The Competitiveness of Nations in a Global Knowledge-Based Economy
Economics and the Idea of Natural Laws
The Quarterly Journal of Economics
Volume 44, Issue 1
Nov. 1929, 1-39.
SUMMARY
IV.
Economic tendencies are toward
adjustment, but not necessarily any ideal adjustment.
Social welfare depends on human motives
and on institutions. This
was recognized in eighteenth-century philosophy of the moral “Law of Nature”
(jus Naturae), accepted by Physiocrats and Adam Smith, p. 34.
ECONOMIC
theory of the traditional type has always purported to be a “scientific”
statement of the most general “laws” of society’s economic life.
Not long ago, respectable economists
were still boldly calling these “laws” of their science “natural laws” or “laws
of nature.” But the idea of natural
laws, which so largely dominated scientific and philosophical thought in the
eighteenth and nineteenth centuries, has in recent decades lost something of its
former freight of meaning, and perhaps of its former prestige.
Philosophers have
1
been criticizing the notion which the phrase conveyed to the nineteenth-century mind, and especially the uses that were made of it in psychological and social “sciences”; and even physical scientists have been revising their conceptions of the nature and significance of scientific “laws.”
1 The laws which the natural sciences discover are still called “laws,” but there is a disposition, perhaps growing, to stop calling them “laws of nature,” on account of the dubious inherited connotations of that phrase. 2 At all events, whatever terminology is employed, there is at least a new scepticism toward some of the notions which the general idea of laws of nature carried with it in the mid-nineteenth-century mind. The tendency of present-day economists, even of the more “orthodox” type, to speak with more modesty and caution about the “laws” of their own science, and to drop all rhetorical language about the “natural laws” of economic life is thus in harmony with current tendencies in other sciences.
1. P. Struvé, in his article “L’idée de loi
naturelle dans la science économique” (Revue d’économie poitique, 1921),
refers to Windelband and Rickert, and the earlier work of Renouvier, as having
specially contributed to the modern critical revaluation of the idea of
scientific “laws.” Windelband and
Rickert have been especially concerned with criticism of attempts to apply it in
historical and social studies. E.
Boutroux, working in the general tradition of Renouvier, has written keenly on
the nature of laws in science generally. A.
N. Whitehead, Bertrand Russell, and some other English philosophers have, I
believe, attacked the problem on rather different lines.
An indication of the present state of
the discussion in physical science may be obtained from A. S. Eddington’s The
Nature of the Physical World (1928).
The article by Struvé, referred to here, and again
below in the text, discusses brilliantly some aspects of the problems considered
in the present article. But my approach
is different, and my indebtedness to him is not great.
I should perhaps apologize for the
accidental similarity of my opening remarks to his, which seemed inevitable.
2. “The conception of the ‘working hypothesis,’
provisional, approximate, and merely useful, has more and more pushed aside the
comfortable 18th-century conception of ‘laws of nature.” - Bertrand Russell, in
Preface to H. Poincaré’s Science and Method, trans. Malt-land, p. 6.
2
But the matter still needs a more definite clearing up. What is the exact nature and significance of the “laws” at which economic theory arrives? Exactly what and how much of all that was involved in or suggested by the old idea of them as real “laws of nature” do we need to discard? A clear answer to this last question, if it could be given, would do much to put an end to the controversy that has dragged on for a century, between the adherents of “theory” of the more “orthodox” type and the “rebels” who have wanted to turn economic inquiries in some wholly different direction. The latter have generally been men who were alienated by some of the apparent implications of the traditional idea of “natural” economic laws. They have regarded that idea, and the scheme of thought bound up with it, as the unalterable essence of “orthodox” theory, and hence have wished to abandon such theory entirely. But the majority of modern adherents of “theory” of this type, are ready to concede that its “laws” are not all that the older economists, who called them “laws of nature,” thought they were. The way would seem to be open for an attempt to “get together” on the basis of a clearer separation of the valid from the invalid or dubious elements in the philosophy of the older economists.
The best way to solve the problem would probably
be to make a thoro philosophical and critical study of the historic evolution of
the theory of economic laws. Criticism
of the notions of the older economists must be based upon a real knowledge and
comprehension of them; and this can come only from a study of their origins and
development and of their setting in the life and thought of the times.
This approach is all the more
indispensable because of the fact that the notions here in question - namely,
those connected with the particular significance then attached to the idea of”
natural laws,”
3
in the minds both of economists and of contemporary workers in other sciences - were not adequately thought out and expressed by anyone, but were merely an elusive part of the “mental climate” or “atmosphere.”
3 The student must undertake the dangerous task of making fully “explicit” ideas which in part are merely “implicit” in the writings of the Physiocrats, of Adam Smith, and of the classical economists; for without making them more fully explicit than they are in those writings, it is impossible to criticize them intelligently. This undertaking would be a dangerous one in any case; but a sufficient knowledge of the development of the whole outlook and philosophy of the epoch might make it possible to penetrate to the half-hidden foundations of its theory of the “natural” organization and laws of society’s economic life, and then to separate what was soundly “scientific” in that theory, according to modern standards, from what was merely dubious and misleading speculation.Numerous scholars have, of course, made historical studies covering some of the ground that needs to be covered. Some American readers will think at once of Thorstein Veblen’s contribution
. 4 But this, brilliant as it is in its way, can hardly be supposed by any one to rank as a serious piece of historical and critical scholar-
3. Whitehead (Science and the Modern World,
pp. 4, 5, 10, 11, and passim) emphasizes the importance of the “climate
of opinion” and the “secret imaginative background” which colored the
fundamental conceptions of the creators of modern physical science.
Possibly this was even more important in
the case of the pioneers in economics, who were less closely tied down, so to
speak, to perfectly definite facts, and who were not yet thinking in terms of
mathematics. But I do not think this
influence of half-hidden “preconceptions,” to use Veblen’s term, upon a writer’s
theories, means that they are wholly a mere product of an historically
transient intellectual and social environment, and contain no elements of
permanently valid “truth.”
4. I refer, of course, to The Place of Science
in the Modern World, and Other Essays, especially the essay on “The
Preconceptions of the Older Economists”.
4
ship. It is an impressionistic and polemical sketch, and is, I believe, biased by a serious misunderstanding of the ideas of the older economists. Of more importance are the studies of several European writers. The work of Neumann
5 is, of course, a classic in the field; but its historical part is subordinate to his critical discussion of the relation (of resemblance or difference) of economic laws to the laws of the natural sciences; and this, I think, is only a part of the problem. Hasbach’s monograph on the “philosophical foundations” of the teachings of Quesnay and of Adam Smith, 6 reflects much careful research; but is concerned with other problems in addition to the special one of understanding and criticizing their conceptions of “natural laws,” and therefore does not deal as directly or as adequately with that problem as could be wished. P. Struvé, a Russian scholar, in a brilliant article in the Revue d’économie politique, 7 has applied the ideas of neo-Kantian philosophy to a critique of “l’idée de loi naturelle dans la science économique,” whose historical development he outlines. Other studies might be mentioned. 8 But no one seems to me to have dealt with all of the important
5. F. J. Neumann,
“Naturgesetz und Wirtschaftsgesetz,” in Zeitschr. für die ges.
Staatswise.
(1892). Also “Wirtschaftliche Gesetze
nachfrühere und jetzige Auffassung,” in Jahrbücher für Nationalökon. u.
