History of Economic Analysis part 77 pptx

sky. But in the last decade or so before the outbreak of the First World War, even the superficial observer should have been able to discern signs of decay, of new breaks in the offing, of revolutions that have not as yet issued into another classical situation. 2. PARAPHERNALIA Through ‘revolution’ and consolidation, that period witnessed substantial advance. I suggest that we are likely to underrate its achievements as much as we are to overrate the achievements of the period from A.Smith to J.S.Mill. In part, this is due to a fact that is the main cause of the difficulties some readers will encounter in perusing this Part: economists began to develop more complex techniques, which increasingly took the place of the simple ones of old that every educated person had been able to master without special training. As a natural and inevitable result, economics became both more specialized and less accessible to the reading public, and because of this economists earned plenty of—entirely unreasonable—reproach not only from spokesmen of this public but also from the less technique-minded in their own midst. This process was slow, however, and leaders who, like Marshall, harbored the ambition to be ‘read by businessmen’ and who wrote accordingly, still secured full-dress reviews in the daily press. It hardly needs pointing out that any such success was bought at a price, and that against such advantage to the science and the public as we may see in it, we must set a loss of analytic efficiency. The science grew still more in bulk than in wisdom. This was in part the consequence of its rapid ‘progress’ in professionalization and professorialization. We have noticed that even in the preceding periods economists recognized each other as people possessed of a special competence and that there had developed something like professional standards of performance. These became much more definite in the period under discussion during which economics—or even each of the recognized branches of the economic trunk— developed into a full-time job. This induced increasing professionalization as much as it was in turn furthered by it. In the preceding period, most of the leading economists were not academic teachers. In the period under discussion, practically all were. In England, the change shows still more strikingly than it does anywhere else, because there professors of economics (or academic teachers with different titles), having been very few before, increased but little in absolute number during that period but nevertheless conquered the field. 1 In the United States, the increase in the number of academic teachers was spec- tacular after Harvard had acquired her first regular professorship in political economy in 1871 (Columbia’s oldest chair in moral philosophy and political economy dates from 1818) and Yale in 1872. Germany, Italy, Spain, and the northern countries developed their economic professions on old-established lines, but France took a big step by establishing in 1878 professorships of economics at all the faculties of law in the country, whereas up to that year there had not been any regular and recognized teaching in economics at all except in Paris. 1 On conditions in the department of money and banking, see ch. 8 below. History of economic analysis 722 Measured by modern standards, research facilities—beyond library facilities that were greatly extended, especially in the United States—remained extremely modest. In many places, they were entirely absent. 2 Teaching methods improved in different ways in different countries. We must remember that both in England and in the United States the professional study of economics was still something new that had to fight its way and to establish its methods by a process of trial and error, 3 and that in some other countries economics remained throughout the period a very minor adjunct of the study of law. Even in Prussia and some other German states, where economics had a much more independent position in the faculties of arts and sciences (‘philosophical’ faculties) that provided a curriculum and granted the Ph.D. in economics, there were usually only two full professors in economics 4 and perhaps one or two lecturers (Privatdozenten). American students will throw up their hands in holy horror when they read that one and the same man was expected to teach general economics, public finance, labor, money and banking, ‘agrarian policy,’ international trade, and industrial organization and control (Industriepolitik), all in three courses. But the seminar (every professor gave a general seminar, covering indiscriminately all these subjects, as students’ papers became available), and later on the specialized seminar, developed to complement the lecture courses (not all of which were exactly fascinating, I am afraid) and to secure individual attention at least for students working on their Ph.D. theses. Progress took different lines elsewhere, though the seminar method was widely copied. Enough has been said, however, to convey an idea of a state of things that explains many of the difficulties that hampered the advance of economic analysis and reduced the level of the average economist’s competence below what it might have been—this level of competence in turn accounts for the frequency of pointless controversies that arose from nothing but a failure to understand, and for a fact that still further complicates the historian’s task. A lifelike picture is difficult