ECONOMICS (from the Gr.
οικονοµικη,
sc.
τεχνη,
from
οικος,
a house, and
νοµος, —
the “art of household
management”), the general term, with its synonym “political
economy,” for the science or study of wealth (welfare)
and its production, applicable either to the individual, the
family, the State, or in the widest sense, the world. How far
the same considerations apply to all these spheres is one of the
problems of economic thought in its widest sense. The term
“economy” (q.v.) by itself, which should strictly mean the art
of applying money (or wealth) wisely, has commonly come to
mean the art of saving money, or spending as little as possible.
In practice the study of “political” economy is mainly devoted
to the sphere of the State; the welfare of the individual as a
member of the State, and of the State in its relation to the world,
being internal aspects of the prosperity of the State itself.
Economics thus includes the discussion of all the numerous
factors which make life profitable, whether to the nation or to
the business, or to the individual man. It may be conceived
either as an historical science (What principles have in fact paid?),
or as an abstract science (What are the true principles which
must pay, presupposing an ideal?). Economists at different
times have studied both aspects, according to their lights, and
influenced by historical conditions of philosophic thought. A
text-book on economics necessarily deals, therefore, with the
whole subject in a manner which need not here be followed,
since separate articles are devoted in this work to the biographies
of writers on economics, and also to the principal economic
questions involved, under their own headings. In this article
we propose therefore to confine ourselves to discussing the
character and subject-matter of the science, indicating its
relation to other sciences, and explaining the methods by which
economists reach their conclusions.
We understand by economics the science which investigates
the manner in which nations or other larger or smaller
communities, and their individual members, obtain food, clothing,
shelter and whatever else is considered desirable or necessary
for the maintenance and improvement of the conditions of life.
It is thus the study of the life of communities with special
reference to one side of their activity. It necessarily involves the
scientific examination of the structure and organization of the
community or communities in question; their history, their
customs, laws and institutions; and the relations between
their members, in so far as they affect or are affected by this
department of their activity.
At the root of all economic investigation lies the conception
of the standard of life of the community. By this expression
we do not mean an ideal mode of living, but the habits and
requirements of life generally current in a community or grade
of society at a given period. The standard of life of the ordinary
well-to-do middle class in England, for example, includes not
only food, clothing and shelter of a kind different in many
respects from that of a similar class in other countries and of
other classes in England, but a highly complicated mechanism,
both public and private, for ministering to these primary needs,
habits of social intercourse, educational and sanitary organization,
recreative arrangements and many other elements. Many
influences operating for a long period of time on the character
and the environment of a class go to determine its standard of
life. In a modern industrial community it is possible to express
this standard fairly accurately for the purposes of economic
investigation in terms of money (q.v.). But it is doubtful whether
the most complete investigation would ever enable us to include
all the elements of the standard of life in a money estimate. The
character, tastes and capacity for management of different
individuals and groups differ so widely that equal incomes do
not necessarily imply identity of standard. In the investigation
of past times, the incommensurate elements of well-being are so
numerous that merely money estimates are frequently misleading.
The conception of the standard of life involves also some estimate
of the efforts and sacrifices people are prepared to make to
obtain it; of their ideals and character; of the relative strength
of the different motives which usually determine their conduct.
But no carefully devised calculus can take the place of insight,
observation and experience. The economist should be a man
of wide sympathies and practical sagacity, in close touch with
men of different grades, and, if possible, experienced in affairs.
It is evident that no permanent classification is possible of
what is or is not of economic significance. No general rules,
Character of
subject-matter.
|
applicable to all times, can be laid down as to what
phenomena must be examined or what may be neglected
in economic inquiry. The different departments of
human activity are organically connected, and all
facts relating to the life of a community have a near or remote
economic significance. For short historical periods, indeed,
many phenomena are so remotely connected with the ordinary
business of life that we may ignore them. But at any moment
special causes may bring into the field of economic inquiry
whole departments of life which have hitherto been legitimately
ignored. In times past, biblical exegesis, religious ideals, and
ecclesiastical organization, the purely political aims of statesmen,
chance combinations of party politics and the intrigues of
diplomatists, class prejudice, social conventions, apparently
sudden changes of economic policy, capricious changes of fashion
— all these causes and many others have exerted a direct and
immediate influence on the economic life of the community.
In our own day we have had many illustrations of the manner
in which special circumstances may at once bring an almost
unnoticed series of scientific investigations into direct and vital
relation with the business world. The economist must, therefore,
not only be prepared to take account of the physical features of
the world, the general structure and organization of the industry
and commerce of different states, the character of their administration
and other important causes of economic change. He must be
in touch with the actual life of the community he is studying,
and cultivate “that openness and alertness of the mind, that
sensitiveness of the judgment, which can rapidly grasp the
significance of at first sight unrelated discoveries or events.”
Some people are of opinion that the factors to be taken account
of in economic investigation are so numerous that progress on
these lines is impossible. It would certainly be impossible if we
had to begin de novo to construct the whole fabric of economic
science. But, as we shall see, it is no more necessary to do this
in the world of science than it is in the world of business or politics.
There is in existence a vast store of accumulated knowledge, and
few, if any, departments of economics have been left quite unilluminated
by the researches of former generations. Progress is
the result of adaptation rather than reconstruction. It must be
remembered also that economic work in modern times is carried
on by consciously or unconsciously associated effort, and although
it must always require high qualities of judgment, capacity and
energy, many of the difficulties which at first sight appear so
insuperable give way when they are attacked. In some ways
also the study of highly developed organizations like the modern
industrial state is simpler than that of earlier forms of society.
In the earliest times for which we have abundant material
the economic life of England had already reached in certain
directions a high degree of complexity. Even in the rural
districts, manorial records reveal the existence of a great variety
of classes and groups of persons engaged in the performance of
economic functions. The lord of the manor with his officials
and retainers, the peasantry bound to him by ties of personal
dependence and mutual rights and obligations, constituted a
little world, in which we can watch the play of motives and
passions not so dissimilar as we are sometimes led to believe
Ancient and
modern conditions
in England.
|
from those of the great modern world. In many a
country district the gradations of social rank were
more continuous, the opportunities of intercourse
more frequent, and the capacity for organization
greater than in modern times. The manorial accounts
were kept with precision and detail, and we are told
that a skilled official could estimate to the utmost farthing the
value of the services due from the villein to his lord. The manor
was indeed self-sufficient and independent in the sense that it
could furnish everything required by the majority of the inhabitants,
and that over the greater part of rural England
production was not carried on with a view to a distant market.
But in the earliest times the manor was subjected to external
influences of great importance. Vast areas of the country were
in fact under the single control of a territorial lord or an ecclesiastical
foundation. Every manor composing these great fiefs
was likely to be affected by the policy or the character of the
administration of the feudal lord, and he, again, by the policy
or the difficulties, the strength or the weakness, of the central
government. Foreign trade and foreign intercourse were
undeveloped, but their influence was in historical times never
entirely absent, while the influence of Roman law and the
Christian Church constantly tended to modify the manorial
organization. In the towns the division of labour had proceeded
much further than in the rural districts, and there were in
existence organized bodies, such as the Gild Merchant and the
crafts, whose functions were primarily economic. But one of
the most striking characteristics of town life in the middle ages
was the manner in which municipal and industrial privileges
and responsibilities were interwoven. In modern times the
artisan, however well trained, efficient and painstaking he may
be, does not, in virtue of these qualities, enjoy any municipal
or political privileges. By means of his trade union, co-operative
society or club he may gain some experience in the management
of men and business, and in so far as the want of a sufficient
income does not constitute an insuperable difficulty, he may
share in the public life of the country. But in his character as
artisan he enjoys no municipal or political privileges. In the
middle ages this differentiation of the industrial, municipal and
political life had not taken place, and in order to understand the
working of at first sight purely economic regulations it is
necessary to make a close study of the functions of local government.
But this, after all, does not carry us very far. From the
very nature of the records in which we study the town life of
the middle ages, it follows that we obtain from them only a
one-sided view. No one knows what proportion of the industrial
population was included in the organized gilds, or how complete
was the control exercised by these bodies over their members.
Elaborate regulations were in force, but no one knows how elastic
they were in practice. Medieval Englishmen were particularly
apt to put their aspirations into a legal form, and then rest
satisfied with their achievement. The number of regulations is
scarcely to be regarded as a test of their administrative success.