Statistik (1898), 3rd series, vol. xvi. The
former of these monographs is praised by
6. W. Hasbach,
Die ailgemeine philosophischen Grundlagen der von F. Quesnay u. A. Smith
begrundeten Politischen Okonomie (Leipzig, 1890).
I
owe a good deal to this work, and something also to the same author’s
Untersuchungen über A. Smith.
7. See note on p. 2 above.
8. The Revue d’économie politique has
published a number of good articles on this subject, and others close to it, of
which I note the following: B. Raynaud, “Les discussions sur l’ordre naturel au
xviii’ siècle,” vol. xviiii (1905); E. Allix, “Le physicisme des Physiocrates,”
vol. xxv (1911) - a particularly excellent article; and the same author’s
“Destutt de Tracy, économiste,” vol. xxvi (1912), which has little on economic
laws, but shows how this ideologist connected a quite orthodox type of theory
with his system of psychology and its mental “laws.”
5
aspects of the history and meaning of the idea, or
to have attained the point of view from which all of its aspects can be
simultaneously grasped, and therefore properly criticized.
The present article attempts no more than to make
suggestions in this field of inquiry.
It does not, of course, pretend to be even a part, however small, of the
adequate historical study which I have called for.
It is rather a preliminary survey of the
ground and the problems, and an effort to indicate some very tentative
conclusions.
The belief that all events, including human actions, are subject to strict “laws of nature” can be traced back to antiquity, and has played an important role in the philosophies of at least some leading thinkers in nearly every epoch in the history of European thought
. 9 But in the seventeenth century, it attained a somewhat new prominence, a new and more definite shade of meaning, and a new fruitfulness for scientific thought, which have made it a main element in the scientific mentality of the last three centuries. In the eighteenth century the idea pervaded all disciplines, including the “moral” or psychological and social as well as the “natural” sciences.’ In the course of the nineteenth century, its
9. A good brief survey of the history of the
notion, from antiquity down, is given by R. Eucken in Main Currents of Modern
Thought, trans. M. Booth (New York, 1912), art.
“B. 3-Law.” Windelband’s History of
Philosophy has brilliant sections on the roles it played in ancient,
medieval, and seventeenth- and eighteenth-century thought.
The first chapter of Whitehead’s Science
and the Mod. World is suggestive on the probable nature of the debt of
modern science, for its conception of strict laws of nature, to ancient
philosophy and even to medieval theology.
1. I cannot crowd much evidence in support of this
statement into a footnote. Some evidence
is given in the text and notes below. Standard
histories of philosophy that deal extensively with the seventeenth and
eighteenth centuries recognize the prevalence, especially in the latter,
[of efforts to discover and formulate, and
of the belief in, natural (causal) laws of human action (psychological and
social laws); Windelband, Hoffding, Lévy-Bruhl, and others.
Condillac in
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displayed on p. 7 of original.
6
sphere gradually became limited, in effect, for many minds, to the natural sciences. Students of the social sciences became conscious of difficulties in the way of its use in their field, of which the eighteenth-century mind had been less acutely aware
. 2 This was due, I believe, to an important change in the connotations of the idea.Even in the history of the natural sciences, since the early seventeenth century, the content of the general belief in “laws of nature” has been slowly changing. Throughout the whole period of three centuries, it is true, the idea in this field has implied the doctrine of determinism.; and it is almost certain that a “mechanistic” metaphysics or cosmology has lurked somewhere in the background, when not explicitly accepted as the starting-point, of scientific thought
. 3 The seventeenth-century pioneers who created classical physics conceived the physical universe as almost literally a ‘machine”; a mass of particles of matter spread through space and perpetually moving and impelling one another to move, in accordance with the laws of mechannics. Robert Boyle, the great pioneer chemist, adopted the “mechanical hypothesis” as the basis also
2. I do not mean that talk of “social laws,”
historical laws, and the like, became less prevalent; it became steadily more
prevalent. But I think the efforts which
this came to involve, to assimilate social science more completely to the
character of natural science, and the simultaneous decline of the old religious
“humanization of nature” as it has been called, combined to produce an
increasing dissatisfaction with the whole proceeding.
This is not the kind of thing that one
can prove by a few citations in a footnote.
3. Windelband, Whitehead, and many others stress
the importance of the “mechanistic” assumption.
7
of his own science, and defended it in voluminous essays
. 4 Most of the students who were advancing the various biological sciences also adopted it, and regarded the bodies of animals and men as “machines.” 5 In the eighteenth century, the idea was almost universally accepted. The whole universe, including living organisms, was pictured as a vast “machine,” whose operations are all explainable, and predictable by the laws of mechanics. 6 And the doctrine of mechanistic determinism has remained until very recently a first article in the creed of the natural scientist.
In the eighteenth century, however, this idea was
still combined with the theological idea of an harmonious “Order of Nature,” in
which every thing or being has a definite, ideal function to fulfill in the
wisely planned economy of the cosmos. The
world-machine was admired as a wise contrivance of the Deity for causing every
part of the whole to fulfill its function. Hence
the “laws of nature,” tho conceived as laws of mechanical causation, were also
and at the same time conceived as “canons of conduct” providentially imposed
upon things. E. Mach, the great
historian of the science of’ mechanics, has shown how eighteenth-century
physicists, who followed up and completed the work of Newton, were often
actually led to their formulations of the laws of mechanics by setting out from
theological
4. R. Boyle, Works (ed. of 1744, in 5
vols), iii, 450 ff. This particular
essay is entitled “Of the Excellence and Grounds of the Corpuscular or
Mechanical Philosophy.” Half the titles
in the five vols. contain the word “mechanical.”
5. II. Driesch, History and Theory of Vitalism,
trans.
6. E. Mach, The Science of Mechanics, trans.
McCormack (
8
postulates about the wisdom, simplicity, economy, and harmony of the “plan” of nature’s operations. The laws, Mach says, were valid, and were afterward restated so as to get rid of the theological implications
. 7In the course of the nineteenth century, the notions summed up in the phrase “the Wisdom of Nature” were gradually discredited, and more or less completely eliminated from scientific thought. Eventually the theory of evolution came along, to explain the adaptations or harmonious adjustments found in nature as products of a blind historical process of “natural selection”; and this theory also emphasized the imperfection or incompleteness, at every stage of the probably eternal process, of the resulting “harmony.” The conception of natural laws as providential ordinances for maintaining harmony in the universe, faded away, and all that was left of the idea, was the doctrine of determinism. The beautifully harmonious world-mechanism of the eighteenth century’s imagination became the blind, ruthless, purposeless mechanism which oppressed the imaginations of so many nineteenth-century poets and philosophers
. 8
7. E. Mach, op. cit., pp. 446-465.
The great historian of this fundamental
natural science here gives what is surely one of the most illuminating
discussions to be found anywhere of its early relations with theology.
8. A perfect picture of a mind that had only half
completed this transition is afforded by Huxley’s famous lecture on “Evolution
and Ethics” (Evolution and Ethics and Other Essays, N.Y., 1909).
Huxley upholds the idea of an Order of
Nature, in which parts are made to function harmoniously in the life of the
whole. But he finds that in the organic
world, the harmony is marred by the presence of pain, “a baleful product of the
evolutionary process,” and by a complicated struggle that is most intense in the
soul of man and in society. He goes on
to argue that the “ethical process” in society, tho it is a product of, is yet
in conflict with, the “cosmic process”; an ethical civilization is built up not
by “natural” forces (which he takes to mean the forces of man’s lower nature),
but by unceasing “artificial” resistance to such forces.
