE SECOND
EDITION
THE first edition of this essay has been out of print for some time, but
apparently some demand for it continues. I have therefore taken advantage
of the publisher’s decision to reprint to introduce certain alterations and
improvements which experience since it was first written seemed to make
desirable.
In making these revisions I have not found it necessary to change
substantially the main trend of the argument. Public criticism has tended to
focus upon the denial in Chapter VI. of the scientific legitimacy of
interpersonal comparisons of utility. I am afraid that without the least
disposition to be intransigent, here or elsewhere, I am still quite
unconvinced. I contended that the aggregation or comparison of the
different satisfactions of different individuals involves judgments of value
rather than judgments of fact, and that such judgments are beyond the scope
of positive science. Nothing that has been said by any of my critics has
persuaded me that this contention is false. Beyond a few supplementary
remarks intended to elucidate matters further, therefore, I have left this
section unaltered. I hope that my critics (some of whom seemed to assume
that I was a very combative fellow indeed) will not regard this as a gesture
of unfriendly defiance. I assure them I am not at all cocksure about any of
my own ideas. But, in spite of the disposition of some of them to refer to
this and other well-known propositions as “Robbinsian Economics,” it is
not my own, and the weight of the authorities by whom it has been
propounded encourages me to believe that in this case, at least, my own
lights have not led me astray.
On the other hand, many of my critics have inferred from my
arguments in this connection certain precepts of practice which I should be
the first to repudiate. It has been held that because I attempted clearly to
delimit the spheres of Economics and other social sciences, and Economics
and moral philosophy, that therefore I advocated the abstention of the
economist from all interest or activity outside his own subject. It has been
held—in spite of activities which I feared had become notorious—that I had
urged that economists should play no part in shaping the conduct of affairs
beyond giving a very prim and restrained diagnosis of the implications of
all possible courses of action. My friend Mr. Lindley Fraser was even led to
urge upon me in an article entitled “How do we want Economists to
Behave?” more socially-minded behaviour. Where so many have
misapprehended my intentions, I cannot flatter myself that I was free from
obscurity. But I do plead that I did in fact state the contrary—as I thought,
most emphatically. In a footnote to Section 6, Chapter V., I stated, “It is
more accuracy in mode of statement, not over-austerity in speculative
range, for which I am pleading”, and I went on to urge that economists have
probably high differential advantages as sociologists. And in Section 4,
Chapter VI., I went on to say: “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 given ends of problems which are put to them for
solution.” I can only add to this that I quite agree with Mr. Fraser that an
economist who is only an economist and who does not happen to be a
genius at his subject—and how unwise it is for any of us to assume that we
are that—is a pretty poor fish. I agree, too, that by itself Economics affords
no solution to any of the important problems of life. I agree that for this
reason an education which consists of Economics alone is a very imperfect
education. I have taught so long in institutions where this is regarded as a
pedagogic axiom that any omission on my part to emphasise it further is to
be attributed to the fact that I assumed that everybody would take it for
granted. All that I contend is that there is much to be said for separating out
the different kinds of propositions involved by the different disciplines
which are germane to social action, in order that we may know at each step
exactly on what grounds we are deciding. I do not believe that Mr. Fraser
really disagrees with me here.
In exactly the same way I would plead that it is a complete
misunderstanding of my position to contend that because I have emphasised
the conventional nature of the assumptions underlying many of the so-
called “measurements” of economic phenomena, I am therefore “opposed”
to the carrying out of operations of this sort. It does seem to me to be a
matter of great importance to recognise very clearly that in computing such
aggregates as the national income or the national capital we are making
assumptions which are not reached by scientific analysis, but which are
essentially conventional in character. But, as I urged in the body of the
essay (pp. 57 and 62), this is not in the least to say that, provided we are
fully conscious of the implications of our procedure, there is any objection
to such computations. On the contrary, it is clear that not enough of this sort
of thing has been done in the past, and that much is to be expected from its
extension in the future. Recognition of this, however, is not incompatible
with the view that it is desirable to know at each step where we are merely
recording facts, and where we are evaluating these facts by arbitrary
measures, and it is just because these things are so frequently confused that
I still maintain that emphasis on their dissimilarity is not uncalled for.
There is, however, a part of the essay where revision has seemed to be
much more incumbent. I have never been satisfied with the chapter on the
nature of economic generalisations. I am not conscious of any fundamental
change of opinion on these matters. But I do think that in my eagerness to
bring out as vividly as possible the significance of certain recent
innovations I was led in certain places to a simplification of emphasis and
to a looseness in the use of logical terms, apt to be misleading outside the
context of my own thought: and the fact that, while some critics have
reproached me with “barren scholasticism”, others have accused me of
“behaviourism”, has not permitted me completely to comfort myself with
the belief that I elucidated satisfactorily the correct position between these
extremes. Accordingly I have rewritten large parts of this chapter, and I
have also extended its scope to cover certain more complex topics, such as
the meaning of the assumption of purely rational conduct, which, in the
earlier version, I had omitted in order not to overload the exposition. I am
afraid this makes this part of the book at once more difficult and more
contentious. But although I am acutely aware of its imperfections, it
satisfies my conscience more than my earlier attempt to deal with such
matters only by implication. The opening section of Chapter V. has also
been rewritten, and I have introduced additional paragraphs in Section 2, in
which I develop a little further my reasons for believing the importance of
the contrast between the qualitative laws discussed in the preceding chapter
and the quantitative “laws” of statistical analysis. I have also added short
sections in Chapters IV. and V. dealing with the relations between statics
and dynamics and the possibility of a theory of economic development—
matters upon which there seems to exist some unnecessary confusion. I
hope that the changes I have made will be acceptable to my friends
Professor F. A. von Hayek, Dr. P. N. Rosenstein Rodan and Dr. A. W.
Stonier, whose advice and criticisms on these difficult matters have taught
me much. They naturally are not responsible for any mistakes which may
have crept in.
I have wondered very much what I ought to do about the various
attacks on my work which have been made by Professor R. W. Souter. I
have read Professor Souter’s strictures with interest and respect. As I have
said already, I am not convinced by anything that he says about what he
calls the “positivism” of my attitude. So far as this part of his case is
concerned Professor Souter must demolish, not me, but Max Weber: and I
think Max Weber still stands. But with much of what he says, particularly
with regard to the desirability of transcending the rather trite generalisations
of elementary statics, I am in cordial agreement. Where I part company
with him is in the belief that it is possible to do this without sacrificing
precision and without regarding the essential static foundations as useless.
My acquaintance with the findings of modern mathematical physics and
astronomy is not great, but I question whether the eminent scientists to
whom he makes appeal would share his apparently very low opinion of the
methods of mathematical economics, however much they felt that its results
were still in a very elementary stage. In this respect I am in fairly complete
agreement with what has been said already by Professor Knight.[1] I cannot
help feeling, too, that, so far as this essay is concerned, one or two
inadvertent acerbities of exposition have so angered Professor Souter that
he has really misunderstood my position much more than would otherwise
have been the case. I regret this, but it is difficult to know what to do about
it. At one or two points I have tried to make things clearer. But to defend
myself against all these misunderstandings would involve so great an
overloading with personal apologia of what is perhaps already an unduly
protracted essay that I fear I should become totally unreadable. I do not
wish to appear discourteous, and I hope, if time permits me to complete
various works now projected, to be able to do something to persuade
Professor Souter that my claim that he has misunderstood me is not
unjustified.
For the rest I have made only small changes. I have deleted certain
footnotes whose topical relevance has waned, and I have endeavoured to
eliminate certain manifestations of high spirits no longer in harmony with
present moods. But nothing short of complete rewriting could conceal the
fact that, for better or worse, the essay was written some time ago—large
parts of it were conceived and drafted years before publication—and
although I think it is perhaps worth reprinting, I do not think it is worth the
time that that would involve. So with all the crudities and angularities that
remain I commend it once more to the mercies of its readers.

LIONEL ROBBINS.

THE LONDON SCHOOL OF ECONOMICS,

May, 1935.

[1] “Economic Science in Recent Discussion”, American Economic

Review, vol. xxiv., pp. 225–238.
 PREFACE TO THE FIRST
EDITION
THE purpose of this essay is twofold. In the first place, it seeks to arrive at
precise notions concerning the subject-matter of Economic Science and the
nature of the generalisations of which Economic Science consists. Secondly
it attempts to explain the limitations and the significance of these
generalisations, both as a guide to the interpretation of reality and as a basis
for political practice. At the present day, as a result of the theoretical
developments of the last sixty years, there is no longer any ground for
serious differences of opinion on these matters, once the issues are clearly
stated. Yet, for lack of such statement, confusion still persists in many
quarters, and false ideas are prevalent with regard to the preoccupations of
the economist and the nature and the extent of his competence. As a result,
the reputation of Economics suffers, and full advantage is not taken of the
knowledge it confers. This essay is an attempt to remedy this deficiency—
to make clear what it is that economists discuss and what may legitimately
be expected as a result of their discussions. Thus on the one hand it may be
regarded as a commentary on the methods and assumptions of pure theory:
on the other hand, as a series of prolegomena to work in Applied
Economics.
The object of the essay necessitates the taking of broad views. But my
aim throughout has been to keep as close to earth as possible. I have
eschewed philosophical refinements as falling outside the province in which
I have any claim to professional competence; and I have based my
propositions on the actual practice of the best modern works on the subject.
In a study of this sort, written by an economist for fellow-economists, it
seemed better to try to drive home the argument by continual reference to
accepted solutions of particular problems, than to elaborate, out of the void,
a theory of what Economics should become. At the same time, I have tried
to be brief. My object has been to suggest a point of view rather than to
treat the subject in all its details. To do this it seemed desirable to be concise
even at the expense of sacrificing much material which I had originally
collected. I hope, however, at a later stage to publish a work on general
Economic Theory in which the principles here laid down are further
illustrated and amplified.
For the views which I have advanced, I make no claim whatever to
originality. I venture to hope that in one or two instances I have succeeded
in giving expository force to certain principles not always clearly stated.
But, in the main, my object has been to state, as simply as I could,
propositions which are the common property of most modern economists. I
owe much to conversations with my colleagues and pupils at the School of
Economics. For the rest I have acknowledged in footnotes the debts of
which I am chiefly conscious. I should like, however, once more to
acknowledge my especial indebtedness to the works of Professor Ludwig
von Mises and to the Commonsense of Political Economy of the late Philip
Wicksteed. The considerable extent to which I have cited these sources is
yet a very inadequate reflection of the general assistance which I have
derived from their use.

