CHAPTER I: THE HEDONISTS

I: THE PSEUDO-RENAISSANCE OF THE CLASSICAL SCHOOL

If we are to give this new doctrine its true setting we must return for a moment to our study of the Historical school. The criticism of that school, as we have already seen, was directed chiefly against the method of the Classical writers. The faith which their predecessors had placed in the permanence and universality of natural law was scornfully rejected, and the possibility of ever founding a science upon a chain of general propositions emphatically denied. Political economy, so it was decreed, was henceforth to be concerned merely with the classification of observed facts.

It would not have been difficult to foretell that the swing of the pendulum—in accordance with that strange rhythm which is such a feature of the history of thought—would at the opportune moment cause a reversion to the abstract method. That is exactly what happened. Just at the moment when Historical study seemed to be triumphantly forging ahead—that is, about the years 1872-74—several eminent economists in Austria, England, Switzerland, and America suddenly and simultaneously made their appearance with an emphatic demand that political economy should be regarded as an independent science. They brought forward the claims of what they called pure economics. Naturally enough there ensued the keenest controversy between the champions of the two schools, notably between Professors Schmoller and Karl Menger.

The new school had one distinctive characteristic. In its search for a basis upon which to build the new theory it hit upon the general principle that man always seeks pleasure and avoids pain, getting as much of the former with as slight a dilution of the latter as he possibly can.[1103] A fact of such great importance and one that was not confined to the field of economic activities, but seemed present everywhere throughout nature in the guise of the principle of least resistance, could scarcely have escaped the notice of the Classical theorists. They had referred to it simply as “personal interest,” but to-day we speak of it as Hedonism, from the Greek ἠδονή (pleasure or agreeableness). Hence the name Hedonists, by which we have chosen to designate these two schools.

The elimination of all motives affecting human action except one does not imply any desire on the part of these writers to deny the existence of others. They simply lay claim to the right of abstraction, without which no exact science could ever be constituted. In other words, they demand the right of eliminating from the field of research every element other than the one which they wish to examine. The study of the other motives belongs to the province of other social sciences. The homo œconomicus of the Classicals which has been the object of so much derision has been replaced on its pedestal. But it has in the meantime undergone such a process of simplification that it is scarcely better than a mere abstraction. Men are again to be treated as forces and represented by curves or figures as in treatises on mechanics. The object of the study is to determine the interaction of men among themselves, and their reaction upon the external world.

We shall also find that the new schools arrive at an almost identical conclusion with the old, namely, that absolutely free competition alone gives the maximum of satisfaction to everybody. Allowing for the differences in their respective points of view, to which we shall refer later on, what is this but simply a revival of the great Classical tradition?

Little wonder, then, that we find a good deal of sympathy shown for the old Classical school. Indeed, it is throughout regarded with almost filial piety.[1104]

This does not mean that the Classical doctrine is treated as being wholly beyond reproach, although it does mean that the new school could scarcely accuse it of being in error, seeing that it comes to similar conclusions itself. But what it does lay to the charge of the older writers is a failure to prove what they assumed to be true and a tendency to be satisfied with a process of reasoning which too often meant wandering round in a hopeless circle. Especially was this the case with their study of causal relations, forgetting that as often as not cause was effect and effect cause. The attempt to determine which is cause and which effect is clearly futile, and the science must rest content with the discovery of uniformities either of sequence or of coexistence.

This applies especially to the three great laws which form the framework of economic science, namely, the law of demand and supply, the law of cost of production, and the law of distribution, none of which is independent of the others. Let us review them briefly.

The law stating that “price varies directly with demand and inversely with supply” possessed just that degree of mathematical precision necessary to attract the attention of the new writers. In fact, it just served for the passage from the old to the new economics. But no sooner was the crossing effected than the bridge was destroyed. Little difficulty was experienced in pointing out that this so-called law which had been considered to be one of the axioms of political economy, the quid inconcussum upon which had been raised all the superstructure of economic theory, was an excellent example of that circular reasoning of which we have just spoken. There was a considerable flutter among the economists of the mid-nineteenth century when they found themselves forced to recognise this. However true it may be that price is determined by demand and supply, it is equally true that demand and supply are each in their turn determined by the price, so that it is impossible to tell which is cause or which is effect. Stuart Mill had already noted this contradiction, and had attempted correction in the way already described (p. 359). But he was ignorant of the fact that Cournot had completely demolished the formula by setting up another in its place, namely, that “demand is a function of price.”[1105] The substitution of that formula marks the inauguration of the Hedonistic calculus. Demand is now shown to be connected with price by a kind of see-saw movement, falling when prices rise and rising when prices fall. Supply is equally a function of price, but it operates in the opposite fashion, moving pari passu with it—rising as it rises and falling as it falls. Thus price, demand, and supply are like three sections of one mechanism, none of which can move in isolation, and the problem is to determine the law of their interdependence.