He therefore damns laisser-faire
individualism as heartily as it is damned by Carlyle.
9
In the last few decades, physics itself appears to have been moving away from the rigid doctrine of determinism. A layman can, of course, say nothing with confidence upon this matter, but it seems clear at least that something is happening to the old idea of “inexorable” laws of nature. The view is expressed by high authorities that all scientific laws may be only “statistical laws”; that is, laws of the average behavior of things or entities in “crowds,” which leave the behavior of individual entities partly a matter of real “chance,” and which may even leave room, in the case of the higher organisms, for “free will.”
9 The whole matter is under lively discussion among physicists. Determinism, if not universally abandoned, at least is under fire. Meanwhile, teleological ideas crop up with renewed strength in some quarters. The general position seems to be that while there undoubtedly are “laws” for science to discover and make confident use of, the implications of this fact, and the nature of these laws, are open to a general reconsideration.
Now it is clearly the mid-nineteenth-century
conception of purposeless but inexorable “laws of nature,” which has caused most
of the trouble in the social sciences. The
belief in, and effort to discover, scientific “social laws” was bound to lead to
confusion, so long as it was supposed that all scientific laws must be of this
type. It is true that there have always
been those who could persuade themselves that no violence need be done to our
experience of the nature of human thought, emotion, volition, conduct, and
social life, by the hypothesis that every mental and social event is
mechanically caused and determined by antecedent events, the chain of which
leads back into the physical environment,
9. A. S. Eddington, The Nature of the Physical
World (1928), is my chief authority for this statement.
10
and the physical organisms upon which the
environment acts. Some economists may be
able to believe that men in business life are automatically impelled into given
courses of action by a balance of external stimuli; and some historians to
suppose that the course of history is mechanically determined by the action of
the material surroundings of men upon their bodies and minds.
But such notions clash with the
persistent habits of thought developed in practical life, and the usual blending
of the two sorts of notions in social theories introduces a sad confusion.
In any case, social determinists have
not attempted to get down to the level of close studies of the mechanical
causation of the actions of individuals, and develop sociology from physiology,
as their view should lead them to do. They
have been content as a rule with vague and sweeping generalizations about social
and historical processes, which can hardly pass muster as “scientific laws.”
Meanwhile, the bias introduced by this
whole way of thinking has caused the knowledge of men’s motives and purposes
which we acquire in practical life to be neglected, because the notions of
practical life do not square with the dogma of mechanistic determinism.
It may be that the change now in
progress in the philosophy of the natural sciences will in time produce a
“mental climate” more favorable to the unembarrassed progress of the social
sciences.
In the history of the social sciences themselves,
during the past three centuries, the belief that there are “natural laws” of
human behavior and therefore of the life of society, has not always been as
closely identified with the doctrine of determinism as belief in such laws has
been in natural science. In the
seventeenth and eighteenth centuries, numerous writers who tried to develop
genetic or explanatory psychological and social sciences were at the same time
defenders of the doctrine of “free
11
will.” Even the notion of the mind as a “mechanism,” and of society as a “mechanism” in which the wills of individuals are the forces that interact, did not always carry with it an acceptance, in the psychological sphere, of the “principle of necessity.” Hobbes, who was one of the first to construct what was virtually a system of psychology and sociology on “mechanical” principles,’ was a rigid determinist. But not all of the later writers who tried to use the same method, accepted the doctrine. Descartes and his followers were strict determinists in the sphere of “natural philosophy,” but insisted that the human will is “free.” Yet they tried to analyze the mechanics or dynamics of the intellectual and emotional life, merely insisting that if the mental mechanism is to work properly, the will must function properly, that is, under the control of “reason”; and that its failures to do so, for which the individual is to blame, are the sole causes of human sin and misfortune
. 2 This, incidentally, was precisely the doctrine of Quesnay, who professed himself as in metaphysics a disciple of Malebranche; yet Quesnay conceived society’s economic system as a “mechanism.” 3
1. See Höifding, Hist. of Mod. Phil., Book
III, chap. 4; and best of all, G. Croom Robertson’s Biography of Hobbes,
chap. 4 and passim. Robertson, the highest authority on Hobbes, is very
explicit on the importance of the mechanical idea, derived from the new physics
of the time, as the basis of Hobbes’ work; and one need read no more than the
first part of’ Leviathan, to see that it was the basis.
2. See Windelband, op. cit., pp. 410-420 and
passim; and H. A. P. Torrey’s The Phil. of Descartes in Extracts from his
Writings (1892), pp. 15-34 (Prof. Torrey’s excellent introduction analysis),
and pp. 275-326 (Descartes’ writings on Physiology and Psychology).
3. In Quesnay’s time, the philosophies of Descartes
and Malebranche had largely gone out of fashion in
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displayed on p. 13 of original.
12
Of the Scottish school in the eighteenth century, to which Adam Smith belonged, it is more difficult to speak with confidence. They were in the tradition started by Locke; and the sensationalists, associationists, and ideologists of the later eighteenth century, who also professed to build upon Locke, were strict determinists But Dugald Stewart claimed that they all misunderstood Locke, and that the philosophy of the Scottish school was really the logical development of his ideas; and Stewart, tho he believed in psychological and social “laws,” believed also in “free will.”
4 The greatest of the group, Hume, maintained that the “principle of necessity,” or causality, cannot be proved; our reliance upon the “laws of nature” rests only on “custom and habit”; but there is, I think, no indication that in practise he abandoned determinism in psychology or elsewhere. 5 Hutcheson and Adam Smith are silent on
4. D. Stewart, Works (ed. Hamilton) vol. i,
A Dissertation on the Progress of Metaphysical, Moral, and Political
Philosophy, since the Revival of Letters, pp. 258-272, 279-280, 295-307,
311-313, 431-449, 489, and passim. This
work is most valuable to the student of eighteenth-century thought, written as
it was ‘just after the close of the century by one who shared all of its most
typical ideas, and knew almost the whole of its literature.
It was written as a supplement for the
first number of the Encyc1opedia Britannica, finally published in 1825.
5. The doctrine of determinism is sometimes
identified with the notion which Hume did demolish and reject, namely,
that causation is something other than empirical sequence or correlation; that
we know why a cause produces its effect, and can prove that it must always do
so. [But a “faith” that exact laws of
sequence will always hold true, where the same conditions are present, is, I
think, determinism; if one is not prepared, in practise, to admit exceptions,
his lack of logical ground for his faith makes no difference., Hume’s
explanation of this “faith” was
psychological; and I can see little difference between this and the Kantian
doctrine that determinism is a “necessity of thought,” arising, so to speak,
from the way our minds are made, instead of from the way in
which the universe is made. The very explanation that Hume gives of
our belief in the reliability of the laws of physics, involves
psychological determinism in the form of a belief in laws of the “association of
ideas.”]
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displayed on p. 14 of original.
13
the matter; but in their theories of the psychological genesis of “moral sentiments,” they always speak as tho men were free to act or not to act in accordance with the “moral sentiments” which their experience generates through the working of their mental “mechanisms.” These examples will perhaps suffice to indicate the frequency with which belief in psychological and social “laws of nature,” or in “mechanically” explainable psychological and social processes, was divorced in the eighteenth century from any full acceptance of the doctrine of determinism
. 6It was in the early nineteenth century that determinism, as applied to psychology and sociology, became the really prevalent and fully realized concomitant of the application in this sphere of the idea of “natural laws.” Professor Rogers, in his history of English philosophy in the nineteenth century, brings out the way in which this doctrine seized upon the imaginations of many in the early decades of the century, and became with some a kind of gospel.
