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analysis, a clumsy tool, an encumbrance rather than a help. But for the moment, we are not concerned with this, but with a third point. For reasons quite different from those that motivate the attitude of modern theorists, economists of the period under survey were reluctant to accept the triad, which accordingly conquered but slowly and incompletely— a fact that, considering the obviousness of the schema, calls for explanation. Moreover, examination of these reasons will teach us an interesting lesson about the ‘ways of the human mind’ in our field. In Chapter 6 of the First Book of the Wealth of Nations, A.Smith decomposed the price of products into three components: wages, rent, and profit. In Chapter 7, these prices are built up again from these same components. 8 In itself, this points strongly enough toward the triad of factors. But the pointer is completely lost in the argument of Chapter 6. There, laborers, landlords, and capitalists are indeed introduced as participants in the process of distribution, but their shares are not construed as returns from the productive employment of their factors: if not wholly denied, and even if occasionally ‘recognized,’ 9 this factor-value aspect of distributive shares is brushed aside in favor of quite another aspect. A.Smith, it will be remembered, tries to show how the landlord’s and the capitalist’s shares are ‘deducted’ from the total product that ‘naturally’ is, in its entirety, the product of labor. And this seems to point toward a different conceptual arrangement, which reserves the role of factor of production for labor alone and bars the outlook on the triad of factors in spite of the fact that A.Smith’s language on the first page of Chapter 7 is clearly suggestive of it. A.Smith’s exposition has been restated, in the first place, because it anticipates instructively the situation that prevailed in this corner of economic theory throughout the period. Whether under A.Smith’s influence or independently, some economists took the line indicated by the one of A.Smith’s pointers, and some took the line indicated by the other. But the majority hesitated and compromised, though the tendency was all along in favor of the triad of factors. In the second place, we have started from A.Smith because his exposition illustrates very well the nature of the main obstacle that stood in the way of smooth acceptance of the three-factor schema. In order to see it, we must recall once more that the proposition that labor alone produces the whole product has no empirical content that could be relevant in an analysis of the facts of the economic process: clearly, nobody can maintain that labor is all that is needed in order to produce something, except in a class of cases without importance. But the proposition may have ‘meta-economic’ meaning of an ethical color and it agrees well with the emotional propensities and the political doctrines of sponsors of the interests of labor who, like A.Smith, loved to declaim about the laborer who produces everything for everybody and himself ‘goes in rags.’ They thought that they were gaining a point for labor by clinging to that doctrine, and they were confirmed in this childish belief by the no less childish belief of many sponsors of the triad that setting up land or capital as factors of production was gaining a point for landlords or capitalists. 10 They failed to see that their ethical philosophies and political doctrines were logically irrelevant for the explanation of economic reality as it is. In other words, they failed to see that all that matters for this purpose is 8 These are equilibrium prices. As we know, the arrangement referred to embodies A.Smith’s manner of recognizing the fact of general interdependence between the elements of the economic system and constitutes one of his greatest merits in the field of pure analysis. But we also know that it was much misunderstood—some critics even saw circular reasoning in it. History of economic analysis 532 9 Thus, A.Smith described the gross revenue of society as ‘the whole produce of their land and labour’ (beginning of ch. 2, Book II). 10 I do not deny, of course, that slogans for popular consumption may be derived from either analytic set-up. To that extent—that is, if meant for the sole purpose of taking in slow-witted people—neither was childish. Only the honest belief was childish that any analytic arrangement about factors of production could in good logic strengthen the political use either for or against the claims of their owners. That this is not so has been pointed out repeatedly in this book: even if there were any sense in maintaining that, e.g., land produces everything, this would not constitute any reason why the returns from it should go to its owners. the simple fact that, in order to produce, a firm needs not only labor but all the things that are included in land and capital as well, and that this is all that is implied in setting up the three factors. In still other words, they had not yet a clear conception of the distinctive purposes of analysis—have we?