Lecture V

Of the Solution of an Economic Problem, and of the Degree of Perfection of which It Is Susceptible.

§1. In treating in my last lecture of the method of inquiry proper to Political Economy, I was led to an examination of the nature of the assertion contained in an economic law and of the kind of proof needed for establishing or refuting it. On these points I arrived at the following conclusions, viz. that an economic law expresses, not the order in which phenomena occur, but a tendency which they obey; that, therefore, when applied to external events, it is true only in the absence of disturbing causes, and consequently represents a hypothetical, not a positive truth; that, being deduced by necessary consequence from certain mental and physical principles, it can be established only by establishing the existence of the principles assumed, and showing that by logical necessity they involve the tendency asserted; and refuted only by proving that the principles do not exist, or that the reasoning is unsound. In all these respects I endeavoured to show that the character of an economic law is strictly analogous to that of those laws of physical nature which are obtained, or which may be obtained, by deduction from the ultimate principles of the sciences to which they belong.

So far, then, the analogy between a 'law' as understood in Political Economy and a 'law' as understood in the more advanced physical sciences holds good. In the present lecture I propose to call your attention to a circumstance in which this analogy fails, and to the consequences which result from this failure, in the development of economic truth. In both departments of speculation alike a law of nature expresses a tendency constantly influencing phenomena; but in the physical sciences the discovery of a law of nature is never considered complete till, in addition to the general tendency, an exact numerical expression is found for the degree of force with which the tendency in question operates.

To give one example more, the use of the balance has brought chemistry into the category of those sciences the laws of which admit of quantitative statement. The chemist is consequently able, not merely to describe the general nature of the reaction which will take place between certain substances under known conditions, but can give beforehand a numerical statement of the exact proportions in which the several elements will unite in the resulting compound.

This is a degree of perfection, however, which it does not seem possible that Political Economy, any more than jurisprudence, philology, or any of those branches of speculation, which derive their premisses from the principles of human nature, should ever attain.^*48 For, although the general character of these principles may be ascertained, and although when stated with sufficient precision they may be made the basis of important deductions, yet they do not, from the nature of the case, admit of being weighed and measured, like the elements and forces of the material world: they are therefore not susceptible of arithmetical or mathematical expression; and hence it happens that, in speculating on results which depend on the positive or relative strength of such principles, perfect precision, numerical accuracy, is not attainable. Political Economy seems on this account necessarily excluded from the domain of exact science.^*49

This quality of economic doctrines will be made more clear by a few examples.

The decline of profits, as nations advance in wealth and numbers, is a circumstance which has long attracted the attention of economists. It has also been observed that, in the course of this progress, a minimum point is attained, beyond which profits do not further decline; and further, that this minimum is different in different nations. In China, it is stated that profits show no tendency to fall below 30 per cent. per annum; while in England profits have fallen perhaps to 10 per cent., in Holland probably lower, and in other countries the decline has been arrested at other points. Now the point in the descent at which the fall is arrested—that is to say, the minimum rate of profit which can for any considerable time exist in any community—is determined by the strength of a principle which Mr. Mill has called 'the effective desire of accumulation.' This 'effective desire of accumulation' is a general expression to denote the degree in which the desire for wealth predominates over those principles of human nature which obstruct its operation—such as the love of ease, and the desire for immediate enjoyment. When a man employs his wealth as capital for the purpose of producing more wealth, he is induced to do this—to abstain from the present enjoyment of what he has accumulated, and to engage in the toils and anxieties of business—by the prospect of adding to the sum-total of his wealth the profit which is to be made by the productive employment of it. If he had not this prospect of profit, he would not employ his acquired wealth for productive purposes at all. He would have no motive to do so. He would either consume it as he had need for it; or, if he wished to reserve some for consumption in future years, instead of adventuring it without prospect of profit in productive operations, he would convert it into money, and lay it by in some secure place, from which he could withdraw it as occasion required. Now since the prospect of profit is that which induces a man to overcome his natural indolence and to repress his desire for immediate enjoyment, it is evident that the minimum rate of profit which shall suffice for this purpose will depend on the relation in which the accumulative propensity in his nature stands to the principles which oppose it—that is to say, to his love of ease and inclination towards immediate enjoyment. The stronger relatively be the former principle, the smaller will be the prospect of gain adequate to induce him to engage in the production of wealth—in other words, the lower may profits fall before the decline will be arrested through the absence of sufficient motive. The case then stands thus: owing to certain conditions incident to the character of productive agents, there is a tendency in profits to decline as nations advance in wealth and population; there is also a point at which the fall is arrested, which point is determined by the strength of the effective desire of accumulation. All the knowledge we are capable of attaining on the subject resolves itself into the general fact—that such tendencies exist, and that such results depend on such conditions; but, as we have no means of ascertaining the precise strength positive or relative of the principles on which the result depends—independently of the manner in which their operation is exhibited in particular cases—we are unable to say beforehand at what point they may be brought into equilibrium: that is to say, we are unable to say before trial, what may be the minimum of profits which is possible in any given community. Contrast this with the precision attainable in physical science. When an astronomer speculates on the course of a comet through space, he does not content himself with stating the broad fact, that the meteor is under the influence of certain antagonistic forces—that it tends to fly off from the sun under the influence of the momentum with which it is carried, but that at a point in its career the force of gravity will overcome this momentum, and that at this point its course will be reversed; the astronomer not only tells us this, but tells us, further, the precise distance which the comet must travel before the force of gravity overcomes the momentum with which it moves so as to arrest its outward course; and he is able to do so, because he not only knows, as a general fact, that those tendencies represented by the laws of gravitation and motion exist, but also is able to obtain an exact numerical expression for the force with which each operates—a degree of precision which is not attainable in the determination of the principles of Political Economy.