to draw and an average is difficult to strike when there is so wide a gulf between the performance of a small number of leaders and the rest of the profession. The growing professions organized themselves and provided outlets for their current production. Again, it is neither necessary nor possible to go beyond a few important and familiar facts. The Verein für Sozialpolitik was founded in 1872, the American Economic Association in 1885 (the Historical Association in 1884), and the Royal Economic Society—to use the name it eventually adopted—in 1890: three significant dates. The Royal Economic Society provided for the profession a central body and a journal; the American Economic Association provided, in addition, the yearly meetings we know 2 This is, however, likely to give too unfavorable an impression. In Germany, for instance, very adequate (real) incomes and long vacations supplied professors, especially at the big universities, with plenty of facilities for research. 3 In this respect, it is highly significant that in Cambridge (England) a Tripos in Economics and associated branches of political science was not organized until 1903. Before that economics was indeed taught but not recognized as a full-time professional study. After that, teaching expanded but throughout the period there was nothing like the ‘economic faculty’ of today. 4 A number of English and Scottish universities had just one teacher of economics. Introduction and plan 723 with their large programs of papers and discussions. The Verein took its name from a special purpose, which was not ‘scientific’ in itself (see below, ch. 4) 5 and involved a definite pledge, which in the first decades of its career determined both the topics and the spirit of the annual discussions. Eventually, however, it tended to become what the other two organizations were from the first—an association of substantially ‘scientific’ character for the whole field of economics. Still more important is another feature of the Verein that was absent from the program, as well as from the practice, of the American and English associations: from its beginnings it organized team-work research. Every member of its central committee had the right to suggest projects. Those that were accepted by the executive committee were entrusted to subcommittees, and these in turn assembled groups of interested members and presented the results of their investigations for discussion in the annual meetings. The original papers together with the discussions are published in the 188 volumes of the Verein’s Schriften. 6 There is a case against, as well as a case for, such large-scale team work. But it is important for the reader to keep in mind this earliest instance of it. New outlets for scientific work were provided in the shape of new journals. To mention but a few of outstanding importance, the Revue d’économie politique, the Giornale degli Economisti, the Economic Journal, the Quarterly Journal of Economics, the Journal of Political Economy, the American Economic Review, the Ekonomisk Tidskrift, Schmoller’s Jahrbuch, the Archiv für Sozialwissenschaft und Sozialpolitik, the Zeitschrift für Volkswirtschaft, Sozialpolitik, und Verwaltung (predecessor of the Zeitschrift für Nationalökonomie) all date from that period. Comprehensive dictionaries of economics were, of course, no more of a novelty than were professional journals. Nevertheless, such 5 The original statutes of the American Economic Association to some extent followed suit by virtue of Article III, which read: ‘We regard the State as an agency whose positive assistance is one of the indispensable conditions of human progress’—a sentence that was intended to convey a principle of policy. But it was soon felt that this did not fit the actual nature of the Association, and the article was accordingly dropped as early as 1888. 6 The way this system worked and the results it turned out have been described by Franz Boese— who acted as secretary for many years—in his Geschichte des Vereins für Sozialpolitik, 1872–1932 (1939; last volume of the Schriften). The unassuming simplicity of this report serves only to make it all the more impressive. History of economic analysis 724 co-operative enterprises as Palgrave’s Dictionary of Political Economy, the new Dictionnaire d’économie politique, the Handwörterbuch der Staatswissenschaften, all reflect the vigorous growth of a—for the time being—new age and of ‘its achievements, its undiminished controversies, its many fruits, its escape from “orthodoxy” [really? J.A.S.], which seems to have weighed so heavily on the previous generation.’ 7 Finally new institutions were established in which economics, in one way or another, held the place of honor. Let us salute the one that is by far the most important: the London School of Economics (1895). 