7 The Benthamites, who
6. Even the eighteenth-century writers who were
professed determinists, often distinguished between physical and psychological
causation in a way intended to save what the “free will” advocates were fighting
for. See some of the passages in
Stewarts’ Dissertation, cited above, especially pp. 272, 305-307.
Perhaps the essential difference between
most eighteenth- and most nineteenth-century conceptions of psychological and
social “laws” lies in the fact that the eighteenth century was building on
“introspective” psychology, and was therefore trying to apply the new
“mechanical” conceptions without being untrue to the realities of what the
Germans call man’s “inner experience.”
7.
14
utilized in their philosophy the association psychology of Hartley and James Mill, were determinists; and this group, of course, included the Mills and some of the other economists. At the same time, the Romanticists of the period, building what systematic philosophy they had largely upon what they knew of the teachings of Kant, Fichte, and Schelling, upheld “free will”; and denounced the deterministic and mechanistic philosophy as the work of the hated eighteenth century
. 8 In France, after the death of “ideology,” some romantic philosophies, and the idealistic philosophy of Cousin, who drew heavily upon the Scottish school, championed “free will”; but there were Comte and many others to uphold the opposite doctrine, or at least to talk of social and historical laws in terms which clearly implied it. 9 Psychological and sociological determinism gained ground rather than lost it, as the century advanced. Yet the protest also gained ground, and gained sobriety and philosophical penetration, as trained philosophers began to attack the whole idea of “inexorable” laws of nature. Toward the end of the century, a large part of the educated public lost much of its earlier naïve faith in the theories and “laws” of the psychological and social scientists. What we now need, I believe, is an approach to social science more like that of the eighteenth-century writers, who, despite the fact that natural science in their time was rigidly deterministic, as it is perhaps ceasing to be in our time, were able to conceive of social “laws” in a way that did not commit them to the treatment of men as mere automata.
8. I am, of course, referring here to the English
Romanticists - Coleridge, Carlyle, Wordsworth, Ruskin, et al.
9. L. Lévy-Bruhl, Modern Philosophy in France,
chaps. 11, 12.
15
The evolution of the idea of “laws” in economics
has closely paralleled its evolution in the natural sciences; except that, as in
other social sciences, it did not until the nineteenth century come to carry so
strongly the rigidly deterministic connotation.
The central notion of economic theory of the
“orthodox” type has always been the conception of a society’s economic system as
in some sense a mechanism. Labor,
capital, business ability, goods, and the money of consumers, have been pictured
as “gravitating” to their best markets, with resultant interactions of supplies,
demands, prices, and incomes taking place according to
definite “laws.” The recent development
of mathematical formulations of the general theory has made clearer than ever
its formal resemblance to the theory of mechanics.
But of course the analogy with
mechanics, and the conception of the economic system as a mechanism, do not need
to be taken too seriously. I shall argue
below that they can be used without at all implying acceptance of a mechanistic
metaphysics, or of a deterministic theory of human behavior.
But their use in the past has
undoubtedly often tended to foster a kind of economic fatalism, which some
critics have mistakenly supposed to be a necessary consequence of the orthodox
type of theory.
In the eighteenth century, and by many writers in
the nineteenth, the economic mechanism was regarded as a wise device of the
Creator for causing individuals, while pursuing only their own interests, to
promote the prosperity of society; and for causing the right adjustment to one
another of supplies, demands, prices, and incomes, to take place automatically,
in consequence of the free action of all individuals.
This doctrine of “eco-
16
nomic harmonies” was entirely in accord with the corresponding notions of contemporary natural, as well as moral, scientists. The notion that the mechanical laws which “control” nature’s operations, and enable us to explain and predict them, are calculated to insure the harmonious mutual adjustment and proper functioning of things, did some harm in scientific thought, but did not prevent men who held it from making scientific discoveries. Mach’s remarks about the eighteenth-century physicists were referred to above. Back in the seventeenth century, Robert Boyle, in a remarkably cautious and critical essay on the philosophy of “final causes,” said that Harvey, the physiologist, had told him that he arrived at his discovery of the circulation of the blood by thinking that the valves of the heart must have a “purpose,” and then looking for it
. 1 And there is little doubt that the minute study of the functions of organs in living organisms, which was prompted by the desire of Paley and his predecessors to bolster up the “design” argument for a Deity, did much to promote the progress of biology. So the doctrine of economic harmonies, while definitely misleading in some of its implications and childish in its extreme forms, was not necessarily a hindrance in the early stages of the search for regularities or laws, and natural processes of adjustment, in society’s economic life.
Ricardo and his immediate followers did not
particularly emphasize the notion of economic harmonies.
In
1. Boyle’s Works, iv, 517ff.
This truly remarkable essay was written
at the request of the Secretary of the Royal Society, whose members (including
Boyle, Newton, and others) had discussed the problem of whether natural
scientists should take any stock in the idea that Nature works to certain
discoverable, divinely appointed, ends; and wanted Boyle to write out his views
(see preface of essay). Boyle supports
the idea cautiously, as
17
fact the pessimistic tendency of their reasonings about population growth, diminishing returns, and wages and profits have caused them to be contrasted with the optimists, not without justice. It is true that they still supposed that self-interest, or the search for profits, would generally lead individuals to turn their efforts and investments into the channels in which they would do most to increase national wealth; and also that the “natural” prices, wage-rates, and rates of profit, resulting in the long run from the free play of demand and supply, would all reflect and promote a better use of the nation’s resources in meeting it’s wants than would be likely to be produced by legislative “interference” with the flow of things to their best markets. But their picture of the natural working of the economic machine, and of its outcome, was hardly rosy enough to lead them to think that it suggested the presence behind the’ scenes of a benevolent, divine, guiding hand. In fact the Romantic poet and essayist, Robert Southey, attacked Malthus precisely because he had denied this hypothesis and had propounded a theory savoring of the late eighteenth-century French doctrines of “brute mechanism, blind necessity, and blank atheism.”
2 The classical economists, in fact, shifted the emphasis from the beneficence to the inexorability of economic laws. The tone of their teaching was deterministic. The economic machine was in effect represented as grinding out definite amounts of wages, profits, and rent for the three, social classes, almost with the precision and inevitability of a literal physical machine.
Modern theorists, however orthodox in their
general tendency, are aware that economic laws do not have this precision and
inexorability. We are ready, I think,
for the view that the general laws at which theory ar-
2. R. Southey, Essays Moral and Political
(1832), pp. 77 ff.