Take another example of the uncertainty which, owing to this indefiniteness in the premisses, attaches itself to the character of the conclusions of economic science.

We know, as a general rule, that human beings will more readily dispense with the luxuries and vanities than with the necessaries of life; and we may infer with certainty that, in the absence of disturbing causes, a diminution in the supply of the ordinary food of a country will be followed by a greater proportional rise in its price, than a corresponding diminution in the supply of an article of less imperative necessity—that a diminution, e.g., of one-third in the supply of wheat will cause a greater rise in the price of wheat than a proportional diminution in the supply of silk will produce on its price. Some writers, indeed, have attempted to go beyond this general statement, and have expressed in a tabulated form the rise in the price of food which takes place in the event of certain assumed deficiencies in its quantity. Thus, according to the calculation of Gregory King, who lived in the latter end of the seventeenth century, a deficiency of one-tenth in the ordinary supply of the staple food will cause a rise in its price to the extent of three-tenths above the ordinary rate; a deficiency of two-tenths a rise of eight-tenths; a deficiency of three-tenths a rise of 1.6; and so on up to a deficiency of one-half, which, it is calculated, will produce a rise in price equal to four-and-a-half times the ordinary rate.^*50 If, however, we consider for a moment the causes on which a rise of price depends, and the circumstances which determine its extent, it will be evident that no reliance can be placed on the accuracy of such calculations; the conditions essential to such accuracy not being susceptible of realization.

The rise which occurs in the price of wheat in consequence of a deficiency in quantity will depend (the amount of the deficiency being given) on two conditions—1st, the disposition of the people amongst whom the deficiency takes place to sacrifice other gratifications which it may be in their power to command to the desire of obtaining the usual quantity of their accustomed nutriment; and 2nd, the extent of the means at their disposal for obtaining other kinds of gratification—that is to say, their general purchasing power. Now if we could obtain an exact measure of this disposition, as well as of the means of giving effect to it at the command of consumers, and knew also the exact extent of the deficiency in the supply of wheat, we might then give a precise numerical statement of the rise of price which would take place under the assumed circumstances. But it is evident that none of these conditions can be accurately fulfilled. Without dwelling upon the difficulty of ascertaining accurately the other data essential to the solution, namely, the extent of the purchasing power of a community, and the mode of its distribution amongst different classes, it is evident that the disposition of people to sacrifice one kind of gratification to another—to sacrifice vanity to comfort, or decency to hunger—is not susceptible of precise measurement, and can never, like the forces of physical nature, be brought within the limits of a formulated statement.