LIONEL ROBBINS.

THE LONDON SCHOOL OF ECONOMICS,

February, 1932.
 CONTENTS
Preface to the Second Edition
Preface to the First Edition

I. The Subject-Matter of Economics

II. Ends and Means
III. The Relativity of Economic “Quantities”
IV. The Nature of Economic Generalisations
V. Economic Generalisations and Reality
VI. The Significance of Economic Science

Index of Authors Cited

 CHAPTER I
THE SUBJECT-MATTER OF ECONOMICS
1. THE object of this Essay is to exhibit the nature and significance of
Economic Science. Its first task therefore is to delimit the subject-matter of
Economics—to provide a working definition of what Economics is about.
Unfortunately, this is by no means as simple as it sounds. The efforts
of economists during the last hundred and fifty years have resulted in the
establishment of a body of generalisations whose substantial accuracy and
importance are open to question only by the ignorant or the perverse. But
they have achieved no unanimity concerning the ultimate nature of the
common subject-matter of these generalisations. The central chapters of the
standard works on Economics retail, with only minor variations, the main
principles of the science. But the chapters in which the object of the work is
explained still present wide divergences. We all talk about the same things,
but we have not yet agreed what it is we are talking about.[1]
This is not in any way an unexpected or a disgraceful circumstance. As
Mill pointed out a hundred years ago, the definition of a science has almost
invariably, not preceded, but followed the creation of the science itself.
“Like the wall of a city it has usually been erected, not to be a receptacle for
such edifices as might afterwards spring up, but to circumscribe an
aggregate already in existence.”[2] Indeed, it follows from the very nature
of a science that until it has reached a certain stage of development,
definition of its scope is necessarily impossible. For the unity of a science
only shows itself in the unity of the problems it is able to solve, and such
unity is not discovered until the interconnection of its explanatory
principles has been established.[3] Modern Economics takes its rise from
various separate spheres of practical and philosophical enquiry—from
investigations of the balance of trade—from discussions of the legitimacy
of the taking of interest.[4] It was not until quite recent times that it had
become sufficiently unified for the identity of the problems underlying
these different enquiries to be detected. At an earlier stage, any attempt to
discover the ultimate nature of the science was necessarily doomed to
disaster. It would have been waste of time to have attempted it.
But once this stage of unification has been reached not only is it not
waste of time to attempt precise delimitation; it is waste of time not to do
so. Further elaboration can only take place if the objective is clearly
indicated. The problems are no longer suggested by naïve reflection. They
are indicated by gaps in the unity of theory, by insufficiencies in its
explanatory principles. Unless one has grasped what this unity is, one is apt
to go off on false scents. There can be little doubt that one of the greatest
dangers which beset the modern economist is preoccupation with the
irrelevant—the multiplication of activities having little or no connection
with the solution of problems strictly germane to his subject.[5] There can
be equally little doubt that, in those centres where questions of this sort are
on the way to ultimate settlement, the solution of the central theoretical
problems proceeds most rapidly. Moreover, if these solutions are to be
fruitfully applied, if we are to understand correctly the bearing of Economic
Science on practice, it is essential that we should know exactly the
implications and limitations of the generalisations it establishes. It is
therefore with an easy conscience that we may advance to what, at first
sight, is the extremely academic problem of finding a formula to describe
the general subject-matter of Economics.
2. The definition of Economics which would probably command most
adherents, at any rate in Anglo-Saxon countries, is that which relates it to
the study of the causes of material welfare. This element is common to the
definitions of Cannan[6] and Marshall,[7] and even Pareto, whose
approach[8] in so many ways was so different from that of the two English
economists, gives it the sanction of his usage. It is implied, too, in the
definition of J. B. Clark.[9]
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”,[10] 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.
But the final test of the validity of any such definition is not its
apparent harmony with certain usages of everyday speech, but its capacity
to describe exactly the ultimate subject-matter of the main generalisations
of the science.[11] And when we submit the definition in question to this
test, it is seen to possess deficiencies which, so far from being marginal and
subsidiary, amount to nothing less than a complete failure to exhibit either
the scope or the significance of the most central generalisations of all.
Let us take any one of the main divisions of theoretical Economics and
examine to what extent it is covered by the definition we are examining. We
should all agree, for instance, that a theory of wages was an integral part of
any system of economic analysis. Can we be content with the assumption
that the phenomena with which such a theory has to deal are adequately
described as pertaining to the more material side of human welfare?
Wages, in the strict sense of the term, are sums earned by the
performance of work at stipulated rates under the supervision of an
employer. In the looser sense in which the term is often used in general
economic analysis, it stands for labour incomes other than profits. Now it is
perfectly true that some wages are the price of work which may be
described as conducive to material welfare—the wages of a sewage
collector, for instance. But it is equally true that some wages, the wages of
the members of an orchestra, for instance, are paid for work which has not
the remotest bearing on material welfare. Yet the one set of services,
equally with the other, commands a price and enters into the circle of
exchange. The theory of wages is as applicable to the explanation of the
latter as it is to the explanation of the former. Its elucidations are not limited
to wages which are paid for work ministering to the “more material” side of
human well-being—whatever that may be.
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.
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”,[12] 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.
This habit on the part of modern English economists of describing
Economics as concerned with the causes of material welfare, is all the more
curious when we reflect upon the unanimity with which they have adopted
a non-material definition of “productivity”. Adam Smith, it will be
remembered, distinguished between productive and unproductive labour,
according as the efforts in question did or did not result in the production of
a tangible material object. “The labour of some of the most respectable
orders in the society is, like that of menial servants, unproductive of any
value and does not fix or realise itself in any permanent subject or vendible
commodity which endures after that labour is past. . . . The sovereign, for
example, with all the officers both of justice and war who serve under him
are unproductive labourers. . . . In the same class must be ranked some both
of the gravest and most important, and some of the most frivolous
professions: churchmen, lawyers, physicians, men of letters of all kinds;
players, buffoons, musicians, opera singers, opera dancers, etc. . . .”[13]
Modern economists, Professor Cannan foremost among them,[14] have
rejected this conception of productivity as inadequate.[15] So long as it is
the object of demand, whether privately or collectively formulated, the
labour of the opera singers and dancers must be regarded as “productive”.
But productive of what? Of material welfare because it cheers the business
man and releases new stores of energy to organise the production of
material? That way lies dilettantism and Wortspielerei. It is productive
because it is valued, because it has specific importance for various
“economic subjects”. So far is modern theory from the point of view of
Adam Smith and the Physiocrats that the epithet of productive labour is
denied even to the production of material objects, if the material objects are
not valuable. Indeed, it has gone further than this. Professor Fisher, among
others, has demonstrated conclusively[16] that the income from a material
object must in the last resort be conceived as an “immaterial” use. From my
house equally as from my valet or the services of the opera singer, I derive
an income which “perishes in the moment of its production”.
But, if this is so, is it not misleading to go on describing Economics as
the study of the causes of material welfare? The services of the opera
dancer are wealth. Economics deals with the pricing of these services,
equally with the pricing of the services of a cook. Whatever Economics is
concerned with, it is not concerned with the causes of material welfare as
such.
The causes which have led to the persistence of this definition are
mainly historical in character. It is the last vestige of Physiocratic influence.
English economists are not usually interested in questions of scope and
method. In nine cases out of ten where this definition occurs, it has
probably been taken over quite uncritically from some earlier work. But, in
the case of Professor Cannan, its retention is due to more positive causes;
and it is instructive to attempt to trace the processes of reasoning which
seem to have rendered it plausible to so penetrating and so acute an
intellect.
 The rationale of any definition is usually to be found in the use which
is actually made of it. Professor Cannan develops his definition in close
juxtaposition to a discussion of “the Fundamental Conditions of Wealth for
Isolated Man and for Society”,[17] and it is in connection with this
discussion that he actually uses his conception of what is economic and
what is not. It is no accident, it may be suggested, that if the approach to
economic analysis is made from this point of view, the “materialist”
definition, as we may call it, has the maximum plausibility. This deserves
vindication in some detail.
Professor Cannan commences by contemplating the activities of a man
isolated completely from society and enquiring what conditions will
determine his wealth—that is to say, his material welfare. In such
conditions, a division of activities into “economic” and “non-economic”—
activities directed to the increase of material welfare and activities directed
to the increase of non-material welfare—has a certain plausibility. If
Robinson Crusoe digs potatoes, he is pursuing material or “economic”
welfare. If he talks to the parrot, his activities are “non-economic” in
character. There is a difficulty here to which we must return later, but it is
clear prima facie that, in this context, the distinction is not ridiculous.
But let us suppose Crusoe is rescued and, coming home, goes on the
stage and talks to the parrot for a living. Surely in such conditions these
conversations have an economic aspect. Whether he spends his earnings on
potatoes or philosophy, Crusoe’s getting and spending are capable of being
exhibited in terms of the fundamental economic categories.
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.
 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. There is still an economic problem of
deciding between the “economic”and the “non-economic”. One of the
main problems of the Theory of Production lies half outside Professor
Cannan’s definition.
Is not this in itself a sufficient argument for its abandonment?[18]
3. But where, then, are we to turn? The position is by no means
hopeless. Our critical examination of the “materialist” definition has
brought us to a point from which it is possible to proceed forthwith to
formulate a definition which shall be immune from all these strictures.
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?
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.
 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.
Now by itself the multiplicity of ends has no necessary interest for the
economist. If I want to do two things, and I have ample time and ample
means with which to do them, and I do not want the time or the means for
anything else, then my conduct assumes none of those forms which are the
subject of economic science. Nirvana is not necessarily single bliss. It is
merely the complete satisfaction of all requirements.
Nor is the mere limitation of means by itself 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,[19] it was not the object of any
activity with an economic aspect.
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.[20]
But when time and the means for achieving ends are limited and
capable of alternative application, and 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.[21] 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.
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.
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.
[22]
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.[23]
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
classificatory 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 analytical. It does not attempt to pick out certain kinds of
behaviour, but focuses attention on a particular aspect of behaviour, the
form imposed by the influence of scarcity.[24] 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.
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.[25]
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 extra-marginal. 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”.
[26] That is to say, they must be based on its 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.
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 raison d’être of a
strictly communist society. But where independent initiative in social
relationships is permitted to the individual, there economic analysis comes
into its own.
But it is one thing to contend that economic analysis has most interest
and utility in an exchange economy. It is another to contend that its subject-
matter is limited 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.[27] 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 technical 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.
In the second place, it is clear that the phenomena of the exchange
economy itself can only be explained by going behind such relationships
and invoking the operation of those laws of choice which are best seen
when contemplating the behaviour of the isolated individual.[28] 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?[29]
5. Finally, we may return to the definition we rejected and examine
how it compares with the definition we have now chosen.
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?
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 cover the field, but it does not describe it. For it is not the
materiality 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.
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.
Moreover, the very example which Professor Cannan selects to
illustrate his definition fits much better into our framework than it does into
his. “Economists”, he says, “would agree that ‘Did Bacon write
Shakespeare?’ was not an economic question, and that the satisfaction
which believers in the cryptogram would feel if it were universally accepted
would not be an economic satisfaction. . . . On the other hand, they would
agree that the controversy would have an economic side if copyright were
perpetual and the descendants of Bacon and Shakespeare were disputing the
ownership of the plays.”[30] Exactly. But why? Because the ownership of
the copyright involves material welfare? But the proceeds may all go to
missionary societies. Surely the question has an economic aspect simply
and solely because the copyright laws supposed would make the use of the
plays scarce in relation to the demand for their use, and would in turn
provide their owners with command over scarce means of gratification
which otherwise would be differently distributed.