8 One more point: those who are wont to emphasize the importance for scientific achievement of professorial chairs, research funds, organizations, and the like would have to infer that English achievement was at or near the bottom of the international scale. As a matter of fact, it was at the top. The supremacy in economic research that England had held during the preceding period was indeed no longer unchallenged. Many of the decisive contributions and especially of the original ones were non-English to a much greater extent than before. England retained supremacy only in the same sense that she retained supremacy in industry and finance. But she did retain it, especially so far as prestige was concerned. And again, this was not only due to the performance of her leaders; it was also and perhaps primarily due to the quality of the ‘second line’: it was not only due to the supreme competence (or more) of Marshall and Edgeworth; it was also due to the nearly complete absence of downright incompetence among the rest. Hence the lesson: funds and chairs are not everything; there are things that cannot be hired or bought; and if these things do not develop in step with funds and chairs, the latter may prove to have been provided in vain. 3. PLAN OF THE PART On the whole, the plan of this Part is on the same lines as that of Part III. No sacrifice has been made, however, on the altar of symmetry. Many things seemed to deserve emphasis that were of no or less importance before and vice versa; and many rearrangements seemed indicated for other reasons. As before, we shall prepare ourselves for our main task by casting a glance at social backgrounds—the Zeitgeist—(Chapter 2) and at such developments in neighboring fields as did exert or might have been expected to exert some influence upon economics (Chapter 3). The reader who finds these surveys superficial is once more reminded that the facts to be mentioned in these two chapters are not mentioned for their own sake. This is a history of economic analysis, a history of the attempts of men to apply their reason to the task of understanding things, not a history of the attempts of men to apply their 7 This is how Lord Keynes expressed himself on the occasion of the Royal Economic Society’s Jubilee in 1940 (Economic Journal, December 1940, p. 409). Of course, we must make allowance for the occasion. 8 See Professor von Hayek’s most instructive sketch of its career during its first fifty years: Economica, February 1946. Introduction and plan 725 reason—and volition—to the task of changing them. Then follow comments on two allied groups of men and ideas that lend themselves to separate treatment, the group whose work centered in the contemporaneous interest in social reform and whose leaders were with singular infelicity dubbed ‘socialists of the chair’ (Kathedersozialisten); and the group that was called, and called itself, the historical school (Chapter 4). 1 The much- debated question of economists’ value-judgments will be touched upon in connection with the former, and the famous ‘battle of methods’ (and its American counterpart, the institutionalist controversy) in connection with the latter. To some extent, this arrangement impairs our picture, because when we go on to a brief survey of the men, groups, and developments in ‘general economics’ (Chapters 5 and 6), we shall have already eliminated two of the most important influences upon this ‘general economics.’ Let me hence entreat the reader to peruse these chapters in their order. The last two chapters of the Part deal with sets of topics that it has seemed best to reserve for separate treatment. Chapter 7 (Equilibrium Analysis) corresponds 2 to Chapter 6 of Part III and assigns the same piloting function to Walras that was assigned to Senior in Part III. It aims at presenting the emergence of the elements of modern pure theory in a manner that will, I am afraid, prove as unsatisfactory to the modern theorist as it will seem overloaded to the non-theorist. The latter may be right in contenting himself with what he will have read on these matters in Chapters 5 and 6. The Appendix to Chapter 7, on the fortunes of utility theory and its successors to the present day, stands by itself, or almost so, and should only be read by those who take special interest in the matter. 3 Segregation of the topics of money, credit, saving and investment, and business cycles in the last chapter (8) calls but for this remark: segregation imposed itself for reasons of exposition as it did in Part III; but in submitting to this necessity, I do not wish to convey the impression that I accept the current views about the monetary theory of this period. This will be made abundantly clear as we proceed. 1 [Originally, J.A.S. intended to treat these subjects in two separate chapters, but later combined them. The consolidated chapter was left unfinished but is presented below (ch. 4) in the condition in which it was found.] 2 [J.A.S. had some doubts about this statement. He left a note in pencil: ‘Can this stay?’] 3 [At the time of writing this Note on Utility, J.A.S. intended to make it a separate chapter but later made it an appendix to Chapter 7. The original plan called for 10 chapters, subsequently reduced to 8.] History of economic analysis 726 CHAPTER 2 Background and Patterns THE NEARER AN epoch is to us, the less we understand it: our own we understand least of all. For this reason alone, the sketch of the cultural pattern of the period to be surveyed must be drawn with greater care than was required in the case of the preceding period. Moreover, the cultural pattern actually grew everywhere more complex as the bourgeois era wore on. The reader will please recall what has been said in Part III (ch. 3) on the subject of the lack of uniformity in the cultural pattern or Zeitgeist of any epoch: to speak of a single dominant Zeitgeist at all spells distortion of the facts—in most cases ideological distortion. But this fundamental truth of cultural sociology applies to the period under discussion with a vengeance. However severely we must simplify things, the following comments will make this abundantly clear. 