John R. Commons
The Economics of Collective Action
Chapter viii. FUTURITY
Economic science began with the study of what had happened in the past, then moved to what is now happening in the present; finally it is concerned with the hopes and fears of what may be expected to happen in future time.
Mathematically defined, “the present” is a moving point of time between the outgoing past and the incoming future. Psychologically, “the present” is an instant of time when feelings of pleasure and pain occur, modified by memory of the past and expectations of the future. Institutionally considered, however, the present is limited by the dates of concluding the negotiations of the several transactions which commit participants and subordinates to a line of behavior in the future.
The three stages of time are embraced in three different theories of value constructed by different schools of economists. The classical economists, followed by the communists, began with the exertions of labor in the production of wealth in past time, which gave “embodied” value to the products in the present. The hedonistic, or pleasure-pain economists, began with the pleasures of consumption of wealth in the present, which create the demand without which the products would not have their present market value. The institutional economists begin with the legislative, administrative, and judicial decisions of both governmental and private collective action on which depend the security of present expectations of future profits, investments, jobs, and contracts. Without this security of expectations, there would be little or no present value, present enterprise, present transactions, or present employment. Value is present worth of future net income.
No school of economists was clear cut on these time dimensions.
All of them took past, present, and future for granted, without investigation, just as time was taken for granted in the physical sciences before the incoming of recent theories of “relativity.” One reason why early economists did not separate out future time for special investigation in their theories of value was the assumption, taken from the physical sciences, that cause precedes effect. Labor precedes its product; sensations precede action; scarcity and want precede effort and satisfaction. But here is an effect that precedes its cause. Philosophers distinguish the two perhaps as “end purpose” and “instrumental purpose,” “reason and consequence.” Without too much philosophizing we investigate their transactions, instead of their individual pleasures and pains, as well as the expectations which they offer to each other in order to induce each other to act. This is negotiational psychology.
Furthermore, early economists were laissez faire as regards government. They thought government was repressive and obnoxious. We also investigate how government acts to lead people into a supposedly better economic administration. We find that people act in exactly opposite ways during periods of depression and prosperity. Not logic, but fear and hope are fundamental. People act to enlarge valuations in periods of hope and to depress valuations in periods of fear.
Their reasons are expected consequences and the immediate alternative opportunities. This, again, is negotiational psychology instead of rational or hedonistic psychology - it is “volitional psychology,” or “will power.” Its instrument is signs and language. It is the psychology of persuasion, coercion, duress, command, obedience, fear or hope; the truly behavioristic psychology of business, of labor, of politicians, of propagandists, of legislatures, of executives, or courts. Its simplification in one general term is futurity. The credit system is its institutional creation.
Different features of futurity may be mentioned and also the dates of their introduction into economic science. Debts and credits are aspects of futurity. Clement Juglar of France was the first, in 1862, 1 to investigate debt exhaustively; his investigation was in
See Encyclopedia of the Social Sciences,
terms of speculative activity, not in terms of the physical analogy of a manufactured commodity. A debt, in British and American law, is “incorporeal property,” which was made “negotiable” in the seventeenth century so that it could be bought and sold like the physical commodity, metallic money. Juglar made debt the economic base of the optimism and pessimism of the English economists. For them, however, the allowance for time was not economics but psychology. But now it is economics, through the inclusion of debts. A debt has two stages in time, distinguishable as the date of “closing of negotiations,” and the date of “closing the transaction.”
The negotiations are closed at a definite point of time
in law, say,
The negotiability or assignability of these rights and obligations means their salability, and this attribute gives to them exchange-value, which has come to be distinguished, in American decisions, as a special case of “intangible property.” Other intangible properties, whose present value depends on their expected exchange value or expected income, are such as patents, good will, trademarks, corporate franchises, various rights “to do business.” All are “intangible,” because all are cases of futurity. Even the so-called “corporeal property” - the ownership of a tangible thing,
like land or an auto—is also “intangible” because it means a present right to sell or rent the thing in the future for money or its equivalent in exchange, which could not be done if one did not have “the right.” In all cases the present value depends on expected scarcity, which is economic futurity, and this is property.
