Economics, perhaps because it deals so obviously with material and measurable things, has tended to be placed with the purer and more precise sciences, and has claimed some of the certainties of mathematics and physics, setting up “laws” and “equations” for which it claims objective and ultimate truth. But economics clearly deals with human and subjective factors not so easily amenable to statistical handling, and it has a social role as well, for it offers to predict social phenomena and— increasingly in recent years—tries to shape them. With the growing importance of economic theory in government, it has become more important than ever that the character of the science itself be understood; we have had all too much evidence of the destructive potentialities of science when it plays a political role without acknowledging it. Robert Lekachman here examines Joseph Schumpeter’s monumental History of Economic Analysis (Oxford, 1260 pp., $17.50), and, using it as his text, discusses in what terms we had best consider the science of economics.
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Because sociology takes as its province the study of the entire society, it all too frequently appears vague, ill-defined, or platitudinous, even wooly, especially in an elementary college course. Here the economist has an advantage. He may be wrong but he needn’t be vague, for his subject possesses well-marked boundaries, his methods are clear-cut, and his central problem is well-defined. The theoretical economist studies man’s material environment: the way in which production is organized, goods produced, incomes earned and spent. In an industrial society whatever can be measured in money is suitable material for economists. Since we rank and compare increasing numbers of activities in monetary terms, the economist’s professional opportunities increase as time goes on. Almost all of us work for money wages, spend them on physical commodities and services, save money if we are thrifty, and relieve human suffering if we are charitable. Our government collects taxes from us in money and spends more money to defend or to benefit us as citizens. In each case economists, while never presuming to investigate the psychic states which underlie human decisions, analyze the monetary expressions of such states.
Money is the touchstone. With its aid, the economist’s central problem, scarcity, yields to his investigation. Start with the assumption, self-evident in Western societies, that human needs are limitless. Add to it the equally obvious proposition that the means to satisfy these needs are limited: in the richest society—our own—men, machines, and natural resources are finite in number. It follows that individuals, consumers, and businessmen must economize in the use of these valuable, because scarce, resources. We economize by comparing alternatives in terms of their monetary costs: two or more automobiles, two or more jobs, two or more movies, two or more almost anything. If businessmen, we compare the prices of alternatives with their effects upon output; if consumers, we compare the price of alternative goods with the satisfactions we expect them to yield. On an abstract plane, an amazing number of problems can be analyzed after this fashion.
The technique of economic theory is the diagrammatic and logical mode in which these problems, thus defined, have been treated. Here, finally, is the heart of the difference between economics and other social studies: economics applies clearer theory in larger quantities than does either sociology or history. Economists command a single technique based on a few assumptions and capable of rigorous application. No such feat of technique distinguishes the historian, a poor being limited in every epoch to words, or yet the sociologist, who in our generation is an eclectic—a dabbler in statistics, an amateur of metaphysics, a borrower from psychology and anthropology. Not, let it be clear, that historians and sociologists have not produced theories and generalizations in plenty. The living Toynbee and Parsons, and the dead Comte, Spencer, and Marx are outstanding witnesses to the contrary. But historians and sociologists have failed where economists succeeded, in developing a widely accepted technique applicable to a clearly demarcated field of study.
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II
The subject of Joseph Schumpeter’s posthumously published work, History of Economic Analysis, is the development of the technical tools of economic analysis. The history of economic analysis means to him “. . . the history of the intellectual efforts that men have made in order to understand economic phenomena or, which comes to the same thing, the history of the analytic or scientific aspects of economic thought.” And he has concentrated the weight of overwhelming erudition, magisterial assurance, and a baroque literary style upon the glorification of the science of economics. Readers of his Capitalism, Socialism, and Democracy, or his weightier technical works on business cycles and economic development, will recall his command of the esoteric, his wide knowledge of literature and the arts, his ability, in sum, to marshal the cultural resources of Western civilization in the service of his aims as an economist. This work demonstrates once more that Schumpeter was a devoted economist indeed. Full of prejudice, proud of the oddity of his opinions, anachronistic in his individualism, Churchillian in his flamboyance, Schumpeter is yet singularly pure in his judgment, according to his own canons, of predecessors and contemporaries. He is as ready to praise Karl Marx, whom he detested, for some sharp bit of analysis, as his own Austrian predecessors whom he so greatly admired.
What he attempts in this massive volume, which he did not live to complete, is a tour de force: he tries to separate economic analysis, regarded as a set of techniques or a collection of tools, from economic thought on the one hand and economic policy on the other. Unlike Joseph Dorfman in the Economic Mind in American Civilization, he does not aim primarily to examine the economic ideas which floated about at various periods, and ascertain who held them, how they were expressed, whom they influenced—even though the book contains much material of this kind. Nor does he care to write a history of political economy—a description of the economic policies advocated by economists at various times, their theoretical and other reasons for supporting such policies, and the effects of the policies themselves.