1. ECONOMIC DEVELOPMENT The period we are about to survey was again one of rapid economic development. It was then that Germany and the United States acquired the status of front-rank industrial powers. But elsewhere, for instance in Austria, Italy, Japan, and Russia, industrialization proceeded at a rate (though not of course in terms of absolute figures) that was not less remarkable. After 1900, England failed to keep in step, but up to about that year she experienced an increase in wealth that may be characterized by the fact that, from 1880 to 1900, English real wages per earner increased by nearly 50 per cent. 1 This created an entirely new standard of life for the masses. But until almost the end of the century expansion in physical output was accompanied by falling prices, widespread unemployment of labor, and business losses. The spells of ‘prosperity’ were shorter and weaker than were the ‘depressions.’ In fact, the whole span between 1873 and 1898 has been dubbed the Great Depression. 2 This particular edition of the ‘paradox of poverty in plenty’ is not difficult to explain. All the observable phenomena can be satisfactorily accounted for by the impact of the products pouring forth from a productive apparatus that the two previous decades had greatly expanded. In a socialist society, such periods might be hailed as periods of harvest. In capitalist society, they do not cease to be that. But this aspect is 1 A.L.Bowley, Wages and Income in the U.K. since 1860 (1937), Table XIV, p. 94. Of course, this means only that the total wage bill kept its percentage position in total national income. 2 For a historian’s protest against this phrase, see H.L.Beales’s article, ‘The Great Depression in Industry and Trade,’ Economic History Review, October 1934. The author makes it last only to 1886. But all the symptoms that this phrase is to indicate persisted for about another decade. entirely lost in the fears, sufferings, and resentments generated by the dislocation of existing industrial structures that is the first consequence of technological or commercial progress. An example will illustrate this. In the seventies and eighties, improved land and sea transportation brought greatly increased quantities of cheap American wheat to Europe, which meant severe depression to European agriculture. Of course, this was an essential element in the 50 per cent increase in the real wages of English labor that we have noticed above. But European farmers and their spokesmen did not look at it in this light. And if they had, they would have derived very little comfort from it. Agrarian sectors were everywhere important enough to spread their depression to others. But, though this would take more space to show, the industrial sectors had analogous troubles of their own. In a sense, these were surface troubles incident to a process of adaptation that led from one long-run spell of prosperity to another. But for many individuals and groups the only available method of adaptation was bankruptcy. For labor it meant unemployment or the ever-present threat of it. The reader will find it easy to visualize the practical problems that resulted from this and the reactions to them of groups, classes, parties, and governments. It is on this background that we shall have to paint for the rest of this chapter. So obvious is this that there is less danger of forgetting it than there is of exaggerating the extent to which the facts alluded to—both the ‘progress’ and its vicissitudes—determined political and cultural history. For instance, those facts do explain much of the radicalization of the masses we observe: the rising standard of life and a novel sense of power contributed to that result not less than did the threat of unemployment. They also explain much of the general zest for social reform, of the tendencies toward industrial organization (especially of the cartel type), of the increasing government activities, of the dissatisfaction with the results produced by free trade, even of renascent militarism. But the further fact that none of these tendencies showed any signs of weakening during the fifteen years before the war, years that were of quite different economic complexion—most of them in fact gathered further momentum—should warn us not to trust such explanations too much. There are deeper things…[J.A.S. intended to expand this section.] 2. THE DEFEAT OF LIBERALISM On the whole, the business class still had its way throughout the period, at least up to the beginning of this century, though much more so in the United States than in Europe. But its serene confidence in the virtues of laissez-faire was gone and its good conscience was going. Hostile forces were slowly gathering with which it had to compromise. Still more History of economic analysis 728 significant, it grew increasingly willing to compromise and to adopt its enemies’ views. 1 Economic liberalism 2 thus became riddled with qualifications that sometimes implied surrender of its principles. Political liberalism, from the eighties on, lost its hold upon electorates much more rapidly than appears on the surface: only in a few countries, such as Germany and Austria, did genuinely liberal parties—in the sense in which this term is used in this book—meet with open defeat at the polls; in others, especially in England, the strength of existing political organizations and their leadership was so great as to make it possible for them to win victories on radicalized programs. 