Further, as the country became more consolidated and the
central government extended its authority over economic affairs,
new regulations came into force, new organs of government
appeared, which were sometimes in conflict, sometimes in harmony,
with the existing system, and it becomes for a time far
more difficult to obtain a clear view of the actual working of
economic institutions. Thus the study of the economic life of
the middle ages is one of the most complicated subjects which
can engage the attention of man. It is impossible to carry the
process of isolation very far. The different threads of social
activity are so closely interwoven that we cannot follow any one
for very long without forming wrong impressions, and it becomes
necessary to turn back and study others which seemed at first
sight unrelated to the subject of our investigations. Under an
apparently uniform and stable system of social regulation there
was much variation and movement, the significance of which
it is impossible to estimate. Materials for forming such an
estimate no doubt exist, but before doing so we have to study in
infinite detail a vast number of separate manors, municipalities
or other separate economic areas. This involves great industry
on the part of many scientific workers. Meanwhile we can
illustrate the economic life of the middle ages, describe its main
features, indicate the more important measures of public policy
and draw attention to some of the main lines of development.
It is only as we approach more modern times that the conditions
of economic study are realized and economic science,
Conditions
of economic
science.
|
as we understand it, becomes possible. Those conditions
are: (i.) the life of the state or other community
or communities we are studying must be so differentiated
that we can isolate those functions which are
wholly or predominantly economic. The “separation of employments”
is not only a condition of economic efficiency; it was
necessary before we could have an economic science, (ii.) We
must be in a position so far to understand and estimate the
character and motives of different classes and groups in these
communities that we can rightly interpret their action. This
condition cannot be realized without great difficulty, for
“economic motives” are very different in different periods,
nations and classes, and even for short periods of time in the
same country are modified by the influence of other motives of
an entirely different order. In studying the economic history
of the 18th century, for example, it is not enough to assume with
Defoe that “gain is the design of merchandise.” We have to be
saturated, as it were, with 18th-century influences, so that we
can realize the conditions in which industry and trade were
carried on, before we can rightly explain the course of development.
In our own day labour disputes, to take another example,
can scarcely ever be resolved into a question of merely pecuniary
gain or loss. The significance of the amount of money involved
varies greatly for different trades, and can only be understood
by reference to the character and habits of the people concerned.
But questions of sentiment, shop-feeling and trade customs
invariably play an important part. (iii.) Economics can never
lead to anything but hypothetical results unless we not only
realize that we must “take account of” other than the purely
economic factors, but also give due weight and significance to
these factors. No explanation of the industrial situation in
Germany, for example, would be intelligible or satisfactory even
from the economic point of view which ignored the significance
of the political conditions which Germans have to deal with.
So, again, it is impossible to make a useful comparative estimate
of the advantages and disadvantages of the transport systems
of England, the United States and Germany, unless we keep
constantly in view the very different geographical, military and
political conditions which these systems have to satisfy. (iv.)
Sufficient information must be available to enable us to test
the validity of our hypotheses and conclusions. Whatever
“method” of economic investigation we employ, we must at
every stage see how far our reasoning is borne out by the actual
experience of life. This obvious condition of scientific inquiry is
very far from being completely realized even at the present time.
It implies the existence of a well-trained class engaged in the
work of collecting information, and much organization both by
the state and private bodies. These four conditions can be
reduced to two. The community we are studying must have
reached such a stage of development that its economic functions
and those immediately cognate to them form a well-defined
group, and adequate means must be available so that we can, as
it were, watch the performance of these functions and test our
hypotheses and conclusions by observation and experience.
It is easy to understand, therefore, why we trace the beginnings
of economics, so far as England is concerned, in the 16th century,
and why the application of strict scientific tests in this subject
of human study has become possible only in comparatively
recent times. Medieval economics was little more than a
casuistical system of elaborate and somewhat artificial rules of
conduct. From the close of the middle ages until the middle of
the 18th century thousands of pamphlets and other works on
economic questions were published, but the vast majority of
the writers have little or no scientific importance. Their works
frequently contain information given nowhere else, and throw
much light on the state of opinion in the age in which they wrote;
It is also possible to find in them many anticipations of the views
of the economists of later times; but such statements were as
a rule generated merely by the heat of controversy on some
measure or event of practical importance, and when the controversy
died down were seldom regarded or incorporated in a
scientific system. Trade bias, personal impressions and guess^
work took the place of scientific method. This was inevitable
in the absence of trustworthy information on an adequate scale,
and from the immediately practical aims of the writers. But
from the end of the 17th century economics has been definitely
recognized as a subject of scientific study.
In modern times the conditions which have made economic
science possible have also made it necessary. While it is impossible
Necessity of
economic science.
|
to give a strictly economic interpretation
of the earlier history of nations, economic interests
so govern the life and determine the policy of modern
states that other forces, like those of religion and
politics, seem to play only a subsidiary part, modifying here and
there the view which is taken of particular questions, but not
changing in any important degree the general course of their
development. This may be, in the historical sense, merely a
passing phase of human progress, due to the rapid extension of
the industrial revolution to all the civilized and many of the
uncivilized nations of the world, bringing in its train the consolidation
of large areas, a similarity of conditions within them,
and amongst peoples and governments a great increase in the
strength of economic motives. When the world has settled
down to the new conditions, if it ever does so, we may be confronted
with problems similar to those which our forefathers
had to solve. But, for the time, if we know the economic interests
of nations, classes and individuals, we can tell with more
accuracy than ever before how in the long run they will act.
Public policy therefore requires the closest possible study of the
economic forces which are moulding the destinies of the great
nations of the world. In most civilized countries except England
this is recognized, and adequate provision is made for the study
of economic science. But the subject is not only of immediate
concern to the state in its corporate and public capacity. The
neglect of it in the domain of private business can now only lead
to disastrous results. To quote from a useful work (National
Education: a Symposium, 1901), “the commercial supremacy
of England was due to a variety of causes, of which superior
intelligence, in the ordinary business sense, was not the most
important. Her insular position, continuity of political development
and freedom from domestic broils played an important
part in bringing about a steady and continuous growth of industry
and manufactures for several generations before the modern era.
The great wars of the 18th and the beginning of the 19th century,
which arrested the growth of continental nations, gave England
the control of the markets of the world. When peace was restored,
England enjoyed something in the nature of a monopoly. The
competition of France ceased for a time to be an important
factor. What is now the German empire was a mere congeries
of small states, waging perpetual tariff wars upon each other.
In the old Prussian provinces alone there were fifty-three different
customs frontiers, and German manufactures could not develop
until the growth of the Zollverein brought with it commercial
consolidation, internal freedom and greater homogeneity of
economic conditions. The industries of the United States were
in their infancy. Thus the productive power of England was
unrivalled, and her manufactures and business men, under a
régime rapidly approximating to complete freedom of trade,
could reap the full advantages to be derived from the possession
of great national resources and production by machinery.
Commercial supremacy required not so much highly trained
intelligence amongst manufacturers and merchants as keen
business instinct and a certain rude energy. In the last generation
all that has changed, and the change is of a permanent
character. The struggle of the future must inevitably be
between a number of great nations, more or less equally well
equipped, carrying on production by the same general methods,
each one trying to strengthen its industrial and commercial
position by the adoption of the most highly developed machinery,
and all the methods suggested by scientific research, policy or
experience. Under these conditions, it is no longer possible for
the individual merchant, or for small groups of merchants, to
acquaint themselves, by personal experience alone, with more
than a fractional part of the causes which affect the business in
which they are engaged. The spread of the modern industrial
system has brought with it the modern state, with its millions
of consumers, its vast area, its innumerable activities, its complicated
code of industrial and commercial law. At the same
time, the revolution in the means of transport and communication
has destroyed, or is tending to destroy, local markets, and closely
interwoven all the business of the world. Events in the most
distant countries, industrial and commercial movements at
first sight unrelated to the concerns of the individual merchant,
now exert a direct and immediate influence upon his interests.
The technical training of the factory or the office, the experience
of business, the discharge of practical duties, necessary as they
are, do not infallibly open the mind to the large issues of the
modern business world, and can never confer the detailed
acquaintance with facts and principles which lie outside the
daily routine of the individual, but are none the less of vital
importance.” Economics, therefore, under modern conditions,
is not only a subject which may usefully occupy the attention
of a leisured class of scientific men. It should form part of the
training of educated men of all classes, on grounds of public
policy and administrative and business efficiency.