18
rives, tho it arrives at them in the first instance without the help of statistical studies, are of the nature of “statistical laws”; that is, they are laws of the average behavior of men in the mass, in response to economic conditions which their behavior in turn modifies. Or, if this view is preferred, they are laws of the average “behavior” of prices and the like, under the influence of such human behavior
. 3 Experience of human motives, of the kind that is gained in practical life, enables us to make rough predictions of the ways in which, on the average, men will react to the changing physical and market conditions which affect their business plans. Since each man’s actions affect the data of the calculations of numerous other men, there are causal sequences that link business developments in one region or industry, with those that follow it elsewhere; and the theory of these processes can be worked out, with some help from the calculus, on lines somewhat remotely like those of the theory of mechanics. But, of course, the extremely general laws of pure theory do not specify any actual quantities, nor the actual forms of the functions supposed. The formulation of laws that can be used to make definite predictions requires the coöperation of the theorist and the statistician, and we are just beginning to explore the possibilities and surmount some of the difficulties of this undertaking. It is not possible3
. Of course in saying that the laws of theory are of the nature of statistical laws, I am not denying the important and familiar difference between the “curves” of theory and actual statistical correlation curves. Theory “isolates” its variables as the statistican cannot. But I am arguing that even if the coeteris paribus assumption were to hold good in a particular case in “real life,” the conformity of the outcome of the forces at work in that situation to any definite “law” that had been derived from a study of similar cases or situations (in which the assumptions also had been realized) would be only approximate; and would be due, not to identical similarities in all human behavior occurring at different times or in different places but under identical (external) conditions, but only to broad similarities in reactions of masses of men to identical economic “stimuli.”
19
to suppose that even with the help of the best
statistical technique, we shall ever be able to make any very exact, or any very
long range, economic predictions. All
this is familiar. The point to be
emphasized here is that it involves, not an abandonment of the method of
“orthodox” theory, but a very definite abandonment of the notion of “inexorable”
economic laws; since that notion implies that the choices of individuals are so,
strictly determined by external events (e. g., price-changes) as to be exactly
predictable.
Some economists might maintain that the laws of
theory are “of the nature of statistical laws,” without admitting the reason
which I have assigned, - that the behavior of particular individuals is not
strictly “determined” by their economic situations; that they, have not only
“non-economic motives” which modify their reactions, but also something like
“free wills.” The economist who, as a
philosopher, feels that the doctrine of determinism is a “necessity of thought,”
may say that our laws are only laws of average tendencies, merely because
our knowledge of the characters of individuals, and of their economic
situations, is imperfect; but that “in reality,” all actions of men in the
economic world, and therefore all economic events, are strictly determined by
the action of economic situations upon human minds.
Personally, I cannot accept such a
statement about a “reality” admittedly unknown to us; nor distinguish this
doctrine from a hopeless economic fatalism. But
at all events, this question does not affect the character of the actual “laws”
of economic theory. These are only laws
of average tendencies, resulting from the average behavior of men in the mass;
and are therefore not “inexorable laws.”
There are some other connotations of the notion of
economic laws as inexorable laws of nature, which have
20
little or nothing to do with the matter of psychological determinism. Business men sometimes speak of these laws as if they were impersonal but active and irresistible forces, which control all prices, rates of wages and the like, in the economic system, quite independently of all human wills, desires, and ideals. They may say, for instance, that they cannot, if they wish to, pay their employees higher wages, because the market rate of wages, which they have to accept, is controlled by economic laws. Modern economists should perhaps be doing more than they are doing to dispel this notion, which has no doubt been encouraged by the too exclusive preoccupation of theorists in the past with the world of “pure competition.” If the actual economic world were the world of pure competition, there would be some excuse for the attitude of the business men referred to
. 4 In that world, no employer could have a wage-policy, or a price-policy. He could not, out of benevolence or a sense of justice, pay higher wages than his competitors were paying; nor, out of a more than average hardness and greed, pay lower wages. But in the actual economic world, every business man, and every trade union or similar group, is in a situation which gives him or it what may be called, by a useful refinement of theory, some degree of monopoly power. Economic friction, to use the older term, leaves everyone free within limits to have a “policy” in regard to his price; and to try to exact for himself, in his dealings with others, a little more than the gains that would accrue to him under “pure competition”; or, on the contrary, to treat others a little more generously than he would or could in that régime. This, of course, is a
4. Not, of course, for the notion of laws as
external constraining agencies, but for the idea that the individual employer in
a labor market cannot in the least degree deviate from, nor influence, the
market rate of wages.
21
familiar qualification of the idea of rigid
economic laws, to which even the classical economists were not entirely blind;
but they did not attach enough importance to it.
A still more serious and more absurd error than
the one just mentioned, which economists of the past have unwittingly encouraged
in .the minds of laymen and opponents, is the notion that economic laws are
supposed to describe an inevitable course of events which neither the state nor
any other human agency can prevent or alter. Of
course the laws are only supposed to describe what will happen under given
conditions, the absence of “interference” by the state being assumed as one of
the conditions. But the impression
that orthodox theory has always tended to discourage such “interference” as
likely to be futile, or powerless to change the course of events, is not
altogether baseless. It has always
tended to lead its votaries to a belief that there are rather narrow limits upon
the power of society to alter the direction and outcome of the “natural”
economic tendencies at work within it. The
foundations of this belief can only be touched upon here; but I shall have more
to say about them in a future article.
In the seventeenth century, Dudley North anticipated what was nearly the outlook of the c1assica1 economists of the nineteenth century, in asserting that “no laws can set prices in trade, the rates of which must and will make themselves.”
5 Of course he was thinking of efforts simply to decree that certain prices should be charged and paid by individuals, the decree being unaccompanied by any public action calculated to redress
5. D. North; Discourse on Trade, 1690,
Hollander reprint (J. Hopkins Univ. Press, 1905).
The preface of this tract has been
neglected by historians of economic thought.
It suggests that the new “mechanical” philosophy (ascribed to Descartes),
which North says has begun to renovate “natural philosophy,” must be applied to
the theory of “Trade”; and is full of other significant hints.
22
the balance of supply and demand.
Such efforts, as plenty of experience in
diverse times and places has proved, are indeed futile, in societies in which
“mobility” and “competition” are at all highly developed.
But all economists, of course, know that
it is always possible to fix prices, if the government is willing and able to
enter the market as buyer and seller on any scale that may be needed to make the
fixed price the “equilibrium price.” This
is, we may say, one way of manipulating the ‘economic mechanism.
And there has never been anything in
orthodox theory inconsistent with the idea that this mechanism can be
manipulated. It is not, like
The classical economists, far from denying the possibility of this kind of control of economic events and conditions by public action, opposed various measures of control that were being used in their day, such as protective tariffs;
6 not on the ground that they were futile or ineffective, but on the ground that their effects were socially bad. As I shall try later to show, their own program of public policy was one designed to provide just the few measures of control which seemed to them to be both feasible and in the public interest. Their belief that the government could do only a few things to increase economic welfare, and that much of its more or less well-intentioned and quite effective activity was mischievous, had two main causes.
6. Taxes, of course, are a much simpler instrument
for manipulating the system of prices, currents of, trade, and the like, than
government buying-and-selling agencies. They
are one way of controlling what men will do, by controlling what is profitable.
The difficulty of resisting economic
tendencies is merely the difficulty of preventing masses of men from doing what
you leave it to their advantage to do.
23
In the first place, they retained, as I have said,
a limited form of the belief in economic harmonies.
Individuals, if free to seek their best
markets, would generally do just the things that were best for the nation,
because the “operation” of economic laws would insure a coincidence of their own
interests with the national interest. Hence
governmental activity of the kind that sought to cut off any group of buyers or
sellers from their best markets, and force them to resort to inferior markets,
injured the nation, as well as this group, and all for the benefit of the
favored group that got their business. In
other words, this kind of “interference” with “natural” tendencies was opposed
on the ground that the latter are, not irresistible or unalterable, but better
for the nation than the new tendencies “artificially” created by the
interference.