As illustration we can do no better than to examine the case of David Ricardo. From either of the points of view which Schumpeter explicitly discards, Ricardo is a towering figure in the intellectual life of the 19th century. His influence upon the thinking of the Philosophical Radicals and, through them, upon educated English society, was enormous. John Stuart Mill, in many ways the representative thinker of his time, learned his economics from Ricardo and to the end of his life struggled to reconcile the economics he believed in with the social sympathies he felt. A central issue of the first half of the 19th century was free trade. England abandoned economic protection by the middle of that century in no small measure because men who had learned economics directly or indirectly from Ricardo employed his arguments in their own self-interest.
But none of this proves that Ricardo was a greater economic analyst, or that he contributed more to sheer economic technique, than men whose influence upon public policy and educated opinion was much smaller. To demonstrate this point, Schumpeter resurrects Nassau Senior (like Ricardo an English Jew), often regarded as an economist of the second rank, and frequently remembered for one contribution, the concept of abstinence, and one absurdity, the notion that all profits are made during the last hour of a laborer’s working day. Senior, Schumpeter claims, was Ricardo’s superior as an analyst, erected a counter-system of his own, and failed to achieve the reputation he deserves for reasons extraneous to his theoretical achievements.
Looked at in this way, the history of economic analysis must be considerably revised. Familiar reputations are deflated. The humble are exalted. Not only Ricardo, but Smith and Keynes as well, must be reduced in stature. Cournot, a pioneer in the pure theory of monopoly; Menger in Austria and Jevons in England, who almost simultaneously presented explanations of commodity prices in terms of the intensity of consumer demand—these are some of the men who assume epic proportions. For this is a tendentious history, devoted to proving that men like these brought economics to a peak of consensus and achievement in the last third of the 19th century, unequalled before or after. It is worth while to quote Schumpeter at some length on the man whom he regarded as the greatest master of all, Marie Esprit Leon Walras. “. . . all-pervading interdependence is the fundamental fact, the analysis of which is the chief source of the additions that the specifically scientific attitude has to make to the practical man’s knowledge of economic phenomena; and . . . the most fundamental of all specifically scientific questions is the question whether analysis of that interdependence will yield relations sufficient to determine . . . all the prices and quantities of products and productive services that constitute the economic system. I have said on a previous occasion that the first discovery of a science is the discovery of itself. But this does not spell discovery of its fundamental problem. That comes much later. The discovery was not fully made until Walras, whose system of equations, defining (static) equilibrium in a system of interdependent quantities, is the Magna Carta of economic theory.”
Economics at its best, then, is a set of equations, not a set of prescriptions for economic ills.
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These great economists improved our general comprehension of how prices are determined, production organized, and consumer choices made. Such economics—the economics of knowledge and understanding rather than of prediction and control—culminated in propositions which are familiar to every student of economics. The law of diminishing returns is a leading example, worth brief discussion. This law is a technical relationship between inputs of the factors of production and outputs of finished products. When one input, say land, is fixed in amount, and another, say men, is added to it in equal increments, the extra output which results from each extra unit of input at first increases and then decreases. Which is to say that two men working on one acre of land will produce more than twice as much as one man, but three men on the same acre will fall short of trebling output. This is a perfectly general proposition, germane to any production problem.
A companion generalization states that as the individual in a short period acquires additional units of a given commodity, each additional unit yields diminishing satisfactions or utilities. The great English economist of the late 19th century, Alfred Marshall, supplied a happy instance. Put a small boy, he said, in the middle of a berry patch, armed with a basket and a voracious appetite. See him eagerly pick and happily gobble a first pint. See him almost as expeditiously dispose of a second helping. Note him to pause thoughtfully and consume slowly a third pint. Then, finally, observe how painfully he picks a fourth pint and how eventually he turns away in disgust from these berries. This lad has discovered for himself the law of declining utility—and his stomach hurts, a fact which may or may not point a moral.
Schumpeter traces the development of these and allied generalizations from the occasional insights of Adam Smith and his predecessors to the elegant geometrical constructions of Marshall and his successors, and the equation systems of Walras and the modern econometricians. Economics to Schumpeter is a precision-ground set of tools, an abstract set of categories, and a mathematical model of reality. And, despite massive digressions into the history of non-economic thought—sociology, law, psychology, even the natural sciences—despite occasionally brilliant, sometimes pedestrian, investigations of the Zeitgeist, age by age, despite allusions to obscure theories which he seldom pauses to explain, Schumpeter in the main tells a clear and impressive story. There is no parallel to this history in scope, erudition, or, within its limits, passion for completeness. The reader can only wish that Schumpeter had lived to complete its final section and to supply final revisions.