The relations between economics and other sciences cannot
be stated in a very general form. They vary for different
Relations between
economics and
other sciences.
|
periods, and are not the same for all branches of
economics. There is no subject of human study which
may not be at some time or other of economic significance
and anything which affects the character, the
ideals or the environment of man may make it
necessary to modify our assumptions and our reasoning with
regard to his conduct in economic affairs. But if the economist,
while studying one side of man's activities, must also cultivate
all other branches of human learning, it is obvious that no
substantial progress can be made. The economist frankly
assumes the reality of the existing world and takes men as they
are, or as they have been if he is studying past times. His
assumptions are based upon ordinary observation and experience,
and are usually accurate in proportion to his practical shrewdness
and sagacity, so that he is not interested in the speculative
flights of philosophy, except in so far as they influence or have
influenced conduct. In times past, and to a less extent in our
own day, philosophical conceptions have formed the basis of
great systems of politics and economics. The historical relations
between philosophy and economics are of great importance in
tracing the development of the latter, and have done much to
determine its present form. But the modern conception of
society or the state owes more to biology than philosophy, and
actual research has destroyed more frequently than it has
justified the assumptions of the older philosophical school.
Experimental psychology may in course of time have an important
bearing on economics, but the older science cannot be said to
be of much significance except in its historical aspects. Ethics
is in much the same position. That is, it is possible to conceive
of an ethical science which would extend considerably our
knowledge of economic affairs, but no important new principle
or original discovery, relevant to economic investigation, has
come from that quarter in recent years, and at present ethics
has more to learn from economics than the latter has from ethics.
It is in the adaptation of biological conceptions and methods,
in the positive contributions of jurisprudence, law and history,
in the rigorous application, where possible, of quantitative tests,
that the explanation of the present position of economics is
to be found. Mathematics has influenced the form and the
terminology of the science, and has sometimes been useful
in analysis; but mathematical methods of reasoning, in their
application to economics, while possessing a certain fascination,
are of very doubtful utility.
There is no method of investigation which is peculiarly
economic or of which economics has the monopoly. In every
Method of economic
investigation.
|
age economists have applied the methods ordinarily
in use amongst scientific men. There would probably
have been no controversy at all on this subject but for
the fact that economics was elaborated into systematic
form, and made the basis of practical measures of the greatest
importance, long before the remarkable development in the 19th
century of historical research, experimental science and biology.
The application of the a priori method in economics was an
accident, due to its association with other subjects and the
general backwardness of other sciences rather than any exceptional
and peculiar character in the subject-matter of the science itself.
The methods applied to economics in the 18th and the early part
of the 19th century were no more invented with a special view
to that subject than the principles of early railway legislation,
in the domain of practical policy, were devised with a special
view to what was then a new means of transport. As a matter
of fact, discussions of method and the criticism of hypotheses
and assumptions are very rarely found in early economic works.
It is only by reference to the prevailing ideas in philosophy and
politics that we can discover what was in the minds of their
authors. The growth of a science is much like the growth of a
constitution. It proceeds by adaptation and precedent. The
scientific and historical movement of the 19th century was
revolutionary in character. When it began to affect economics,
many people were afraid that the whole fabric of science
would be destroyed and the practical gains it had achieved,
jeopardized. These fears were justified, in so far as those who
entertained them shut their eyes to everything new and assumed
an attitude of no compromise. Where the newer methods were
assimilated, the position of economics was strengthened and
its practical utility increased. General discussion of method,
however, is rarely profitable. In all branches of economics,
even in what is called the pure theory, there is an implied reference
to certain historical or existing conditions of a more or less
definite character; to the established order of an organized
state or other community, at a stage of development which in
its main features can be recognized. In all economic investigation
assumptions must be made, but we must see that they are
legitimate in view of the actual life and character of the community
or communities which are the subject of investigation. In
common with other sciences, economics makes use of “abstractions”;
but if for some problems we employ symbolic processes
of reasoning, we must keep clearly in view the limits of their
significance, and neither endow the symbols with attributes
they can never possess, nor lose sight of the realities behind them.
Every hypothesis must be tested by an appeal to the facts of life,
and modified or abandoned if it will not bear examination, unless
we are convinced on genuine evidence that it may for a time be
employed as a useful approximation, without prejudice to the
later stages of the investigation we are conducting.
We shall best illustrate the character and method of economic
reasoning by examples, and for that purpose let us take first of
An illustration of
economic method.
|
all a purely historical problem, namely, the effect on
the wage-earners of the wages clauses of the Statute of
Apprenticeship (1563). It is at once obvious that we
are dealing not with an abstract scheme of regulation
in a hypothetical world, but with an act of parliament nominally
in force for two hundred and fifty years, and applicable to a
great variety of trades whose organization and history can be
ascertained. The conclusions we reach may or may not modify
any opinions we have formed as to the manner in which wages
are determined under modern conditions. For the time being
such opinions are irrelevant to the question we are investigating,
and the less they are in our minds the better. There is no reason
why we should apply to this particular act a different method of
inquiry from that we should apply to any other of the numerous
acts, of more or less economic importance, passed in the same
session of parliament. The first step is to see whether there is a
prima facie case for inquiry, for many acts of parliament have
been passed which have never come into operation at all, or have
been administered only for a short time on too limited a scale to
have important or lasting results. The justices were authorized
to fix wages at the Easter quarter sessions. Did they exercise
their powers? To answer this question we must collect the
wages assessments sanctioned by the magistrates. This is a
perfectly simple and straightforward operation, involving nothing
more than familiarity with records and industry in going through
them. Without having recourse to any elaborate process of
economic reasoning, by confining our attention to one simple
question, namely, what happened, we can establish conclusions
of the greatest interest to economic historians and, further,
define the problem we have to investigate. We can show, for
example: (1) that the Statute of Apprenticeship did not stand
alone; it was one of a long series of similar measures, beginning
more than two centuries before, which in their turn join on to
the municipal and gild regulations of the middle ages; one of an
important group of statutes, more or less closely interwoven
throughout their history, administered by local authorities
whose functions had grown largely in connexion with this
legislation and the gradual differentiation of the trades and
callings to which it related. (2) That wages were regulated with
much greater frequency during the reigns of Elizabeth, James I.
and Charles I. than at any later period. (3) That they were
regulated in some counties and not in others. (4) That in the
counties and towns where they were regulated the action of the
magistrates was in general spasmodic, and rarely continuous
for a long series of years. (5) That the magistrates used their
powers sometimes to raise wages, sometimes to force them down.
(6) That the local variations of wages and prices were what we
should call excessive, so that the standard of comfort in one
district was very different from that of others. (7) That the
wages assessments group themselves round certain short periods,
coincident in many instances with high prices, increase of poverty,
and other causes of exceptional action. (8) That what we may
call, with the above limitations, the effective period of the act
terminates with the outbreak of the Civil War. (9) That
subsequent to that period organic changes in the industries
affected, coupled with the incompetence of parliament to adapt
the old legislation to new conditions, and the growing acceptance
of the doctrine of laissez faire, brought about a general disuse of
the statute, though isolated attempts to enforce it were made
and new acts applicable to certain trades were passed in the 18th
century. (10) For more than one hundred years before the
repeal of the act, trade unions and other forms of voluntary
association amongst wage-earners, combinations amongst employers,
collective agreements, customary regulations, were
established in many of the important trades of the country.
But these conclusions, after all, suggest more difficulties than
they remove, for they show that our inquiry, instead of presenting
certain well-marked features which can be readily dealt with,
has to be split up into a number of highly specialized studies:
the investigation of rates of wages, prices and the standard
of comfort in different localities, bye-industries, regularity of
employment, the organization of particular trades, the economic
functions of local authorities, apprenticeship and a host of
other subjects. Moreover, all these subjects hang together, so
that it seems impossible to come to a decision about one of them
without knowing all about the others.
