In conversation recently, one of America’s most noted scientists was discussing economics with one of America’s most noted historians. The scientist observed that whereas medicine had made enormous advances in the past fifteen hundred years, economics had made no comparable progress; and he attributed it chiefly to a single fact. Medicine always relates itself ultimately to a patient who is sick in bed; the dominant problem is always that of a man who is in trouble and wants to get out. Economists for their part rarely meet an individual who is in difficulties and then funnel their learning toward the single task of doing something about his individual difficulties. The historian observed that while a man’s physical condition was complicated in the extreme, it was relatively simple compared to his economic relationships; perhaps there was some excuse for the economist. The dismal scientist of necessity must take into account every element; the illness of the particular patient, for instance, is one such fact among many.
There the colloquy might end were it not for the speculations of another scientist, Dr. Alexis Carrel, whose central thesis, brilliantly expressed in “Man the Unknown,” has been that an individual, however you touch him, combines in himself all the forces present in the world today. It is true that his illness may be an economic factor. But it is quite as likely that his economic status has a good deal to do with his illness. Therefore, Dr. Carrel argues, either in the physical or the social sciences the central idea must be the state of man; and there is no possibility of drawing a dividing line.
When this sort of discussion about economics goes on among thoroughly capable men in other fields it is high time for economists to pause and take account of stock. This essay is no attempt to do that job. It is, however, an attempt to work out a line of march which conceivably may connect the theoretical speculations of economists with the practical problems of individuals, in the hope that a new approach may prove useful.
Some historical background is always enlightening when a new standpoint is sought.
Modern economics largely takes off from Adam Smith and his “Wealth of Nations.” This was the magnificent attempt to rationalize in terms of property the doctrine of individual freedom and of the rights of man which was beginning to make headway on the Continent at the end of the eighteenth century. But it was far from theoretical. Adam Smith had made his reputation as a writer on moral philosophy. He was struggling with the troubles arising in considerable degree from restraints on free enterprise that had survived in England from Elizabethan times. “The Wealth of Nations” was not exposition. It was a tract. Like most tracts it did not attain instant success; its great acceptance was reserved until Adam Smith was safely in his grave. Had he lived, Smith would have found his ideas succeeding probably beyond his wildest dreams; and it is at least a fair question whether he would not have rubbed his eyes at many of the interpretations given by his later disciples. In that respect at least, Adam Smith and Karl Marx met on common ground,
The point is that Smith had become violently interested in the state of individual merchants in England; and when he wrote he was probably thinking more about them than about the creation of an ex cathedra system.
He was followed by Ricardo; and Ricardo was not an economist but a stock broker. Then, as now, stock brokers were irresistibly led to speculation about economics if only because of their vivid and immediate day-to-day interest in why the prices of certain stocks or commodities go up and down.
A contemporary of Ricardo was Malthus. He could be said to have been primarily a student of economics; but his interest undoubtedly grew from his preoccupation with the problem of relief in England. Much of his life was spent in abolishing and reorganizing the Elizabethan “poor laws”; this led him to ask why there were paupers in England, to advocate the limitation of population, and to propose tariffs to protect farm products in the United Kingdom.
From there on the discussion becomes progressively more theological in tone and less practical, until the savage thrust of Karl Marx in 1865 brought the discussion back to the clinical test of what happened to laborers and farmers; after which the classical school and the Marxian school run contemporaneously.
The logical result of theoretical speculations arrived when Marshall undertook to restate and synchronize the classical school founded on Adam Smith; and from his logic there came into existence the so-called school of “mathematical economics,” which came into full recognition almost at the time of Marshall’s death, just after the World War. In like manner the Marxian school was having a strange and brilliant afterglow in the sardonic descriptive work of Thorstein Veblen in the United States. Yet even Veblen, who psychologically is not unrelated to Marx, was looking for the theory, whereas Marx was looking at the laborer—a curious commentary on the inevitable desire of men to escape from problems and to find refuge in the world of pure logic.
Now any economist of the classical school labors under one particular difficulty. (Actually the same difficulty exists for his Marxian brethren, though the conflict is not yet as apparent.) His supposed laws of economics are invariably upset by laws of men. What happens is that, as the economic process bears heavily on an individual or a group of individuals, these people resist. You may say that the efficient will survive and make profits; that the less efficient will survive and make less profits; that there is a margin which allows some people to hang on in good times and to go under in bad times; and that there is a submerged group never quite able to make the grade. This, you will argue, is a natural order of things because a clever man will always outdistance a fool; and an honest man will always have better credit than a knave. Despite this, even the very efficient will try, not only to take profits arising from their cleverness and strength, but also to increase their profits by getting any artificial advantage they can from a complaisant congress or state or dictator. The people who are on the narrow edge, though dismissed by the economists as “marginal,” decline to enjoy the process. They get together and organize, using whatever political tools they can muster to safeguard themselves. They will, accordingly, ask for protective tariffs, or for a monopoly, or for a state subsidy, or for any other advantage that they can get.