This does not by any means imply that there is no longer any place in economics for the law of demand and supply. It has merely been given a new significance, and the usual way of expressing it nowadays is by means of a supply and demand curve, which simply involves translating Cournot’s dictum into figures.

The same is true of the law stating that cost of production determines value. There is the same petitio principii here. It is easy enough to see, on the contrary, that the entrepreneur regulates his cost of production according to price. The Classical school had realised this as far as one of the elements in the cost of production was concerned, for it was quite emphatic in its teaching that price determined rent, but that rent did not determine price. It is just as true of the other elements. In other words, the second law is just as fallible as the first. It is obviously imperative that the vain quest for causal relations should be abandoned and that economists should be content with the statement that between cost of production and price there exists a kind of equilibrating action in virtue not of any mysterious solidarity which subsists between them, but because the mere absence of equilibrium due either to a diminution or an increase in the quantity of products immediately sets up forces which tend to bring it back to a position of equilibrium. This interdependent relation, which is extremely important in itself and upon which the Hedonists lay great store, is simply one example taken from among many where the value of one thing is just a function of another.

Similar criticism applies to the law of distribution, to the Classical doctrine of wages, interest, and rent. The way the Classical writers treated of these questions was extraordinarily naïve. Take the question of rent. You just subtract from the total value of the product wages, interest, and profit, and you are left with rent. Or take the question of profit. In this case you will have to subtract rent, if there is any, then wages and interest, the other component elements, and what remains is profit. Böhm-Bawerk wittily remarks that the saying that wages are determined by the product of labour apparently only amounts to this—that what remains (if any) after the other co-operators have had their share is wages. Each co-partner in turn becomes a residual claimant and the amount of the residuum is determined by assuming that we already know the share of the other claimants![1106]

The new school refuses any longer to pay honour to this ancient trinity. It is impossible to treat each factor separately because of the intimate connection between them, and their productive work, as the Hedonists point out, must necessarily be complementary. In any case, before we can determine the relative shares of each we must be certain that our unknown x is not reckoned among the known. This naturally leads them on to the realm of mathematical formulæ and equations.

All the Hedonists, however, do not employ mathematics. The Psychological school, especially the Austrian section of it, seems to think that little can be gained by the employment of mathematical formulæ. Some of the Mathematical economists, on the other hand, are equally convinced of the futility of psychology, especially of the famous principle of final utility, which is the corner-stone of the Austrian theory.[1107]

For the sake of clearness it may be better to take the two branches—the Psychological and the Mathematical—separately.

II: THE PSYCHOLOGICAL SCHOOL

The feature of the Psychological school is its fidelity to the doctrine of final utility, whatever that may mean.[1108] The older economists had got hold of a similar notion when they spoke of value in use, but instead of preserving the idea they dismissed it with a name, and it was left to the Psychological school to revive it in its present glorified form.

It must not be imagined that the term is employed in the usual popular sense of something beneficial. All that it connotes is ability to satisfy some human want, be that want reasonable, ridiculous, or reprobatory. Bread, diamonds, and opium are all equally useful in this sense.[1109]

Nor must we fall into the opposite error of thinking of it as the utility of things in general. Rather is it the utility of a particular unit of some specific commodity relative to the demand of some individual for that commodity, whether the individual in question be producer or consumer. It is not a question of bread in general, but of the number of loaves. To speak of the utility of bread in general is absurd, and, moreover, there is no means of measuring it. What is interesting to me is the amount of bread which I want. This simple change in the general point of view has effectively got rid of all the ambiguities under which the Classical school laboured.[1110]

1. The first problem that suggests itself in this connection is this: Why is the idea of value inseparable from that of scarcity? Simply because the utility of each unit depends upon the intensity of the immediate need that requires satisfaction, and this intensity itself depends upon the quantity already possessed, for it is a law of physiology as well as of psychology that every need is limited by nature and grows less as the amount possessed increases, until a point zero is reached. This point is called the point of satiety, and beyond it the degree of utility becomes negative and desire is transformed into repulsion.[1111] Hence the first condition of utility is limitation of supply.

So long as people held to the idea of utility in general it was impossible to discover any necessary connection between utility and scarcity. It was easy enough to see that an explanation that was not based upon one or other of these two ideas was bound to be unsatisfactory, but nobody knew why. As soon as the connection between the two was realised, however, it became evident that utility must be regarded as a function of the quantity possessed, and that this degree of utility constitutes what we call value.