It is a comparatively simple thing to state the question to
which we want an answer, but extremely difficult to define the
exact nature of the evidence which will constitute a good answer;
easy enough to say we must try hypothesis after hypothesis, and
test each one by an appeal to the facts, but a man may easily
spend his life in this sort of thing and still leave to his descendants
nothing more than a legacy of rejected hypotheses. Every
volume of records we look through contains a mass of detailed
information on the economic life of England in the period we
are studying. How much of it is relevant to the subject of
inquiry? What is to be the principle of selection? How shall
we determine the relative weight and importance of different
kinds of relevant evidence? As in modern problems, so in those
of past times, a man requires for success qualities quite distinct
from those conferred by merely academic training and the use
of scientific methods. A correct sense of proportion and the
faculty of seizing upon the dominant factors in an historical
problem are the result partly of the possession of certain natural
gifts in which many individuals and some nations are conspicuously
wanting, partly of general knowledge of the working
of the economic and political institutions of the period we are
studying, partly of what takes the place of practical experience
in relation to modern problems, namely, detailed acquaintance
with different kinds of original sources and the historical imagination
by which we can realize the life and the ideals of past
generations. These qualities are required all the more because,
in order to make any further progress with such an inquiry as
we have suggested, we have deliberately to make use of
abstraction as an instrument of investigation.
Let us see how this will work out. Suppose we have selected
one of the numerous subsidiary problems suggested by the
The plan of a
general theory.
|
general inquiry, and obtained such full and complete
information about one particular industry that we
can tabulate the wages of the workers for a long series
of years. We may do the same for other industries,
some of them coming under the Statute of Apprenticeship, others
not. If all the industries belong to one economic area over which,
so far as we can tell from general statistics of wages and prices,
and other information, fairly homogeneous conditions prevailed,
we may be able to reach some useful conclusions as to the
operation of the act. But it would be absurd to suppose that
we could reach those conclusions by simple reference to the trades
themselves. We cannot assume that the fluctuations in wages
were due to the action or inaction of magistrates without the
most careful examination of the other influences affecting the
trades. In economic affairs the argument post hoc propter hoc
never leads to the whole truth, and is frequently quite misleading.
We cannot suppose that the policy of the Merchant Adventurers'
Company had nothing to do with the woollen industry; that the
export trade in woollen cloth was quite independent of the
foreign exchanges and international trade relations in those
times; that the effect on wages of the state of the currency,
the influx of new silver, the character of the harvests, and many
other influences can be conveniently ignored. In studying,
therefore, such an apparently simple question as the effect of an
act of parliament on wages in a small group of trades we want a
general theory which we can use as a kind of index of the factors
we have to consider.
Assuming that we have in our minds this safeguard against
loose thinking and neglect of important factors, the investigation
Difficulties due
to want of evidence.
|
of the special problems arising out of the general
inquiry resolves itself into a careful definition of each
problem we wish to deal with, and the collection,
tabulation and interpretation of the evidence. In
most cases the interpretation of the facts is far from obvious,
and we have to try several hypotheses before we reach one
which will bear the strain of a critical examination in the light
of further evidence. But at this stage in historical investigation
it is generally the want of evidence of a sufficiently complete
and continuous character, rather than difficulties of method,
which forces us to leave the problem unsolved. It is, for instance,
practically impossible to obtain reliable evidence as to the
regularity of employment in any industry in the 17th century,
and the best approximations and devices we can invent are very
poor substitutes for what we really want. For this reason guess-work
must continue to play an important part in economic
history. But every genuine attempt to overcome its difficulties
brings us into closer touch with the period we are examining;
and though we may not be able to throw our conclusions into
the form of large generalizations, we shall get to know something
of the operation of the forces which determined the economic
future of England; understand more clearly than our forefathers
did, for we have more information than they could
command, and a fuller appreciation of the issues, the broad
features of English development, and be in a position to judge
fairly well of the measures they adopted in their time. By
comparing England with other countries we may be able in the
distant future to reach conclusions of some generality as to the
laws of growth, maturity and decay of industrial nations. But
like the early statisticians of the 17th century, economic historians
are the “beginners of an art not yet polished, which tune may
bring to more perfection.”
When we come to exclusively modern questions, there is no
reason or necessity for a fundamental change of method. We
The investigation
of modern questions.
|
cannot suppose that there occurred, at or about the
commencement of the 19th century, a breach of
historical continuity of such a character that
institutions, customs, laws and social conventions were
suddenly swept away, the bonds of society loosened, and the
state and people of England dissolved into an aggregate of
competing individuals. The adoption of machinery gradually
revolutionized the methods of production; but in the first
instance only certain industries were affected, and those not at
the same time or in the same degree; old laws grown obsolete
were repealed, but other laws affecting wage-earners and employers
took their place, more complicated and elaborate than
the Elizabethan code. Trade unions, so far from disappearing,
were legalized, gathered strength from the changes in industrial
organization, and nowhere became so powerful as in the most
progressive industries; while other forms of combination
appeared, incomparably stronger, for good or evil, than those
of earlier times. But while we recognize these facts, we must
not suppose that we have to study the action of men as though
they were all enrolled in organized associations, or covered by
stringent laws which were always obeyed. There has never
been in the history of English industry such licence as we find
in certain directions in the earlier part of the 19th century.
It is not in the decay of combination and monopoly or in the
growth of competition that we must look for the distinctive
characteristics of modern problems. A 17th-century monopoly
was a very weak and ineffective instrument compared
with a modern syndicate; the Statute of Apprenticeship was
certainly not so widely enforced as the “common rules” of trade
unions; and many of the regulations of past times, which look
so complicated to modern eyes, were conditions of free
enterprise rather than restraints upon it. It is due
to the influence of the laisser faire doctrine that we
regard law and regulation as a restraint on liberty.
As a maxim for guidance in public affairs, laisser faire
genuinely relevant at the end of the 18th and the beginning
of the 19th century, when the Statute Book was cumbered with
vexatious and obsolete laws. As an explanation of what has
taken place in later years, or of the actual economic life of the
present day, it is ludicrously inadequate. Competition, in the
sense in which the word is still used in many economic works,
is merely a special case of the struggle for survival, and, from its
limitation, does not go far towards explaining the actual working
of modern institutions. To buy in the cheapest market and sell
in the dearest; to secure cheapness by lowering the expenses
of production; to adopt the less expensive rather than the more
expensive method of obtaining a given result — these and other
maxims are as old as human society. Competition, in the
Darwinian sense, is characteristic not only of modern industrial
states, but of all living organisms; and in the narrower sense
of the “higgling of the market” is found on the Stock Exchange,
in the markets of old towns, in medieval fairs and Oriental
bazaars. In modern countries it takes myriads of forms, from
the sweating of parasitic trades to the organization of scientific
research. Economic motives, again, are as varied as the forms
of competition, and their development is coeval with that of
human society. They have to be interpreted in every age in
relation to the state of society, the other motives or ideals with
which they are associated, the kind of action they inspire, and
the means through which they operate. Apparently the same
economic motives have led in the same age and in the same
nation to monopoly and individual enterprise, protection and
free trade, law and anarchy. In our own time they have inspired
both the formation of trade combinations and attempts to break
them up, hostility to all forms of state interference and a belief
in collectivism.
The conditions which are peculiar to the modern world
are the large numbers we have to deal with, the vast and fairly
homogeneous areas in which justice is administered and property
secured, and the enormously increased facilities for transport
and communication. These conditions are of course not
independent of each other, and they have brought in their train
many consequences, some good and some bad. But they supply
the bases for that general theory which, as we have seen, is
indispensable in economic investigation. From the standpoint
of general theory economic movements assume an impersonal
character and economic forces operate like the forces of nature.
Although economic motives have become more complex, they
have just as much and no more to do with general economic
reasoning and analysis than the causes of death with the normal
expectation of life, or domestic ideals with the birth-rate. So
far as we have anything to do with psychology at all, it is the
psychology of crowds and not of individuals which we have to
consider. If we study the economy of a village, the idiosyncrasies
of every individual in it are of importance. If the village
is replaced by a large area, inhabited by millions, with modern
facilities of communication, it is a matter of observation and
experience that for the purposes of general reasoning the idiosyncrasies
of individuals may be neglected. Whether such large
numbers have the character of the “economic man” of the
early economists matters very little. All the assumptions we
require are furnished by observation of people in the mass and the
larger generalizations of statistics. Thus we can construct a
kind of envelope of theory, which, by careful testing as we proceed,
can be made to indicate in a general manner the reactions
of one part of the activities of the economic world upon the others,
and the interdependence of the several parts. From its very
nature this general theory can never correspond strictly to the
actual life and movement of any given state. It is useful and
necessary, and plays somewhat the same part in economic
investigation as ton-mile statistics do in the administration of a
railway. To express in any language or to illustrate by any
images, from a purely objective standpoint, the infinitely complicated
movements of the actual world, is a task far beyond
human capacity.