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III
Is this an appropriate conception of economics? Most non-economists and many economists as well conceive of economics as a practical subject addressed to the solution of such problems as business cycles, income inequality, low standards of living, inefficient production, inequitable taxation, and sluggish foreign trade. There is no doubt that Keynesian economics and the easy inferences drawn from it support this view. With great simplicity, Keynes, in 1935, argued that employment depended on National Income and that National Income itself varied with total spending by businessmen, consumers, and government. But, he continued, consumers are comparatively fixed in their spending habits. The villain of the piece is the instability of investment outlays made by businessmen, which lead to wide fluctuations in income and employment. This simple diagnosis suggested an equally simple cure: government deficit spending to remedy the inadequacy of private investment during depressions. Thus, the New Deal apparatus of subsidy and public works found its intellectual justification in this new theory of income determination.
But economists like Keynes who orient their work around economic problems struck Schumpeter as betraying the science of economics. His was the attitude of the pure scientist, surprised and somewhat alarmed when his theories produce results in the world of action, scornful of colleagues Who deliberately sought such ends. His opinion of Ricardo and Keynes stems from this attitude. “The comprehensive vision of the universal interdependence of all the economic elements of the economic system that haunted Thunen probably never cost Ricardo as much as an hour’s sleep. His interest was in the clear-cut result of direct, practical significance.”
Schumpeter proceeds to explain why Ricardo and Keynes achieved success in the eyes of the world. His references are to Ricardo, but in a footnote he explicitly extends them to Keynes as well. “. . . his reputation was made by his writings on the great economic issues of his time—in the first instance, by his writings on monetary policy, in the second instance, by his writings on free trade. In all the questions that he touched, he was on the side that would have won out anyway, but to the victory of which he contributed usable argument, earning corresponding applause. Though others did the same, his advocacy was more brilliant, more arresting than was theirs: there is no superfluous sentence in his pages; no qualification, however necessary, weakens his argument; and there is just enough genuine analysis about it to convince practically and, at the same time, to satisfy high intellectual standards, but not enough to deter.”
Free trade in the 19th and deficit financing in the 20th century thus found their support in the writing of a brilliant, but misleading, economist.
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Is Schumpeter’s judgment a fair one? Is economics less important as a practical art than as an abstract science? Is the economist more valuable as an adviser than as a scholar? Should he participate vigorously in the formation of public policy, so largely economic in our time, even though economic theory supplies only an indifferent guide to the advice he must offer? Should he profess ignorance when his services are sought?
The behavior of even the most scientifically oriented of economists in our day suggests that the last two questions are hardly living issues. The present Chairman of the Council of Economic Advisers, Dr. Arthur F. Burns, has in the past expressed considerable doubt that economists can successfully predict, and even more hesitation about the role economists should play in the making of policy. The published works of the research organization he has headed, the National Bureau of Economic Research, have studiously refrained from specific recommendations, or even the examination of current problems. This same Dr. Burns as counselor has, however, taken an increasing number of stands in favor of or in opposition to particular economic policies. This writer has heard him, on the occasion of a Columbia University Bi-Centennial Dinner, publicly defend the economic record of the Eisenhower administration, not, it is true, in the colorful language of the politician, but rather in the cautious and admonitory voice of the academic. How far could he have been guided by economic theory and how far by the judgment of a practical man of affairs? In truth, economic analysis has little to say about the delicate problems of timing, public psychology, political obstacle, and social equity which are the very essence of democratic policy.
Granted this much, we may ask a related question: has there been a serious misallocation of resources on the part of economists? Have they been wasting their time in the pursuit of pure theory? No easy answer is possible and certainly no program designed to eliminate theoretical speculation is proposed. We may grant that a considerable intellectual superstructure has been erected on the familiar truism that price depends upon supply and demand. With great intellectual force, economists have pushed beyond the truism to the laws of diminishing returns and diminishing utility to which we have briefly alluded. Diminishing returns in production implies that as output expands, costs and, therefore, prices must rise. Diminishing utility implies that as consumers add to their supplies of any commodity, from bubble gum to bassoons, they derive less pleasure from additional units and will purchase them only at a lower price. The prices of individual items are the result of the interplay of these two tendencies. And almost any event, economic or other, can be classified as affecting either supply or demand. Thus the recent steel settlement increased wages and prices and probably diminished the demand for steel. Recent studies of the relationship between smoking and lung cancer caused some smokers to alter their evaluation of the pleasures of smoking and to buy fewer cigarettes at the same prices. In many other cases as well, supply and demand are tremendously useful analytical categories. We may cheerfully admit, therefore, that economic analysis frequently helps the economist to classify and order his thoughts about specific problems. It does not follow that further refinement of this conceptual apparatus is worth the trouble involved except in terms of what Veblen called “idle curiosity.” It may be that some of the theorists whom Schumpeter admired most had already approached the point of diminishing returns.