—and of what is and what is not relevant to the analytic purpose. It will be realized therefore that to see this distinctive purpose and to perceive that the three-factor schema served it in a simple way was, under the circumstances, not quite so easy as one might infer from its obviousness and that hence its adoption spelled considerable analytic merit after all. There is, however, another aspect to the matter. If one accepts a labor-quantity theory of value, either in Ricardo’s or in Marx’s manner (see below, ch. 6, sec. 2a), the three- factor schema, which we have been commending for its simplicity, meets with analytic difficulties that are quite independent of any philosophies. For the distributive shares must be paid from prices of products that, owing to the presence of claimants other than labor, cannot in general be proportional to the quantities of labor embodied in those products. A new problem therefore arises concerning the manner in which those other claims are satisfied. And in attempting to solve this problem, we find the triad of factors that puts these factors all in fundamentally the same logical position very inconvenient to handle: 11 from this standpoint the mere fact that all agents are equally ‘requisite’ cannot any longer be regarded as decisive. Note this interesting fact: from the standpoint of any theory of value other than the labor-quantity theory, this problem appears as a choice example of a spurious problem, that is, a problem that owes its very existence to defective analysis and disappears, without any trouble, if the defective element, in this case the labor-quantity theory of value, be removed; but from the standpoint of the labor- quantity theory of value, the problem in question becomes the most important of all, the problem the solution of which must reveal the innermost secret of capitalist society. Marx had therefore plenty of reason to rise in wrath against the triad of factors and to condemn it as a piece of vile apologetics that, reducing colorful struggles of social classes to colorless allocations of returns to co-operating factors, emasculated capitalist reality. 12 Sometimes, 11 James Mill and McCulloch tried to do this with very indifferent success. 12 Conceiving of economic analysis as an element in social evolution—and theories other than his as the fog that rises from it—Marx, as stated above, was of the opinion that, after Ricardo, ‘bourgeois economics’ had entered a stage of decay along with the society that produced it. It is not without interest to ask what the facts were he took for manifestations of this decay. The first we know already: it was the refusal of ‘bourgeois’ economics to couch its analysis in terms of social classes. The second, related to the first, was precisely the increasing tendency to adopt the three- factor schema. The third was the tendency to assert that the economic process, however much given General economics 533 to stalling under the impact of ‘disturbances,’ was yet free, in its pure logic, from inherent hitches. Marx took this for another piece of ‘whitewashing’ though, from another standpoint, it was the natural consequence of improved analysis. The fourth was the tendency to replace what Marx considered to be profoundest truth by a description of the surface phenomena of business practice as they appear to the business- the task of analysis is rendered difficult by the nature of its problems—wave mechanics is a good example. Sometimes the difficulties are not in the things but in our own minds. As soon as this is understood, we can deal very briefly with the facts of the case. The aversion to the triad schema that was due to philosophical or political or emotional causes gave way eventually and in the end asserted itself merely in verbal concessions. The obstacle of the labor-quantity theory was, of course, next to insuperable for Ricardo himself and for the Ricardian socialists, including Marx. But it was overcome by the non- Ricardian and anti-Ricardian theory of the 1830’s—which shows again that the Ricardian teaching was really in the nature of a detour. On the Continent, Say—possibly following Turgot’s lead—established the triad schema 13 and the practice of dealing, both in the theory of production and in the theory of distribution, with the ‘services’ of the three factors on the same footing. In England, Lauderdale was the first major writer to set up capital as a distinct factor. Malthus placed no emphasis upon the triad but his theoretical set-up implies it. Torrens, Read, and Senior, especially the last, are the most important of the economists who helped it toward anchorage in English economics. 14 J.S.Mill, finally, adopted it in substance but hesitatingly and without going through with it—in a way that mirrors the actual doctrinal situation very well. He started like Petty with two ‘requisites’ of production, a felicitous term that disarms unintelligent criticism by avoiding any suggestion to the effect that ‘agents’ might be morally entitled to ‘rewards.’ 15 Then he noticed the fact that the economic process of every period also depends on the stock of goods that is available at the beginning of the period which is all that is implied in setting up ‘capital’ as a distinct factor. And so he recognized capital as a factor but distinguished it from the other two, the two ‘original’ ones. 16 Senior had spoken of capital as a ‘secondary’ agent in contrast to the two ‘primary’ ones. There is in fact point in maintaining that capital is a ‘factor with a difference.’ For, if capital is goods, it raises problems of depreciation and renewal that the other two factors do not raise. And if capital is so defined as to include wage goods, it is not quite on a par with land and labor but stands to them, so far as the wage goods are concerned, in a relation that is peculiar to it. But J.S.Mill did not go much further than this. Though he did recognize occasionally that in this schema the rent of land enters or does not enter into price and cost exactly as do wages, he yet refused to put land quite on a par with labor. He man. It is for the reader—and an excellent exercise it would be—to make up his mind on these points now. 13 He also generalized ‘land’ into ‘natural agents.’ 14 And in spite of Say’s priority and in spite of the fact that we moderns do not think very highly of it, there was considerable merit in this around 1830. 15 The term Requisite is, so far as I know, due to James Mill, who has labor and capital, however, instead of labor and land. J.S.Mill uses also the term Agents. 16 If we wished to be nasty, we could quote him to the effect that he started with two factors and, after prolonged discussion, ‘reduced’ these two factors to three (Book I, ch. 1, 1 and ch. 7, 1). History of economic analysis 534 therefore clung, officially as it were, to the Ricardian theory of rent, although it was quite superfluous for him. 17 And capital remained stored-up labor for him, as it had been for James Mill, although from the standpoint of his schema and if he wished to ‘resolve’ capital into something else, he should have ‘resolved’ it into stored-up services of labor and land. 18 To sum up: the question what is and what is not to be ‘recognized,’ by the analyst, as an agent of production is a mere question of analytic convenience and efficiency. As such, however, it is very important, for the way in which a writer answers it will, to a considerable extent, determine his schema of the economic process and the formulation of the problems to be solved. At an early stage of analysis, the triad of agents suggests itself primarily because it links up nicely with the three categories of participants in the economic process that are derived from the layman’s picture of society. But it so happens that the triad also makes economic sense because it presents a complete list of the requisites of physical production, the items of which are both nonoverlapping and distinguished by economically relevant characteristics. Therefore, it makes a useful basis to start from. J.B.Say seems to have been the first to realize this fully. But most of the economists of the period did not look at the matter in this light. They believed that when they were deciding what to ‘recognize’ as an agent, they were dealing with momentous real problems of analysis and, still more important, of social justice. Hence we find widespread reluctance to adopt the triad, which was reinforced, in some cases, by a theory of value that did not work well with it and by the fact that the role of capital in the productive process does display certain traits that are not shared by the two ‘original’ or ‘primary’ agents. And so one-factor schemata and two-factor schemata survived throughout. Moreover, even writers who in fact adopted the three-factor scheme displayed a tendency to make verbal concessions to the other two 19 —which further obscures the situation. (c) The Model. In every scientific venture, the thing that comes first is Vision. That is to say, before embarking upon analytic work of any kind we 17 The specifically Ricardian element in the theory of rent was logically superfluous for him because mere ‘requisiteness’ of land plus its scarcity is all that is needed to explain the price of its services. Yet he commits himself to the Ricardian view of rent, e.g., in the last sentence of 2, ch. 2, of Book III. 18 Let us notice at once that this ‘resolution’ of capital goods, e.g., a machine, involves two problems: first, the ‘resolution’ of the machine into the factors that enter into it and include services of other capital goods; second, the ‘resolution’ into land and labor only (or, with Marx, into labor only). In the next period it was especially Böhm-Bawerk and, following him, Wicksell who used and propagated the ‘resolution’ into land and labor. 19 Such a verbal concession that veils a man’s acceptance of the triad is instanced by the turn of phrase that capital increases the productivity of labor (or that its function consists in making labor more effective). This seems to point toward a one-factor theory by confining the honorific quality of productivity to labor alone but actually does, so far as explanation of facts is concerned, exactly what ‘recognition’ of capital as an agent of production is meant to do. General economics 535 must first single out the set of phenomena we wish to investigate, and acquire ‘intuitively’ a preliminary notion of how they hang together or, in other words, of what appear from our standpoint to be their fundamental properties. This should be obvious. If it is not, this is only owing to the fact that in practice we mostly do not start from a vision of our own but from the work of our predecessors or from ideas that float in the public mind. We then proceed to conceptualize our vision and to develop or correct it by closer examination of facts, two tasks that of necessity go together—the concepts we possess at any time and the logical relation between them suggesting further