A History of Economic Doctrines / from the time of the physiocrats to the present day

by Charles Gide; Charles Rist

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.