In the second place, such methods as were then
available or even conceivable for changing or modifying the action of other
“natural” economic tendencies that were freely admitted to be less beneficial to
the nation, were in many cases regarded by the economists, for one reason or
another, as unpromising, unsafe, or undesirable.
The “natural” tendency of population growth to force wages to the level
of subsistence was not a beneficent tendency. But
Malthus saw no good remedy except that of urging laborers to practise moral
restraint, and advocated this, tho it did not promise to accomplish much.
Some of his followers, more boldly,
advocated the more promising remedy of birth control.
Of course state action was hardly
involved here. But in opposing the
existing Poor Law, the reformers were, of course, arguing that this bit of state
action was accelerating, instead of checking, the harmful natural tendency.
Again, to glance at a very different
field, the monetary theories and policies of the classical economists empha-
24
sized the desirability of adhering to the
“automatic” gold standard, which leaves the regulation of the value of money to
the working of “natural” tendencies. This
was not because they thought that the regulation thus secured was perfect, from
the point of view of the general interest of the nation; still less was it
because they imagined that effective state interference with the value of money
was impossible. Their argument, which is
still respected by many economists, was simply that “artificial” control in this
case was pretty certain in practice to work even less well than the automatic
system.
These familiar illustrations, taken together, may
suffice to drive home the point that the classical economists never held that
“economic laws” describe a “natural course of things” in the economic world
which human efforts cannot alter. They
believed in natural tendencies, processes of adjustment or equilibration, which
are in some cases socially beneficent, and in some cases not; which can be
engineered, manipulated, or controlled, given sufficient knowledge and the right
methods; but which cannot be abolished or thwarted by simple decree, cannot be
ignored in devising sound legislation, and should not be tampered or interfered
with in cases where we are not in a position to control them properly and in a
way that is really in the common interest.
The further development of the orthodox type of
theory, in the last two generations, has brought with it an ever-increasing
interest, on the part of economists, in schemes for “manipulating” the “economic
mechanism” in socially desirable ways. Control
of currency and credit systems is the most conspicuous case.
But most of the new forms of
governmental activity for the betterment of economic conditions, which many
econ-
25
omists have supported from their inception
- forms of labor legislation, social
insurance, regulation of public utilities, - may be said in a sense to fall
within this category, as they all involve attempts to alter the direction and
effects of natural tendencies, not by passing laws against them, but by creating
new conditions under which the play of supply and demand will have new effects.
As economic knowledge advances, and
society’s facilities for effective control of its economic system increase, the
limits upon its power to redirect economic tendencies are pushed back.
There remains still, however, a difficulty with the conception of an economic “mechanism” which can be “manipulated.” The human beings who have to do the manipulating are, so to speak, themselves parts of the mechanism
. 7 The conception seems to involve a dualism which leaves the “economic man” a cog in the mechanism, but regards the same man in his capacity as a .“political man,” a citizen, reformer, legislator, or public administrator, as “free” to act in the light of his knowledge of what is needed to promote the general welfare, instead of having his action even approximately or partially “determined” by the economic or the political and social situation in which he is placed, and by the way in which it affects his economic or his political interests, or his mores and prejudices.
Now just this dualism was, in a way, the most marked feature of
the outlook of the eighteenth-century reformers, the French philosophes,
the Physiocrats among them, and the English utilitarians and classical
economists who carried on this eighteenth-century tradition in the early
nineteenth century. They all had
the
7. This point is developed in a somewhat different
way in an article by the late A. A. Young: “Economics as a Field of Research,”
Q. J. E., Nov. 1927.
26
mechanistic idea, and worked out explanatory
theories of the forces that determine the actions of individuals and the
processes of social life. At the same
time, in their programs for political, economic, and social reform, they were
naïve “rationalists”; that is, they assumed that a society of enlightened men
would be able to use government as a scientific tool for carrying out purely
rational measures in the common interest. Man
the citizen would use a “reason” ungoverned and undistorted in its working, or
in the ends in whose service it would work, by the pressure of his particular
environment upon his particular interests and desires.
But man as the being whose conduct the
rational measures of the state were to control, would remain something like an
automaton, reacting in predictable ways to his environment and to the forces
brought to bear upon him by the new social order.
It is true that they all tried to get around the
difficulty by applying in political theory, as well as in economic theory, the
conception of a harmony of interests. The
Physiocrats contended that the king’s real interest was necessarily identical
with that of his subjects taken as a body: “poor peasants, poor kingdom; poor
kingdom, poor king.” Other reformers,
notably the English utilitarians, did not find this harmony working out under
existing governments; but proposed to create it by setting up a complete system
of democratic control. In both cases,
however, the argument presupposed the possibility of the achievement, by rulers
and by ruled, of a level of intelligence or rationality at which conduct would
be determined, not by the immediate and particular environments and interests of
the actors, but by those “real” interests which were held to be identical with
the general interest of society. It was
the “enlightenment” that was counted upon to make the
27
political mechanism work as harmoniously as the
economic mechanism which it was to control (or whose freedom to operate
“naturally” it was to maintain). But the
mechanistic theory of human behavior, if rigidly adhered to, is not really
compatible with this belief in the power of men to make their conduct completely
rational. The eighteenth-century
reformers never really explained or accounted for those irrational prejudices,
and narrow and anti-social interests and passions, which they expected to see
eliminated in the new “natural” or rational order of things.
Men’s mental mechanisms were and through
the centuries had been reacting to their particular environments in such a way
as to produce conduct that was largely irrational; and the hope of changing this
really required a belief that man is more than a mechanism; that he can assert
his reason and his will and change the nature of his motives.
The Physiocrats, with their belief in a
measure of “free will” and in the power of reason to judge motives and ends from
an ideal standpoint, were consistent. But
the strict determinists, including the English utilitarians and perhaps the
classical economists, were I think unconsciously caught in a circle.
The same dilemma, I think, must be faced by the
modern behaviorists in psychology. And
it must be faced by economists who conceive the economic system as a mechanism
to be manipulated. One can fancy that a
man trained in economic theory might transfer his energies to the field of
political theory, and attempt to formulate the laws of the natural working of
the democratic political mechanism, on certain assumptions taken from experience
as to the motives and purposes of average voters and average politicians.
The result might be interesting.
But would it increase our faith in the
practical possibility and desirability of governmen-
28
tal manipulation of the economic system? Of course there is only one way out of the difficulty. This is to admit that the mechanistic approach to social theory, while useful within limits, does not reveal the whole nature of social reality. The motives of individuals, which are the ultimate “forces” dealt with in this type of theory, are themselves changeable, and do change, as civilization develops; nor can we afford to admit that this historic evolution is itself rigidly determined and fated to proceed in a given direction. Man has a measure of “freedom” to bring the character of his motives under the control of his “reason.” To deny this, I think, is to be a fatalist. The classical economists and their utilitarian allies in reality escaped complete fatalism only because they inconsistently assumed that a democratic legislature could work consistently for the “greatest good of the greatest number,” and do all necessary manipulating of the circumstances that determine the paths of conduct of private men, without having its own motives manipulated by irrational political forces. When Carlyle accused them of being fatalists, he was mistaken; but he was not so far wrong when he criticized them for supposing that all society’s problems could be solved by tinkering with mechanisms, and insisted that a change in the spirit and ideals of the nation might be far more important
. 8
To return to my original proposition in this whole
part of the discussion, we have to conclude, I think, that in more ways than one
the “laws” of economic theory are far from being “inexorable.”