[1] 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, Principles, p. 1).
“Economics is the science which treats phenomena from the standpoint of
price” (Davenport, Economics of Enterprise, p. 25). “The aim of Political.
Economy is the explanation of the general causes on which the material
welfare of human beings depends” (Cannan, Elementary Political
Economy, 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, Economics as a Liberal Education, Economica, 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” (Economics of Welfare, 3rd edition, p. 1). The sequel will show
how widely the implications of these definitions diverge from one another.
[2] Unsettled Questions of Political Economy, p. 120.
[3] “Nicht die ‘sachlichen’ Zusammenhänge der ‘Dinge’ sondern die
gedanklichen Zusammenhänge der Probleme liegen den Arbeitsgebieten der
Wissenschaften zugrunde” (Max Weber, Die Objectivität
sozialwissenschaftlicher und sozialpolitischer Erkenntnis, Gesammelte
Aufsätze zur Wissenschaftslehre, p. 166).
[4] See Cannan, Review of Economic Theory, pp. 1–35, and
Schumpeter, Epochen der Methoden- und Dogmengeschichte, pp. 21–38.
[5] See Chapter II., Section 5, especially the footnote on p. 42, for
further elaboration of this point.
[6] Wealth, 1st edition, p. 17.
[7] Principles, 8th edition, p. 1.
 [8] Cours d’Economie Politique, p. 6.
[9] Essentials of Economic Theory, p. 6. See also Philosophy of
Wealth, 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”.
[10] But see Chapter II. below for an examination of the validity of
this interpretation.
[11] 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 is 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.
[12] Cannan, An Economist’s Protest, p. 49.
[13] Wealth of Nations (Cannan’s ed.), p. 315.
[14] Theories of Production and Distribution, pp. 18–31; Review of
Economic Theory, pp. 49–51.
[15] It is even arguable that the reaction has gone too far. Whatever its
demerits, the Smithian classification had a significance for capital theory
which in recent times has not always been clearly recognised. See Taussig,
Wages and Capital, pp. 132–151.
[16] The Nature of Capital and Income, ch. vii.
[17] This is the title of ch. ii. of Wealth (1st edition).
[18] 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.
[19] It is perhaps worth emphasising the significance of this
qualification. The application of technically similar means to the
achievement of qualitatively similar ends at different times constitute
alternative uses of these means. Unless this is clearly realised, one of the
most important types of economic action is overlooked.
[20] 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.
[21] Cp. Schönfeld, Grenznutzen und Wirtschaftsrechnung, p. 1; Hans
Mayer, Untersuchungen zu dem Grundgesetze der wirtschaftlichen
Wertrechnung (Zeitschrift für Volkswirtschaft und Sozialpolitik, Bd. 2, p.
123).
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.
[22] 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.
[23] Cp. Menger, Grundsätze der Volkswirtschaftslehre, lte Aufl., pp.
51–70; Mises, Die Gemeinwirtschaft, pp. 98 seq.; Fetter, Economic
Principles, ch. i.; Strigl, Die ökonomischen Kategorien und die
Organisation der Wirtschaft, passim; Mayer, op. cit.
 [24] On the distinction between analytical and classificatory
definitions, see Irving Fisher, Senses of Capital (Economic Journal, 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.
[25] See his Objekt und Grundbegriffe der theoretischen
Nationalökonomie, 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.
[26] See Mises, Die Gemeinwirtschaft, pp. 94–138. In his Economic
Planning in Soviet Russia, Professor Boris Brutzkus has well shown the
way in which this difficulty has been exemplified in the various phases of
the Russian experiment.
[27] See Strigl, op. cit., pp. 23–28.
[28] Professor Cassel’s dismissal of Crusoe Economics (Fundamental
Thoughts, 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.
[29] The objections outlined above to the definition suggested by
Professor Amonn should be sufficient to indicate the nature of the
objections to those definitions which run in terms of phenomena from the
standpoint of price (Davenport), susceptibility to the “measuring rod of
money” (Pigou), or the “science of exchange” (Landry, etc.). Professor
Schumpeter, in his Wesen und Hauptinhalt der theoretischen
Nationalökonomie, has attempted with never to be forgotten subtlety to
vindicate the latter definition by demonstrating that it is possible to
conceive all the fundamental aspects of behaviour germane to Economic
Science as having the form of exchange. That this is correct and that it
embodies a truth fundamental to the proper understanding of equilibrium
theory may be readily admitted. But it is one thing to generalise the notion
of exchange as a construction. It is another to use it in this sense as a
criterion. That it can function in this way is not disputed. But that it throws
the maximum light on the ultimate nature of our subject-matter is surely
open to question.
[30] Wealth (1st edition), ch. i.
 CHAPTER II
ENDS AND MEANS
1. WE 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”.
2. Let us turn first to the status of ends.[1]
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 any 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.
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 can so describe a satisfaction
which is contingent on the availability of scarce means as distinct from a
satisfaction which depends entirely on subjective factors—e.g., 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.
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.
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 limited 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.
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 and 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.
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 Wealth,[2] 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.
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 Æsthetics as an Economic
Factor.[3] 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.[4] 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”.[5] 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.
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 a priori probability, to assume that
this necessarily 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 either
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 material 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.
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 in pari materia.[6] 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 as such. 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.
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 per se. 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 all those ends
which are capable of achievement by the aid of purchasable commodities.
Money as such 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 y
axis, economists have been in the habit of assuming, as a first
approximation, that it is of the nature of a rectangular hyperbola.[7]
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.
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 Economics as a Liberal Education. “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”.[8] 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.
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 given factors influencing the relative scarcity of
different economic goods.[9] 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.
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?
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.[10] 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.
Let us consider the behaviour of an isolated man in disposing of a
single scarce commodity.[11] 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?
Now, if the wood can only be used at one time and for one purpose, or
if it is only wanted at one time and for one purpose, and if we assume that
Robinson has ample time to devote to its utilisation, it is perfectly true that
his economising will be dictated entirely by his knowledge of the technical
arts of production concerned. If he only wants the wood to make a fire of
given dimensions, then, if there is only a limited supply of wood available,
his activities will be determined by his knowledge of the technique of fire-
making. His activities in this respect are purely technical.
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—the problem of how much wood to use for fires and how
much for fencing. In these circumstances the techniques of fire-making and
fencing are still important. But the problem is no longer a purely technical
problem.[12] 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.[13]
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.
All this sounds very abstract. But, in fact, it merely states, in terms of a
degree of generality appropriate to the very fundamental questions we are
examining, facts which are well known to all of us. If we ask the concrete
question, why is the production of such a commodity in such and such an
area what it is, and not something else, our answer is not couched in terms
which, in the first instance, have a technical implication. Our answer runs in
terms of prices and costs; and, as every first-year student knows, prices and
costs are the reflection of relative valuations, not of merely technical
conditions. We all know of commodities which, from the technical point of
view, could be produced quite easily.[14] Yet their production is not at the
moment a business proposition. Why is this? Because, given the probable
price, the costs involved are too great. And why are costs too great?
Because the technique is not sufficiently developed? This is only true in a
historical sense. But it does not answer the fundamental question why, given
the technique, the costs are too high. And the answer to that can only be
couched in economic terms. It depends essentially on the price which it is
necessary to pay for the factors of production involved compared with the
probable price of the product. And that may depend on a variety of
considerations. In competitive conditions, it will depend on the valuations
placed by consumers on the commodities which the factors are capable of
producing. And if the costs are too high, that means that the factors of
production can be employed elsewhere producing commodities which are
valued more highly. If the supply of any factor is monopolised, then high
costs may merely mean that the controllers of the monopoly are pursuing a
policy which leads to some of the factors they control being temporarily
unemployed. But, in any case, the process of ultimate explanation begins
just where the description of the technical conditions leaves off.
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.
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.
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.
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;[15] it
concentrates upon the description of a certain aspect thereof—a changing
network of economic relationships,[16] the effect on values in the economic
sense of changes in ends and changes in the technical and social
opportunities of realising them.[17] 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.
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.
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
ad infinitum. 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.
 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.[18]
6. Finally, we may notice the bearing of all this on the celebrated
Materialist or “Economic” Interpretation of History. For, from the point of
view we have adopted, certain distinctions, not always clearly recognised,
are discernible.
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.
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 labelled
“Materialist”, it is in substance 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.[19]
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
autonomous 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.[20]