It is in vain that the philosopher argues with them that this does not make for a sound body politic; or that in the end everyone suffers. They are taking care of themselves in the only way they know. Corporations will ask for laws favoring their financial operations and their expansion. Country storekeepers will band together to ask for laws taxing chain stores out of existence. Farm organizations will ask for subsidies; inefficient producers will seek embargoes on the imports of foreign products.
We may therefore assume as our first point that in any study of economics an automatic force is developed which will upset the balance supposed to be created by normal economic transactions.
To date, this factor has not been sufficiently taken into account by economic students. Thunders of economic logic are loosed to demonstrate that these individuals are misguided, and that the artificial measures they ask are wrong. But it is not ordinarily accepted that the desire of a group of textile producers to have a high tariff, or the desire of a railway labor union to make more jobs, is quite as much part of the economic process as is the act of manufacture of cloth, or the working out of a wage rate for a crew of trainmen. Is it not conceivable that in the new economics we should concern ourselves a little with what happens when the merchant’s mill goes under or what happens when the trainman loses his job? It might be found that the motive of profit or gain which is supposed to inspire the manufacturer to invest his capital and produce, or the trainman to work, is minor, compared to the black fear which he and his family and friends have of being relegated to an economic death.
For this reason, perhaps, we are unrealistic in not examining with great care the economic doctrines of the dictatorships, such as Germany, Italy, and Russia. We may note, and reserve for further judgment, a feeling that their policies are essentially wrong and will ultimately be disastrous. But that does not relieve us from the necessity of understanding why these doctrines command acquiescence—an acquiescence so wide that within such countries systems can be created which simply leave out the theories on which the so-called classical economics is constructed.
There is no mistaking the fact that something—whether it comes under the head of economics or politics or religion or psychology—has happened when a state definitely adopts a new line: when it claims that it is interested in every individual, whoever he is and wherever he is. We may not necessarily have to pass upon the reasons for that interest. It was not so long ago that the Catholic Church insisted more or less on the proposition that every individual was entitled to a place in the scheme of things because he had an immortal soul which should ultimately be destined for the Kingdom of God; and that this produced some very definite duties to see that he was at least tolerably well taken care of on earth. Much of the appeal of communist philosophy lies in this same universality: in theory (though probably not in practice) every individual has standing merely because he is an individual. One supposes that in totalitarian states like Germany each individual is entitled to his place—partly because he is an individual for military purposes and partly because he is an integral factor in the entire production of the state; partly also because, if he is also a good Nazi, the doctrine of the ruling group is strengthened. These doctrines may be and often are mutually exclusive in themselves. But the results they produce in terms of economics are often surprisingly similar.
Can it be said that the resistance leading to protective legislation which is familiar to democracies, or the mere universal conceptions of their states, cuts across or violates economics? Possibly it may be that there are no universal rules in economics; that if we are looking for absolutes we have to look deeper and find them in the motivations of individuals. If that were ever assumed it would be discovered that the fear of a workman that he might lose his job, coupled with his ability to get together with a few million other workmen and compel the passage of a law, was quite as important in building an economic philosophy as, let us say, the law of supply and demand.
The point is merely this: every motive which leads men to act in the economic sphere is potentially as important as any other motive.
Another and more forceful way of stating the question opens a still wider argument. We might attempt to redefine economics. Classically, economics is the science of the exchange of goods and services. But conceding that we admit political and other similar factors, we have to qualify the definition somewhat. Desires—good, bad, and indifferent —come into play. We often find economics appearing as an attempt to describe and analyze the effect of human desires, however they may be made effective, upon men and things, with specific interest in production, exchange, and distribution.