With the aid of this general theory the methods we have
sketched in relation to historical problems apply with greater
Application to
modern problems.
|
force to the special problems of modern times, and are
rewarded with results more accurate, more fruitful,
more relevant to difficulties which all civilized nations
have to face, than those of historical research. To
many minds the interest and usefulness of economics depend
entirely on the application of these methods, for it is the actual
working of economic institutions about which the statesman,
the publicist, the business man and the artisan wish to know.
Under the conditions we have described, many of the most
interesting problems of our own time, when they are once
defined, resolve themselves into statistical inquiries. But in
most cases such an inquiry cannot be successfully carried out
by a mere statistician. Definite economic problems can very
rarely be dealt with by merely quantitative methods. In the
tabulation and interpretation of statistical evidence, as in its
collection, it is scarcely possible to overrate the importance of
wide knowledge and experience. There is another very important
instrument of investigation which can be used in our own time,
but cannot be employed in historical research. Historical
documents, however detailed, rarely show all the factors we have
to deal with or fully explain a given situation. No sane person
would suppose that the minutes of a modern legislative body
explain the steps by which legislation has been passed, or the
issues really involved. The ostensible cause of a modern labour
dispute is frequently not the real or the most important cause.
In modern problems we can watch the economic machine actually
at work, cross-examine our witnesses, see that delicate interplay
of passions and interests which cannot be set down or described
in a document, and acquire a certain sense of touch in relation to
the questions at issue which manuscripts and records cannot
impart. We can therefore substitute sound diagnosis for guess-work
more frequently in modern than in historical problems.
What then, it may be asked, becomes of the “old Political
Economy”? Of what possible use are the works of the so-called
classical writers, except in relation to the history of economics
and the practical influence of theory in past times? If we take
the mere popular view of what is meant by the “old Political
Economy,” that is, that a generation or so ago economics was
comprised in a neatly rounded set of general propositions,
The “old
political economy.”
|
universally accepted, which could be set forth in a
text-book and learnt like the multiplication table, it
is not incumbent on the present generation to define
its attitude at all. In this sense of the words, there
was no faith delivered to our fathers which we are under any
obligation to guard or even explain. If by the “old Political
Economy” we mean the methods and conclusions of certain
great writers, who stood head and shoulders above their contemporaries
and determined the general character of economic
science, we are still under no obligation to define the attitude
of the present generation with regard to them. The fact that
Adam Smith, with the meagre materials of the 18th century
at his disposal, saw his way to important generalizations which
later research has established on a firm basis, may enhance
greatly the reputation of Adam Smith, but does not strengthen
the generalizations. They stand or fall by the strength of the
evidence for or against them. In the history of economics or
the biography of Ricardo it is of interest to show that he anticipated
later writers, or that his analysis bears the test of modern
criticism; but no economist is under any obligation to defend
Ricardo's reputation, nor is the fact that a doctrine is included
in his works to be taken as a demonstration of its truth. The
appeal to authority cannot be permitted in economics any more
than in chemistry, physics or astronomy. But the cases stated
above suggest more or less false issues. There has been no
revolution in economic science, and is not likely to be any. The
question we have really to determine is how we can make the
best use of the accumulated knowledge of past generations, and
to do that we must look more closely into the economic science of
the 19th century.
Any one who has taken the trouble to trace the history of one
of the modern schools of economists, or of any branch of economic
science, knows how difficult it is to say when it began.
“Anticipations” of method and doctrine can generally be found by the
diligent investigator in the economic literature of his own or a
foreign country. So that cross-sections of the stream of economic
thought will reveal the existence, at different times, in varying
proportions and at different stages of development, of most of
the modern “schools.” Again, the classification of an economic
bibliography at once shows how varied has been the character
of economic investigation, ranging from the most abstract
speculation on the one hand to almost technical studies of
particular trades on the other. Of the great army of writers who
flourished in the first half of the 19th century some were
closely identified with the utilitarian school, and the majority
were influenced in a greater or less degree by the prevailing
ideas of that school. Others, however, were hostile to it. In
many works, such as those of a statistical or historical character,
there are frequently to be found passages which could have been
written in no other period, but are only of the nature of ejaculations
and do not affect the argument. In stating the position of
economics during this time we cannot ignore all writers, except
those who belonged to one group, however eminent that group
may have been, simply because they did not represent the
dominant ideas of the period, and exercised no immediate and
direct influence on the movement of economic thought. We
must include the pioneers of the historical school, the economic
historians, the socialists, the statisticians, and others whose
contributions to economics are now appreciated, and without
whose labours the science as we know it now would have been
impossible. If we take this broadly historical view of the progress
of economics, it is obvious that even in England there was no
general agreement, during the 19th century, as to the methods
most appropriate to economic investigation.
Suppose, now, we ignore the writers who were inaugurating
new methods, investigating special problems or laboriously
collecting facts, and concentrate attention on the dominant
school, with its long series of writers from Adam Smith to John
Stuart Mill. It is the work of these writers which people have
in mind when they speak of the “old Political Economy.” There
are several quite distinct questions we can ask with regard to
them. That they must be studied closely by every one who
wishes to follow the history of economics goes without saying.
That they must be studied by the economic historian is equally
clear, owing to their practical influence and the fact that they
furnished the theoretical bases of much of the economic policy
of the 19th century. This is true whether their method is good
or bad, whether their conclusions are true or false. It is not so
easy to determine their relevance and usefulness in relation to
distinctively modern problems, or to indicate within what limits
their work is of permanent value, and we can only deal with these
questions in their more general aspects.
It must be clear to every observer that the economists of the
classical period, with the one exception of Adam Smith, will
speedily share the fate of nearly all scientific writers. They will
be forgotten, and their books will not be read. Adams Smith's
Wealth of Nations, if it has ever been, has long ceased to be a
scientific text-book. Whether a modern economist accepts his
views or not is of no importance. There is probably not a single
chapter in the Wealth of Nations which would be thoroughly
endorsed by any living economist. But the reputation of the
book and its author is quite independent of considerations of this
kind. The Wealth of Nations is one of the great books of the
world, many of the sayings of which are likely to be more frequently
quoted in the future than they have been in the 19th
century. Malthus is already an author whose name is probably
more widely known than that of any other economist, but whose
works are rarely read, and studied only by a small proportion of
the few people who write books on the history of economic
theory. Of economic students, many are unaware of the fact
that he wrote any other book than the Essay on the Principle
of Population, and what is of permanent importance in that work
is contained in the generalization which it suggested to Darwin.
Moreover, modern economists, while accepting in the main the
general tenor of Malthus's theory of population, would not agree
with his statement of it. Like Malthus, Ricardo owes his reputation
very largely to the theory associated with his name, though
it has long ceased to be stated precisely in the terms he employed.
But there are very few people in the world who have made a
careful study of his works; and although his theory of rent has
a wide and increasing application in economics, it is not comparable
in general scientific importance with Malthus's theory of
population. It is already impossible to take J. S. Mill's Principles
of Political Economy as a text-book. Important as it was for
thirty or forty years, it will soon be as little read as McCulloch's
Principles. For the rest of the economists of this period, it is
difficult to see how they can escape oblivion. When the generation
whose economic training was based upon J. S. Mill has died out,
the relevance of the “old Political Economy” is not likely to
be a question of any interest to ordinary educated men and
women, or even to the great mass of economic students.
The explanation of this decay of interest does not lie upon the
surface. It is frequently supposed that the influence of the “old
Political Economy” has been gradually undermined by the
attacks of the historical school. But great as the achievements
of this school have been, it has not developed any scientific
machinery which can take the place of theory in economic
investigation. If our view is correct that, broadly speaking,
the two ways of regarding economic questions are complementary
rather than mutually exclusive, there does not seem to be any
reason why the growth of the historical school should have been
destructive of the “old Political Economy” if it had been well
founded. The use of the historical method has, in fact, raised
more reputations than it has destroyed, because by keeping
carefully in view the conditions in which economic works have
been written, it has shown that many theories hastily condemned
as unsound by a priori critics had much to be said for them at the
time when they were propounded. This observation is true not
only of old-world writers like the Mercantilists, but also of
Ricardian economics. No one is concerned to prove that the
Ricardian economics applies to the manorial system, and it is
generally supposed at any rate that the world has been approximating
more and more nearly during the last century to the
conditions assumed in most of the reasoning of that school. On
the principles we have explained, therefore, the Ricardian
economics should supply just that body of general theory which
is required in the investigation of modern economic problems,
and the reputation of at any rate the leading writers should be
as great as ever. It would be of immense advantage from a
scientific point of view if this could be taken for granted, if for
a time the work of the classical economists could be considered
final so far as it goes, and for the purposes of investigation regarded
as the theoretical counterpart of the modern industrial
system. This assumption, however, has been made quite impossible,
not by the historical school, but by the criticism and
analysis of economists in the direct line of the Ricardian succession.