[1] The following sections are devoted to the elucidation of the

implications of Economics as a positive science. On the question whether
Economics should aspire to a normative status, see Chapter VI., Section 4,
below.
[2] First, edition, p. 15.
[3] Some Economic Factors in Modern Life, pp. 1–25.
[4] “I use . . . economics as a term to cover the getting of material
welfare” (op. cit., p. 3).
[5] Ibid., p. 4.
[6] 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.
[7] On all this, see Wicksteed, The Commonsense of Political
Economy, 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.
[8] Economica, 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.
[9] Professor Knight in a recent article (“Economic Science in Recent
Discussion”, American Economic Review, vol. xxiv., p. 225 et seq.)
complains that I do not make clear that technique in relation to economics is
simply so much data. 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.
 [10] 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.
[11] Compare Oswalt, Vorträge über wirtschaftliche Grundbegriffe,
pp. 20–41.
[12] 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.
[13] See Hans Mayer, op. cit., pp. 5 and 6.
[14] The production of motor oils from coal is a very topical case in
point.
[15] On the impossibility of history of any kind without selective
principle see Rickert, Kulturwissenschaft und Naturwissenschaft, pp. 28–
60.
[16] 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” (Growth of English Industry and Commerce, vol. i., p. 8).
[17] On the relation between Economic Theory and Economic History,
see Heckscher, A Plea for Theory in Economic History (Economic History,
vol. i., pp. 525–535); Clapham, The, Study of Economic History, passim;
Mises, Soziologie und Geschichte (Archiv für Sozialwissenschaft und
Sozialpolitik, 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 Economic 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.
[18] 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 all 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 raison
d’être, 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.
 [19] In what follows, the distinctions I employ are very similar to those
used by Dr. Strigl (op. cit., 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 Datenänderung. 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.
[20] 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 directly
influence amounts demanded, it is extraordinarily difficult to bring oneself
to postulate any necessary 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.
 CHAPTER III
THE RELATIVITY OF ECONOMIC
“QUANTITIES”
1. THAT aspect of behaviour which is the subject-matter of Economics is, as
we have seen, conditioned by the scarcity of given means for the attainment
of given ends. It is clear, therefore, that the quality of scarcity in goods is
not an “absolute” quality. Scarcity does not mean mere infrequency of
occurrence. It means limitation in relation to demand. Good eggs are scarce
because, having regard to the demand for them, there are not enough to go
round. But bad eggs, of which, let us hope, there are far fewer in existence,
are not scarce at all in our sense. They are redundant. This conception of
scarcity has implications both for theory and for practice which it is the
object of this chapter to elucidate.
2. It follows from what has just been said that the conception of an
economic good is necessarily purely formal.[1] There is no quality in things
taken out of their relation to men which can make them economic goods.
There is no quality in services taken out of relation to the end served which
makes them economic. Whether a particular thing or a particular service is
an economic good depends entirely on its relation to valuations.
Thus wealth[2] is not wealth because of its substantial qualities. It is
wealth because it is scarce. We cannot define wealth in physical terms as we
can define food in terms of vitamin content or calorific value. It is an
essentially relative concept. For the community of ascetics discussed in the
last chapter there may be so many goods of certain kinds in relation to the
demand for them that they are free goods—not wealth at all in the strict
sense. In similar circumstances, the community of sybarites might be
“poor”. That is to say, for them, the self-same goods might be economic
goods.
So, too, when we think of productive power in the economic sense, we
do not mean something absolute—something capable of physical
computation. We mean power to satisfy given demands. If the given
demands change, then productive power in this sense changes also.
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.”[3] “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.[4]
3. The proposition which we have just been discussing, concerning
what may be described as the relativity of “economic quantities”, has an
important bearing on many problems of Applied Economics—so important,
indeed, that it is worth while, here and now, interrupting the course of our
main argument in order to examine them rather more fully. There can be no
better illustration of the way in which the propositions of pure theory
facilitate comprehension of the meaning of concrete issues.
A conspicuous instance of a type of problem which can only be
satisfactorily solved with the aid of the distinctions we have been
developing, is to be found in contemporary discussions of the alleged
economies of mass production. At the present day the lay mind is
dominated by the spectacular achievements of mass production. Mass
production has become a sort of cure-all, an open sesame. The goggled eyes
of the world turn westward to Ford the deliverer. He who has gaped longest
at the conveyors at Detroit is hailed as the most competent economist.
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.[5] 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.[6] 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.
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.
This confusion between technical potentiality and economic value,
which, borrowing a phrase of Professor Whitehead’s, we may call the
“fallacy of misplaced concreteness”,[7] 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.
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.
[8] No doubt, if 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.
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.[9]
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 all resources. Now it can
be shown[10] 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.[11]
4. It is time to return to more abstract considerations. We have next to
consider the bearing of our definitions upon the meaning of Economic
Statistics.
Economic Statistics employ two kinds of units of reckoning—physical
units and value units. Reckoning is by “weight and tale” or by valuation—
so many tons of coal, so many pounds sterling worth of coal. From the
point of view of economic analysis, what meaning is to be attached to these
computations?
So far as physical reckonings are concerned, what has been said
already is sufficient. There is no need further to labour the proposition that,
although, as records of fact, physical computations may be unimpeachable
and, in certain connections, useful, yet from the point of view of the
economist they have no significance apart from relative valuations. No
doubt, assuming a certain empirical permanence of relative valuations,
many physical series have direct significance for applied Economics. But
from the logical point of view this is an accident. The significance of the
series always depends upon the background of relative valuation.
So far as reckonings in terms of value are concerned, there are other
subtler difficulties which we must now proceed to unravel.
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.[12] 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.[13] 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.”[14]
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 quantity” 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.[15]
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 conventional significance.
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 conventional
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.
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.[16]
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.[17]
5. It is a further consequence of the conception of value as an
expression of an order of preference that comparisons of prices have no
precise significance, unless exchange is possible between the commodities
whose prices are being compared.
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.[18]
At one time it used to be thought that these difficulties could be
overcome by correcting individual prices for variations in the “value of
money”. And it may be admitted that, if the relations between each
commodity and all the others save the one under consideration remained the
same, and only the supply of money and the demand or supply of this
particular commodity altered, such corrections would be sufficient. If, that
is to say, the original price relationships were

Pa=Pb=Pc=Pd=Pe (1)

and in the next period they were

Pa=1/2 Pb=1/2 Pc=1/2 Pd=1/2 Pe (2)

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 other commodities may change. It is because
almost any conceivable change, either real or monetary, must bring about
different 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

Pa=1/2 Pb=1/4 Pc=3/4 Pd=Pe (3)

It has long been recognised that this must be the case with real changes. If
the demand for a changes, it is most improbable that the demand for b, c, d,
e . . . will change in such a way that the change in relation between a and b
will be equivalent to the change in relation to b and c . . . and so on. With
changes in technique, factors of production which are released from the
production of a will not be likely to be distributed between b, c, d in such
proportions as to preserve Pb:Pc::Pc:Pd . . . But, as may be demonstrated by
very elementary reasoning,[19] 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.[20] 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.”[21] 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.[22] 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 past prices. 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 at every moment there may be
tendencies towards an equilibrium, yet from moment to moment it is not the
same 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.
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
conventional element depending either upon the assumption of a certain
empirical constancy of data[23] or upon arbitrary judgments of value with
regard to the relative importance of particular prices and particular
economic subjects.
6. The interpretation of economic statistics is not the only department
of economic studies to be affected by this conception of our subject-matter.
The arrangement and elaboration of the central body of theoretical analysis
is also considerably modified. This is an interesting example of the utility of
this kind of investigation. Starting from the intention to state more precisely
the subject of our generalisations, we reach a point of view which enables
us, not only to pick out what is essential and what is accidental in those
generalisations, but also to restate them in such a way as to give their
essential bearing much greater force. Let us see how this happens.
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.[24] 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.
Now, no doubt, there is a strong prima facie case for this procedure.
As Professor Cannan urges,[25] 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.[26]
Yet, if we bear in mind what has been said already with regard to the
nature of our subject-matter and the relativity of the “quantities” it
contemplates, it should be fairly clear that from this point of view the
traditional division has serious deficiencies.
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.[27]
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 conceived exactly.[28]
Now, as we have seen already, the idea of changes in the total volume
of production has no precise content. We may, if we please, attach certain
conventional values to certain indices and say that we define a change in
production as a change in this index; for certain purposes this may be
advisable. But there is no analytical justification for this procedure. It does
not follow from our conception of an economic good. The kind of empirical
generalisation which may be made concerning what causes will affect
production in this sense, can never achieve the status of a law. For a law
must relate to definite conceptions and relationships; and a change in the
aggregate of production is not a definite conception.
As a matter of fact, nothing which can really be called a “law” of
production in this sense has ever been elaborated.[29] 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.[30]
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”,[31] 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.[32]
 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 Tableau Economique 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,[33] 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.[34]
At first sight it might be thought that these innovations ran the risk of
over-austerity; that they involved dispensing with a mass of theory which is
genuinely illuminating. Such a belief would be founded on an absence of
knowledge of the potentialities of the new procedure. It may safely be
asserted that there is nothing which fits into the old framework, which
cannot be more satisfactorily exhibited in the new. The only difference is
that, at every step in the new arrangement, we know exactly the limitations
and implications of our knowledge. If we step outside the sphere of pure
analysis and adopt any of the conventional assumptions of applied
Economics, we know just where we are. We are never in danger of asserting
as an implication of our fundamental premises something which is
smuggled in on the way by means of a conventional assumption.
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.
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.
[35] 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.