factual investigation and further factual investigation suggesting new concepts and relations. The total or ‘system’ of our concepts and of the relations that we establish between them is what we call a theory or a model. We have had ample opportunity to observe how difficult a task conceptualization is in the early stages of analytic effort, chiefly because the scientific fraternity takes time to learn, by a process of trial and error, what is and what is not important in an ‘explanation’ of the phenomena envisaged. In economics, particularly, there are many inhibitions to overcome before the nature of the analyst’s task can be clearly understood. But model building, that is, conscious attempts at systematization of concepts and relations, is more difficult still and characterizes a later Stage of scientific endeavor. In economics, efforts of this kind date, substantially, from Cantillon and Quesnay. In the period under discussion, a model evolved from the Cantillon-Quesnay pattern that, since we already know the actors and the agents that figure in it, may be briefly described as follows. Consideration of details will be deferred to the next chapter. 20 Moreover, comments on the ‘classic’ schema of economic evolution will be deferred to the next section. In this section I shall present the ‘classic’ schema of a stationary process only—a schema which, in this respect, was much like that of Quesnay. From A.Smith on, most of the English ‘classics’ used the term Stationary State. But this stationary state was an actual condition of the economic process which they expected to materialize sometime in the future. Taken in this sense, the subject of the stationary state belongs in the next section. Here we are concerned with a different kind of stationary state, namely, with a stationary state that is not a future reality but only a conceptual construct or tool of analysis that serves to isolate, for the purposes of a preliminary study, the group of economic phenomena that would be observable in an unchanging economic process. The first to recognize explicitly the methodological importance of doing this was J.S.Mill. But Marx, whose schema of Simple Reproduction (Capital, vol. I, ch. 23) is the schema of an economic process that merely reproduces itself in time, went much more deeply than Mill. All other writers, however, including A.Smith and Ricardo, actually used that tool but, not being aware of the fact that they were using any particular device of this kind, they used it in a haphazard and unsatisfactory manner. This point be- ing both important and somewhat difficult to understand calls for additional comment. We have repeatedly had the opportunity to advert to the slow development, not completed within the period under discussion or even 20 This procedure entails the disadvantage that certain concepts will have to be used before they have been fully explained. No serious inconvenience will, however, arise from this. History of economic analysis 536 within the next one, of the notions of economic (or social) statics and dynamics. J.S.Mill, who as we have seen probably took them from Comte and used them in his logic, defined statics as the theory of ‘the economical phenomena of society considered as existing simultaneously’ (Principles, Book IV, ch. 1, 1). This definition, by itself, might pass muster as an anticipation of the modern definition (Frisch). Statics as thus defined pivots on the concept of (stable or unstable) equilibrium that appears in Mill and in the ‘classic’ literature generally, for example, in the garb of such constructs as the ‘natural’ or ‘necessary’ prices. But a little later, we learn that in the passage quoted he did not really think of the statics that is defined by his wording or, rather, that he confused it with ‘the economical laws of a stationary and unchanging society.’ As we shall see more clearly later on, these are different things: we can study a changing process by means of a static method (comparative statics, see below, Part IV, ch. 7, sec. 3a) and an unchanging process by means of a sequence analysis of the kind which Sismondi occasionally used, and which relates economic quantities that belong to different points of time—i.e., by means of a dynamic theory in the sense of Frisch. Mill, following Comte, understood by dynamics something altogether different, namely, the analysis of those forces that produce fundamental change in the long run—the kind of thing we shall discuss in the next section. All this is confusing enough. But we must add a final element to the confusion. In addition to speaking of a static theory and of a stationary state, which is an analytic tool, Mill also, like Ricardo, expected the economic process to settle down, at some future time, into a stationary state of a special kind that will not be an analytic device for facilitating the study of a nonstationary reality but will be itself a reality. I repeat that, in all this, Mill did no more than to make explicit what everybody fumbled for. Some of the fundamental features of the ‘classic’ model or models of the stationary process may be thus described in Ricardo’s words (Principles, ch. 31). Suppose that a capitalist ‘employs a capital of the value of £20,000’ and ‘that profits are 10 per cent’ Of this capital, £7000 are ‘invested in fixed capital, viz. in buildings, implements, etc. etc.’ and ‘the remaining £13,000 is employed’ as wage capital 21 ‘in the support of labour.’ ‘Each year the capitalist begins his operations by having food and necessaries in his possession to the value of £13,000 [plus another quantity of the value of £2000 destined for his own consumption, J.A.S.], all of which he sells in the course of the year to his own workmen for that sum of money, and, during the same period, he pays them the like amount of money for wages: at the end of the year, they 21 Ricardo wrote ‘circulating capital,’ but see below, ch. 6, sec. 5b. General economics 537 replace in his possession food and necessaries of the value of £15,000, £2000 of which’ he then consumes himself in the following year 22 —a piece of sequence analysis that is certainly the last word in simplicity—which is why I refrain from elucidating it either by a system of equation or by a tableau of the Quesnay type. 23 Now, first, one feature of this model was generally accepted throughout the period, by Marx not less than by Say. This was the physiocrat notion, which it embodied, that the fundamental flows of goods (and money) that constitute the economic process consist of a flux and an (augmented) reflux of ‘advances.’ Yet, unlike the physiocrats, the ‘classics’ made the capitalists the sole source of these advances, and the value of the goods advanced swelled in the industrial process instead of in agriculture only. Nevertheless, it was substantially the old idea of Quesnay as it had already been transformed by Turgot. I cannot emphasize too strongly that this was a particular way of interpreting the economic process and not at all directly suggested by the practice of life: in practice, the employer ‘hires’ the workman—or he may be said to ‘buy’ the latter’s services—but he does not advance anything to him. Moreover, this interpretation means more than recognition of the trivial facts that whatever is being consumed must have been produced before; or that society at any moment always lives on the past and works for the future; or, finally, that initial stocks are always among the data we must start from. J.B.Clark’s theory of the synchronized process or, for that matter, Walras’ system (both discussed below, Part IV, ch. 7) proves sufficiently that these facts do not force us to make them the pivots of our analysis. But if we do make them the pivots, then a number of consequences suggest themselves that are not avoided simply by refusing to recognize them. If ‘capitalists’ actually advance labor’s real income and if this is to mean more than a monetary arrangement, discounts and ‘abstinence’ will have to be admitted among the essentials of the economic process whether we like them or not; 24 that is, no analysis of pro- duction and consumption will be complete that does not take account of them in one way or another. This is important enough to justify a distinctive label for all analytic patterns that do work with the notion under discussion. We may call them advance economics and distinguish them from synchronization economics, that is, all analytic patterns that do not in a stationary process assign any fundamental role to the fact that what society lives on 22 Ricardo neglects, of course, the wear and tear of the machines, etc. This could be easily avoided, but we shall do the same thing. The £2000 must be consumed each year or else the process would not be stationary. 23 But, in spite of its gauntness, the model we took from Ricardo will still serve two purposes that may be of some help to the reader. First it will illustrate what dynamic analysis in the modern sense is and in what it differs from the kind of investigation that J.S.Mill denoted by Dynamics. Second, it will explain what sounds like a paradox even to some economists of today, viz., how it is possible to treat a stationary process dynamically. This consists simply in describing such a process in terms of quantities that belong to a sequence in time or in terms of relations that link quantities that belong to different points of time. The particular form of dynamic analysis which this model displays is, for obvious reasons, often called Period Analysis. 24 Talk about exploitation may cover up this state of things but cannot alter it. If I were asked what I consider the easiest method for upsetting Marx’s theoretical structure, I should certainly answer: start from Marx’s admission that capitalists advance wages and develop the logical consequences of this admission. I should add, of course, that this is the answer to the question what is the easiest, not to the question what is the most profound, set of moves for the anti-Marxist to make. History of economic analysis 538 at any given moment is the result of past production, on the ground that, once a stationary process has been established, the flow of consumers’ goods and the flow of productive service are synchronized so that the process works as if society did live on current production. Second, we may as well introduce another classification of analytic patterns (‘theories’), though its practical usefulness is in the analysis of growth rather than in the analysis of stationary states. No economist has ever denied, of course, that, like every other engine, the economic engine is given to stalling, besides being sensitive to disturbance by factors external to itself. But economic models differ according to