2. Just as the notion of final utility solved one of the most difficult problems in economics, namely, why water, for example, has less value than diamonds, it also helped to clear up another mystery that had perplexed many economists from the Physiocrats downward, namely, how exchange, which by definition implies the equivalence of the objects exchanged, can result in a gain for both parties. Here at last is the enigma solved. In an act of exchange attention must be focused not upon the total but upon the final utility. The equality in the case of both parties lies in the balance between the last portion that is acquired and the last portion that is given up.

Imagine two Congoese merchants, the one, A, having a heap of salt, and the other, B, a heap of rice, which they are anxious to exchange. As yet the rate of exchange is undetermined, but let them begin. A takes a handful of salt and passes it on to B, who does the same with the rice, and so the process goes on. A casts his eye upon the two heaps as they begin mounting up, and as the heap of rice keeps growing the utility of each new handful that is added keeps diminishing, because he will soon have enough to supply all his wants. It is otherwise with the salt, each successive handful assuming an increasing utility. Now, seeing that the utility of the one keeps increasing, while that of the other decreases, there must come a time when they will both be equal. At that point A will stop. The rate of exchange will be determined, and the prices fixed by the relative measures of the two heaps. At that moment the heap of rice acquired will not have for A a much greater utility than has the heap of salt with which he has parted.

But A is not the only individual concerned, and it is not at all probable that B will feel inclined to stop at the same moment as A; and if he had made up his mind to stop before A had been satisfied with the quantity of rice given him no exchange would have been possible. We must suppose, then, that each party to the exchange must be ready to go to some point beyond the limit which the other has fixed in petto. This point can only be arrived at by bargaining.[1112]

3. Another question that requires answering is this: How is it that there is only one price for goods of the same quality in the same market? Once it is clearly grasped that the utility spoken of is the utility of each separate unit for each separate individual it will be realised that there must be as many different utilities as there are units, for each of them satisfies a different need. But if this is the case, why does a person who is famishing not pay a much higher price for a loaf than a wealthy person who has very little need for it? or, why do I not pay more when I am hungry than when I am not? The reason is that it would be absurd to imagine that goods which are nearly identical and even interchangeable should have different exchange values on the same market and especially for the same person. This law of indifference,[1113] as it is called, is derived from another law to which the Psychological school rightly attaches great importance, and which constitutes one of its most precious contributions to the study of economics, namely, the law of substitution. This law implies that whenever one commodity can be exchanged for another for the purpose of satisfying the same need, the commodity replaced cannot be much more valuable than the commodity replacing it.[1114]

For what is substitution but mutual exchange? And exchange implies equality, so that if there is a series of interchangeable goods none of them can be of greater value than any of the rest.

Consequently, if an individual has at his disposal 100 glasses of water, which is easily available everywhere except in the Sahara, perhaps, no one of these glasses, not even that one for which he would be willing to give its weight in gold were he very thirsty and that the only glassful available, will have a greater value than has the hundredth, which is worth exactly nothing. The hundredth is always there ready to be substituted for any of the others.

But the best way of getting a clear idea of final utility is not to consider the value of the object A, but of the object B, which can replace it. It becomes evident, then, that if I am about to lose some object, A, which I value a good deal but which can be perfectly replaced by another object, B, that object A cannot be much more valuable than B; and if I had the further choice of replacing it by C, C being less valuable than B, then A itself cannot be much more valuable than C.[1115]

We arrive, then, at this conclusion: The value of wealth of every kind is determined by the value of its least useful portion—that is, by the least satisfaction which any one portion of it can give.

Hitherto we have been concerned with the notion of final utility as applied to the problems of value and exchange, but has it the same effect when applied to problems of production, distribution, or consumption? The Hedonists have no doubt as to the answer, for what are production, distribution, and consumption but modifications of exchange?

Take production, for example. How is it that under a system of free competition the value of the product is regulated by its cost of production? It is because a competitive régime is by every definition a régime where at any moment one product may be exchanged for another of a similar character, the similarity in this case being simply the result of a certain transformation of the raw material. The law of substitution is operative here, and the reason why cost of production regulates value is that the cost of production at any moment represents the last interchangeable value.