[1] Of course, the conceptions of any pure science are necessarily

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.
[2] The term wealth is used here as equivalent to a flow of economic
goods. But I think it is clear that there are profound disadvantages in using
it in this sense. It would be very paradoxical to have to maintain that, if
“economic” goods by reason of multiplication became “free” goods, wealth
would diminish. Yet that might be urged to the implication of this usage.
Hence, in any rigid delimitation of Economics, the term wealth should be
avoided. It is used here simply in elucidation of the implications for
everyday discussion of the somewhat remote propositions of the preceding
paragraph.
[3] The World Crisis, vol. v., pp. 33–35.
[4] It is, perhaps, worth while observing how our practice here differs
from the practice which would seem to follow from Professor Cannan’s
procedure. Having defined wealth as material welfare, Professor Cannan
would be logically compelled to argue that we were not producing during
the War. In fact, he gets out of the difficulty by arguing that we may say that
we were producing produce but not material welfare (Review of Economic
Theory, p. 51). From the point of view of the definitions here adopted, it
follows, not that we were not producing, but simply that we were not
producing for the same demands as during peace time. From either point of
view, the non-comparability of material statistics of war and peace follows
clearly. But from our point of view the persistence of formal economic laws
is much more clearly emphasised.
[5] See above, pp. 32–38.
[6] See Allyn Young, Increasing Returns and Economic Progress
(Economic Journal, vol. xxxviii., pp. 528–542). On the sense in which it is
legitimate to use the term “economical” in this connection, see Chapter VI.
below.
[7] Science and the Modern World, p. 64.
 [8] Compare Pigou, Economics of Welfare, 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.
[9] Exchange, Prices and Production in Hyperinflation: Germany,
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”.
[10] See Mises, The Theory of Money and Credit, pp. 339–366; Hayek,
Monetary Theory and the Trade Cycle, and Prices and Production; Strigl,
Die Produktion unter dem Einflusse einer Kreditexpansion (Schriften des
Vereins für Sozialpolitik, Bd. 173, pp. 187–211).
[11] See Bonn, Das Schicksal des deutschen Kapitalismus, pp. 14–31.
Bresciani-Turroni, Il Vicendi del Marco Tedesco.
[12] See below, Chapter IV., Section 2.
[13] For an exhaustive description of the process, see especially
Wicksteed, Commonsense of Political Economy, pp. 212–400.
[14] A Critical Dissertation on Value, p. 5.
[15] 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 Bedeutung 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, Zur Lehre von den Bedürfnissen,
pp. 186–216; Pareto, Manuel d’Economie Politique, pp. 540–2; and Hicks
and Allen, A Reconsideration of the Theory of Value (Economica, 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.
[16] See Bowley, The Division of the Product of Industry, and Stamp,
Wealth and Taxable Capacity.
[17] 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 who were
supported by the efforts of others, 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.
[18] On all this, the classical discussion is still to be found in Samuel
Bailey’s chapter (op. cit., pp. 71–93) “On comparing commodities at
different periods”. Bailey overstates his case to this extent, that he does not
mention prospective 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 blasé could scarcely resist a thrill at the exquisite
delicacy of his exhibition of the ambiguities of the first proposition of
Ricardo’s Principles. 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.
[19] See especially Hayek, Prices and Production, ch. iii.
[20] 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.
[21] Op. cit., p. 72.
[22] See Fetter, Economic Principles, p. 101 ff., and pp. 235–277. See
also Hayek, Das intertemporale Gleichgewichtsystem der Preise und die
Bewegungen des “Geldwertes” (Weltwirtschaftliches Archiv, Bd. 28, pp.
33–76).
[23] As in discussions of changes in real income and the cost of living.
On all this see Haberler, Der Sinn der Indexzahlen, passim. 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 Naturaleinkommen and Realeinkommen unless
we use “Real income” as equivalent to Naturaleinkommen and Fetter’s
“Psychic income” for the German Realeinkommen).
[24] See Cannan, Theories of Production and Distribution, ch. ii.
[25] “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, Wealth, 3rd
edition, p. v).
[26] Whether their generalisations did answer the questions, especially
that relating to personal distribution, is another matter (see Cannan,
Economic Outlook, pp. 215–253, and Review of Economic Theory, pp. 284–
332; see also Dalton, Inequality of Incomes, 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.
[27] See Schumpeter, Das Wesen uni der Hauptinhalt der
theoretischen Nationalökonomie, p. 156.
[28] See Edgeworth, Mathematical Psychics, pp. 1–6; Kaufmann, Was
kann die mathematische Methode in der Nationalökonomie leisten?
(Zeitschrift für Nationalökonomie. Bd. 2, pp. 754–779).
[29] 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
appears 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 Optimum Theory of Population in London Essays in Economics, 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.
[30] It is important not to overstress the excellence of past procedure.
The theory of money e.g., 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.
[31] On the various types of equilibrium contemplated, see Knight,
Risk, Uncertainty and Profit, p. 143, note; Wicksell, Lectures on Political
Economy, vol. i; and Robbins, On a Certain Ambiguity in the Conception of
Stationary Equilibrium (Economic Journal, vol. xl., pp. 194–214).
 [32] See Pareto, Manuel d’Economie Politique, p. 147; also my article
on Production in the Encyclopædia of the Social Sciences. 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.
[33] Op cit., pp. 540–542.
[34] 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.
[35] The best discussions are to be found in Wicksell, Lectures on
Political Economy, vol. i., pp. 100–206; Hans Mayer, Produktion in the
Handwörterbuch der Staatswissenschaften.
 CHAPTER IV
THE NATURE OF ECONOMIC
GENERALISATIONS
1. WE have now sufficiently discussed the subject-matter of Economics and
the fundamental conceptions associated therewith. But we have not yet
discussed the nature of the generalisations whereby these conceptions are
related. We have not yet discussed the nature and derivation of economic
laws. This, therefore, is the purpose of the present chapter. When it is
completed we shall be in a position to proceed to our second main task—
investigation of the limitations and significance of this system of
generalisations.
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 en passant,[1] 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,[2] we proceed rather by examining specimens drawn
from the existing body of analysis.
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.
 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.[3] 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 is 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.[4] “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
fundamentum divisionis between history and natural science that history
does not proceed by way of generalising abstraction.[5]
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.
But on what, then, does it depend?
 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.[6] 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,[7] 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.
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, e.g., 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?
 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.[8] 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.[9]
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.[10]
 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.[11] 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.
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 minimum sensible[12] 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 must 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.
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 in the same sense. 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 all
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.
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 political
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,[13]
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
Historismus is that Historismus is much more interesting.
4. If the argument which has been developed above is correct,
economic analysis turns out to be as Fetter has emphasised,[14] 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.
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.
 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.[15] Böhm-
Bawerk explicitly repudiated any affiliation with psychological hedonism;
indeed, he went to infinite pains to avoid this kind of misconception.[16]
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 Entwicklung
der Gesetze des menschlichen Verkehrs certainly invokes hedonistic
postulates. Jevons in his Theory of Political Economy prefaces his theory of
utility and exchange with a theory of pleasure and pain. Edgeworth
commences his Mathematical Psychics with a section which urges the
conception of “man as a pleasure machine”.[17] Attempts have even been
made to exhibit the law of diminishing marginal utility as a special case of
the Weber-Fechner Law.[18]
But it is fundamentally important to distinguish between the actual
practice of economists, and the logic which it implies, and their occasional
ex post facto 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 Fach-Psychologie. 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.[19] 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.
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 observe 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,[20] and there are passages in the later work of
Pareto[21] 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.
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 understand 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.
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 Ausschaltung der Wertlehre.
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 inter alia 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.[22] 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?
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.[23] All that the “objective” (that is to say, the wertfrei, 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 correct in the
ultimate sense of the philosophy of value, but whether they are made 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.
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 rational disposal
of goods?[24] 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.
Now in so far as the idea of rational action involves the idea of
ethically appropriate 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 wertfrei in the Weber sense. The
values of which it takes account are valuations of individuals. The question
whether in any further sense they are valuable 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.
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.
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.
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 (i.e., 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?
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.[25] 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 ab initio 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.
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.
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.
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.
Now the valuations which determine particular transactions may be of
various degrees of complexity. In my purchase of bread I may be interested
solely in the comparison between the bread and the other things in the circle
of exchange on which I might have spent the money. But I may be
interested too in the happiness of my baker. There may exist between us
certain liens which make it preferable for me to buy bread from him, rather
than procure it from his competitor who is willing to sell it a little cheaper.
In exactly the same way, in my sale of my own labour or the hire of my
property, I may be interested only in the things which I receive as a result of
the transaction; or I may be interested also in the experience of labouring in
one way rather than another, or in the prestige or discredit, the feeling of
virtue or shame in hiring out my property in this line rather than in that.
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, not to the maximisation of money gains, but to the maximisation
of net advantages in the various alternatives open.[26] 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.
This, then, is all that lies behind the homo œconomicus—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. e.g., 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 by contrast 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.
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 deep
insight into human motivation might be expected to accrue from so
spectacular an exposure!
Unfortunately this belief rests upon misapprehension. The propositions
of the theory of variations do not involve the assumption that men are
actuated only by considerations of money gains and losses. They involve
only the assumption that money plays some part in the valuation of the
given alternatives. And they suggest only that if from any position of
equilibrium the money incentive is varied 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.
 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.
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.[27] Is this in
contradiction with our theory? Not at all. The idea of scales of valuation
does not assume that every physical unit 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
minimum sensibile.[28] 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
inevitably affect the distribution of expenditure, even if in the line of
expenditure directly affected it leaves the quantity demanded unchanged.
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.
 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.
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.[29] 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 Lectures on Political Economy, or Walras’ Elements—
provide examples of the sort of thing under discussion.
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 by contrast to understand the
conditions in which the flows will be tending to alter, we may push our
investigations further and consider variations.
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.[30]
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.[31]
In all this, as will be obvious to anyone acquainted with the procedure
of economic analysis, our knowledge of the statical foundations is
fundamental.[32] 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.
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.