But this opens an enormously wide vista. It was Lawrence Dennis who made the point some years ago that the fundamental forces which guided economics were philosophical and emotional. This is a flat contradiction of the teaching of that large and extremely respectable group which holds that economic motives furnish the great and only interpretation of history. As school children we were taught that Columbus and his followers wanted a trade route to India because the Turks had cut the overland routes, forcing Western Europe to look to the sea for communication. Actually it developed later that the overland routes were not cut until some ten years after Columbus’s first voyage; which is another way of saying that there was a desire to explore sufficiently great to interest several European powers before economics compelled that desire. It would, I think, be extremely difficult to explain Mohammedanism entirely in terms of economics; yet the Koran undeniably changed the economics of the mediaeval world. That philosophical and spiritual forces must either create or conform to a system of economics which permits survival is obvious. But it has long since ceased to be a proven fact that they are solely a product of economic necessities.
If, for instance, a singularly intelligent and singularly persuasive enemy desired to destroy the economy of the United States, the quickest way he could do it would be to persuade this dynamic nation that the true end of man was contemplation; that instead of working at jobs, riding in automobiles, and going to moving pictures, the greatest joy in life consisted in filling one’s stomach and looking at the sky and stars. American industry would fall to pieces within six months if the doctrine were generally accepted and people began to find an appropriate tree under which to consider the infinite.
By now, our new student of economics has considerably enlarged his range. Instead of thinking primarily of a seller who has goods or services to sell, seeking a buyer who proposes to purchase, he is forced to consider a man who has a set of mixed emotions going on in his head and heart. These emotions will determine how much he wants to work or buy —with a minimum limit of the absolute necessities for subsistence, and a maximum limit of the completest physical satisfaction that can be given by material possessions or sensations. Our student will be forced to consider a producer or seller who is interested not in profit but in life; who may— reasonably or unreasonably—desire to produce for the highest degree of profit, or, conceivably, for the mere joy of service or patriotism or devotion to party doctrine, provided he is allowed to live. Within those sweeping ranges any development of the subject is possible. In this analysis economics has to be just as interested in intellectual or spiritual forces as it is in the statistics of production and consumption, since any one of these forces may change either the supply or the demand or both.
By way of diversion it is worthwhile to examine this enlarged concept of economics in terms of a discussion going on today. This is the problem of rigidity of price which, surprisingly enough, recently leaped from the classroom to the front pages of the newspapers.
The classical doctrine of price rigidity is, of course, that it is wrong. When the supply is greater than the effective demand, the price should come down. This makes the product or service available to a larger number of people; consumption increases; the supply is thus brought into equilibrium by an enlarged demand. If, however, the price is held rigid in spite of the oversupply, there is no corresponding increase in demand and a large part of the product goes to waste. Factories are shut down; unemployment results; and only when the ultimate law is at length recognized, the price greatly reduced, and the accumulated surplus taken off the market, does the balance re-establish itself and does production go forward.
Gardiner C. Means, a brilliant economist working for the National Resources Committee a few years ago, threw a purely factual bombshell into this theory when he printed a little study of the actual behavior of prices during the depression of 1929-33. Without comment, he pointed out that in a modern industrial society this elastic response did not take place. Actually, in manufactured products (and for that matter in wage rates as well) prices held substantially to their old levels. It was consumption that declined. This meant, in substance, that the price of steel and other similar products remained as high as they were before; and hourly wage rates remained where they were. Instead, the steel plants stopped producing steel and the worker, having a nominal wage rate as his only consolation, was laid off for tremendously long periods. Right or wrong, this was what happened; which is another way of saying that while the economist may have been right as a matter of theology, his law did not work in action. Or at all events, if it did work, it worked so slowly as to be of relatively little practical use.
The prevailing explanation has been that large-scale industry is not highly competitive; that either through monopolistic organizations or because of trade agreements, the producers desired to keep prices from falling, preferring instead to close their plants. The leftist writer, Ferdinand Lundberg, attempted to find the inevitable scapegoat, and blamed the result largely on the so-called sixty families. Assistant Attorney General Robert H. Jackson insisted that what was needed was violent application of the anti-trust laws. While this debate was going on, another resistance of the type noted earlier in this essay appeared. Organized labor declined to make any change in its “price,” asserting, among other things, that the price of a commodity is one thing, but that the price of human life quite another. The economic desire for flexibility, translated into a wage rate, bore too directly on human beings. As a consequence, organized labor declined to join in any general price-cutting arrangement if it were to affect labor’s “price.” The realistic approach came, as usual, from President Roosevelt. He cut under the theory that a wage rate was a price at all. In his view, the actual income of a family was the important thing. A plasterer who got eighteen dollars a day but who worked only 60 days in the year might actually be better off if he could be guaranteed, say, 150 days’ work in the year at a lower “price.” There the discussion rests to date; but it is a good illustration of the problem under consideration.