The same is true of consumption, as we can see if we only watch the way in which each of us distributes his purchases and arranges his expenditure. There is evident everywhere an attempt to get the best out of life—to get all the enjoyment which our different incomes may be made to yield; here spending more on house-room and less on food, there curtailing on amusement and extending on charity, until a rough kind of equilibrium is reached where the final utility of the last exchanged objects—or, if another phrase be preferred, the intensities of the last satisfied needs—are equal. If the coin spent in purchasing the last cigar does not yield the same pleasure as the same coin yields when spent on a newspaper, the newspaper will in future probably take the place of the cigar. Consumption seems really to be a kind of exchange, with conscience for mart and desires as buyers and sellers.[1116]

Nor is the realm of distribution even beyond the reach of the utility theory. Its application to the problems of interest, wages, and rent is largely the work of American economists, especially of J.B. Clark. It is quite impossible for us to give an exposition of the subtle analyses in which the quarterly reviews of the American universities take such a delight, and which undoubtedly afford a very welcome relaxation in an atmosphere so charged with pragmatism and realism. But we must just glance at the theory of wages. Wages, like other values, must be determined by final utility. But the final utility of what, and for whom? The final utility of the services which the worker renders to the entrepreneur. Following other factors of production, the final productivity of the workers will determine their wages. That is, their final utility is fixed by the value produced by the marginal worker—no matter how worthless he may be—who only just pays the entrepreneur. The value produced by this almost supernumerary worker not only fixes the maximum which the employer can afford to give him, but also the wages given to all the other workers who can take his place, i.e. who are employed upon the same kind of work as his, although they may produce much more than he does; just as in the case of the 100 glasses of water the least valuable glassful determines the value of all the rest.[1117]

Thus is the productivity theory of wages at once confirmed and corrected. But this time it is the productivity of the least productive worker, of the individual who barely keeps himself. No wonder the theory has lost its optimistic note. Somehow or other it does not seem very different from the old “brazen law.”

The rate of interest follows a similar line—the marginal item of capital fixing the rate. It is even more true of capital, which is more completely standardised, with the result that the principle of substitution works much more easily.[1118]

Rent is treated at greater length in the next chapter.

Gradually we begin to realise how the observation of certain facts apparently of a worthless or insignificant character, such as the substitution of chicory for coffee or the complete uselessness of a single glove, enabled the Psychological school to propound a number of general theories such as the law of substitution and the doctrine of complementary goods which shed new light upon a great number of economic questions. There is something very impressive about this deductive process that irresistibly reminds one of the genie of the Thousand and One Nights, who grew gradually bigger and bigger until he finally reached the heavens. But then the genie was nothing but flame. It still remains to be seen whether this is equally true of the Hedonistic theories.

III: THE MATHEMATICAL SCHOOL [1119]

The Mathematical school is distinguished for its attachment to the study of exchange, from which it proposes to deduce the whole of political economy. Its method is based upon the fact that every exchange may be represented as an equation, A = B, which expresses the relation between the quantities exchanged. Thus the first step plunges us into mathematics.

However true this may be, the application of the method must necessarily be very limited if it is always to be confined to exchange. It is, however, a mistake to suppose that this is really the case, and one of the most ingenious and fruitful contributions made by the new school was to show how this circle could be gradually enlarged so as to include the whole of economic science.

Distribution, production, and even consumption are included within its ambit. Let us take distribution first and inquire what wages and rent are. In a word, what are revenues? A revenue is the price of certain services rendered by labour, capital, and land, the agents of production, and paid for by the entrepreneur as the result of an act of exchange.

And what is production? It is but the exchanging of one utility for another—a certain quantity of raw materials and of labour for a certain quantity of consumable goods. Even nature might be compared to a merchant exchanging products for labour, and Xenophon must have had a glimpse of this ingenious theory when he declared that “the gods sell us goods in return for our toil.” The analogy might be pushed still farther, and every act of exchange may be considered an act of production. Pantaleoni puts it elegantly when he says that “a partner to an exchange is very much like a field that needs tilling or a mine that requires exploiting.”[1120]

And what are capitalisation, investment, and loan but the exchange of present goods and immediate joys for the goods and enjoyments of the future?

It was a comparison instituted between the lending of money and an ordinary act of exchange that led Böhm-Bawerk to formulate his celebrated theory of interest. Böhm-Bawerk, however, is a representative of the Austrian rather than the Mathematical school.

Even consumption—that is, the employment of wealth—implies incessant exchanging, for if our resources are necessarily limited that must involve a choice between the object which we buy and that which with a sigh we are obliged to renounce. To give up an evening at the theatre in order to buy a book is to exchange one pleasure for another, and the law of exchange covers this case just as well as any other.[1121] It is the same everywhere. To pay taxes is to give up a portion of our goods in order to obtain security for all the rest. The rearing of children involves the sacrifice of one’s own well-being and comfort in exchange for the joys of family life and the good opinion of our fellow-men.

It is not impossible, then, to discover among economic facts certain relations which are expressible in algebraical formulæ or even reducible to figures. The art of the Mathematical economist consists in the discovery of such relations and in putting them forth in the form of equations.