[1] See below, Section 4, and Chapter V., Section 3.

 [2] For an example of such a derivation reaching substantially similar
results, see Strigl, op. cit., p. 121 seq.
[3] 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, British Food Control, by Sir William Beveridge.
[4] “The vulgar notion that the safe methods on political subjects are
those of Baconian induction—that the true guide is not general reasoning
but specific experience—will one day be quoted as among the most
unequivocal marks of a low state of the speculative faculties of any age in
which it is accredited. . . . Whoever makes use of an argument of this kind .
. . should be sent back to learn the elements of some one of the more easy
physical sciences. Such reasoners ignore the fact of Plurality of Causes in
the very case which affords the most signal example of it” (John Stuart
Mill, Logic, chapter x., paragraph 8).
[5] See Rickert, op. cit., pp. 78–101, Die Grenzen der
naturwissenschaftlichen Begriffsbildung, passim, See also Max Weber, op.
cit., passim.
[6] On all this see the illuminating observations of Dr. Strigl, Die
ökonomischen Kategorien und die Organisation der Wirtschaft, pp. 85–121.
[7] See above, Chapter I., Section 3.
[8] See Robinson, Economics of Imperfect Competition, 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.
[9] See, e.g., Schneider, Theorie des Produktion, passim.
[10] See Knight, Risk, Uncertainty, and Profit; Hicks, The Theory of
Profit (Economica, No. 31, pp. 170–190).
[11] See Mises, The Theory of Money, pp. 147 and 200; Lavington,
The English Capital Market, pp. 29–35; Hicks, A Suggestion for Simplifying
the Theory of Money (Economica, 1934, pp. 1–20).
[12] See below, p. 99.
[13] Cp. Mises, Kritik des Interventionismus, pp. 66–90.
[14] Economic Principles, pp. ix and 12–21.
 [15] See Menger, Grundsätze, 1 Aufl., pp. 77–162.
[16] See Positive Theorie des Kapitals, 4eAuflage, pp. 232–246.
[17] Mathematical Psychics, p. 15.
[18] For a refutation of this view, see Max Weber, Die Grenznutzenlehr
und das psychophysische Grundgesetz (Archiv für Sozialwissenschaft und
Sozialpolitik, vol. xxix., 1909).
[19] That this does not assume the possibility of measuring valuations
has been already sufficiently emphasised in Chapter III., Section 4, above.
[20] The Theory of Social Economy, First English Edition, vol. i., pp.
50–51.
[21] Notably in the article on Economie mathématique in the
Encyclopédie des Sciences mathématiques, Paris, 1911.
[22] See, e.g., Hicks, Gleichgewicht und Konjunktur (Zeitschrift für
National-ökonomie, vol. iv., pp. 441–455).
[23] Max Weber, Die Objectivität socialwissenschaftlichen und
socialpolitischen Erkenntnis: Der Sinn der Werlfreiheit der soziologischen
und ökonomischen Wissenschaft in Gesammelte Aufsatze zur
Wissenschaftlehre.
[24] In her interesting pamphlet entitled Economics is a Serious
Subject 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.
[25] It is in this sense, I think, that Professor Mises uses the term when
he argues that all conduct (Handeln) must be conceived of as rational as
opposed to merely vegetative reactions (Grundprobleme der
Nationalökonomie, 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 rational and irrational 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 Kritik des Interventionismus has omitted to notice that conduct may be
irrational in the sense of inconsistent.
[26] See Cantillon, Essai sur la Nature du Commerce, (Higgs’ edition),
p. 21; Adam Smith, Wealth of Nations. Bk. I., ch. x; Senior, Political
Economy, pp. 200–216; McCulloch, Political Economy, pp. 364–378; J. S.
Mill, Political Economy, 5th edition, vol. i., pp. 460–483; Marshall,
Principles, 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, Commonsense of
Political Economy, Part I., passim.
[27] By primary movement, I mean movement in the line of
production affected; by secondary movement, expansions or contractions of
expenditure in other lines. As argued below, some secondary movement is
almost inevitable.
[28] Cp. Wicksteed, op. cit., Part II., chs. i. and ii.
[29] In his interesting remarks on the relation between statics and
dynamics (Prolegomena to Relativity Economics, 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 Theory of Economic
Development 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 Intertemporale Gleichgewicht System, Weltwirtschaftliches
Archiv, Bd. 28, pp. 33–76.
[30] The phrase, I believe, is due to Dr. Schams. See his Komparative
Statik (Zeitschrift für Nationalökonomie, Bd. II, pp. 27–61). But, as
indicated above, the procedure goes back to the time of the classical
economists.
 [31] See the illuminating article of Dr. Rosenstein-Rodan, The Rôle of
Time in Economic Theory (Economica, new series, vol. i., p. 77).
[32] 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 (On a
Certain Ambiguity in the Conception of Stationary Equilibrium, Economic
Journal, vol. xl., p. 194). By this, however, I did not 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 raison d’être 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 Papers on the
Pure Theory of International and Domestic Values. Would Professor Souter
really disagree with this?
 CHAPTER V
ECONOMIC GENERALISATIONS AND
REALITY
1. IT 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.
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.
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.[1] It is true that we deduce much from
definitions. But it is not true that the definitions are arbitrary.
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.
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,[2] 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 irrational
element in our universe of discourse.[3]
 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.
No doubt such knowledge would be useful. But a moment’s reflection
should make it plain that we are here entering upon a field of investigation
where there is no reason to suppose that uniformities are to be discovered.
The “causes” which bring it about that the ultimate valuations prevailing at
any moment are what they are, are heterogeneous in nature: there is no
ground for supposing that the resultant effects should exhibit significant
uniformity over time and space. No doubt there is a sense in which it can be
argued that every random sample of the universe is the result of determinate
causes. But there is no reason to suppose that the study of a random sample
of random samples is likely to yield generalisations of any significance.
That is not the procedure of the sciences. Yet that, or something very much
like it, is the assumption underlying the expectation that the formal
categories of economic analysis can be given substantial content of
permanent and constant value.[4]
A simple illustration should make this quite clear. Let us take the
demand for herrings. Suppose we are confronted with an order fixing the
price of herrings at a point below the price hitherto ruling in the market.
Suppose we were in a position to say, “According to the researches of
Blank (1907–1908) the elasticity of demand for the common herring
(Clupea harengus) is 1.3; the present price-fixing order therefore may be
expected to leave an excess of demand over supply of two million barrels”.
How pleasant it would be to be able to say things like this! How flattering
to our usually somewhat damaged self-esteem vis-a-vis the natural
scientists! How impressive to big business! How persuasive to the general
public!
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 permanent significance—save as
Economic History?
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.
[5]
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 degree
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?
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 might 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 in excelsis. 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.[6]
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;[7] 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 Business Cycles,[8] 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 contrast. 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.[9] Certainly he has provided
the most mordant comment on the methodology of “Quantitative
Economics” that any of its critics could possibly wish.
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,[10]
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.
[11] 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.
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?
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 Methodenstreit,[12] 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.
But what, then, are legitimate expectations in this respect? We may
group them under three headings.
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 validity of a particular theory is
a matter of its logical derivation from the general assumptions which it
makes. But its applicability 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.
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 theory 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[13] can
such misapprehensions be avoided.
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.
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.
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.
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.
[14] 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.
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.[15] 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.
But this is not in the least to say that the solutions 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.
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.
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.
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.
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 read as it
were, the effects on the price.[16] They are implied in the original
suppositions. The diagram has simply made explicit the concealed
implications.
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.
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 at that moment some content for the formal categories.
Of course, if other things do not remain unchanged, the consequences
predicted do not necessarily follow. This elementary platitude, necessarily
implicit in any scientific prediction, needs especially to be kept in the
foreground of attention when discussing this kind of prognosis. The
statesman who said “Ceteris paribus 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 soi-disant
economists as well, are continually criticising well-established propositions
on grounds hardly less slender.[17] 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?
Now, no doubt, the very fact that events in the large are uncontrolled,
[18] 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.
6. None the less, economic laws have their limits, and, if we are to use
them wisely, it is important that we should realise exactly wherein these
limitations consist. In the light of what has been said already, this should
not be difficult.
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.[19] 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.
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[20]
distinguish between endogenous and exogenous changes. The ones occur
within a given structure of assumptions. The others come from outside.
We can see the relevance of these distinctions to the problem of
prognosis if we consider once more the implications of the theory of money.
Given certain assumptions with regard to the demand for money, we are
justified in asserting that an increase in the volume of any currency will be
followed by a fall in its external value. This is an endogenous change. It
follows from the original assumptions, and, so long as they hold, it is
clearly inevitable. We are not justified in asserting, however, as has been so
often asserted in recent years, that if the exchanges fall, inflation must
necessarily follow. We know that very often this happens. We know that
governments are often foolish and craven and that false views of the
functions of money are widely prevalent. But there is no inevitable
connection between a fall in the exchanges and a decision to set the printing
presses working. A new human volition interrupts the chain of “causation”.
But between the issue of paper money and the fall in its external value, no
change in the assumed disposition to action on the part of the various
economic subjects concerned is contemplated. All that happens is, as it
were, that the exchange index moves to a lower level.
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.[21] 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.[22]
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.
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.[23]
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.
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?
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.
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?
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 induce the
constant supply of labourers, not merely that which makes it physiologically
possible to support them. Still, for what it is worth, such an assumption can
be made.
But even so we have only described in formal terms a condition of
final equilibrium. We have done nothing which enables us to predict
changes 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.
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 nature 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.
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?
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.
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.