Other aspects of futurity may be mentioned, such as risk, security, profit, interest, savings, or investment. Risk had always been assumed in economic science as true for everybody, whether manufacturer, laborer, or investor. But it was not separated out for investigation until corporation finance had made the distinction between stocks and bonds.
This separation required a distinction to be made between two dimensions of time, a “flow” of time and a “lapse” of time. Each has practical significance only with reference to future time. A “flow” is an expected succession of events, the expectation of profits; a “lapse” is an expected interval between two events, the expectation of interest on investments. All future events are risky because they are unknown, but the stockholder takes more risks than the bondholder, and names it profit or loss, because he takes what is left after the bondholder is paid. His are the risks of the “equity.” He gets “profit” in the form of dividends; the bondholder gets “interest,” secured by contract as a prior claim upon the assets. The distinction is between “venture,” or equity capital, and “secured,” or privileged capital. Each is savings; each is “investment” of savings. Stockholders and bondholders are both capitalists, and both invest their savings. Both take risks, but the stockholders insure the risk of the bondholders to the extent of their investments as stockholders. Were it not for the governmental scheme of “limited liability” for stockholders, there would be no investments of savings in corporations adequate for large-scale industry.
The same is true of a farm or other business, not incorporated. The mortgagee has a prior claim on the farm; the owner has the “equity” - whatever is left. The owner’s “profit” depends on the “margins” of what is left in the succession of risky transactions. The lender’s “interest” is guaranteed during the interval between a present and a future event.
Having analyzed the matter in the intricacies of corporation-finance, the modern economist shifts the analysis back to the primitive farmer or manufacturer for whom the early economists did not find it necessary to make the distinctions. But the time factor is exactly opposite to that of the older economists. Early economists began with the past and traced the origins of the present out of the past. Economists now begin with the future and read it back into the present.
One of the facts for economics is the past intentions of the parties to the transaction. What did they agree to do or not to do? Courts of law have developed methods of investigating this negotiational psychology. One of their devices is in the distinction between “law” and “fact.” The facts are ascertained by a jury who are ordinary humble men and therefore “reasonable.” What would a reasonable man have intended to do in assenting to that agreement under the “then” circumstances? It is a method of comparative psychology. The economist makes similar investigations of negotiational psychology in general. I have sometimes made similar investigations in interpreting collective bargaining agreements and in the negotiations themselves leading up to such an agreement. I formulate certain “psychologies,” the business man’s psychology, the socialistic psychology, the trade unionist psychology. What do they want to do? Why do they differ in their psychologies? How can they negotiate an agreement under the circumstances? It is a “technique” of negotiational psychology which I investigate in successful arbitrators, mediators, business managers, executives, and in politicians.
Negotiational psychology is often mistaken in its calculations of the future. It may be too optimistic, too pessimistic, or too ignorant. Yet it is controlling and controllable. In feudal times domination was the psychology of physical force. At the opposite extreme in the highly developed credit system of voluntary agreements, with the modern emerging monopolistic central bank or reserve system and its variety of “controls,” it is through the negotiational psychology of sellers, buyers, bankers, that their transactions, prices, and voluntary rules of action for the future are controlled, more or less, for good or ill.
Thus I make negotiational psychology a part of the foundation of economics. It always has been “social psychology.” But that term is too broad for use in economics. When reduced to a mental tool of investigation usable in economics, it is negotiational psychology which is the psychology of transactions. There is difficulty in constructing the idea for those brought up on the individualistic psychology of pains, pleasures, wants, satisfactions, or dreams and psychoanalysis. Yet negotiational psychology is the psychology of courts of law, of business men, of legislative bodies, of all collective action where it is necessary to agree upon prices or wages that will be paid in the future, upon deliveries that will be performed, or upon future rules of action that will be followed.
Negotiational psychology can be seen actively at work and can be investigated in any bargaining, managerial, or rationing transaction. I name it objective psychology instead of the subjective psychology of pleasure and pain. It is the psychology of language, of duress, coercion, persuasion, command, obedience, propaganda. It is the psychology of physical, economic, and moral “power,” the truly “behavioristic” psychology of economics in preparing for the unknown future.