Encyclopaedia Britannica, 11th Edition, "Echinoderma" to "Edward, prince of Wales" / Volume 8, Slice 10

by Various

In a subject like economics it must always be very difficult to decide how far a departure from the traditional form and expression of its main doctrines is necessary or desirable. No one who is really experienced in economic Economics a conservative science. investigation cares to emphasize the originality, still less the revolutionary character of his own work. It is 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, on its relevance to the actual life of the economic world, on its ability to unravel the social and economic Some recent developments of economic theory. 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; be discharged by treatises on economic theory. The relations between general theory and special studies Relations between general economics 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 from 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, Bright’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 Commerce and finance. 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.