Modern economic criticism and analysis has destroyed the
authority of the “old Political Economy” as a scientific system.
The assumptions, the definitions, the reasoning, the conclusions
of the classical writers have been ruthlessly overhauled. Defects
in their arguments have been exposed to view by those who are
most concerned to defend their reputation. Writers with none
of the prejudices of the historical school, but with the cold and
remorseless regard for logic of the purely objective critic, have
pointed out serious inconsistencies here, the omission of important
factors there, until very little of the “old Political Economy”
is left unscathed. In fact, there never was a scientific system
at all. What was mistaken for it was fashioned in the heat of
controversy by men whose interests were practical rather than
scientific, who could not write correct English, and revealed in
their reasoning the usual fallacies of the merely practical man.
So the “old Political Economy” lies shattered. It is useless
to suppose that this destructive criticism from within can be
neutralized by generously sprinkling the pages of the classical
writers with interpretation clauses. This may serve to show
that the ideals of our youth were not without justification; but
the younger generation, which does not care about our ideals,
and looks to the future rather than the past, will not read
annotated editions of old books, however eminent their authors.
If the Ricardian school of economists had been merely philosophers,
or even a group like the French physiocrats, this
state of things might be regarded with equanimity. We might
assume that criticism and analysis had separated the wheat from
the chaff in their writings, that everything of permanent value
had probably been preserved and incorporated in the works of
later economists. But the character of much of their work
makes this assumption impossible. It is, in fact, quite true that
many of them were more interested in practical aims than in the
advancement of economic science. We may talk of
the assumptions implicitly involved in Ricardo's
works. In reality we do not know what those assumptions
were; we only know what assumptions we should
make in order to reach the same conclusions, and they may be
very different from “the mind of Ricardo.” Ricardo's works,
in fact, do not explain a theoretical system, but contain the
matured reflections, more or less closely reasoned, of a man of
great mental power looking out on the world as it appeared to a
business man experienced in affairs. The conclusions of such a
work are of wider significance than the assumptions we attribute
to the author would warrant. They are not expressed in terms
which satisfy our canons of scientific accuracy. Dissected
sentence by sentence, the book may be shown to be a mass of
inconsistencies. If it has the misfortune to be systematized by
an enthusiastic but dull and incompetent disciple, it may appear
even absurd. But after all the misinterpretation of contemporaries
and the destructive criticism of later times, the book as
a whole leaves upon us an impression of peculiar strength and
charm, and imparts a sense of the relations of things truer,
because less mechanical, than the laboured reasoning of smaller
men. Such is the character of much of the work of Ricardo and
some of his contemporaries. We think that the decay of interest
in these writers involves a real loss, and that students of modern
problems may do worse than read Ricardo and his school. Some
of the criticism of their works, necessary and useful as it has been,
will probably be corrected later on by that breadth of view and
sense of proportion which has enabled us to appreciate justly
the achievements of lesser men in more remote times. But
rehabilitation in accordance with the canons of historical justice
will not restore the lost influence of the Ricardian school. Their
achievements in the 19th century will be fully acknowledged,
but the relevance of their work to the problems of the 20th
century will be admitted less than at the present time.
In a subject like economics it must always be very difficult
to decide how far a departure from the traditional form and
Economics a
conservative
science.
|
expression of its main doctrines is necessary or
desirable. No one who is really experienced in economic
investigation cares to emphasize the originality, still
less the revolutionary character of his own work. It
much more likely than not that some principle which for the
moment seems new, some distinction which we may flatter ourselves
has not been observed before, has been pointed out over
and over again by previous writers, although, owing to special
circumstances, it may not have received the notice it deserved.
Economics is therefore, on the whole, an intensely conservative
science, in which new truths are cautiously admitted or incorporated
merely as extensions or qualifications of those enunciated
by previous writers. This procedure has its advantages, but it
may easily become dangerous by destroying the influence of the
science it is meant to preserve. It is not unlike the procedure
of the canonists and casuists of the middle ages with regard to
the doctrine of usury, by which the doctrine was to all appearances
preserved intact while in reality it was stripped of all its
original meaning by innumerable distinctions “over-curious
and precise.” In the same way the doctrines of the classical
economists may be adapted by interpretation clauses and
qualifications the exact force of which cannot be tested or explained,
so that we do not know whether the original proposition
is to be considered substantially correct or not. The result will
be that while the doctrines are apparently being brought into
closer correspondence with the facts of life, they will in reality
be made quite useless for practical purposes or economic investigation.
It is easier to point out the danger than to suggest
how it should be met. The position we have described is no
doubt partly due to the unsettlement of economic opinion
and the hostile criticism of old-established doctrines which
has characterized the last generation. Or it may be the
result of economic agnosticism, combined with unwillingness
to cut adrift from old moorings. Whatever the cause, the complete
restatement of economic theory, which some heroic persons
demand, is clearly impossible, except on conditions not likely
to be realized in the immediate future. The span of life is limited;
the work requires an extensive knowledge of the economic
literature of several countries and the general features of all the
important departments of modern economic activity. In general
theory special studies by other men cannot play the same part
as they do in historical and statistical work. In historical and
statistical investigation, or in special studies of particular subjects,
it is possible, given the pecuniary means, to organize a
whole army of skilled assistants, and with ordinary care to
combine the results of their separate efforts. In general theory
the inverse rule seems to prevail. There the unity of conception
and aim, the firm grip of all the different lines of argument and
their relation to each other, which are required, can only be
given by a single brain. But no one individual can do original
work over the whole field. He is lucky if he can throw new light
on a few old propositions. For the rest, he can only, with the
utmost caution, adopt the suggestions of other minds as qualifications
of old doctrines, never feeling quite sure that he is right in
doing so. A complete restatement could only be undertaken
by a group of men, trained in much the same conditions, accustomed
to think and work together, each one engaged on a special
department, but all acting under the control of one master-mind.
This is largely a question of the organization of economic studies,
and it is of the greatest importance that, if possible, such an effort
should be made to present in a connected form the best results
of modern criticism and analysis.
Economics is unlike many other sciences in the fact that its
claim to recognition must be based upon its practical utility,
Some recent
developments of
economic theory.
|
on its relevance to the actual life of the economic
world, on its ability to unravel the social and economic
difficulties of each generation, and to contribute to the
progress of nations. The very effectiveness of modern
criticism and analysis, which has brought great gains in
almost all branches of economic theory, has made the
science more difficult as a subject of ordinary study. The
extensions, the changes or the qualifications, of old doctrines,
which at any rate in the works of responsible writers are rarely
made without good if not always sufficient reason, have modified
very considerably the whole science, and weakened the confidence
of ordinary educated men in its conclusions. In the case of many
subjects this would matter very little, but in that of economics,
which touches the ordinary life of the community at so many
points, it is of great importance, especially at a time like the
present, when economic questions determine the policy of great
nations. The “economic man” of the earlier writers, with his
aversion from labour and his desire of the present enjoyment
of costly indulgences, has been abandoned by their successors,
with the result that in the opinion of many good people altruistic
sentiment may be allowed to run wild over the whole domain
of economics. The “economic man” has, on the other hand,
been succeeded by another creation almost as monstrous, if his
lineaments are to be supposed to be those of the ordinary
individual — a man, that is, who regulates his life in accordance
with Gossen's Law of Satiety, and whose main passion is to
discover a money measure of his motives. It is extremely important
to consider how far the economic conceptions based upon
this view of the action of men in the ordinary business of life —
such, for example, as the doctrine of marginal utility — depend
for their truth and relevance on the fact that in economics we
are dealing with large aggregates. The earlier writers generally
assumed perfect mobility of labour and capital. No economist
would deliberately make that assumption now unless he were
dealing with some purely theoretical problem, for the solution
of which it was legitimate at some stage in the reasoning. Many
of the questions of the greatest practical importance at the present
time, such as the competition between old and new methods
of manufacturing commodities substantially the same in kind,
and equally useful to the great body of consumers, arise largely
from the immobility of capital or labour, or both of them. But
it is obvious that if the assumption of perfect mobility is invalid,
there is scarcely any economic doctrine identified with the
earlier writers which may not require modification, in what
degree it is impossible to say without very careful investigation.