For example, we know that when the price of a commodity goes up the demand for it falls off. Here are two quantities, one of which is a function of the other.[1122] Let us see how the law of demand in its amended form would express this.

If along a horizontal line A B we take a number of fixed points equidistant from one another to represent prices, e.g. 1, 2, 3, 4, 5 … 10, and from each of these points we draw a vertical line to represent the quantity demanded at that price, and then join the summits of these vertical lines, which are known as the ordinates, we have a curve starting at a fairly high point—representing the lowest prices—and gradually descending as the prices rise until it becomes merged with the horizontal, at which point the demand becomes nil.[1123]

What is very interesting is that the curve is different for different products. In some cases the curve is gentle, in others abrupt, according as the demand, as Marshall puts it, has a greater or lesser degree of elasticity. Every commodity has, so to speak, its own characteristic curve, enabling us, at least theoretically, to recognise that product among a hundred.[1124]

Geometrical figures can always take the place of equations, for every equation can be expressed in the form of a curve. Geometrical representation makes a quicker appeal to the eye, and it is extremely useful where people are not conversant with the calculus which is frequently employed by Cournot and other Mathematical writers. But it is hardly as fruitful, for a geometrical figure can only trace the relation between two quantities, one of which is fixed and the other is variable, or between three at most, when two would be variable. Even in this case recourse would be necessary to projections, and the figures in that case would not be very clear. In the case of algebraical formulæ, on the other hand, we can have as much variation as we like provided we have as many equations as there are variables.

We would naturally expect the supply curve to be just the inverse of the demand curve, rising with a rising price and descending with a falling one, so that by the time the price is zero supply is nil, whereas the demand is infinite.[1125]

But it is not quite correct to regard it as merely the inverse of the demand curve. A supply curve is really a much more complicated affair, because supply itself depends upon cost of production, and there are some kinds of production—agriculture, for example—where the cost of production increases much more rapidly than the quantity produced. In industry, on the other hand, the cost of production decreases as the quantity produced increases.

Mathematical political economy, not content with seeking relations of mutual dependence between isolated facts, claims to be able to embrace the whole field within its comprehensive formulæ. Everything seems to be in a state of equilibrium, and any attempt to upset it is immediately corrected by a tendency to re-establish it.[1126] To determine the conditions of equilibrium is the one object of pure economics.

The most remarkable attempt at systematisation of this kind was made by Professor Walras, who endeavoured to bring every aspect of the economic world within his formula, a task almost as formidable as that attempted by Laplace in his Mécanique céleste.[1127]

Let us imagine the whole of society included within one single room, say the London Stock Exchange, which is full of the tumult of those who have come to buy and sell, and who keep shouting their prices. In the centre, occupying the place usually taken up by the market, sits the entrepreneur, a merchant or manufacturer or an agriculturist, as the case may be, who performs a double function.

On the one hand he buys from producers, whether rural or urban, landlords, capitalists, or workers, what Walras calls their “productive services,” that is, the fertility of their lands, the productivity of their capital or their labour force, and by paying them the price fixed by the laws of exchange he determines the revenue of each; to the proprietor he pays a rent, to the capitalist interest, to the workman wages. But how is that price determined? Just as at the Exchange all values whatsoever are determined by the law of demand and supply, so the entrepreneur demands so many services at such and such a price and the capitalist or workman offers him so many at that price, and the price will rise or fall until the quantity of services offered is equal to the quantity demanded.

The entrepreneur on his side disposes of the manufactured goods fashioned in his factory or the agricultural products grown on his farm to those very same persons, who have merely changed their clothes and become consumers. As a matter of fact the proprietors, capitalists, and workers who formerly figured as the vendors of services now reappear as the buyers of goods. And who else did we expect the buyers to be? Who else could they be?

And in this market the prices of products are determined in just the same fashion as we have outlined above.

All at once, however, a newer and a grander aspect of the equilibrium comes to view. Is it not quite evident that the total value of the productive services on the one hand and the total value of the products on the other must be mathematically equal? The entrepreneur cannot possibly receive in payment for the goods which he has sold to the consumers more than he gave to the same persons, who were just now producers, in return for their services. For where could they possibly get more money? It is a closed circuit, the quantity that comes out through one outlet re-enters through another.

With the important difference that it keeps much closer to facts, the explanation bears a striking resemblance to Quesnay’s Tableau économique.[1128]

We have two markets in juxtaposition,[1129] the one for services and the other for products, and in each of them prices are determined by the same laws, which are three in number:

(a) On the same market there can be only one price for the same class of goods.

(b) This price must be such that the quantity offered and the quantity demanded shall exactly coincide.

All these laws are mathematical in character and involve problems of equilibrium.