3 The reasons why, and the extent to which, all this was different in the United States need not, it is hoped, be explained. What would have to be a lengthy analysis may be summed up by saying that, barring a number of groups and movements, none of which was strong enough to influence national politics perceptibly, all the average American’s radicalism amounted to—and this also goes for economists—was hostility to Big Business (‘curbing monopoly’). Before trying to see how all this mirrored itself in those departments of public policy in which we are primarily interested (section 3) we must briefly glance at what we have described above as political forces hostile to bourgeois laissez-faire that were gathering momentum during that period. Orthodox socialism is the most obvious one. But it was not, during that period, the most important one. In any case, its career may be assumed to be so familiar to the reader that very few comments will suffice for our purpose. 4 First, the period saw the rise of Marxist parties in almost all countries. 1 This statement involves a distinction between enforced and voluntary retreat that a popular theory of political behavior refuses to accept. According to this theory, no class ever retreats voluntarily. Any facts that I might adduce in support of my distinction would by the sponsors of this theory be interpreted as ‘strategical’ retreat. But if the occurrence of such strategical retreats be admitted, the theory in question ceases to be meaningful—any ‘concession’ that is not directly enforced is then strategical by definition—unless the strategical purpose of each ‘concession’ is established. I maintain, though I cannot prove here, that this is possible in some cases but not in others—e.g. not in the cases of ‘paternalistic’ employers or in the cases of groups that are covered by the label of bourgeois radicalism. 2 On the meaning that this term and the term Political Liberalism carry in this book, see Part III, ch. 2. 3 This resolves an apparent paradox that might puzzle the reader. It does seem paradoxical to speak of decline of English liberalism in a period that covers the sweeping victories of Gladstone in 1880 and of Sir Henry Campbell-Bannerman in 1906. The paradox disappears, however, when it is remembered that we are not concerned with party labels even where the continuity of a political organization is reinforced by (substantial) continuity of personal leadership, as was the case with the Gladstonian party. In the latter case, the point I wish to make is illustrated by the split of the liberal party that occurred in the eighties. Viewed superficially, it occurred on the question of Irish Home Rule; but most of those who renounced allegiance on this issue had also other reasons for doing so: they did not wish any longer to be towed along by the radical wing. 4 Readers who feel this assumption to be unwarranted will do well to compare, e.g., the relevant parts of H.W.Laidler’s Social-Economic Movements (1944). Background and patterns 729 But even the most successful of these, the German Social Democratic Party, which by weight of talent and numbers was an important factor in politics, kept on principle aloof from political responsibility 5 and thus reduced its practical influence, even on matters of social legislation, far below what it might have been. None of the other Marxist parties was numerically significant except the Austrian one. The non-Marxist socialist parties, which shaded off into non-socialist labor groups and which felt no qualms about political co-operation with bourgeois parties, did get near or into political office here and there. These events—which raised the much-debated issue of Millerandism 6 —and the appearance, in 1906, of a Labour party in the English Parliament are, of course, tremendously important. But for the time being their importance was symptomatic only. For those who had their ear to the ground another symptom was still more significant— and much more so than were the most flamboyant revolutionary speeches. To be sure, there were many bourgeois who habitually exploded at the mere sound of the word Socialism. But there were others who were in sympathy with socialist ideas and, to an extent much greater than is commonly realized, lent practical support to them in one way or another, though not always openly. Of course, the non-socialist vote of the socialist parties was in many cases nothing but the manifestation of temporary resentments. But the number was on the increase of those who approved of the ultimate ends of socialism or who approved of the immediate aims of socialist parties—or who did both and still professed that they were not socialists. The growth of bourgeois radical groups and parties was immediately of greater practical importance. They varied greatly in type and program—from liberal groups of the old type that had taken aboard more or less important items of social reform, to groups of intellectuals that descended from the philosophical radicals of old and differed little, if at all, from ‘reformist’ socialists such as Eduard Bernstein (ch. 5, sec. 8, below). The reason why radicals of the more advanced type carried political weight out of all proportion to their voting power—or, like the English Fabians, 7 without having any voting power at all—was that their support was often needed by governments in precarious positions, both where radicals formed parties of their own and where they formed the left wing of a bigger party of different complexion. This very situation characterizes the epoch. 