Much suggestive work on this subject of a general character is
incorporated in economic books of the present day, but there is
room for a whole series of careful monographs on a question of
such fundamental importance. The same may be said of another
subject, too frequently neglected by earlier writers, to which
due significance has been given in the best recent work, namely,
time in relation to value. It would perhaps be too much to say
that the full consideration of this point has revolutionized the
theory of value, but it has certainly created what seems almost
a new science in close contact with the actual life of the modern
world.
Some doctrines of the earlier economists, such as the Wages
Fund Theory, are now practically abandoned, though it may be
said that they contained a certain amount of truth. Others,
which were considered of fundamental importance, owe their
position in modern economics and the form in which they are
stated to the “tradition of the elders.” If they could, by some
happy chance, have been left for discovery by modern economists,
they would without doubt have received different treatment,
to the great advantage of economic science. Such a doctrine
is the so-called Law of Diminishing Returns, which Mill considered
“the most important proposition in Political Economy.”
“Unless this one matter,” he says, “be thoroughly understood,
it is to no purpose proceeding any further in our inquiry.”
“Were the law different, nearly all the phenomena of the production
and distribution of wealth would be other than they are.”
On the other hand, Thorold Rogers, not to speak of earlier
objectors, described the law as a “dismal and absurd theorem.”
The opinions of present-day economists appear to fluctuate
between these two extremes. The law may apparently be “a
general rule” or “a tendency” which is liable to be
“checked,”
or a particular case of the law of the conservation of energy.
If we go to Mill to discover what it is, we find that “it is not
pretended that the law of diminishing return was operative from
the beginning of society; and though some political economists
may have believed it to come into operation earlier than it does,
it begins quite early enough to support the conclusions they
founded on it.” “It comes into operation at a certain and not
very advanced stage in the progress of agriculture.” But this
very important stage in the history of a nation is not defined or
clearly illustrated. We are told that we can see “the law at
work underneath the more superficial agencies on which attention
fixes itself ”; it “undergoes temporary suspension,”
which may
last indefinitely; and “there is another agency, in habitual
antagonism” to it, namely, “the progress of civilization,”
which may include every kind of human improvement. Mill
apparently is not content with the confusion between “law”
and “agency” or “force,” but opposes the one to the other.
He is constantly speaking in terms which imply the conquering
of one law by another, a habit from which his successors have not
freed themselves; and the theory of natural processes which
appears to have satisfied him, was that when two forces come into
operation there is a partial or complete suspension of one by the
other. In modern economics “fertility” has no very definite
meaning. It may mean what is ordinarily understood by the
word — climate, rainfall, railway rates or anything else except
“indestructible powers of the soil.” To speak of “additional
labour and capital” without reference to the kind and quality
of the labour and capital, and the manner in which they are
employed, organized and directed, throws very little light on
agriculture. Every improvement involves, from a quantitative
point of view, more or less of capital or of labour, so that it is the
“antagonizing” influences, which are nearly all qualitative,
which appear to be really important. It is therefore extraordinarily
difficult at present to know what happens, or rather what
would happen if it were not prevented, when a country reaches
“the stage of diminishing returns”; what precisely it is which
comes into operation, for obviously the diminishing returns are
the results, not the cause; or how commodities “obey” a law
which is always “suspended.” Possibly the present generation
of English industrial history will furnish many illustrations of
the law of diminishing returns. We can only say that it requires
investigation and restatement.
Closely related to the law of diminishing returns is the Theory
of Rent. No economic doctrine so well illustrates the achievements
and the defects of modern economic analysis. Ricardo's
statement of the theory left upon the world an impression, not
wholly just, of singular clearness. He employed the theory
with wonderful success in unravelling the problems of his time.
Its importance has not been seriously, or at any rate successfully,
called in question. Treated at first as a doctrine peculiarly
applicable to land, with a certain controverted relevance to other
natural agents, it has been so extended that there is scarcely
any subject of economic study in which we may not expect to
find adaptations or analogies, so that Ricardo seemed to have
discovered the key of economic knowledge. But it was discovered
that there were no “indestructible powers of the soil”; that
the fertility of land in a country like England is almost entirely
the result of improvement at some time or other; that “advantage
of situation” includes very much more than the words in
their literal sense imply; that both “fertility” and “advantage
of situation” include many kinds of differential advantage;
that in some circumstances rent does not enter into the price
of agricultural and other produce, and that in others it does.
Moreover, the study of the theory of rent has had a very great
influence on all branches of economics by destroying the notion
that it is possible to draw sharp lines of distinction, or deal with
economic conceptions as though they were entirely independent
categories. That modern economic analysis is incomparably
more accurate than that of earlier times there can be no question.
But the net result of the development of the doctrine of rent is
that all problems in which this factor appears, and they embrace
the whole range of economic theory, must apparently be treated
on their merits. In its modern form the doctrine is far too
general to be serviceable without the closest scrutiny of all the
facts relating to the particular case to which it is applied. To
deal adequately with the numerous extensions or qualifications
of these and other doctrines in the hands of modern economists
would involve us in an attempt to do what we have already said
is impossible except on conditions not at present realized. It is
clear that in the interests of general economic theory we require
a vast number of special studies before an adequate restatement
can be undertaken.
It must be clearly recognized that the functions of economic
science in the present requirements of the world cannot possibly
Relations between
general economics
and special studies.
|
be discharged by treatises on economic theory. The
relations between general theory and special studies
conducted on the lines we have indicated have completely
changed. General theory never has been, and
in the nature of things never can be, the actual reflex
of the life and movement of the economic world. It
never has been, and never can be, more than an indication
of the kind of thing which might be expected in a purely
hypothetical world. When the aim of the man of affairs and the
hypothesis of the economist was unrestricted competition, and
measures were being adopted to realize it, general theory such as
the classical economists provided was perhaps a sufficiently
trustworthy guide for practical statesmen and men of business.
If only people can be got to believe in them, a few abstract
principles are quite enough to destroy an institution which it has
taken centuries to create. But a new institution cannot be
made on the same terms. The modern industrial system has
brought with it an immense variety of practical problems which
nations must solve on pain of industrial and commercial ruin.
For these problems we want, not a few old-established general
principles which no one seriously calls in question, but genuine
constructive and organizing capacity, aided by scientific and
detailed knowledge of particular institutions, industries and
classes. Just as the historical school grew up along with the
greatest constructive achievement of the 19th century, namely,
the consolidation of Germany, so the application to modern
problems of the methods of that school has been called forth by
the constructive needs of the present generation. We have
already shown how these methods, in their turn, require the aid
of general theory, but not of a general theory which tries to do
their work. In fact, every attempt to make it do so must inevitably
fail. How can such a huge mass of general propositions
as are necessarily included in a system of economics ever be
thoroughly tested by an appeal to facts? If they are not so tested,
the general theory will remain a general theory, of no practical
use in itself, until the end of time. It they are to be tested, an
indefinitely large number of special studies must be made, for
which the original materials must be collected and examined.
That is, original investigation of special problems has to be
carried out on a more gigantic scale than any economist of the
historical school ever dreamt of or the world requires, with the
certain knowledge that at the end of it all the general theory will
not correspond with the facts of life. For there is all the difference
in the world between using a body of general theory as an
indication of the factors to be considered in the study of a special
problem, and undertaking special studies with a view to testing
the general theory. If the necessary limitations of general
economic theory are recognized, most of the difficulties we have
noticed disappear. Now that the “industrial revolution” has
extended practically all over the world, so that we have several
countries carrying on production by modern methods, it is easily
possible to sketch the main features of industrial and commercial
organization at the present time, to describe the banking and
currency systems of the principal nations, their means of transport
and communication, their systems of commercial law and
finance, and their commercial policy. It is true that at present
very little work of this kind has been done in England, but
innumerable books, many of them about England, have been
written by thoroughly competent economists, in French, German
and other languages. So that no great amount of original work
is required for a reliable account of those general features of the
modern system which should form the introduction to economics.