[1] See the classical discussion of this matter in Cairnes’ Character

and Logical Method of Political Economy, 2nd edition, pp. 81–99. See also
Hayek: Collectivist Economic Planning, pp. 8–12.
[2] See above, Chapter II., Sections 1, 2, 3.
 [3] Strigl, op. cit., p. 18.
[4] 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.
[5] On the problems discussed above very interesting remarks are to be
found in Halberstaédter, Die Problematik des wirtschaftlichen Prinzips.
[6] On the matters discussed in this section I am much indebted to
conversations with Dr. Machlup.
[7] On the aspect of Institutionalism discussed below, Professor
Wesley Mitchell’s essay on The Prospects of Economics in the Trend of
Economics (edited Tugwell) should be consulted. On the general position of
the school, see Morgenstern, Bemerkungen über die Problematik der
Amerikanischen Institutionalisten in the Saggi di Storia e Teoria Economica
in onore e recordo di Giuseppe Prato, Turin, 1931; Fetter, art. America,
Wirtschaftstheorie der Gegenwart, Bd. 1, pp. 31–60. See also the review of
the Trend of Economics by the late Professor Allyn Young, reprinted in his
Economic Problems New and Old, pp. 232–260.
[8] Business Cycles, 2nd edition, p. 419.
[9] On this see Morgenstern, International vergleichende
Konjunkturforschung (Zeitschrift für die Gesammte Staatswissenschaft, 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” (Business Cycles, 2nd edition, p. 420).
[10] Richard Jones, Collected Works, 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.
[11] 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.
[12] Die Irrthümer des Historismus, Preface, pp. iii. and iv.
[13] Professor Jacob Viner’s Canadian Balance of International
Indebtedness and Professor Taussig’s International Trade provide classical
examples of this kind of investigation.
[14] On all this see Hayek, Monetary Theory and the Trade Cycle,
chaps i. and ii., passim.
[15] Another important function, this time in relation to practice, will
be discussed in the next section.
[16] See, e.g., Dalton, Public Finance, 2nd edition, p. 73.
[17] See, e.g., 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” (The Principles and Operation of Sir Robert
Peel’s Act of 1844 Explained and Defended, 1st edition, p. 75).
[18] 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 raison
d’être 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 he thinks
appropriate. Strange to say this not infrequently happens. Scratch a would-
be planner and you usually find a would-be dictator.
[19] 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.
[20] See especially Strigl, Aenderungen in den Daten der Wirtschaft
(Jahrbücher für Nationalökonomie und Statistik, vol. cxxviii., pp. 641–
662).
[21] This is the limiting case discussed in Dr. Machlup’s Transfer und
Preisbewegung (Zeitschrift für Nationalökonomie, vol. i., pp. 555–561).
[22] Professor Souter says that words fail him to describe the type of
mind that takes any pleasure in drawing such distinctions (op. cit., 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.
[23] 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.
 CHAPTER VI
THE SIGNIFICANCE OF ECONOMIC
SCIENCE
1. WE 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?
2. It is sometimes thought that certain developments in modern
Economic Theory furnish by themselves a set of norms capable of providing
a basis for political practice. The Law of Diminishing Marginal Utility is
held to provide a criterion of all forms of political and social activity
affecting distribution. Anything conducive to greater equality, which does
not adversely affect production, is said to be justified by this law; anything
conducive to inequality, condemned. These propositions have received the
support of very high authority. They are the basis of much that is written on
the theory of public finance.[1] No less an authority than Professor Cannan
has invoked them, to justify the ways of economists to Fabian Socialists.[2]
They have received the widest countenance in numberless works on
Applied Economics. It is safe to say that the great majority of English
economists accept them as axiomatic. Yet with great diffidence I venture to
suggest that they are in fact entirely unwarranted by any doctrine of
scientific economics, and that outside this country they have very largely
ceased to hold sway.
The argument by which these propositions are supported is familiar:
but it is worth while repeating it explicitly in order to show the exact points
at which it is defective. The Law of Diminishing Marginal Utility implies
that the more one has of anything the less one values additional units
thereof. Therefore, it is said, the more real income one has, the less one
values additional units of income. Therefore the marginal utility of a rich
man’s income is less than the marginal utility of a poor man’s income.
Therefore, if transfers are made, and these transfers do not appreciably
affect production, total utility will be increased. Therefore, such transfers
are “economically justified”. Quod erat demonstrandum.
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.
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.[3]
But it is one thing to assume that scales can be drawn up showing the
order 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
I can compare the importance to me 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 not assume that, at
any point, it is necessary to compare the satisfaction which I get from the
spending of 6d. on bread with the satisfaction which the Baker 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 n to m and B prefers n and m
in a different order. It involves an element of conventional valuation. Hence
it is essentially normative. It has no place in pure science.
If this is still obscure, the following considerations should be decisive.
Suppose that a difference of opinion were to arise about A’s preferences.
Suppose that I thought that, at certain prices, he preferred n to m, and you
thought that, at the same prices, he preferred m to n. It would be easy to
settle our differences in a purely scientific manner. Either we could ask A to
tell us. Or, if we refused to believe that introspection on A’s part was
possible, we could expose him to the stimuli in question and observe his
behaviour. Either test would be such as to provide the basis for a settlement
of the difference of opinion.
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. There is no means of testing the magnitude of A’s
satisfaction as compared with B’s. 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.
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 scientific. 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.
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.[4]
 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 had the effect 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 ought to be
carried out. For such an inference would beg the whole question whether
the increase of satisfaction in this sense was socially obligatory.[5] 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.[6]
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.
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.[7] 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.
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.[8] 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.
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.
But it is not intelligible to use them as regards ends themselves. As we
have seen already, there are no economic ends.[9] 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.
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.
It is the same with measures more specifically “economic”—to use the
term in its confused popular sense. If we assume that the ends of public
policy are the safeguarding of conditions under which individual demands,
as reflected in the price system, are satisfied as amply as possible under
given conditions, then, save in very special circumstances which are
certainly not generally known to those who impose such measures, it is
legitimate to say that a protective tariff on wheat is uneconomical in that it
imposes obstacles to the achievement of this end. This follows clearly from
purely neutral analysis. But if the object in view transcends these ends—if
the tariff is designed to bring about an end not formulated in consumers’
price offers—the safeguarding of food supply against the danger of war, for
instance—it is not legitimate to say that it is uneconomical just because it
results in the impoverishment of consumers. In such circumstances the only
justification for describing it as uneconomical would be a demonstration
that it achieved this end also with an unnecessary sacrifice of means.[10]
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.[11] 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.[12] But such a policy is not
necessarily 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.
4. In recent years, certain economists, realising this inability of
Economics, thus conceived, to provide within itself a series of principles
binding upon practice, have urged that the boundaries of the subject should
be extended to include normative studies. Mr. Hawtrey and Mr. J. A.
Hobson, for instance, have argued that Economics should not only take
account of valuations and ethical standards as given data in the manner
explained above, but that also it should pronounce upon the ultimate
validity of these valuations and standards. “Economics”, says Mr. Hawtrey,
“cannot be dissociated from Ethics”.[13]
Unfortunately it does not seem logically possible to associate the two
studies in any form but mere juxtaposition. Economics deals with
ascertainable facts; ethics with valuations and obligations. The two fields of
enquiry are not on the same plane of discourse. Between the generalisations
of positive and normative studies there is a logical gulf fixed which no
ingenuity can disguise and no juxtaposition in space or time bridge over.
The proposition that the price of pork fluctuates with variations in supply
and demand follows from a conception of the relation of pork to human
impulses which, in the last resort, is verifiable by introspection and
observation. We can ask people whether they are prepared to buy pork and
how much they are prepared to buy at different prices. Or we can watch
how they behave when equipped with currency and exposed to the stimuli
of the pig-meat markets.[14] But the proposition that it is wrong that pork
should be valued, although it is a proposition which has greatly influenced
the conduct of different races, is a proposition which we cannot conceive
being verified at all in this manner. Propositions involving the verb “ought”
are different in kind from propositions involving the verb “is”. And it is
difficult to see what possible good can be served by not keeping them
separate, or failing to recognise their essential difference.[15]
 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.
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 given 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.
And, quite apart from all questions of methodology, there is a very
practical justification for such a procedure. In the rough-and-tumble of
political struggle, differences of opinion may arise either as a result of
differences about ends or as a result of differences about the means of
attaining ends. Now, as regards the first type of difference, neither
Economics nor any other science can provide any solvent. If we disagree
about ends it is a case of thy blood or mine—or live and let live, according
to the importance of the difference, or the relative strength of our
opponents. But, if we disagree about means, then scientific analysis can
often help us to resolve our differences. If we disagree about the morality of
the taking of interest (and we understand what we are talking about),[16]
then there is no room for argument. But if we disagree about the objective
implications of fluctuations in the rate of interest, then economic analysis
should enable us to settle our dispute. Shut Mr. Hawtrey in a room as
Secretary of a Committee composed of Bentham, Buddha, Lenin and the
Head of the United States Steel Corporation, set up to decide upon the
ethics of usury, and it is improbable that he could produce an “agreed
document”. Set the same committee to determine the objective results of
State regulation of the rate of discount, and it ought not to be beyond human
ingenuity to produce unanimity—or at any rate a majority report, with
Lenin perhaps dissenting. Surely, for the sake of securing what agreement
we can in a world in which avoidable differences of opinion are all too
common, it is worth while carefully delimiting those fields of enquiry
where this kind of settlement is possible from those where it is not to be
hoped for[17]—it is worth while delimiting the neutral area of science from
the more disputable area of moral and political philosophy.
5. But what, then, is the significance of Economic Science? We have
seen that it provides, within its own structure of generalisations, no norms
which are binding in practice. It is incapable of deciding as between the
desirability of different ends. It is fundamentally distinct from Ethics.
Wherein, then, does its unquestionable significance consist?
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 us 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.[18]
 An example or two should make this quite clear. Let us start with a
case in which the implications of one act of choice are elucidated. We may
revert once more to an example we have already considered—the
imposition of a protective tariff. We have seen already that there is nothing
in scientific Economics which warrants our describing such a policy as
good or bad. We have decided that, if such a policy is decided upon with
full consciousness of the sacrifices involved, there is no justification for
describing it as uneconomical. The deliberate choice by a body of citizens
acting collectively to frustrate, in the interests of ends such as defence, the
preservation of the countryside, and so on, their several choices as
consumers, cannot be described as uneconomical or irrational, if it is done
with full awareness of what is being done. But this will not be the case
unless the citizens in question are fully conscious of the objective
implications of the step they are taking. And in an extensive modern society
it is only as a result of intricate economic analysis that they may be placed
in possession of this knowledge. The great majority, even of educated
people, called upon to decide upon the desirability of, let us say, protection
for agriculture, think only of the effects of such measures on the protected
industry. They see that such measures are likely to benefit the industry, and
hence they argue that the measures are good. But, of course, as every first
year student knows, it is only here that the problem begins. To judge the
further repercussions of the tariff an analytical technique is necessary. This
is why in countries where the level of education in Economics is not high,
there is a constant tendency to the approval of more and more protective
tariffs.
Nor is the utility of such analysis to be regarded as confined to
decisions on isolated measures such as the imposition of a single tariff. It
enables us to judge more complicated systems of policy. It enables us to see
what sets of ends are compatible with each other and what are not, and upon
what conditions such compatibility is dependent. And, indeed, it is just here
that the possession of some such technique becomes quite indispensable if
policy is to be rational. It may be just possible to will rationally the
achievement of particular social ends overriding individual valuations
without much assistance from analysis. The case of a subsidy to protect
essential food supplies is a case in point. It is almost impossible to conceive
the carrying through of more elaborate policies without the aid of such an
instrument.[19]
We may take an example from the sphere of monetary policy. It is an
unescapable deduction from the first principles of monetary theory that, in a
world in which conditions are changing at different rates in different
monetary areas, it is impossible to achieve at once stable prices and stable
exchanges.[20] The two ends—in this case the “ends” are quite obviously
subordinate to other major norms of policy—are logically incompatible.
You may try for one or you may try for the other—it is not certain that price
stability is either permanently attainable or conducive to equilibrium
generally—but you cannot rationally try for both. If you do, there must be a
breakdown. These conclusions are well known to all economists. Yet
without some analytical apparatus how few of us would perceive the
incompatibility of the ends in question!
And even this is a narrow example. Without economic analysis it is not
possible rationally to choose between alternative systems 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.
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.[21] 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.[22]
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.
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 raison d’être 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.
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 raison d’être 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.