The classical economists strongly tended
to regard them as inexorable, but only in the sense that under given conditions,
which
8. For the charge of fatalism, see Past and
Present, Books I and III passim; and for the other charge, Signs
of the Times, in Illustrated Library ed. of’ Carlyle’s Works, i, 465 ff.
29
society certainly could alter in some cases,
certain adjustments in the economic system would inevitably work themselves out,
and prices, wages, and profits, in all industries, would seek certain levels.
The more modern view is that the laws
describing these processes of adjustment are only rough descriptions of
tendencies, or are of the nature of “statistical laws”; and in no sense rigid
“laws of nature” in the nineteenth-century meaning of that phrase.
But while the notion that economic laws are
inexorable has been decaying in recent decades, the notion that they are in some
measure beneficent, or that they guarantee a certain measure of “harmony” in the
working of the whole economic system, has hardly shown the same signs of
disappearing completely. Accepted by the
classical economists only in a limited form, it enjoyed, in the second half of
the nineteenth century, a certain renaissance and further development.
Bastiat and his followers, a little
earlier in the century, carried it out to absurd lengths.
The marginal utility and marginal
productivity schools, when they came along, developed a terminology which almost
inevitably suggests it, and some of them went far in accepting it outright.
More “optimistic” views about population
growth, the continual “postponement” of the stage of “diminishing returns,” the
“natural” factors making for “increasing returns” in many or even in all
industries with the growth of population and of capital, and the action of the
forces that determine wages, came to prevail. To
look at a different aspect of the matter, opposition to socialism was
undoubtedly a factor in causing various economists to argue that in our present
economic system, the play of “natural” forces brings about a large or maximum
social product, and a fairly equitable division or distribution of it among
individuals and among
30
social classes. The
great majority of the theorists now writing are more cautious; but the doctrine
of “economic harmonies,” understood not as meaning that we live in the best of
all possible economic worlds, but as meaning merely that the “natural” or
spontaneous tendencies which work themselves out in a more or less freely
“competitive” society are very often socially desirable tendencies - this
doctrine, or opinion, cannot yet be said to be entirely dead.
It is useful to compare the persistence of this
idea in economics, with the persistence of the corresponding idea in natural
science. In its origins, the idea in
both cases was undoubtedly connected with the eighteenth century’s theological
and teleological philosophy of natural laws. But
it does not follow from this that it was bound to be, or should have been,
discarded completely, as soon as science became completely separated from
theology. For even when we reject the
notion that Providence ordained the laws of nature, we do not therefore
necessarily reject the belief, which must of course be tested by facts, that the
processes described by scientific laws are processes of adjustment of things to
changing conditions, which tend to preserve a certain measure of “order” and
“harmony”; or to insure, under all conditions, the effective functioning of
individual entities in the systems of which they are parts.
Nor has this idea ever disappeared from
scientific thought. Even the theory of
evolution by natural selection, which has done more than anything else to
undermine the design argument for a Deity, is an alternative explanation, and
not a denial, of the “adaptations” on which that argument was based.
In other words, it still encourages the
view that nature’s processes, as seen in the biological world, are processes of
adjustment of things to their environments, or of the attainment of an
increasing measure of
31
“harmony.” There
is certainly an analogy between this and the idea that in the economic life of
human societies, the “natural” working of competition brings about an adjustment
or adaptation of the whole economic system to the physiographic environment, and
of every individual to the economic system of which he is a part.
The eighteenth century’s optimistic philosophy of the harmonious order and wise laws of nature was perhaps not so much a deduction from a priori theological postulates, as an inference from facts which were in the main correctly analyzed. But the inference was overstated and turned into an argument for the “design” hypothesis
. 9 Of course this tended to happen because the hypothesis was there from the outset, and facts were selected and interpreted, and theories stated, in such a way as to confirm it. But the effect of this was not wholly bad. The faith that the “plan” of nature’s operations would turn out everywhere to be rational and wise, probably guided modern science in its beginnings to its most valuable discoveries. It stimulated the search for “order,” for uniformities in nature’s procedure under similar conditions and for differences of procedure adapted to different conditions, for the simplest and the smallest number of principles to explain complex and apparently diverse phenomena, and for indirect causal connections that would give every event, however isolated and inexplicable it might seem at first sight, its appropriate place in the general “scheme.” But the same faith also led to some unwarranted conclusions. Too much meaning was read into the order and harmony which science seemed to be discovering in
9. Adam Smith, for one, distinctly held that
whatever is valid in theology is an inference from, and not a postulate from
which to deduce,, the harmonious Order of Nature, which is independently
revealed by science. See his (much
neglected) “philosophical essays,” especially the essay on the history of
physics.
32
nature’s plan. Being taken as proofs of the wisdom of God, they had to be regarded as completely worthy of that wisdom. The coming of Darwinism, while it did not do away with the idea that nature works toward adjustment and harmony, called attention to the fact that she works toward them, so to speak, by methods which are from the human point of view most often wasteful and cruel; or which involve the perpetual recurrence of a certain amount of maladjustment and disharmony)
. 1 In a word, what has happened since the eighteenth century, in natural science as in economics, has been a serious modification, but hardly a complete abandonment, of the belief in an harmonious Order of Nature.That a trace of that belief remains implicit, legitimately as I think, in modern orthodox economic theory, it seems impossible to deny
. 2 It is true that modern theorists are aware that there is no marvellous perfection in the working of our economic system; that its quasi-automatic adjustments do not insure anything like the absolutely wisest utilization of society’s resources in meeting its wants, or the largest possible output of useful goods and services; and that distribution of the output among the agents of production in accordance with the “marginal productivity” of each agent, is not necessarily synonymous with distributive justice. The ad-
1. See the comment above, p. 9, note 8, on Huxley’s
views.
2. Many modern theorists say that evaluative
judgments upon the working of the economic system, and upon public policies, are
no part of the business of the economist, qua economist or scientist; and
repudiate justificatory inferences from theory on this ground.
But this seems to me less important than
the fact that their scientific theory does lead, naturally if not logically, to
a certain measure of “optimism,” if one accepts it as valid and then applies his
common sense to the evaluative problem. I
am convinced that the way to divorce economic theory from dogmatic and
doctrinaire philosophies of public policy, is not to try to dodge the evaluative
problem, but to try hard to solve it as honestly and carefully as we can.
33
justments that do work themselves out, in a rather
haphazard and wasteful way, are at all times imperfect.
It is certainly conceivable that a
sufficiently intelligent, well-informed, efficient, and wisely zealous central
planning authority, of the type desired by socialists, might eliminate much
waste and maladjustment. But many
theorists still believe that socialists, and most laymen as well, underrate both
the effectiveness of the forces that make for tolerably good adjustments in our
present system, and the difficulty of securing even equally good adjustments in
a planned economy; and that at all events, so long as we retain our present
system, sporadic interferences with the flow of things to their best markets,
and with the resulting levels of prices, are very often in danger of doing more
harm than good. This, much qualified,
version of the belief in economic harmonies is not, I think, at all out of
keeping with the tone of the most “up-to-date” and “scientific” thinking, in the
natural sciences.
A brief recognition of some possible doubts about
this last conclusion, and of the further problems which they raise, will provide
the best transition to the second instaliment of this discussion, which I hope
to publish in the near future.