5 We cannot go into the reasons for this attitude. But it was not altogether a matter of sour grapes. 6 Alexandre Millerand, later on President of the French Republic, rose into notoriety as a labor lawyer and entered the Chambre as a radical-socialiste. The radicaux-socialistes were not socialists as a party but formed the left wing of bourgeois radicalism: the party label expresses very well the social situation of latter-day capitalism that I am trying to describe. However, Millerand made his position more definitely socialist later on; and he had become the leader of a group of 60 deputies of more or less socialist persuasion when, in 1899, he accepted office in the Waldeck- Rousseau administration. He thus was the first and for some time the only socialist to take office in a bourgeois cabinet in one of the great nations. Hence his name came to denote this practice which, however, caused no difficulties in the northern countries. 7 On the Fabians, see below. [J.A.S. intended to discuss the Fabians in ch. 4, sec. 1, but this chapter and section were not completed.] History of economic analysis 730 Bourgeois radicalism might be considered as a mere by-product of the growth of socialism. And the latter was without doubt the product of laissez-faire society: one need not be a Marxist in order to realize that the private enterprise system tends to develop toward a socialist form of organization. The facts we have been discussing so far, however ominous they may have been for the bourgeois order of things, were thereforepart and parcel of this very order and in this sense perfectly ‘natural.’ But there were others that did not fit into the schema or logic of capitalist evolution. Some of these do not present any difficulties of analysis either, but some others do. As regards the first category, we shall in fact have no difficulty in understanding that rapid capitalist evolution will evoke resistance from strata that are threatened by it and cannot adapt themselves to a new form of existence. This was the case with the European peasantry—also with English and especially Irish farmers—and, on the continent of Europe, with the independent artisans. Landlords were, of course, in the same boat. Very naturally, they clamored for protective legislation—that was bound to violate the creed of economic liberalism—and lent support to groups and parties that were anti-capitalist though not socialist. 8 Even within the range of these phenomena, however, we cannot be sure that this was all. Many of the spokesmen of these groups did not feel that they were concerned with a particularly difficult economic situation—they felt, unlike the bourgeois radicals, that the whole liberalistic schema, including its legal and moral aspects, was fundamentally wrong. The second category consists of cases where the same attitude stands out better and presents much more of a problem because it does not link up so obviously with a definite economic plight. In countries where the bureaucracy was a powerful factor and where, as in Germany, it had sponsored economic liberalism in the preceding period, a significant change occurred: without as yet becoming definitely hostile, the bureaucracy began to look upon the business class in a different way—to consider it as something to be controlled and managed rather than to be left alone, much as the American bureaucracy does today. The white collar class that increased rapidly in numbers and the other groups that were beginning to be called the ‘new middle class’—the ‘old’ consisting of farmers, artisans, and small traders—displayed a remarkably strong resistance to socialist propaganda. But the minority that embraced economic or political liberalism in our sense was not much greater, if at all, than the minority that went socialist. The rest evolved attitudes and reform programs of their own. Finally, individuals and subgroups of all classes broke loose from economic and political liberalism—though often retaining the label—to do likewise. And they had one thing in common in spite of all the differences in interests and cultural preconceptions that no doubt existed between them: the central or controlling position that they allocated to the State and the Nation—the National State. Accordingly, these tendencies are commonly referred to as ‘nationalistic’ or ‘neo- mercantilist’ or ‘imperialist,’ but though these and other phrases do express individual aspects of an attitude that is as difficult to define as it is to explain, they do not express the whole of it. Marxists have simple formulae to offer that will fit these phenomena into their scheme—the simplest being perhaps that ‘imperialism’ is the last stage (or ‘last card’) of capitalism. Popular social psychology has 8 In England, things did not work out in this way or at least did so much less markedly. The reasons for this, extremely interesting though they are, must not detain us. Background and patterns 731 . own sake. This is a history of economic analysis, a history of the attempts of men to apply their reason to the task of understanding things, not a history of the attempts of men to apply their. said, however, to convey an idea of a state of things that explains many of the difficulties that hampered the advance of economic analysis and reduced the level of the average economist’s competence. provided in vain. 3. PLAN OF THE PART On the whole, the plan of this Part is on the same lines as that of Part III. No sacrifice has been made, however, on the altar of symmetry. Many things