In some such way would the new school reduce the science of economics to a sort of mechanism of exchange, basing its justification upon the contention that the Hedonistic principle of obtaining the maximum of satisfaction at the minimum discomfort is a purely mechanical principle, which in other connections is known as the principle of least resistance or the law of conservation of energy. Every individual is regarded simply as the slave of self-interest, just as the billiard-ball is of the cue. It is the delight of every economist as of every good billiard-player to study the complicated figures which result from the collision of the balls with one another or with the cushion.[1130]

Another problem of equilibrium is to discover the exact proportion in which the different elements combine in production. Jevons compares production to the infernal mixture which was boiled in their cauldron by the witches in Macbeth. But the ingredients are not mixed haphazard, and Pareto thinks that they conform to a law analogous to the law known in chemistry as the law of definite proportions, which determines that molecules shall combine in certain proportions only. The combination of the productive factors is perhaps not quite so rigidly fixed as is the proportion of hydrogen and oxygen which goes to form water. Similar results, for example, may be obtained by employing more hand labour and less capital, or more capital and less hand labour. But there must be some certain proportion which will yield a maximum utility, and this maximum is obtainable in precisely the same way as in other cases of equilibrium—that is, by varying the “doses” of capital and labour until the final utility in the case both of capital and labour becomes equal. Generally speaking, this is the law that puts a limit to the indefinite expansion of industry, for whenever one element runs short, be it land or capital, labour or managing ability or markets, all the others are directly affected adversely and the undertaking as a whole becomes more difficult and less effective. Pareto rightly enough attaches the greatest importance to this law, and we have only to remember that it is the direct antithesis of the famous law of accumulation of capital to realise its full significance.

There are several other cases of interdependence to which the new school has drawn attention, as, for example, that of certain complementary goods whose values cannot vary independently. What is the use of one glove or one stocking without another, of a motor-car without petrol, of a table service without glasses? Not only is this true of consumption goods; it also applies to production goods. The value of coke is necessarily connected with the value of gas, for you cannot produce the one without the other, and this applies to all by-products. The possibility of utilising a by-product always lowers the price of the main commodity.

IV: CRITICISM OF THE HEDONISTIC DOCTRINES

The triumph of the new doctrines has been by no means universal. England, Italy, and Germany, and even the United States, where one would least expect enthusiasm for abstract speculation, have supplied many disciples, and several professorial chairs and learned reviews have been placed at their disposal. But up to the present France seems altogether closed to them. Not only was Walras, the doyen of the new school, forced to leave France to find in foreign lands a more congenial environment for the promulgation of his ideas, but until recently it would have been quite impossible to mention a single book or a single course of lectures given either in a university or anywhere else in which these doctrines were taught or even criticised.[1131]

We might have understood this antipathy more easily if France, like Germany, had already been annexed by the Historical school. There would have been some truth in a theory of incompatibility of tempers under circumstances of that kind. But the great majority of French economists were still faithful to the Liberal tradition, and one might naturally have expected a hearty welcome for a school that is essentially Neo-Classical and pretends nothing more than to give a fuller demonstration of the theories already taught by the old masters.[1132]

The mere fact, however, that they presumed to draw fresh lessons or to deduce new principles from those already formulated by the older writers appeared an unwarranted interference with doctrines that had hitherto seemed good enough for everyone. Criticism of that kind, of course, is not worth serious attention.

An easier line of criticism, and one very frequently adopted, is to maintain that the wants and desires of mankind are incapable of measurement and that mathematical causations can never be reconciled with the doctrine of free will. But such claims as these were never put forward by the Mathematical school. On the contrary, it has always recognised that every man is free to follow his own bent—trahit sua quemque voluptas—merely inquiring how man is to act if he is to obtain the maximum satisfaction out of the means at his disposal and to overcome the obstacles that stand in his way. Neither has it ever ventured to say that such and such a man is forced to sell corn or to buy it, but simply that if he does buy or sell it will be with a determination to make the best of the bargain, and that such being the case the buying or selling will take place in such and such a fashion. It further claims that the action of a number of individuals under similar circumstances is equally calculable. So is the movement of the balls on the billiard-table, but that does not interfere with the liberty of the players.[1133]

Nor do they pretend to be able to measure our desires. What they do—and it is not so absurd after all, because we are all doing it—is to express in pounds, shillings, and pence the value we put upon the acquisition or loss of an object that satisfies our desire. Moreover, the Mathematical school does not make much use of numbers, but confines itself to algebraical notation and geometrical figures—that is, to the consideration of abstract quantities. To write down a problem in the form of a mathematical equation is to show that the problem can be solved and to give the conditions under which solution is alone possible. Beyond this the economist never goes. He never tries to fix the price of corn, whatever it may be; he leaves that to the speculators.[1134]

From the other side—that is, from the historians, interventionists, solidarists, socialists—comes criticism which is quite as bitter and not a whit easier to justify. The Hedonistic doctrine appears to them simply as a fresh attempt to restore the optimistic teaching of the Manchester school, with its individualism and egoism, its free competition and general harmony, its insidious justification of interest, rent, and starvation wages—in the name of some imaginary entity which they call marginal utility. In short, it looks just like another proof of the thesis that the present economic order is the best possible—a proof that is all the less welcome seeing that it claims to be scientific and mathematically infallible.