[1] See, e.g., Edgeworth, The Pure Theory of Taxation (Papers

Relating to Political Economy, vol. ii., p. 63 seq.).
[2] See Economics and Socialism (The Economic Outlook, pp. 59–62).
[3] 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.
[4] Cp. Davenport, Value and Distribution, pp. 301 and 571; Benham,
Economic Welfare (Economica, June, 1930, pp. 173–187); M. St. Braun,
Theorie der staatlichen Wirtschaftspolitik, 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” (Economic Essays in Honour of John Bates Clark,
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 I 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 convenient 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 Methods for Measuring Marginal Utility of Professor Ragnar
Frisch.
[5] 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.
[6] See below, Section 4.
[7] See two very important papers by Professor Plant, Co-ordination
and Competition in Transport (Journal of the Institute of Transport, vol.
xiii., pp. 127–136); Trends in Business Administration (Economica, No. 35,
pp. 45–62).
[8] 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, op. cit., pp. 85–121.
[9] See Chapter II., Sections 2 and 3, above.
[10] See a paper by the present author on The Case of Agriculture in
Tariffs: The Case Examined (edited by Sir William Beveridge).
[11] Hicks, The Theory of Wages, chs. ix and x. On the evidence of
postwar history, Dr. Benham’s Wages, Prices and Unemployment
(Economist, June 20, 1931) should be consulted.
[12] 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 not induced by wages above the equilibrium
level.
 [13] See Hawtrey, The Economic Problem, especially pp. 184 and
203–215, and Hobson, Wealth and Life, pp. 112–140. I have examined Mr.
Hawtrey’s contentions in some detail in an article entitled, Mr. Hawtrey on
the Scope of Economics (Economica, No. 20, pp. 172–178). But in that
article I made certain statements with regard to the claims of “welfare
Economics” which I should now wish to formulate rather differently.
Moreover, at that time I did not understand the nature of the idea of
precision in economic generalisations, and my argument contains one
entirely unnecessary concession to the critics of Economics. On the main
point under discussion, however, I have nothing to retract, and in what
follows I have borrowed one or two sentences from the last few paragraphs
of the article.
[14] 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 Der Sinn der “Wertfreiheit” der
Soziologischen und Ökonomischen Wissenschaften, Gesammelte Aufsätze
zur Wissenschaftslehre, pp. 451–502.)
[15] 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 modus vivendi or contact
between economic values and human values” (Hobson, op. cit., 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.
[16] See below, Section 5.
[17] In fact, of course, such has been the practice of economists of the
“orthodox” tradition ever since the emergence of scientific economics. See,
e.g., Cantillon, Essai sur la Nature du Commerce (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, Notes on Malthus, 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.
[18] It is perhaps desirable to emphasise that the consistency which is
made possible is a consistency of achievement, not a consistency of ends.
The achievement of one end may be held to be inconsistent with the
achievement of another, either on the plane of valuation, or on the plane of
objective possibility. Thus it may be held to be ethically inconsistent to
serve two masters at once. It is objectively inconsistent to arrange to be
with each of them at the same time, at different places. It is the latter kind of
inconsistency in the sphere of social policy which scientific Economics
should make it possible to eliminate.
[19] All this should be a sufficient answer to those who continually lay
it down that “social life is too complex a matter to be judged by economic
analysis”. It is because social life is so complicated that economic analysis
is necessary if we are to understand even a part of it. It is usually those who
talk most about the complexity of life and the insusceptibility of human
behaviour to any kind of logical analysis who prove to have the most
simpliste intellectual and emotional make-up. He who has really glimpsed
the irrational in the springs of human action will have no “fear” that it can
ever be killed by logic.
[20] See Keynes, A Tract on Monetary Reform, pp. 154–155; also an
interesting paper by Mr. D. H. Robertson, How do We Want Gold to
Behave? reprinted in the International Gold Problem, pp. 18–46.
[21] Cf. M. S. Braun, Theorie der Staatlichen Wirtschaftspolitik, p. 6.
[22] 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, Churches in the
Modern State; Maitland, Introduction to Gierke’s Political Theories of the
Middle Ages; Laski, The Problem of Sovereignly, Authority in the Modern
State.
 INDEX OF AUTHORS CITED
ALLEN, D., 56, 75
Amonn, A., 17, 20, 21

Bailey, S., 56, 60–62

Benham, F., 141, 146
Beveridge, W., 2, 32, 73
Böhm-Bawerk, E. v., 84, 92
Bonn, M., 54
Bowley, A., 58
Braun, M. St., 141, 156
Bresciani-Turroni, C., 54
Brutzkus, B., 18

Cairnes, J., 82, 105

Cannan, E., 2, 4, 7–11, 22, 27, 48, 64, 65, 136
Cantillon, R., 96, 98, 115, 129, 151
Carlyle, T., 26, 27
Cassel, G., 20, 87, 88
Child, J., 114
Churchill, W., 47, 48
Clapham, J. H., 39, 40
Clark, J. B., 4
Čuhel, 56
Cunningham, W., 39

Dalton, H., 65, 67, 122

Davenport, H. J., 2, 21, 69, 141

Edgeworth, F. I., 66, 84, 85, 136

Fetter, F., 16, 62, 63, 83, 112

Figgis, J. N., 156
Fisher, I., 8,17,142
Fleetwood, W., 40
Fraser, L., viii, ix
Frisch, R., 142

Gossen, H., 84
Graham, F. B., 53
Gregory, T. E., 67

Haberler, G., 63
Halberstaédter, H., 110
Hawtrey, R., 147, 148
Hayek, F. v., xi, 54, 61, 62, 100, 105, 119
Heckscher, E., 39
Hicks, J. R., 56, 75, 78, 89, 138, 146
Hobson, J. A., 147–149
Horner, F., 124

Jevons, S., 52, 84

Jones, R., 114

Kaufmann, F., 66
Keynes, J. M., 103, 154
Knight, F. H., xii, 33, 67, 78, 129

Landry, A., 21
Laski, H. J., 156
Lavington, F., 78

Machlup, F., 112, 128

Maitland, F. W., 156
Malthus, T., 60
Marshall, A., 1, 4, 96, 102
Mayer, H., 14, 16, 35, 71
McCulloch, J., 96
Menger, C., 16, 56, 75, 84, 115
Mill, J. S., 2, 74, 96, 150
Mises, L. v., xvi, 16, 18, 39, 54, 77, 78, 83, 93
Mitchell,’W., 112, 113
Morgenstern, O., 112, 113

Oswalt, H., 34

Pareto, V., 4. 56, 68, 75, 87

Pigou, A. C., 2, 21, 52
Plant, A., 144

Quesnay, F., 68

Ricardo, D., 20, 60, 124, 151

Rickert, H., 39, 74
Robbins, L., 67, 68, 146
Robertson, D. H., 154
Robinson, J., 77, 91
Rosenstein-Rodan, P., xi, 102
Ruskin, J., 26, 27

Schams, E., 101

Schneider, E., 77
Schönfeld, L., 14, 75
Schumpeter, J., 2, 17, 21, 65, 100, 133
Senior, N., 82, 96
Smith, A., 7, 8, 17, 40, 68, 95, 96, 98, 115, 124
Souter, R. W., xi, xii, 100, 102, 129
Stamp, J., 28–30, 58
Strigl, R., 16, 17, 20, 43, 54, 72, 106, 127, 144

Taussig, F., 8, 118

Tooke, T., 124
Torrens, R., 124

Viner, J., 118

Walras, L., 101

Weber, M., xii, 2, 74, 85, 90, 91, 148
Whitehead, A. N., 51
Wicksell, K., 67, 71, 101
Wicksteed P., xvi, 31, 56, 76, 96, 99
Wieser, F. v., 69

Young, A., 50, 69, 112

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Billing and Sons Ltd., Guildford and Esher