The general theory which we require should be sketched in firm
and clear outline, leaving the detailed qualifications of broad
principles to special studies, where they can be dealt with if it is
necessary or desirable, and examined by statistical and other
tests. For such a general theory there is ample material in the
economic literature of all civilized countries. It is of the utmost
importance that the economic terms, which are also, though in
many cases with an entirely different meaning, the terms of
business and commerce, should as far as possible be used in their
common and ordinary English sense: that they should correspond
in meaning with the same words when used in description,
in law, accountancy and ordinary business. This is no doubt
a difficult matter. But some change in this direction is necessary
both in the interests of the science itself and of its practical
utility. All the materials for investigation, all the facts and
figures from which illustrations are drawn, all methods of keeping
accounts in England, assume the ordinary English tongue.
There are few if any conceptions in economics which cannot be
expressed in it without depleting the ordinary vocabulary. At
present the language of economics is for the ordinary Englishman
like a foreign language of exceptional difficulty, because he is
constantly meeting with words which suggest to his mind a whole
world of associations quite different form those with which
economic theory has clothed them. The refinements of economic
analysis, as distinguished from its broader achievements, should
be reserved for special studies, in which a technical scientific
terminology, specially devised, can be used without danger of
misconception. But in a subject like economics obscurity and
an awkward terminology are not marks of scientific merit.
Economic studies should be as relevant to existing needs as
those of engineering and other applied sciences. The scientific
study of practical problems and difficulties is (generally speaking,
and with honourable exceptions) far more advanced in almost
every civilized country than it is in England, where the limited
scale upon which such work is carried on, the indifference of
statesmen, officials and business men, and the incapacity of the
public to understand the close relation between scientific study
and practical success, contrast very unfavourably with the state
of affairs in Germany or the United States. The backwardness
of economic science has been an index of the danger threatening
the industrial and commercial supremacy of the United Kingdom.
There are very few questions of public or commercial importance
upon which the best and most recent investigations are to be
found amongst English works. This would matter very little,
perhaps, if Englishmen had a firm belief, established by actual
experience, in the soundness of their policy, the present security
of their position, and the sufficiency of their methods to strengthen
or maintain it. But this is very far from being the case. If we
take, for example, the corner-stone of the British commercial
system in the 19th century, namely, the policy of “free trade”
(q.v.), the public do not now read the economic works which
supplied the theoretical basis of that policy, and, indeed, would
Economic problems
in Great Britain.
|
not be convinced by them. The great men of the period,
Cobden and Bright, are merely historical figures.
Long before his death, Blight's references in public
speeches to the achievements of the Anti-Corn Law
League were received with respectful impatience, and Peel's
famous speech on the repeal of the corn laws would not convince
the German Reichstag or a modern House of Commons. The
result is that free trade had become by the end of the 19th century
in the main an old habit, for which the ordinary English manufacturer
could give no very reasonable explanation, whatever may
be its influence in commerce and public affairs. The doctrine of
free trade only prevailed in so far as it could be restated in terms
which had a direct relevance to the existing position of England
and existing conditions of international trade. And it was
directly challenged by the representatives of Mr Chamberlain's
school of Imperialist thought (see
Chamberlain, Joseph). It
thus became the work of economic science ruthlessly to analyse the
existing situation, explain the issues involved in the commercial
policy of different countries, and point out the alternative methods
of dealing with present difficulties, with their probable results.
The commercial policy of a state is merely the reflex of its
system of public finance (see e.g.
English Finance). The absence
of conviction in regard to British commercial policy naturally had
its counterpart in the attitude of many men to the financial
system of the country. The eulogies showered upon it in the
past were no longer considered adequate. The great increase in
recent years in British military and naval expenditure, made
necessary by the exceptional demands of a state of war and the
great development of foreign powers, was partly responsible for
the new difficulties; partly it was due to the great extension of
the functions of the state during the latter part of the 19th
century. The former causes may be considered partly permanent,
partly temporary; but those of a permanent character are likely
to increase in force, and those of a temporary character will leave
a deposit in the shape of an addition to the normal
expenditure of the central government. The extension
of government functions appeared much more likely
to continue than to be checked. Normal expenditure
might therefore be calculated to rise rather than fall. In spite
of the vast increase in national wealth, it was found a matter of
increasing difficulty to meet a comparatively slight strain without
recourse to measures of a highly controversial character; and
the search for new sources of revenue (as in 1909) at once raised,
in an acute form, questions of national commercial policy and
the relations between the United Kingdom and the colonies.
The development of the powers of the central government has
been less than that of the functions of local governing authorities.
This, again, is a movement much more likely to extend than to be
checked. Local governing authorities now discharge economic
functions of enormous importance and complexity, involving
sums of money larger than sufficed to run important states a
generation ago. The scientific study of the economics of local
administration is, however, in its infancy, and requires to be
taken up in earnest by economists. These questions of commercial
policy and local government are closely bound up with
the scientific study of the transport system. Although the
British Empire contains within itself every known species of
railway enterprise, the study of railways and other means of
transport, and their relation to the business, the commerce and
the social life of the country, is deplorably backward. It is
obvious that no inquiry into commercial policy, or into such
social questions as the housing of the poor, can be effective unless
this deficiency is remedied.
The whole social and political fabric of the British Empire
depends upon the efficiency of its industrial system. On this
subject many monographs and larger works have been published
in recent years, but dealing rather with such questions
as trade unionism, co-operation and factory legislation, than the
structure and organization of particular industries, or the causes
and the results of the formation of the great combinations,
peculiarly characteristic of the United States, but not wanting
in England, which are amongst the most striking economic
phenomena of modern times.
These are some of the questions which must absorb the energies
of the rising generation of economists. The claim of economics
for recognition as a science and as a subject of study must be
based on its relevance to the actual life of the economic world,
on its ability to unravel the practical difficulties of each generation,
and so contribute to the progress of nations.
Literature. — See also
Free Trade; Protection;
Tariff;
Commercial Treaties; Trusts;
Money; Finance; &c. The
bibliography of economics as a whole would include a history of all
the writers on the subject, and is beyond our scope here; see the
numerous articles on economic subjects throughout this work.
The article by Dr J. K. Ingram in the ninth edition of the Encyclopaedia
Britannica is still a valuable historical account. It is only
possible to mention here a few of the more recent text-books. The
most important general work published in English is Marshall's
Principles of Economics, vol. i. (1st edition, 1890; 4th edition, 1898).
J. Shield Nicholson's Principles of Political Economy (3 vols.) not
only gives a survey of economic principles since Mill's time, but
contains much suggestive and original work. The writer of this
article is much indebted to the works of Schmoller, particularly his
Grundris der allgemeinen Volkswirtschaftslehre (1900), and Adolph
Wagner, particularly his Grundlegung der politischen Ökonomie.
On the history of economic theory, Cannan's History of the Theories
of Production and Distribution (1776-1848) is an admirable criticism,
from a purely objective standpoint, of the works of the English
classical writers. The most important English works published in
recent years on general English economic history are W. Cunningham's
Growth of Industry and Commerce, and W. J. Ashley's Economic
History, while Vinogradoff's Villenage in England and The Growth of
the Manor, as well as Maitland's Domesday Studies, are of great
importance to the student of early economic institutions. D'Avenel's
Histoire économique de la propriété, &c. (1200-1800),
is a monumental
work on the history of prices in France. Other books dealing
with special subjects are likely to take a very high place in economic
literature. We may mention particularly Charles Booth's Life and
Labour of the People in London, B. S. Rowntree's Poverty, Sidney
and Beatrice Webb's History of Trade Unionism and Industrial
Democracy, and Dr Arthur Shadwell's Industrial Efficiency (1906).
These books are generally regarded as typical of the best English
work of recent years in economic investigation. We may also
mention Schloss's Methods of Industrial Remuneration, a most important
contribution to the study of the wages question; C. F.
Bastable's works on International Trade and Public Finance; George
Clare on the Money Market and the Foreign Exchanges; and A. T.
Hadley's Economics: An Account of the Relations between Private
Property and Public Welfare (1896). Studies of particular questions,
both concrete and theoretical, in foreign languages are too numerous
to specify, and much of the best modern work is to be found in
economic periodicals.
(William Albert Samuel Hewins)
Britannica Index
Economics Papers