whether they are or are not built on the assumption that the economic engine has or has not an inherent tendency to develop hitches (merely by working normally and according to design), which then make it stall or stop working normally and according to design. The various forms of underconsumption theories of crises that we shall discuss later on may serve as examples: they all of them hold that, because of oversaving or other reasons, the economic system, as it goes on functioning, develops strains and stresses by virtue of its own design or logic, for example, the strain or stress that—really or supposedly—shows in the impossibility of selling the products it is capable of producing at prices that will cover costs. With apologies, I introduce the term hitchbound for models that do recognize the existence in the economic system of such inherent tendencies to stall, and the term hitchless for models that do not. For the moment, all we get from an application of this distinction is the statement: all the models of stationary processes that were ever constructed are hitchless. Marx, for example, makes this very clear—hitches do not occur in his schema of Simple Reproduction; they enter his picture only with Accumulation. A few comments may be useful. To begin with, though all economists do recognize the propensity of the economic engine to stall on any number of provocations and its sensitiveness to the impact of external disturbance, there is still room for disagreement as regards the importance of this propensity to stall and sensitiveness to disturbance, in particular as to the importance of both, relatively to the importance they would have in a planned economy. These questions may well make all the difference in an appraisal of the relative efficiency of different forms of economic organization. Next, let us notice that, precisely because of this, there is no question of apologetics or ‘whitewashing’ involved in constructing a hitchless model. For the economist who constructs such a model may still have so high an opinion about the sensitivity of the economic system he wishes to describe that he may, because of this sensitivity, rate its efficiency lower than does another economist who prefers a hitchbound model but has no such high opinion about the importance of the hitch. Malthus’ model of economic growth was hitchbound. But this did not make him a ‘planner.’ Finally, observe that the analyst’s choice between constructing a hitchbound and constructing a hitchless model is to some extent a question of mere analytic convenience. Two economists may entertain exactly the same opinion about something that both of them recognize as a stress. Nevertheless, the one may think it more useful to build a hitchless model first and then superimpose the stress, and the other General economics 539 may think it more useful to introduce the stress, as it were, on the groundfloor, and include it in his model from the first so that he gets a hitchbound model. The same man may do the one for some purposes and the other for other purposes. It is only our inability to divorce research from politics, or our suspicion, all too often justified, that the other fellow cannot analyze with single-minded devotion to truth, which makes problems and party issues out of decisions that do not excite anyone in more fortunate fields of research. Third, the model from which we started may be complicated in various ways without losing its fundamental simplicity. Thus, we can easily introduce current production of producers’ goods and investigate the simple conditions for equilibrium that exist between the various departments of production. 25 Also, we can easily introduce servants, physicians, teachers, and so on. More important, the reader may wonder what has become, in that model, of the third class of actors, the landowners. Why they do not figure in Ricardo’s text will become clear presently. Marx treated them as a sort of appendage to the ‘capitalists.’ The ‘capitalists’ employ labor and extort from it Surplus Value. But this surplus value is not all Ricardian profits. The ‘capitalist’ must share his loot, the surplus value, with the landlords. Thus, in a second act of the drama of distribution, the surplus value is split into profits and rent, both of which are therefore simply parts of a unitary exploitation gain. Everybody not completely blinded by indoctrination will, however, realize immediately that, so far as description of fact and not agitatorial phraseology is concerned, this comes to the same thing as saying that the capitalist hires services of land exactly in the same sense in which he hires services of labor. In fact, all we need to do in order to arrive at this result is to ask the question why landlords are in a position to prey upon the ‘capitalist’s’ loot. The only answer is that the services of land, also, are requisites of production. As soon as we realize this not very recondite truth, we arrive at what, to any unbiased mind, must seem to be the most natural view to take: the landowners should enter the model of the stationary process, along with labor, as another class of owners of productive services, which, at the beginning of (or during) each period, they stand ready to exchange for the income goods that the ‘capitalists’ were supposed to 25 Marx, more directly inspired by Quesnay than was any other economist