This character of indefiniteness which belongs to the premisses of Political Economy is very strikingly exhibited in the effect which an alteration in the duty on taxed articles sometimes produces on their consumption. It is often found, e.g., that a reduction in the duty on an article of consumption—say tobacco—is followed by an increase in the total proceeds of the tax, but that if the reduction be continued further, the returns will decline. Now, if the disposition and purchasing power of the community with regard to tobacco, as compared with other articles of general consumption, were known, and could be accurately expressed by a mathematical formula, the precise point at which the proceeds of a tax upon tobacco would attain their maximum could be determined beforehand; and an immense reform, without risk of failure, could at once be effected in our fiscal system. But as we have no means of ascertaining with precision the disposition of mankind, or of any portion of them, in this respect, we are obliged to have recourse to a series of tentative experiments, and must content ourselves with a rough approximation to the required maximum, obtained perhaps at the cost of considerable loss to the revenue and of inconvenience to the public.

I have thought it well to call attention to this source of imperfection in our economic reasonings, as it appears to me desirable that we should know the weakness as well as the strength of our position as political economists, that we may not, by affecting an accuracy that is unattainable, bring suspicion and discredit on the undoubted truths of the science.

The celebrated formula of Malthus, as you are aware, asserted that population tends to increase in a geometrical, subsistence in an arithmetical ratio. In advancing this statement, Malthus really intended nothing more; as every candid and intelligent reader of his work will at once perceive, than to give definiteness to our conceptions of an important principle; the conclusions which he based upon the principle thus expressed not in the least depending for their truth on the mathematical accuracy of the formula. His opponents, however, were not in the humour for making this allowance. The doctrine had been stated in mathematical form, and it must, therefore, be maintained in all its strictness, or the speculations of Malthus must be forthwith pronounced a delusion, and his conclusions the phantasms of a diseased imagination.

§2. Such, then, being the character of an economic law, analogous in all respects to those laws of physical nature which are obtained by a similar process of deductive reasoning, with the important exception that it does not admit of quantitative statement, we are now in a position to understand how far economic laws can be made available in the explanation of economic phenomena.

The explanation of a phenomenon, or the solution of a problem (the expressions being equivalent) consists in a reference of the fact to be solved or explained to some known or acknowledged principles. The velocity of a planet through space, e.g., is said to be explained when this velocity is shown to be the result of known dynamical principles. The physical phenomenon of dew is said to be explained when it is shown that the known laws of the radiation and conduction of heat, together with the laws of the condensation of watery vapour, necessarily under certain external conditions lead to the occurrence of dew; these conditions being the same as those under which, in fact, dew is observed to appear. If we admit the existence of the laws, we see that the phenomenon must be present when, in fact, it is present. In the same way the economic phenomenon of rent is said to be explained when it is shown to be the necessary consequence of the play of human interests trafficking in an article having the peculiar physical properties which are found to reside in land. In this case, also, if we admit that human beings in their dealings with land act with a view to their own interests, and further, that the best soils in point of fertility and situation are not unlimited in supply, and that the yield to be obtained from a limited area is also not unlimited, but diminishes in proportion to the outlay, as the quantity raised is increased, we see—or by reasoning on these facts we may see—that the phenomenon of rent must present itself in the progress of society, and that it will rise and fall from those causes which we find in fact to affect it. So far, the solution of an economic problem is strictly analogous to that of a physical problem; in each case the process consists in tracing back the fact to be explained to its source in the ultimate principles of the science; if it be a physical fact, to the ultimate laws of physical nature; if an economic fact, to the ultimate axioms of Political Economy—that is to say, to the mental and physical principles from which its doctrines are derived. Until this connection is clearly established, no physical or economic phenomenon can be said to be explained.

The solution of a problem may be regarded as perfect when the principles to which it is referred are shown to exist, and to lead by necessary consequence to the precise fact which constitutes the problem to be solved.^*51 Supposing our reasoning to be correct, it is evident that imperfection may yet arise either from the indefiniteness of our knowledge of the laws which operate in producing the phenomenon, or from ignorance of the precise circumstances under which they come into operation. With the exception, perhaps, of astronomy, there is no science that has attained absolute perfection in both these respects. Most of the advanced physical sciences, however, satisfy the first condition, though they generally fail of complete accuracy in the latter. To revert to a former example—the formation of dew—the laws of the radiation and conduction of heat and of the condensation of watery vapour on which that phenomenon depends may be accurately ascertained and expressed in mathematical formulæ; but the circumstances under which the phenomenon appears—the state of the atmosphere, and the condition of the various bodies on which the deposition of dew takes place during any given night—cannot be accurately ascertained. Now, while this is so, the solution of the problem is not complete; since, although we may perceive from our knowledge of the laws of heat and of aqueous vapour that dew under the actual circumstances must appear, yet, from want of precision in our knowledge as to what the actual circumstances are, we cannot tell the precise quantity that ought, in obedience to these laws, to be deposited; and, therefore, cannot be certain that our solution may not be more or less than adequate; nor whether there may not be other causes affecting the result which we have omitted to notice.