I have argued that modern science still supports
the view that in the inorganic and organic worlds nature works in the direction
of a certain measure of what is in a certain sense harmony: equilibrium of
forces, adjustment of things to their environments, development of organs to
perform necessary functions. This is
truly analogous to the view that the natural working of competition tends in the
economic world to produce a general “equilibrium,” adjustment of supplies to
demands, of prices to costs, and so on. But
there is the difficulty
34
of what is meant by calling the economic process,
which is supposed to bring about these adjustments, a “natural” process and
regarding it as the process in economic life which corresponds to other
“natural” processes, outside of human societies.
This difficulty arises from the fact that in our society, a particular
fabric of “institutions,” mores and customs, and business methods, in
large degree peculiar to our own civilization, constantly changing, and
changeable by deliberate, collective effort, condition the working out of the
process in its every phase. No doubt if
the word “nature” is used in its widest and perhaps its proper sense, mankind
and its societies are parts of nature, and everything that goes on in society,
including the growth of institutions, is part of a system of natural processes.
But this is not the sense in which the
adjective is used when and if the quasi-automatic working of the competitive
economic system is called natural. A
contrast is implied between the “natural” or spontaneous tendencies which are
there at work and are described by economic “laws,” and the “artificial” or
deliberate regulation of economic life by the state or by some other authority.
But in fact the working of the economic
system is in all times and places, and even in the theorists’ imaginary world of
pure or perfect competition, regulated in manifold ways by legal institutions
and social conventions, which are perhaps as artificial as the interfering
methods of control deplored by old-fashioned liberals.
Why draw the line at this particular
point between the “natural” tendencies in the economic life of society, and
other tendencies, represented in the activities of labor unions, of governments,
of socialist agitators, and the like, which perhaps are also a part of the
general system of tendencies toward better adjustment to environment on the part
of society and of its members?
35
The same objection may be stated in another way.
The adjustments which work themselves
out in the inorganic and organic worlds cannot properly be judged or evaluated
by human standards and called “good.”
To say that nature works in the direction of an equilibrium of forces,
and of adaptation of things to their environments, is not to say that she works
toward results that accord with human ideals. Biological
“adaptation” insures only “survival”; and while some thinkers have tried to get
an ethic out of Darwinism, and connect all valid human ideals with the struggle
of human beings and of groups and races to survive by achieving biological or
economic adaptation to environment, this ethic does not seem to many, nor I
confess to me, at all adequate. Whatever
of good, or social welfare, is achieved by human communities is achieved not by
any purely automatic and in that sense natural process, but by deliberate
efforts guided by human ideals. If the
whole of social life is called a natural process, then nature in this case is
working toward humanly valuable ends; but only because we have enlarged nature
to include man and his ideals and his conscious efforts to attain them.
Now the natural economic process of
orthodox economic theory is of course not wholly an automatic or blind
process. It is the result of the
interplay of the conscious efforts of all individuals to achieve their more or
less private and self-centered ambitions, by achieving economic “adaptation.”
Society, moreover, has evolved a division of labor which makes men
interdependent, a system of institutional restraints to limit what we stigmatize
as robbery and exploitation, and a régime of “competition” of a particular kind
of which one aspect is “competition in service.”
As a result there is a partial coincidence of individual and social
interests, and the indirect and unforeseen results of pri-
36
vate actions directed only to a private and therefore partial good are often contributory to a larger social good. But precisely in so far as it is blind or automatic, and in that sense natural; in so far, in other words, as it is not guided by human foresight employed in the service of completely ethical ideals, in just so far does the economic process described by economic laws fall short of being the kind of social process that can result in the complete “harmony” that would really “maximize welfare.” What is good in the process and its outcome is the result of what is good in the purposes of individuals, and in the mores and the institutions by which their purposes are partly socialized, or by which, at least, their actual conduct is partly socialized, the element of social purpose being embodied in these very institutions and mores. There can be no warrant, then, for the belief that a more socialization of economic life and activity, a more complete control of it by human intelligence engaged directly in the service of social welfare, would not increase the amount of economic harmony achieved. The securing of this harmony cannot be left to an automatic natural process. The process to which it is entrusted at present is defective just in so far as it is in this sense natural; and to make it a less automatic and more socially purposeful process ought to be our aim
. 3
Of course the social purpose behind institutions
and mores is not at present a fully conscious purpose.
They have been built up by compromises
among more limited purposes, by a kind of automatic “natural selection”
3. It should hardly be necessary for me to say that
by “socializing” economic activity, and making it “socially purposeful,” I do
not mean, necessarily, what socialists and other critics of “the profit-motive”
mean by such terms. The desire, and the
freedom, of individuals to choose and carry on the lines of activity in which
they can make, legitimately, the largest gains for themselves, by supplying
services that others want, is not incompatible with a will on the part of all to
make the general good, and not any private good that conflicts with it, the
supreme end.
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of elements in the institutional fabric which
further “group survival,” and by periodic reform movements that have tried to
bring a fully conscious social purpose to bear upon them.
The automatic or “natural” part of the process of the growth of
institutions may do better work in the long run than deliberate effort guided by
insufficient knowledge and foresight can do; but it can never do as good work as
a conscious social purpose can do, when fully armed, by social science.
It can fit societies to prosper
materially and morally, to the extent needed for “survival”; but not to the
extent needed for full achievement of the “good life.”
These objections to the notion that the automatic
operation of “natural” economic laws can be trusted to take care of all needed
adjustments in a community’s economic system, and to make it work for the
general welfare, have been for a century the chief burden of the arguments of
most rebels against orthodox economics. As
against that notion, stated in just that form, I think they are undoubtedly
valid. The processes described by
economic laws are real processes, and they are processes of adjustment,
comparable in a sense to other natural processes.
They make in a measure and in many cases
for economic harmony and social welfare, but only because and in so far as the
human purpose to promote these ends is, in a sense, active in them, in the wills
of the individuals who carry on economic life, and in the institutions and
mores that help to control their activities.
To make this human purpose as strong and effective as possible, and to
modify our institutions to this end in so far as that may be necessary, must be
our aim. If I believed that this
conclusion was really contrary to the spirit and purport of the traditional type
of economics, I should be among the “rebels.”
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But I believe there is another, neglected, aspect of the philosophies of the eighteenth-century pioneers who gave this type of economics its direction. The present article has considered only those aspects of the notion of natural economic laws, as accepted in the past, which have strict parallels in the history of the idea of such laws in natural science. But the reader will recall that the Physiocrats, and Adam Smith, believed not only that there are causal “laws of nature” which control the course of events in the universe at large and in society, but also that there is a moral “Law of Nature,” consisting of the rules which, as Adam Smith said, “ought to run through and be the foundation of the [civil] laws of all nations.”
4 This notion pervaded their philosophies of what the institutions of a rationally ordered society ought to be. It was, in the case especially of the Physiocrats, confusingly blended with their notion of causal or explanatory economic laws, by a twist characteristic of eighteenth-century thought, but not readily intelligible or comprehensible to modern minds. A clearer interpretation than has ever been given of this whole side of their teachings would, I believe, throw new light upon their conceptions of economic laws, their ideals as to laissez-faire or natural liberty, and the foundations of such faith as they had in economic harmonies; and would give us a new point of departure for a study of the historical relations of orthodox economic theory to social ideals, reform movements, and ethical and legal philosophies. To make this clear will be the purpose of the second part of this discussion.
4. Theory of
Moral Sentiments, Part VII, Section IV; in 6th ed., ii, 395-399.
O.H.
39
The Competitiveness of Nations
in a Global Knowledge-Based Economy
October 2002