If we expect our economists to practice economics in the service of the government, then a little economic theory, not too refined, is probably enough when combined with the talents of the man of affairs and the facts gathered by the statistician. Logically correct economic theory of the highest order is too abstract to be relevant to many specific problems, largely because what is abstracted from are human emotions, human whims, human uncertainties. It remains to be demonstrated whether the sophisticated mathematical techniques of the econometricians will modify this judgment.
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IV
The practice of economics is an art. Its successful adepts combine wisely chosen techniques with imagination and intelligence directed to individual cases. In public affairs, political flair—a knowledge of the possible—and social insight—a feeling for the desirable—are as essential as economic understanding. Truly understood, they are aspects of such understanding.
Must we, therefore, abandon hope in economics, saying resignedly, to each man his own economics, reckoning that in matters economic, de gustibus non disputandum est? Not at all. Sciences have standards of correctness and arts have canons of taste and judgment about which artists argue and eventually agree, if only temporarily and incompletely. It is this kind of agreement which exists among economists today.
Most economists, alt present, to take a concrete instance, find the same policies appropriate to the treatment of economic recession in the mixed economies of Western Europe and the United States. These measures—public works, lower interest rates, reduced taxation, increased unemployment compensation, enlarged farm supports, to name some of the more important—have gained adherents only partly for analytic reasons in Schumpeter’s sense. The judgment of economists in their favor is political and social as much as it is economic. It is a belief that the governments concerned possess enough sophistication in public administration to introduce and control the application of these remedies. It is a conviction that our society will not willingly bear a great deal of economic privation and unemployment for more than a brief period. Not least in this complex of influences, there is an ethical preference: economists would rather relieve human need than preserve fiscal orthodoxy.
The present policy of the Eisenhower administration and the public statements of its economic advisers do not disprove this happy state of unity among economists. For the caution so far displayed by the federal government is based upon the assumption that the extent of current unemployment is bearable only because it is temporary. In making this prediction, the President’s advisers advanced much further than economic analysis alone could have carried them, and their prediction is not necessarily correct. But it is only because they made this prediction that they have recommended some of the measures which economists agree would alleviate the effects of economic adversity.
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In fact, economists come closer to agreement in public policy than they do in many areas of theory. This condition is, no accident. It may the attributed to precisely that group of economists whom Schumpeter distrusted, those individuals who erected analytic systems in order to solve specific economic problems, who derived and always intended to derive policy inferences from their systems, and who combined in themselves the roles of social analyst and economist.
Preeminent among them are Adam Smith, David Ricardo, and John Maynard Keynes. There is no mistake in the general opinion of economists that these are the great men of economics in their respective centuries. Each had a policy, none was a pure theorist. When Adam Smith looked about him in 1776, he saw an economy hampered in growth and productivity by Settlement Acts which limited workers’ freedom of movement, import duties and export bounties which protected inefficient English producers at the expense of English consumers, apprenticeship rules, and obsolete guild restrictions. His book is an angry protest against these fetters upon English enterprise and its heart is the attack upon mercantilism, the body of ideas which supported these restraints. By 1817, when Ricardo published his great Principles of Political Economy and Taxation, England had begun to suffer from a group of new difficulties. Population was growing rapidly and it was far from obvious that economic output could keep up with its increase. As an aftermath of the Napoleonic wars, English currency had depreciated and unemployment soared. Machines had begun to displace men in factories. These are the problems which stimulated Ricardo, and his arid analysis pointed to two practical measures: reform of the Poor Laws and repeal of the Corn Law which protected English agriculture from foreign grain. Keynes’s problems in 1935 were predominantly unemployment, wasted resources, and declining investment opportunities. His consideration of these topics leads directly to solutions. Each man started in Schumpeter’s own term with a “vision.” We measure their stature by the consequences of their vision. Beside these consequences, the analytic achievements of Senior, Walras, and Jevons fade into comparative insignificance.
We can only conclude that Schumpeter’s performance is magnificent, if imperfect, but that we cannot agree with the vision from which it started. It is nonetheless a fascinating book to read, taken as a whole, though there are dull pages intermingled with passages of soaring rhetoric. This history is a great intellectual achievement which even as it arouses contradiction, provides the illumination to conduct the argument.
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