It would be easy to say that this is a mere factor of large organization. The steel industry is, by hypothesis, composed of large units. Labor unions are great and powerful. Should we not find a different situation were production reduced to small and highly competitive unions?
Unfortunately for this theory, a parallel illustration of similar resistance is also going on today in one of the most highly competitive occupations known—agriculture. Price flexibility works in farm products if it works anywhere. The greater the supply, the lower the price. There is no monopoly in the growing of cotton or wheat. But there is a political line which can be followed; and farm organizations promptly develop the same resistance to changing their prices as does the steel manufacturer or Mr. John L. Lewis. Specifically, they have steadily sought legislation which by a process of subsidy or surplus control would produce the price level to which they were accustomed. They argue much as does organized labor that a reduction in price to them is a reduction in life itself. The vicissitudes of intellectual economics are a matter for classroom discussion. The doctrine that men who worked and produced and kept their obligations to society were entitled to be taken care of was the psychological force which undercut the theoretical economic doctrine. To date, their theory has prevailed; and the classical economist is limited to prophesying ultimate disaster because he cannot meet the claims of great groups of organized individuals— claims whose justice is in large measure recognized by the political state.
It will be seen accordingly that the only economic system which we can regard as realistic is a system which roughly meets the ultimate desires and claims that spring from emotional and psychological reactions of individuals, to the extent that the consensus of opinion in a modern state recognizes such claims as justifiable. Should the aggregate of those claims be greater than the national production, the situation will not be stable until production has somehow been increased to a point where it is able to meet the claims and where a distribution in accordance with them has been worked out. Mr. Owen Young put it forcefully recently when he pointed out that in America we were some twenty billion dollars below the level of actual production, or national income, necessary to meet the claims which were now being advanced; and by consequence, that our immediate preoccupation would have to be economic development in terms of that production. Once that was done, the debate as to distribution through the operation of prices, wages, and the like, would begin to be fruitful; until it was done, the debate would be empty.
And here our economist studying his reorganized science suddenly finds that he is asked to take a responsibility not previously imposed on him, except to a limited degree. He is asked to join hands with the business man and the engineer and to arrange for the increase of production. If in the American scene of today part of the difficulty is unduly low production, the economist might conceivably wish to study what production is needed, whether the resources are available to engender it, and how the physical resources, the manpower, the organization, and so on, can be put together to get the result.
Once he discards his premise that the science of exchange is motivated only by profit, and considers the whole range of emotions, he will find some curious facts.
A present need of production, for instance, is housing to replace city slums. As I write, in New York that need is recognized. There is an area where such production could be immediately used within a half mile of my study. There is also an ample supply of engineering ability; of labor; of materials in warehouses within the greater city.
A mediaeval monk might go to that area and preach a great sermon. As a result of his insistence on man’s duty to the Lord and to his fellowmen, there might be a sudden concourse of supply-men offering material; of laborers anxious to work; of engineers and contractors prepared to guide the job. Abbeys were built by somewhat this process in the Middle Ages.
A brutal and ruthless dictator might sit in his seat of government and issue conscription orders, requisitioning the land, the laborer, the materials, the technicians. He could likewise requisition the food necessary to feed the laborers, the dispossessed landowner, and so on; and he could get the result. The houses would be built.
An economic genius might manufacture credit exchangeable for other goods and services and he might proclaim that this credit was available to the landowner who turned in his land, to the supply men who turned in their materials, to the workmen, and so forth; and he could get the result.
Conceivably, any combination of these three methods might be worked out. During a war, when patriotic emotion runs high, credit is freely created; the army authorities have a high degree of power to requisition; and volunteer services are freely offered. All three of these motivations are drawn on to produce a new munition plant or a fleet of ships. Can it fairly be said that these do not lie squarely within the scope of modern economics ?
The major point here to be made is that the theory of mere profit-motive economy inducing production and exchange must now be modified. Every word that proceeds from the mouth of God may be just as important in the economic field as the hope of bread alone. Every motive which proceeds from kindliness or from hatred, from life or from fear, from anger or from constructive vision, is as much an item in the picture as the fragment of profit which Adam Smith’s merchants sought to derive from their sales. These motives tend to merge in great currents which induce national action. The economist of today must not only assume national action, but go behind it to discover the smaller rivers and riverlets of human desire whose confluence leads to the flood of public opinion on which the national action is borne. Going back over these courses, the economist will eventually discover larger groups, smaller groups, finally individuals; and his preoccupation with the economic system at long last will be referred to a family or a man whose desires and hopes and fears all enter into the fabric which economics is attempting to understand.