This sort of criticism is nothing less than caricature. It would be futile to deny that the new school has undertaken the task of carrying on the work of the Classical writers, but what possible harm can there be in that? The royal road of science often turns out to be nothing better than a very narrow path—but it does lead somewhere. There would be no progress in economic science or in any other if every generation were to throw overboard all the work done by its predecessors. What the Hedonistic school has tried to do is to distinguish between the good and the bad work of the Classical writers and to retain the one while rejecting the other.

The main object of the equilibrium and final utility theories is not to justify the present economic régime, but merely to explain it,[1135] which is quite a different matter. But it does happen in this case that the explanation justifies the conclusion that under the conditions of a free market the greatest good of the greatest number would naturally be secured. The term “good,” however, is used in a purely Hedonistic and not in the ethical sense. No attention is paid to the pre-existing conditions of the exchange, and none is bestowed upon its possible consequences. The old-time bargain between Esau and Jacob, when the former sold his birthright for a mere mess of pottage, gave the maximum of satisfaction to both, even to Esau, of whom it is related that he was at the point of death, and to whom accordingly the pottage must have been of infinite value. Even if Jacob had offered him a bottle of absinthe instead the result would have been equally satisfactory from a Hedonistic standpoint. The theory takes as little account of hygiene as it does of morals.

The Hedonist, by way of amendment, might suggest that Esau would have made a better bargain if there had been, not one, but several Jacobs offering the pottage, which helps to explain why they are so partial to competition and so strongly opposed to monopoly.[1136] No Hedonist would deny that Esau was exploited by Jacob; but, on the other hand, they would point out that there is no necessity to imagine that society is made up only of Esaus and Jacobs.[1137]

The same thing applies to Böhm-Bawerk’s celebrated theory of interest. Indeed, Böhm-Bawerk quite definitely states that he merely wants to discover some explanation of interest, but does not anticipate that he will be able to justify it, and in that spirit he condemns the ethical justifications that were attempted some centuries back. His object is to show that interest is neither due to the productivity of capital nor to the differential advantages enjoyed by its possessor. Neither is it a tax levied upon the exploited borrower: it is simply a time-payment. In other words, it represents the difference between the value of a present good and the same good on some future occasion. It is just the result of exchanging a present good for a future one. A hundred francs a year hence are not equal in value to a hundred francs here and now. To make them equal we must either add something by way of interest to the future item or take away something by way of discount from the present one.[1138]

Turning to the theory of wages, according to which the wages of each class of producers is supposed to be determined by the productivity of the marginal worker in that class, we are struck by the fact that it is only a little less pessimistic than the old “brazen law.” What it really implies is that the marginal worker—the worker whom the entrepreneur is only just induced to employ—consumes all that he produces.

The Hedonistic school, in short, has no theory of distribution, neither does it seem very anxious to have one. It speaks, not of co-sharers, but of productive services, whose relative contributions it is interested to discover. But it is one thing to know exactly what fraction of the work is due to a certain unit of capital or a given individual workman, and quite another to know whether workers or capitalists are being unfairly treated.

The best proof that the Hedonists are not mere advocates of laissez-faire is the general attitude of the leaders. It is true that the Austrian school has always shown itself quite indifferent to the social or working-class question,[1139] as it is sometimes called, but it certainly has a perfect right to confine itself to pure economics if it wishes. The other leaders of the school, however, have clearly shown that the method followed need involve no such approval or acquiescence. Not to mention Stanley Jevons, who in his book Social Reform makes a very strong case for intervention, we have also Professor Walras, who stands in the front rank of agrarian socialists. Leaving aside merely utilitarian considerations, he points out that in the interest of justice, which, as he has been careful to emphasise, involves quite a different point of view, he wants to establish a régime of absolutely free competition. But how is this to be accomplished? Merely by means of laissez-faire, as the old Liberal school had thought? Not at all. It can only be done through the abolition of monopoly of every kind, and land monopoly, which is the foundation of every other, must go first. The reform advocated in his Économie sociale consists of two items, land nationalisation and the abolition of all taxation. The two items are intimately connected because the rents now become the possession of the State will take the place of the taxes, and the object of both is the same, namely, the extension of free competition by securing to every citizen the full produce of his work. Under existing conditions the producer is doubly taxed—in the first place by the landowner and then by the State.[1140] Moreover, when we remember that the point of equilibrium in Walras’s system occurs just where the selling price exactly coincides with the cost of production—in other words, where profit is reduced to zero—we begin to realise how far it is from anything in the nature of an apology for the present condition of things.