In Political Economy we have seen that the laws which it announces do not admit of precise quantitative statement: we have now further to note that the remaining portion of the data necessary to the solution of a given problem, namely, the circumstances under which they come into operation, though generally susceptible of measurement could they be ascertained, yet in practice can seldom be ascertained so completely as to admit of being stated numerically.

Take, e.g., an economic phenomenon which has excited much speculation lately amongst economists and commercial men—the export of silver from Europe to the East, which has been proceeding on an extraordinary scale during the last year (1856). Many causes may be assigned, which, taken together, will go a certain way in accounting for this fact. There has been, in the first place, a general rise of wages in the United Kingdom—the consequence partly of our general commercial prosperity, partly of the gold discoveries—leading to an increased money demand here for the productions of eastern countries. There has been, in the next place, a failure in the silk crop on the Continent, obliging Europeans to obtain a large portion of their silk from India and China, and thus increasing the liabilities of Europe in those quarters. The interruption of our trade during the Russian war, again, has obliged us to resort to the same quarters for linseed and other articles which we usually procure from Russian sources; leading to a further augmentation of our liabilities in the East. There is then a Chinese rebellion, tending to increase the passion for hoarding so prevalent in oriental countries. In addition to all these causes, there are the new supplies of gold from California and Australia, lowering its value in relation to silver, displacing thereby the latter metal from the circulation of countries which have a double standard (such countries being principally confined to the continent of Europe), and thus, by lessening the demand for, lowering the value of, silver. Having regard to these different circumstances, and to the play of human interests in the pursuit of wealth to which they give occasion, it may be easily shown that the export of silver from Europe to the East (unless counteracted, by some other causes of equal efficacy in an opposite direction) must take place as a necessary consequence; and, taking them altogether, and the scale of their magnitude as far as it can be ascertained, they probably go far to explain the existing drain. But are they adequate to a complete explanation? or are they more than adequate? and is it, therefore, necessary to look out for some cause acting in an opposite direction, in order to a complete explanation of the result which we witness?

Or, take another example—the high price of corn during the last four years (1853 to '56 inclusive). Amongst the causes which have been assigned in explanation of this phenomenon is the fall which has recently taken place in the value of gold, the effect of the large influx from Australia and California. Some writers, however, who are of opinion that gold has not fallen in value, maintain that the high range of price is sufficiently accounted for by the shortness of supplies consequent upon the great deficiency of the harvest of 1853 over the whole of Europe, in conjunction with our exclusion from some of the usual sources of supply during the Russian war; and this, notwithstanding the influence of free trade operating powerfully in the opposite direction. Now if Political Economy were an exact science, this question could be at once determined by calculating the effect of the causes assigned, and comparing the result of the calculation with the actual market price. But, for the reasons I have explained, such a calculation transcends its resources; for even though it were possible to obtain accurate and trustworthy statistics of the production and importation of corn during the period in question, we should yet be unable to say what effect this would produce on price, from the essential indefiniteness of the other premisses involved in the problem—the relative strength of human desires, the extent of the means at the disposal of consumers, not to mention the various circumstances influencing opinion as to the prospects of the coming crop, such as the changes in the weather and the reports of the harvests from other countries.^*52 We are, consequently, in arguing this question, obliged to have recourse to arguments of a probable, and often of a conjectural, nature, the conclusions from which must, of course, partake of the same merely probable and conjectural character, and can, therefore, never attain to that precise and definite form which distinguishes the conclusions of physical science.