of his time and perceiving more clearly the importance of such research, tried to construct tableaus or reproduction schemata of his own, starting from Quesnay’s tableau. Technical handicaps prevented him from getting very far either in this or in the attempt to replace it by arithmetical or algebraic equations. However, in magnis voluisse sat est and he saw more intuitively than he was able to express. His efforts naturally centered on the case of ‘extended’ rather than of ‘simple’ reproduction. But he developed the condition of stationarity all right, and also the condition of equilibrium between the two departments of consumers’ goods and producers’ goods production. The interested reader finds all he needs in P.M.Sweezy’s Theory of Capitalist Development and in its Appendix by Shigeto Tsuru. History of economic analysis 540 possess. 26 This should be extended, of course, to the ‘capitalists’ (or whoever the people are) who own the nonwage capital. Fourth, as our discussion of Agents must have led readers to expect, the frame provided by the model under study was filled in, not by one but by two theories (or types of theories) of production and distribution, which were but very imperfectly welded in J.S.Mill’s mongrel performance. This was because the triad of agents and returns was gaining ground so slowly—we know the reasons why—that types of analysis that were distinctly more primitive not only survived but also prospered. On the one hand, then, we have the analysis that is associated, primarily, with the names of Turgot and Say; partially, hesitatingly, and mixed with incompatible elements, it was also outlined by A.Smith. It accepted the triad of agents and returns in its fullest and deepest meaning. Let me restate this meaning. Production in the economic sense of the term 27 is nothing but a combination, by purchase, of requisite and scarce services. In this process, each of the requisite and scarce services secures a price, and the determination of these prices is all that distribution or income formation fundamentally consists in. Thus the process effects, in one and the same series of steps, production in the economic sense and, through the evaluation of productive services incident to production, also distribution or the formation of incomes. Thus, in this schema, capitalist production and distribution cease to be what they would be in a socialist community, namely, two distinct processes: we behold but one process of choices and evaluations of which production and distribution are merely two different aspects. And all types of incomes are by this schema explained on one and the same principle, the principle of pricing the services of co-operating factors. The analytic task of showing how this principle, so obvious in the case of consumers’ goods or their services, may be made to apply also to the case of producers’ goods or their services, was not clearly discerned, let alone accomplished before the rise of the theory of imputation in the next period (see Part IV, ch. 5, sec. 4a), except perhaps by a few forerunners, such as Longfield and Thünen. But the fundamental thesis, that the production-distribution process of capitalist society is in the last analysis a web of exchanges, for one another, of productive (or directly consumable) services—the employing entrepreneur acting as an 26 This curious idea, according to which capitalist employers are supposed to hold cabbages and shoes, which they sell to their workmen, must be viewed as a measure of simplification designed to bring out essentials and meanings that underlie the treacherous mass of surface phenomena in a monetary economy. ‘Capitalists’ who are not themselves producers of food and necessaries are supposed to acquire these from the ‘capitalists’ who are. Even if it should be granted that this schema brings out the essentials correctly, we have still to observe that it neglects so many intermediate steps and draws together the essentials so closely—another example of this is the ‘classic’ theory of saving and investment—that the possibility of deriving practical conclusions from such a theory becomes questionable. 27 It is highly characteristic of the difficulties most authors experienced in the task of conceptualization that the large majority kept on defining production technologically. They philosophized about man’s inability to ‘create matter’ and his ability to displace it and to change its forms in useful ways and other completely irrelevant things. Say’s phrase to the effect that production produces utilities pointed in the right direction, but much more important was his emphasis upon the combination of services in connection with his definition of entrepreneurial activity. General economics 541 . History of economic analysis 532 9 Thus, A.Smith described the gross revenue of society as ‘the whole produce of their land and labour’ (beginning of ch. 2, Book II). 10 I do not deny, of. A.Smith’s manner of recognizing the fact of general interdependence between the elements of the economic system and constitutes one of his greatest merits in the field of pure analysis. But we. explained. No serious inconvenience will, however, arise from this. History of economic analysis 536 within the next one, of the notions of economic (or social) statics and dynamics. J.S.Mill, who as

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