Vilfredo Pareto, another representative of this school, although ultra-individualistic in his opinions and extremely hostile to interventionism or solidarity, takes good care not to connect his personal opinion with the Hedonistic doctrines. As a matter of fact he thinks that, theoretically at least, the maximum of well-being might be equally attainable under a collectivist régime, although he does not think that collectivism is yet possible. But this opinion is founded upon “ethical and other considerations which are quite outside the scope of economics.”[1141]

M. Pantaleoni, who soars higher still into the realm of pure, transcendental science, ventures to declare that the substitution of purely altruistic motives for merely selfish ones would involve about as much change in the calculation as would the substitution throughout of a plus for a minus sign in an algebraical equation. All extremes meet. Complete disinterestedness and absolute egoism would necessarily work out very much the same. Devotion to duty would replace the clamour for rights; sacrifices would be exchanged instead of utilities. But the laws determining their exchange would still be the same. The Hedonists are not so much concerned with the morality of such laws as with the productive capacity of a given economic state, just as in the case of a piece of machinery the engineer’s sole concern is to gauge the output of that machine.

But the most serious criticism passed upon the work of the school is that at the end of the reckoning nothing has been discovered that was not already known, to which the Hedonists reply that they have at least succeeded in making certain what was only tentative before. The discovery of truth appears to be an intermittent process, and the first vague presentiment is often as useful as the so-called scientific discovery. Astronomy, which is the most perfect of the sciences, has progressed just in this way. The older economists felt fully convinced that the régime of free competition was best, but they gave no reason for the faith that was in them and no demonstration of the conditions under which the doctrine was true. Such a demonstration the Mathematical economists claim to have given by showing that a régime of free competition is the only one where a maximum of satisfaction is available at a minimum of sacrifice for both parties. The same consideration applies to the law of demand and supply, the law of indifference, cost of production, wages, interest, rent, etc. To have given an irrefutable demonstration of theories that were formerly little better than vague intuitions [1142] or amorphous hypotheses is certainly something. We may laugh as much as we like at the homo œconomicus, who is by this time little better than a skeleton, but it is the skeleton that has helped the science to stand upright and make progress. It has helped forward the process from the invertebrate to the vertebrate.

But admitting that all these doctrines have been definitely proved, as the Hedonists claim they have, is the science going to profit as much as they thought by it? Somebody has remarked that mathematics is a mere mill that grinds whatever is brought to it. The important question is, What is the corn like? In this case it consists of a mass of abstractions—a number of individuals actuated by the same selfish motives, alike in what they desire to get and are willing to give,[1143] the assumed ubiquity of capital and labour, facility for substitution, etc. It is possible enough that the flour coming from the mill may not prove very nutritious. When ground out the result would at any rate be as unlike reality as the new society outlined by Fourier, the Saint-Simonians, or the anarchists, and its realisation quite as improbable, unless we presuppose an equally miraculous revolution. The Hedonists frankly recognise this, and in this respect they show themselves superior to the Classical economists, who when they talk of free competition believe that it actually exists.[1144]

But however sceptical they are about the possibility of ever realising all this, they are somewhat emphatic about the virtues of the new method, and they are not exempt, perhaps, from a certain measure of dogmatic pride which irresistibly reminds one of the Utopian socialists. Could we not, for example, imagine Fourier writing in this strain: “What has already been accomplished is as nothing compared with what may be discovered” (by the application of the mathematical method);[1145] or “The new theories concerning cost of production have the same fundamental importance in political economy that the substitution of the Copernican for the Ptolemaic system has in astronomy”?[1146] We have already called attention to the comparison of Walras’s system with Newton’s Principia—all of which rather savours of enthusiasm outrunning judgment.

While recognising the very real services which the Mathematical and Austrian schools have rendered to the science, and admitting that they mark an era in the history of economics which can never be forgotten, we cannot do better than conclude with the advice of an economist who is himself an authority both in the Mathematical and Classical schools, and who is therefore well qualified to judge: “The most useful applications of mathematics to economics are those which are short and simple and which employ few symbols; and which aim at throwing a bright light on some small part of the great economic movement rather than at representing its endless complexities.”[1147]