§3. I have dwelt thus at some length on the character of an economic problem, and the degree of perfection of which its solution is susceptible, because it appears to me that, amongst those who in the public press and elsewhere engage in economic discussions, there are few who seem to have any clear conception of what it is which, in the investigation of the phenomena of wealth, Political Economy proposes to accomplish. The following very just observations, taken from a paper in the Statistical Journal of October last by my immediate predecessor, Mr. Walsh, on the export of silver to the East, will illustrate the confusion of ideas to which I have adverted:—"There is a mode in which some persons deceive themselves into the belief that they are accounting for this phenomenon, which calls for our consideration. I have seen it put forward by persons signing themselves 'China Merchants,' 'Eastern Merchants,' and the like—names which seem to claim authority for the bearers in a question relating to a trade with which they are conversant. They state what is occurring, and then imagine they have told us why; while in fact, all their labour ends in telling us silver is exported to the east, because silver is exported to the east. One announces (in a letter to the Economist, February 2, 1856) that the direct answer to the question as to the cause of the export of silver is, that the metal presents just now the most lucrative branch of commerce; and he rejects any speculations that aim at offering further explanation. The answer is quite correct, but as trifling as true. If the trade were not lucrative, no one would continue to carry it on; but the question is, what makes it unusually lucrative? and on that subject the writer does not inform us. Others wander into long descriptions of the machinery by which the transmission of silver is effected—bills drawn on this place for debts due elsewhere; and goods sent to one locality in return for what is transmitted to some other; and finally flatter themselves they have told us why, when they have merely mentioned how. Why is such a one crossing the ferry? Because he is carried in the boat. But why did he get into the boat? That is the question to be answered. And so, in like manner, it is no answer to the question why silver is exported to the east, to state the channels and appliances by which it is transmitted. What is really required to be known is not the machinery of transfer, but what set that machinery in motion:"—in other words, what those physical facts or events are, which, in conjunction with the self-interest of men operating in the pursuit of wealth, produce the actual result—the drain of silver.

Everyone, I suppose, has met with antagonists who, when hard pressed with an economic difficulty, have taken refuge in the convenient maxim that 'in the end things will find their level'—an explanation which does not leave upon the mind a very definite notion of the means by which the desiderated level is to be attained. A writer in the Examiner^*53 turns to almost equal account the words 'stimulate' and 'absorb,' making them available in the support of some very extraordinary doctrines. Among other paradoxes this writer maintains that not only has gold not fallen in value in consequence of the recent discoveries; but that it has never fallen in consequence of former discoveries; and not only this, but that there is nothing in the cheapened cost of producing gold which tends to lower its value. Having assumed (in disregard of such statistics as he gives) that the increased production of gold has hitherto had no effect upon prices, the writer thus proceeds to account for the fact:—"The additional supply of the precious metals has stimulated the industry of the world, and in fact produced an amount of wealth, in representing which they have been themselves, as it were, absorbed." Further on he says:—"But the produce of Australian and Californian gold, as well as that of silver which has accompanied it,^*54 is likely to go on, and it may be asked if this must not in course of time produce depreciation. We think it certainly is not likely to do so.... On the contrary, it will surely be absorbed by increasing wealth and population as fast as it is produced."

It is strange that the obvious reductio ad absurdum should not have restrained such speculations. The theory applies to every conceivable augmentation of gold. The stimulus is represented as in proportion to the increase of supply. Consequently, however great the increase, in the same degree will be the stimulus,—in the same degree, therefore, the amount of wealth produced, and, as in representing this the gold is absorbed, in the same degree the absorption. According to this theory, then, if gold were produced in such quantities as to be as abundant as copper—nay, if it were as common as the sand on the sea-shore, it would nevertheless be as valuable as ever, and a given quantity of gold would still command the same quantity of all other things.

It is to be regretted that the writer did not favour us with his notion of the manner in which the alleged 'stimulus' to industry operates, and the supposed 'absorption' is effected. The stimulus, it seems, is not felt, according to the popular view, in a rise of price; for this, he asserts, the new gold has no tendency to produce: nor does it take place through an increase of demand, for this could only manifest itself through a rise of price; nor does it operate through a fall in the rate of interest, for it is notorious that during recent years the rate of interest has been high; while, with regard to the modus operandi of 'absorption,' we are equally left in ignorance.^*55

Such attempts at an explanation of economic phenomena remind us of some of the physical speculations of the schoolmen. Dr. Whewell mentions a doctrine maintained by these philosophers, that a vessel full of ashes would contain as much water as an empty vessel. The mysterious capacity of 'absorption,' which in this case was attributed to the ashes, is by the political economist of the Examiner attributed to wealth and population.

Whether in Political Economy or in physical science, before proceeding to account for a phenomenon, it is well to ascertain the fact of its existence. This preliminary point being settled, the problem is to be solved not by vague phrases and wholesale assumptions, but by connecting the phenemenon to be accounted for with the ultimate principles of the science to which it belongs; and, in the case of Political Economy, these are certain known propensities of human nature and certain ascertained facts of the external world.